<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1999
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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
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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
incorporation or organization) Identification No.)
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
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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)
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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 |_|
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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1999 (Part I and II)
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder Matters 6
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
Item 8. Financial Statements and Supplementary Data 8
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 8
PART III
Item 10. Directors and Executive Officers of the Partnership 9
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners and Management 11
Item 13. Certain Relationships and Related Transactions 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14-17
</TABLE>
2
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PART I
Item 1. Business.
(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").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one industry segment the business of
acquiring used commercial aircraft and leasing 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 aircraft. Operating leases are those in which the
aggregate undiscounted noncancellable rental payments are less than the
acquisition cost of the aircraft). Industry segment data is not applicable.
(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.
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
acquisitions of the Partnership's aircraft and the associated leases are
described in Note 3 to the financial statements included in Item 14, 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. See
Note 7 to the financial statements in the 1999 Annual Report.
3
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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 4 to the
financial statements included in Item 14, herein.
The Partnership's investment in commercial aircraft is, and will continue to
be, subject to various risks, including physical deterioration, technological
obsolescence 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. 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, 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.
Many competitors have greater financial resources and more experience than the
Partnership, the General Partner and the Manager. 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 anticipated
revenues.
In recent years, market values for certain models of used commercial jet
aircraft have deteriorated. Consistent price competition and other pressures
within the airline industry have inhibited sustained profitability for many
carriers. Most major airlines have had to re-evaluate their aircraft fleets and
operating strategies. Aircraft condition, age passenger capacity, distance
capability, fuel efficiency, and other factors also influence market demand and
market values for passenger jet aircraft.
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.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1999, 1998 and 1997 is
incorporated herein by reference to Note 2 to the financial statements in the
1999 Annual Report. 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.
4
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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.
Incorporated herein by reference to Note 3 to the financial statements in
the 1999 Annual Report.
Item 3. Local Proceedings.
Incorporated herein by reference to Note 7 to the financial statements in
the 1999 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
5
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PART II
Item 5. Market for the Partnership's Securities and Related Security Holder
Matters.
(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, 1999, there were 3,910 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, 1999, 1998 and
1997.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 7 to the financial statements in the 1999 Annual Report. The proposed
settlement to that lawsuit, if effected, will materially change the future
organizational structure and business interests of the Partnership, as well as
its cash distribution policies. The General Partner believes that it will be in
the Partnership's best interests to continue to suspend the payment of quarterly
cash distributions pending final resolution of the Class Action Lawsuit.
Accordingly, future cash distributions are not expected to be paid until the
Class Action Lawsuit is adjudicated.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket aircraft upon lease expiration. Liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining aircraft portfolio consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft.
The management and remarketing of aircraft can involve, among other things,
significant costs and lengthy remarketing initiatives. Although the
Partnership's lessees are required to maintain the aircraft during the period of
lease contract, repair, maintenance, and/or refurbishment costs at lease
expiration can be substantial. For example, an aircraft that is returned to the
Partnership meeting minimum airworthiness standards, such as flight hours or
engine cycles, nonetheless may require heavy maintenance in order to bring its
engines, airframe and other hardware up to standards that will permit its
prospective use in commercial air transportation. At December 31, 1999, the
Partnership had ownership interests in six commercial jet aircraft (and two
aircraft engines). Three of the aircraft are Boeing 737 aircraft formerly leased
to Southwest Airlines, Inc (Southwest"). The lease agreements for each of these
aircraft expired on December 31, 1999 and Southwest elected to return the
aircraft. A fourth aircraft, a Boeing 727-251 ADV aircraft formerly leased by
Transmeridian Airlines, Inc., is being stored at a repair facility in Louisiana.
Each of these aircraft are Stage 2 aircraft, meaning that they are prohibited
from operating in the United States after December 31, 1999 unless they are
retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the
Federal Aviation Administration. The cost to hush-kit an aircraft, such as the
Partnership's Boeing 727 and Boeing 737s, can approach $2 million. At this time,
the General Partner is attempting to remarket these assets without further
capital investment by either re-leasing the aircraft to a user outside of the
United States or selling the aircraft as they are without retro-fitting the
aircraft to conform to Stage 3 standards. The remaining two aircraft in the
Partnership's portfolio already are Stage 3 compliant. One of these aircraft had
a lease term that expired in January 2000 and is being held in storage pending
the outcome of ongoing remarketing efforts. The other aircraft has a lease term
expiring in April 2001.
6
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Cash distributions consist of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
"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.
7
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Item 6. Selected Financial Data.
Incorporated herein by reference to the section entitled "Selected Financial
Data" in the 1999 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1999 Annual Report.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference to the financial statements and
supplementary data included in the 1999 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
8
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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, 2000 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF
THE GENERAL PARTNER (See Item 13)
<TABLE>
<CAPTION>
Name Title Age Term
---- ----- --- ----
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a
Executive Committee of EFG successor
and President and a Director is duly
of the General Partner 51 elected
and
Gary D. Engle President and Chief Executive qualified
Officer and member of the
Executive Committee of EFG and a
Director of the General Partner 51
Gary M. Romano Executive Vice President and Chief
Operating Officer of EFG and
Clerk of the General Partner 40
James A. Coyne Executive Vice President of EFG 39
Michael J. Butterfield Senior Vice President, Finance and
Treasurer of EFG and Treasurer of
the General Partner 40
Sandra L. Simonsen Senior Vice President, Information
Systems of EFG 49
Gail D. Ofgant Senior Vice President, Lease
Operations of EFG 34
</TABLE>
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Partners, Directors or
Executive Officers.
9
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(e) Business Experience
Mr. MacDonald, age 51, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the General Partner.
Mr. MacDonald was also a co-founder, Director, and Senior Vice President of
EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is President of
American Finance Group Securities Corp. and a limited partner in Atlantic
Acquisition Limited Partnership ("AALP") and Old North Capital Limited
Partnership ("ONC"). Prior to co-founding EFG's predecessors, Mr. MacDonald held
various executive and management positions in the leasing and pharmaceutical
industries. Mr. MacDonald holds a M.B.A. from Boston College and a B.A. degree
from the University of Massachusetts (Amherst).
Mr. Engle, age 51, is President and Chief Executive Officer of EFG and sole
shareholder and Director of its general partner, Equis Corporation and a member
of the Executive Committee of EFG and President of AFG Realty Corporation. Mr.
Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG
and its subsidiaries in December 1994. Mr. Engle is Vice President and a
Director of certain of EFG's subsidiaries and affiliates, a limited partner in
AALP and ONC and controls the general partners of AALP and ONC. Mr. Engle is
also Chairman, Chief Executive Officer, and a member of the Board of Directors
of Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal
and co-founder of Cobb Partners Development, Inc., a real estate and mortgage
banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and
Chief Financial Officer of Arvida Disney Company, a large-scale community
development company owned by Walt Disney Company. Prior to 1980, Mr. Engle
served in various management consulting and institutional brokerage capacities.
Mr. Engle has a MBA from Harvard University and a BS degree from the University
of Massachusetts (Amherst).
Mr. Romano, age 40, became Executive Vice President and Chief Operating
Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or
Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in
November 1989, became Vice President and Controller in April 1993 and Chief
Financial Officer in April 1995. Mr. Romano assumed his current position in
April 1996. Mr. Romano is also Vice President and Chief Financial Officer of
Semele. Prior to joining EFG, Mr. Romano was Assistant Controller for a
privately held real estate development and mortgage origination company that he
joined in 1987. Previously, Mr. Romano was an Audit Manager at Ernst & Whinney
(now Ernst & Young LLP), where he was employed from 1982 to 1986. Mr. Romano is
a Certified Public Accountant and holds a B.S. degree from Boston College.
Mr. Coyne, age 39, is Executive Vice President, Capital Markets of EFG and
President, Chief Operating Officer and a member of the Board of Directors of
Semele. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG
in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice
President of EFG. Mr. Coyne is a limited partner in AALP and ONC. From May 1993
through November 1994, he was employed by the Raymond Company, a private
investment firm, where he was responsible for financing corporate and real
estate acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a
real estate investment company and an equipment leasing company. Prior to 1985,
he was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He
has a BS in Business Administration from John Carroll University, a Masters
Degree in Accounting from Case Western Reserve University and is a Certified
Public Accountant.
Mr. Butterfield, age 40, is Senior Vice President, Finance and Treasurer of
EFG and certain of its affiliates and is Treasurer of the General Partner and
Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance
and Treasurer of EFG and certain of its affiliates in April 1996 and was
promoted to Senior Vice President, Finance and Treasurer of EFG and certain of
its affiliates in July 1998. Prior to joining EFG, Mr. Butterfield was an Audit
Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was
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 CPA requirements in the United States. He holds a
Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand.
Ms. Simonsen, age 49, joined EFG in February 1990 and was promoted to Senior
Vice President, Information Systems of EFG in April 1996. Prior to joining EFG,
Ms. Simonsen was Vice President, Information Systems with Investors Mortgage
Insurance Company, which she joined in 1973. Ms. Simonsen provided systems
consulting
10
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for a subsidiary of American International Group and authored a software program
published by IBM. Ms. Simonsen holds a BA degree from Wilson College.
Ms. Ofgant, age 34, is Senior Vice President, Lease Operations of EFG and
certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to
Manager Lease Operations in April 1994, and became Vice President of Lease
Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice
President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by
Security Pacific National Trust Company. Ms. Ofgant holds a BS degree in Finance
from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
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 4 to the financial
statements included in Item 14, herein.
(d) Compensation of Directors
None.
(e) 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
11
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(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 1, 2000.
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,
1999, 1998 and 1997, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Equipment management fees $ 92,059 $ 156,535 $ 161,231
Administrative charges 71,699 53,676 50,304
Reimbursable operating expenses
due to third parties 1,987,647 1,762,271 1,240,204
----------- ----------- ------------
Total $ 2,151,405 $ 1,972,482 $ 1,451,739
=========== =========== ============
</TABLE>
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 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 14, 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
12
<PAGE>
December 31, 1999, the Partnership was owed $1,476 by EFG for such funds and the
interest thereon. These funds were remitted to the Partnership in January 2000.
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.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
Number of Percent of Total
Affiliate Units Owned Outstanding Units
--------- ----------- -----------------
Old North Capital Limited
Partnership 40,000 1.47%
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG. The general partner of ONC
is controlled by Gary D. Engle. In addition, the limited partnership interests
of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
See Item 13(a) above.
13
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors ....................................*
Statement of Financial Position
at December 31, 1999 and 1998 .....................................*
Statement of Operations
for the years ended December 31, 1999, 1998 and 1997 ..............*
Statement of Changes in Partners' Capital
for the years ended December 31, 1999, 1998 and 1997 ..............*
Statement of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 ..............*
Notes to the Financial Statements .................................*
(2) Financial Statement Schedules
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, 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.
* Incorporated herein by reference to the appropriate portion of the 1999
Annual Report to security holders for the year ended December 31, 1999 (see
Part II).
14
<PAGE>
Exhibit
Number
------
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
is filed in the Registrant's Annual Report on Form 10-K for the
year ended December 31,1999 as Exhibit 2.5 and is included
herein.
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) is filed in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999 as Exhibit 2.6 and is
included herein.
4 Amended and Restated Agreement and Certificate of Limited
Partnership included as Exhibit A to the Prospectus, which is
included in Registration Statement on Form S-1 (No. 33-25334).
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, is filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999 as Exhibit 10.1 and is included herein.
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, is filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999 as Exhibit 10.2 and is included herein.
13 The 1999 Annual Report to security holders, a copy of which is
furnished for the information of the Securities and Exchange
Commission. Such Report, except for those portions thereof which
are incorporated herein by reference, is not deemed "filed" with
the Commission.
23 Consent of Independent Auditors.
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.
15
<PAGE>
Exhibit
Number
------
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.
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date 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 and a member of the President and Chief Executive
Executive Committee of EFG and Officer and a member of the
President and a Director of the Executive Committee of EFG and a
General Partner Director of the General Partner
(Principal Executive Officer)
Date: March 30, 2000 Date: March 30, 2000
------------------------- -------------------------
By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield
---------------------------- ----------------------------
Gary M. Romano Michael J. Butterfield
Executive Vice President and Chief Senior Vice President, Finance and
Operating Officer of EFG and Clerk Treasurer of EFG and Treasurer
of the General Partner of the General Partner
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 30, 2000 Date: March 30, 2000
------------------------- -------------------------
17
<PAGE>
EXHIBIT INDEX
1999 Form 10-K
Exhibit
-------
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.
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).
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.
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.
18
<PAGE>
Exhibit 2.5
IN THE UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 98-8030-CIV-HURLEY
- --------------------------------------------------------------------------------
LEONARD ROSENBLUM, J/B INVESTMENT PARTNERS, SMALL AND REBECCA BARMACK, PARTNERS,
BARBARA HALL, HENRY R. GRAHAM, ANNE R. GRAHAM, MARGO CORTELL, PATRICK M. RHODES,
BERNICE M. HUELS, GARRETT N. VOIGHT, CLAIRE E. FULCHER, MARCELLA LEVY, RICHARD
HODGSON, CITY PARTNERSHIPS, HELMAN PARSONS AND CLEVA PARSONS, on behalf of
themselves and all others similarly situated and derivatively on behalf of the
Nominal Defendants,
Plaintiffs,
vs.
EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, a Massachusetts, Limited Partnership,
EQUIS CORPORATION, a Massachusetts Corporation, GDE ACQUISITION LIMITED
PARTNERSHIP, a Massachusetts Limited Partnership, AFG LEASING INCORPORATED, a
Massachusetts Corporation, AFG LEASING IV INCORPORATED, a Massachusetts
Corporation, AFG LEASING VI INCORPORATED, a Massachusetts Corporation, AFG
AIRCRAFT MANAGEMENT CORPORATION, a Massachusetts Corporation, AFG ASIT
CORPORATION, a Massachusetts Corporation, AF/AIP PROGRAMS LIMITED PARTNERSHIP, a
Massachusetts Limited Partnership, GARY D. ENGLE and GEOFFREY A. MACDONALD,
Defendants,
AIRFUND I INTERNATIONAL LIMITED PARTNERSHIP, a Massachusetts Limited
Partnership, AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP, a Massachusetts
Limited Partnership, AMERICAN INCOME 4 LIMITED PARTNERSHIP, a Massachusetts
Limited Partnership, AMERICAN INCOME 5 LIMITED PARTNERSHIP, a Massachusetts
<PAGE>
Limited Partnership, AMERICAN INCOME 6 LIMITED PARTNERSHIP, a Massachusetts
Limited Partnership, AMERICAN INCOME 7 LIMITED PARTNERSHIP, a Massachusetts
Limited Partnership, AMERICAN INCOME 8 LIMITED PARTNERSHIP, a Massachusetts
Limited Partnership, AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP, a
Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS III-B LIMITED
PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS III-C
LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME
PARTNERS III-D LIMITED PARTNERSHIP, a Massachusetts Limited Partnership,
AMERICAN INCOME PARTNERS IV-A LIMITED PARTNERSHIP, a Massachusetts Limited
Partnership, AMERICAN INCOME PARTNERS IV-B LIMITED PARTNERSHIP, a Massachusetts
Limited Partnership, AMERICAN INCOME PARTNERS IV-C LIMITED PARTNERSHIP, a
Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS IV-D LIMITED
PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS V-A
LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME
PARTNERS V-B LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN
INCOME PARTNERS V-C LIMITED PARTNERSHIP, a Massachusetts Limited Partnership,
AMERICAN INCOME PARTNERS V-D LIMITED PARTNERSHIP, a Massachusetts Limited
Partnership, AMERICAN INCOME FUND I-B, a Massachusetts Limited Partnership,
AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership, AFG INVESTMENT
TRUST A, a Delaware business trust, AFG INVESTMENT TRUST B, a Delaware business
trust, AFG INVESTMENT TRUST C, a Delaware business trust, and AFG INVESTMENT
TRUST D, a Delaware business trust,
Nominal Defendants.
- --------------------------------------------------------------------------------
2
<PAGE>
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
Plaintiffs ("Plaintiffs" or "Class Counsel") and Defendants submit this
Joint Memorandum in support of their Joint Motion To Further Modify Order
Preliminarily Approving Settlement, Conditionally Certifying Settlement Class
and Providing For Notice of, And Hearing On, The Proposed Settlement.
Background
By Order dated August 20, 1998, this Court preliminarily approved the
original Stipulation of Settlement dated July 16, 1998, conditionally certified
the Settlement Class, and three sub-classes,(1) and provided for Notice of, and
Hearing on, the proposed Settlement (the "Settlement"). A true and complete copy
of the Court's August 20, 1998 Order (the "Preliminary Approval Order") is
attached to the Motion as Exhibit 1.
As part of the settlement of the claims brought by the Operating
Partnership Sub-Class, the Settlement provides for Defendants to pursue and
cause the consummation of an exchange transaction (the "Exchange"), pursuant to
which eleven (11) of the limited partnerships named as Nominal Defendants (the
"Operating Partnerships") would be restructured, and converted into a
publicly-traded entity ("Newco") whose securities would be listed and traded on
the NASDAQ National Market System or other national securities exchange.
On or about August 24, 1998, four days after the Court's entry of the
Preliminary Approval Order, Defendants filed a Consent Solicitation Statement
(Form 14A) to be used in
3
<PAGE>
connection with the solicitation of the Operating Partnership Sub-Class' consent
to the Exchange for review with the U.S. Securities and Exchange Commission (the
"SEC"). The parties had anticipated that the SEC would be able to complete the
review within several months, and thereafter the Notice of the Settlement and
fairness hearing would be sent to all Class members, with the Consent
Solicitation Statement included only with the Notice sent to the Operating
Partnership Sub-Class members.
However, after encountering numerous unanticipated delays in the SEC
review process, the parties entered into an Amended Stipulation of Settlement
dated March 15, 1999 (the "Amended Stipulation"). On March 22, 1999, after a
hearing, this Court entered an order modifying the preliminary approval order
(the "Modified Preliminary Approval Order"). A true and complete copy of the
Modified Preliminary Approval Order is attached the Motion as Exhibit 2.
Pursuant to the Modified Preliminary Approval Order, the settlement process was
bifurcated into two phases. In the first phase, the parties asked the Court to
approve the settlement with respect to the claims brought by the so-called RSL
and Trust Sub-Classes.(2) In the second phase, the parties will seek the Court's
final approval of the settlement with respect to the claims brought by the
Operating Partnership Sub-Class.
Due to the delays caused by the SEC review process, certain financial
information upon which the settlement was based has become outdated.
Accordingly, the parties have agreed to further modifications to the Amended
Stipulation to reflect updated valuations of
- --------------------------------------------------------------------------------
(1) The three sub-classes are referred to as: (a) the "RSL Sub-Class"; (b) the
"Operating Partnership Sub-Class'; and (c) the "Trust Sub-Class".
(2) A hearing on the final approval of the settlement with respect to the RSL
and Trust Sub-Classes was held on May 21, 1999. After that hearing, on May 26,
1999, the Court entered an order approving the settlement with respect to the
RSL and Trust Sub-Classes.
4
<PAGE>
the Operating Partnerships and Management Assets and revised allocations of
Shares in Newco based on those valuations.
The Proposed Amendments
The following is a description of the proposed amendments to the
Settlement that were negotiated on an arm's-length basis by Class Counsel and
the Defendants. The vast majority of the original Stipulation and the Amended
Stipulation have not been altered, and the sub-classes, which were conditionally
certified by the Court in its August 20, 1998 Order, remain the same. The
parties have agreed to the following amendments to the Amended Stipulation:
(a) amend the $10 million cash distribution schedule (see Chart #1)
in Section 2.2(a) to reflect the updated cash reserves held by each
of the Operating Partnerships as of September 30, 1999;
(b) amend the allocations of Newco Shares in Sections 2.2(c) and
2.2(d) (see Chart #2 and #3) to reflect updated valuations of the
Operating Partnerships and Management Assets;
(c) amend Section 2.2(d) to increase the payment by Equis of Newco
Shares to the Operating Partnership Sub-Class members from $8
million to $9 million;
(d) eliminate Section 2.2(g) which offered so-called "appraisal
rights" for Participating Investors who did not wish to retain their
Shares in Newco;
(e) eliminate Section 2.2(i) which required that twenty-five percent
(25%) of the Shares of Newco allocated to the Equis Owners be placed
in an escrow account:
and
5
<PAGE>
(f) amend Section 4.1(i) to clarify that the Operating Partnerships
may invest a total of $32 million in New Investments, to be
increased only upon the further agreement of the parties, which
amount corresponds to forty percent (40%) of the total aggregate net
asset values of all the Operating Partnerships as of March 19, 1999.
1. Amendments Pertaining to Updated Financial Information, Including
Valuations and Allocations
The information which is fundamental to the terms of the original
Stipulation and Amended Stipulation has become outdated. Specifically, the data
supporting the valuation of the Operating Partnerships and the Management Assets
was prepared as of September 1998 and now has changed. The Partnerships have
sold various of their equipment assets and, in certain instances, they have
entered into agreements to renew existing leases or otherwise to re-lease their
equipment assets. In addition, information that was used to assess the potential
market value of the common stock of Newco, and the value of the Management
Assets to be contributed by the Defendants, such as price earnings ratios and
other market multiples for companies comparable to Newco and the Management
Assets, has changed due to the passage of time and resulting changes in the
business environment and stock markets. Therefore, the parties believe that it
is in the best interests of the limited partners of the Partnerships to update
the valuation of the transaction using the same methodology employed before and
to revise the Amended Stipulation to simplify and improve upon its terms.
The Defendants have updated and revised the valuation information as of
September 30, 1999 and based on this latest analysis and negotiations with Class
Counsel, Equis has agreed to reduce its net allocation of Newco Shares for the
Management Assets
6
<PAGE>
to 14.72% from the prior 22.335%, representing a reduction of approximately 34%.
Accordingly, the parties have amended Sections 2.2(c) and 2.2(d) of the Amended
Stipulation to reflect the updated valuations of the Operating Partnerships and
Management Assets. Set forth below is a schedule showing the revised valuations
and allocations as of September 30, 1999 in comparison with the September 30,
1998 valuations and allocations (3):
REVISED VALUATIONS AND ALLOCATIONS
---------------------------------------------------------
September 30, 1999 September 30, 1998
---------------------------------------------------------
Value Percent Value Percent
---------------------------------------------------------
Partnerships $64,686,726 85.28% $ 78,042,346 77.665%
Management Assets 11,165,280 14.72% 22,443,000 22.335%
---------------------------------------------------------
$75,852,006 100.00% $100,485,346 100.000%
---------------------------------------------------------
2. Amendments Pertaining To Increased Payment by Equis of Newco Shares
from $8 Million to $9 Million and Elimination of Promissory Notes
and Escrow Account Provisions
Equis has also agreed to increase the reallocation of Newco Shares it
would have received for the Management Assets to the Partnerships from $8
million to $9 million. By increasing the payment to $9 million, Equis will give
up a much greater percentage of the estimated value of the Management Assets in
favor of the limited partners (44.6% compared to the previous 26.3%). In
exchange for the substantial benefits to the limited partners caused by the
changes described above, the parties have agreed to eliminate the requirement
that the Defendants defer retention of 25% of the Newco Shares allocated to them
for the Management Assets in escrow pending attainment of future target net
income
- ----------
(3) The allocations above are net of the $10 million cash distribution and
reflect the re-allocation of $9 million of value from Equis' Management Assets
to the Partnerships.
7
<PAGE>
levels. Under the prior settlement agreement, the Defendants would have received
16.75% of Newco's common stock in exchange for the Management Assets, assuming
that none of the escrow shares were retained by the Defendants, and 22.335%,
assuming that all of the escrow shares were retained by the Defendants. Under
the revised settlement agreement, the Defendants will receive a smaller stock
allocation of 14.72% for the Management Assets and the escrow concept will be
eliminated. The elimination of the escrow shares concept will permit management
to focus on Newco's long-term success while having the added benefit of
accelerating finalization of the settlement to a date coincident to the date of
Consolidation.
In addition, the parties have agreed to eliminate the option for the
limited partners to elect to receive promissory notes instead of common stock in
order to simplify the capital structure of Newco and eliminate any form of
"equity" debt service upon the Consolidation. This revision will cause all
limited partners of the Operating Partnerships (and the general partners) to
have uniform financial interests and will simplify the choices presented to the
limited partners to either (a) object to their Partnership participating in the
Consolidation, or (b) approve of its participation.
3. Amendments to Clarify Maximum Amount Which May be Reinvested In New
Investments
In its Modified Preliminary Approval Order, this Court approved amendments
to the Settlement which permitted the Operating Partnerships, pending the
completion of the SEC review process and ultimately the Exchange, to reinvest a
certain portion of the money (40% of the total aggregate net asset value of the
Partnerships) they have received from the sales of equipment. The parties now
seek to clarify the Amended Stipulation to make clear that the Operating
Partnerships may invest a total of $32 million in New
8
<PAGE>
Investments, to be increased only upon the further agreement of the parties,
which amount corresponds to forty percent (40%) of the total aggregate net asset
values of all the Operating Partnerships as of March 19, 1999.
Conclusion
For the foregoing reasons, Plaintiffs and Defendants request that this
Court grant the Joint Motion To Further Modify Order Preliminarily Approving
Settlement, Conditionally Certifying Settlement Class and Providing For Notice
of, And Hearing On, The Proposed Settlement.
Respectfully submitted,
this 24 day of February 2000,
ATTORNEYS FOR DEFENDANTS:
/s/ [ILLEGIBLE]
--------------------------------------
RICHMAN GREER WEIL BRUMBAUGH
MIRABITO & CHRISTENSEN, PA.
Gerald F. Richman
Joseph F. Hession
Phillips Point - East Tower
777 South Flager Drive - Suite 1100
West Palm Beach, Florida 33401
(561) 803-3500
NIXON PEABODY LLP
Deborah L. Thaxter, P.C.
Gregory P. Deschenes
101 Federal Street
Boston, MA 02110 - 1832
(617) 345-1000
9
<PAGE>
ATTORNEYS FOR PLAINTIFFS:
/s/ [ILLEGIBLE] /FOR/
--------------------------------------
LERNER & PEARCE, P.A.
Allan M. Lerner
2888 East Oakland Park Boulevard
Ft. Lauderdale, FL 33306
(954) 563-8111
/s/ [ILLEGIBLE] /FOR/
--------------------------------------
WINCHESTER HARWOOD HALEBIAN
& FEFFER LLP
Andrew D. Friedman
488 Madison Avenue, 8th Floor
New York, NY 10022
(212) 935-7400
LAW OFFICES OF VINCENT T.
GRESHAM
Vincent T. Gresham
6065 Roswell Road, Ste. 1445
Atlanta, GA 30328
(770) 552-5270
GILMAN AND PASTOR
Peter A. Lagorio
One Boston Place
Boston, MA 02108-4400
(617) 589-3750
BENJAMIN S. SCHWARTZ,
CHARTERED
Benjamin S. Schwartz
4600 Olympic Way
Evergreen, CO 80439
(303) 670-5941
LAW OFFICES OF LIONEL Z. GLANCY
Lionel Z. Glancy
1801 Avenue of the Stars, Suite 306
Los Angeles, CA 90067
(310) 201-9150
10
<PAGE>
LAW OFFICES OF JAMES V. BASHIAN
500 Fifth Avenue, Ste. 2700
New York, NY 10110
(212) 921-4100
THOMAS A. HOADLEY, PA
310 Australian Avenue
Palm Beach, FL 33480
(561) 792-9006
GOODKIND, LABATAN, RUDOFF &
SUCHAROW, LLP
Lynda J. Grant
Robert N. Cappucci
100 Park Avenue
New York, NY 10017
(212) 907-0700
LASKY & RIFKIND, LTD.
Leigh Lasky
30 North LaSalle Street, Ste. 2140
Chicago, IL 60602
(312) 759-7670
HAROLD B. OBSTFELD, P.C.
Harold B. Obstfeld
260 Madison Avenue
New York, NY 10116
(212) 696-1212
11
<PAGE>
Exhibit 2.6
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF FLORIDA
- --------------------------------------------------------------------------------
LEONARD ROSENBLUM, J/B INVESTMENT PARTNERS, SMALL and REBECCA BARMACK, PARTNERS,
BARBARA HALL, HENRY R. GRAHAM, ANNE R. GRAHAM, MARGO CORTELL. PATRICK M RHODES,
BERNICE M. HUELS, GARRETT N. VOIGHT, CLAIRE E. FULCHER, MARCELLA LEVY, RICHARD
HODGSON, CITY PARTNERSHIPS, HELMAN PARSONS AND CLEVA PARSONS, on behalf of
themselves and all others similarly situated and derivatively on behalf of the
Nominal Defendants,
Plaintiffs,
v. Case No. 98-8030
EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, a Massachusetts Limited Partnership.
EQUIS CORPORATION, a Massachusetts Corporation, GDE ACQUISITION LIMITED
PARTNERSHIP, a Massachusetts Limited Partnership, AFG LEASING INCORPORATED, a
Massachusetts Corporation, AFG LEASING IV INCORPORATED, a Massachusetts
Corporation. AFG LEASING VI INCORPORATED, a Massachusetts Corporation, AFG
AIRCRAFT MANAGEMENT CORPORATION, a Massachusetts Corporation, AFG ASIT
CORPORATION. a Massachusetts Corporation, AF/AIP PROGRAMS LIMITED PARTNERSHIP, a
Massachusetts Limited Partnership, GARY D. ENGLE and GEOFFREY A. MACDONALD.
Defendants,
AIRFUND I INTERNATIONAL LIMITED PARTNERSHIP, a
- --------------------------------------------------------------------------------
<PAGE>
Massachusetts Limited Partnership, AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP,
a Massachusetts Limited Partnership, AMERICAN INCOME 4 LIMITED PARTNERSHIP. a
Massachusetts Limited partnership, AMERICAN INCOME 5 LIMITED PARTNERSHIP, a
Massachusetts Limited Partnership, AMERICAN INCOME 6 LIMITED PARTNERSHIP, a
Massachusetts Limited partnership, AMERICAN INCOME 7 LIMITED PARTNERSHIP, a
Massachusetts Limited Partnership, AMERICAN INCOME 8 LIMITED PARTNERSHIP, a
Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS III-A LIMITED
PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS III-B
LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME
PARTNERS III-C LIMITED PARTNERSHIP, a Massachusetts Limited Partnership,
AMERICAN INCOME PARTNERS III-D LIMITED PARTNERSHIP, a Massachusetts Limited
Partnership, AMERICAN INCOME PARTNERS IV-A LIMITED PARTNERSHIP, a Massachusetts
Limited Partnership, AMERICAN INCOME PARTNERS IV-B LIMITED PARTNERSHIP, a
Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS IV-C LIMITED
PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS IV-D
LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME
PARTNERS V-A LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN
INCOME PARTNERS V-B LIMITED PARTNERSHIP, a Massachusetts Limited Partnership,
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP, a Massachusetts Limited
Partnership, AMERICAN INCOME PARTNERS V-D LIMITED PARTNERSHIP, a Massachusetts
Limited Partnership,
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<PAGE>
AMERICAN INCOME FUND I-B, a Massachusetts Limited Partnership, AMERICAN INCOME
FUND I-C, a Massachusetts Limited Partnership, AMERICAN INCOME FUND I-D, a
Massachusetts Limited Partnership, AMERICAN INCOME FUND I-E, a Massachusetts
Limited Partnership, AFG INVESTMENT TRUST A, a Delaware business trust, AFG
INVESTMENT TRUST B, a Delaware business trust, AFG INVESTMENT TRUST C, a
Delaware business trust, and AFG INVESTMENT TRUST D, a Delaware business trust,
Nominal Defendants.
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SECOND MODIFIED ORDER PRELIMINARILY APPROVING SETTLEMENT,
CONDITIONALLY CERTIFYING SETTLEMENT CLASS AND PROVIDING
FOR NOTICE OF, AND HEARING ON, THE PROPOSED SETTLEMENT
WHEREAS, by Order dated August 20, 1998 (the "Preliminary Approval
Order"), this Court issued an order in the above captioned action (the "Action")
preliminarily approving the Settlement, conditionally certifying the settlement
class and providing for notice of, and hearing on the proposed settlement, and
by order dated March 22, 1999, this Court entered an order modifying the
Preliminary Approval Order ("Modified Preliminary Approval Order"), and the
parties to the Action have now agreed to further amend the Stipulation of
Settlement ("Second Amended Stipulation"), this Court having read and considered
the Second Amended Stipulation and the exhibits annexed thereto;
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<PAGE>
NOW, THEREFORE, IT IS HEREBY ORDERED THAT THE COURT FURTHER MODIFIES THE
ORDER INSOFAR AS SET FORTH BELOW:
1. A hearing (the "Hearing") shall be held before this Court on Thursday,
July 27, 2000, at 701 Clematis Street, West Palm Beach, Florida, 4:00 p.m., in
Courtroom 5, to determine whether the proposed Settlement of the Action on the
terms and conditions provided for in the Second Amended Stipulation, with
respect to the Operating Partnership Sub-Class, including the issuance and
exchange of the securities in the Exchange, is fair, reasonable and adequate and
should be finally approved by the Court; whether a final judgment as provided in
the Second Amended Stipulation should be entered herein with respect to the
claims brought by the Operating Partnership Sub-Class: and whether Class
Counsels application(s) for attorneys' fees, awards to the Class Plaintiffs and
the reimbursement of out-of-pocket expenses should be granted. The Court may
continue the Hearing without further notice to Class Members.
2. The Court approves, as to form and content, the Notices of Class Action
Determination, Proposed Settlement and Fairness Hearing (the "Notices"), and
finds that the mailing of the Notices substantially in the manner and form set
forth in paragraph 3 of this Order meets the requirements of Rule 23 of the
Federal Rules of Civil Procedure, the Constitution of the United States and any
other applicable law, is the best notice practicable
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<PAGE>
under the circumstances, and constitutes due and sufficient notice to all
persons entitled thereto.
3. (a) Within five (5) days following review by the SEC of the Consent
Solicitation Statement (said 5th day being referred to hereafter as the "Notice
Date), the Defendants shall cause a copy of the Notice and the Consent
Solicitation Statement to be mailed to all Operating Partnership Sub-Class
Members at their last known address as appearing in the records maintained by
the Partnerships;
(b) At or prior to the Hearing, Defendants' counsel shall serve and
file with the Court proof, by affidavit or declaration, of such mailing to the
Operating Partnership Sub-Class; and
(c) All reasonable costs incurred in identifying and notifying Class
Members shall be paid as set forth in the Second Amended Stipulation. In the
event that the Settlement is not approved by the Court, or otherwise fails to
become effective, Defendants shall not have any recourse against the Plaintiffs,
Class Counsel or the Claims Administrator for such costs and expenses which have
been incurred or advanced pursuant to the Second Amended Stipulation or Second
Modified Court Order.
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<PAGE>
4. Class Members may enter an appearance in the Action, at their own
expense, individually or through counsel of their own choice. If they do not
enter an appearance, they will be represented by Class Counsel.
5. Pending final determination of whether the Settlement should be
approved, neither the Class Plaintiffs nor any Class Member, either directly,
representatively, derivatively, or in any other capacity, shall commence or
prosecute against any of the Defendants or the Released Parties, any action or
proceeding in any court or tribunal asserting any of the Settled Claims.
6. Pending final determination of whether the Settlement should be
approved, the Class Plaintiffs and all other Class Members are barred and
permanently enjoined from (i) transferring, selling, assigning, giving,
pledging, hypothesizing or otherwise disposing of any Units of the Operating
Partnerships to any person other than a family member or in cases of divorce,
incapacity or death of the Unitholder; (ii) granting a proxy to object to the
Exchange; or (iii) commencing a tender offer for the Units. In addition, pending
final determination of whether the Settlement should be approved, the General
Partners of the Operating Partnerships are enjoined from (i) recording any
transfers made in violation of the Order and (ii) providing the list
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<PAGE>
of investors in any Operating Partnership to any person for the purpose of
conducting a tender offer.
7. In addition effective March 19, 1999, the Operating Partnerships may
collectively invest up to forty percent (40%), to be Increased only upon
agreement of the parties, of the total aggregate net asset values of all
Operating Partnerships, in any investment, including, but not limited to
additional equipment and other business activities, that the General Partner and
the Manager reasonably believe to be consistent with the operating objectives
and business interests of Newco after the Exchange (the New Investments"),
subject to the following limitations:
a. Under no circumstances may the Operating Partnership reduce its cash
balance to an amount less than the amount required to pay the
Operating Partnership's share of the $10 Million Cash Distribution
provided for herein, plus such additional amount as the General
Partner reasonably believes to be necessary to meet working capital
and other cash reserve requirements of the Operating Partnership.
b. To the extent that New Investments are made in additional equipment,
the Manager will (i) defer, until the earlier of the effective date
of the Exchange or December 31, 1999, any Acquisition Fees resulting
therefrom and (ii) limit its Management Fee on all such assets to 2%
of rental income. In the event the
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<PAGE>
Exchange is consummated, all such Acquisition and Management Fees
related to the New Investments will be paid to Newco.
c. To the extent that New Investments are not represented by equipment
(ie: business acquisitions), the Manager will forego any Acquisition
Fees and Management Fees related to such assets.
d. Except for permitting New Investments, or as otherwise provided for
herein, all other provisions of the Partnership Agreements governing
the investment objectives and policies of the Partnership shall
remain in full force and effect.
e. In the event that an Operating Partnership has acquired New
Investments pursuant to Section 4.1 (i)(a) through (d) of the Second
Amended Stipulation, and is not a party to the Exchange, Newco shall
acquire all such New Investments from such Operating Partnership for
an amount equal to the Operating Partnership's net equity investment
in such New Investments plus an annualized return thereon of 7.5%.
f. In the event that an Operating Partnership has acquired New
Investments pursuant to Section 4.1(i)(a) through (d) of the Second
Amended Stipulation, and the Exchange is not consummated, the
General Partner(s) shall (i) use its (their) best efforts to divest
all such New Investments in an orderly and timely fashion, and (ii)
cancel or return to each Operating Partnership any accumulated or
deferred fees on such New Investments.
g. The parties agree the Operating Partnerships may invest a total of
$32 million in New Investments, to be increased only upon the
further agreement of the
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<PAGE>
parties, which amount corresponds to forty percent (40%) of the
total aggregate net asset values of all Operating Partnerships as of
March 19, 1999.
8. Any Member of the Settlement Class may appear at the Settlement
Hearings and object to (a) the approval of the proposed Settlement of the Action
as fair, reasonable and adequate, (b) the entrance of a final judgment, and/or
(c) the application(s) for attorneys' fees and expenses; provided, however, that
no Class Member or any other person shall be heard or entitled to contest the
approval of the terms and conditions of the proposed Settlement, or, if
approved, the judgment to be entered thereto approving the same, or the
attorneys' fees and expenses to Class Counsel, unless on or before fourteen (14)
days prior to the Hearing, that person has served, by hand or by first-class
mail, written objections and copies of any papers and briefs desired to be
considered by the Court, together with proof of membership in the Settlement
Class, upon both Plaintiffs' Lead Counsel: Andrew D. Friedman, Esq., Wechsler
Harwood Halebian & Feffer, LLP, 488 Madison Avenue, New York, N.Y. 10022; and
Defendants' Counsel: Deborah L. Thaxter, P.C., Nixon Peabody LLP, 101 Federal
Street, Boston, Massachusetts 02110, and filed said objections, papers and
briefs with the Clerk of the United States District Court for the Southern
District of Florida. Any Member of the Settlement Class who does not make his or
her objection in the manner provided herein shall be deemed to have waived such
objection, including the right to appeal, and shall forever be foreclosed
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<PAGE>
from making any objection to the fairness or adequacy of the proposed Settlement
as incorporated in the Second Amended Stipulation and the award of attorneys'
fees and expenses to Class Counsel, unless otherwise ordered by the Court.
9. The Court reserves the right to continue the date of the Hearing and
any continuation thereof without further notice to the members of the Settlement
Class, and retains jurisdiction to consider all further applications arising out
of or connected with the proposed Settlement.
DONE and SIGNED in Chambers at West Palm Beach, Florida, this 5th day of
March, 2000.
/s/ Daniel T.K. Hurley
-----------------------------------
Daniel T.K. Hurley
United States District Judge
Copies To All Counsel Of Record
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<PAGE>
Exhibit 10.1
PROMISSORY NOTE
$3,640,000 As of March 8, 2000
FOR VALUE RECEIVED, the undersigned, Echelon Residential Holdings LLC, a
Delaware limited liability company with a principal address of 450 Carillon
Parkway, Suite 200, St. Petersburg, FL 33716 (hereinafter "the Maker"), promises
to pay to the order of AIRFUND II International Limited Partnership, with a
principal address of 88 Broad Street, Boston, MA 02110 (together with any other
holder hereof, the "Payee") or at such address or at such other place as the
Payee may from time to time designate in writing, the principal sum of
THREE MILLION SIX HUNDRED FORTY THOUSAND DOLLARS
($3,640,000), together with interest on the unpaid principal balance hereof from
time to time at a fixed rate equal to fourteen percent (14.0%) per annum through
that date which is twenty-four (24) months from the date hereof and eighteen
percent (18%) per annum thereafter. Such interest shall accrue and compound on a
monthly basis but shall not be due and payable until the Maturity Date. In the
absence of demonstrable error, the books and records of the Payee shall
constitute conclusive evidence of the unpaid principal balance hereof from time
to time.
This Note may be prepaid, in whole or from time to time in part, at any
time, without premium or penalty. All payments shall be applied first to
collection costs, then to accrued interest and any remainder in payment of
principal. The principal amount prepaid, if any, may not at any time be
reborrowed.
If not sooner paid, all outstanding principal and accrued and unpaid
interest thereon shall be due and payable on that date which is thirty (30)
months from the date hereof (the "Maturity Date").
All payments hereunder shall be payable in lawful money of the United
States which shall be legal tender for public and private debts at the time of
payment. Interest shall be calculated on the basis of a year consisting of 360
days and payable for the actual number of days elapsed (including the first day
but excluding the last day), including any time extended by reason of Saturdays,
Sundays and holidays.
It is expressly agreed that the occurrence of any one or more of the
following shall constitute an "Event of Default" hereunder:
(a) any failure to pay any amount or installment of interest or principal
and interest whereon the same is payable as above expressed;
(b) any representation or warranty made by the Maker in connection
herewith be untrue when made or not be fulfilled;
<PAGE>
(c) failure to observe or perform any other covenant, agreement,
condition, term or provision hereof;
(d) the Borrower or any guarantor or any member or joint venturer in the
Borrower shall be involved in financial difficulties as evidenced by: (1) its
commencement of a voluntary case under Title 11 of the United States Code as
from time to time in effect, or its authorizing, by appropriate proceedings, the
commencement of such a voluntary case; (2) its filing an answer or other
pleading admitting or failing to deny the material allegations of a petition
filed against it commencing an involuntary case under said Title 11, or seeking,
consenting to or acquiescing in the relief therein provided, or by its failing
to controvert timely the material allegations of any such petition; (3) the
entry of an order for relief in any involuntary case commenced under said Title
11; (4) its seeking relief as a debtor under any applicable law, other than said
Title 11, of any jurisdiction relating to the liquidation or reorganization of
debtors or to the modification or alteration of the rights of creditors, or its
consenting to or acquiescing in such relief; (5) the entry of an order by a
court of competent jurisdiction (i) finding it to be bankrupt or insolvent, (ii)
ordering or approving its liquidation, reorganization or any modification or
alteration of the rights of creditors, or (iii) assuming custody of, or
appointing a receiver or other custodian for, all or a substantial part of its
property; or (6) its making an assignment for the benefit of, or entering into a
composition with, its creditors, or appointing or consenting to the appointment
of a receiver or other custodian for all or a substantial part of its property.
If any such Event of Default hereunder shall occur, the Payee may declare
to be immediately due and payable the then outstanding principal balance under
this Note, together with all accrued and unpaid interest thereon, and all other
amounts payable to the Payee hereunder, whereupon all such amounts shall become
and be due and payable immediately. The failure of the Payee to exercise said
option to accelerate shall not constitute a waiver of the right to exercise the
same at any other time.
The Maker will pay on demand all costs and expenses, including reasonable
attorneys' fees, incurred or paid by the Payee in enforcing or collecting any of
the obligations of the Maker hereunder. The Maker agrees that all such costs and
expenses and all other expenditures by the Payees on account hereof which are
not reimbursed by the Maker immediately upon demand, and all amounts due under
this Note after maturity and any amounts due hereunder if an Event of Default
shall occur hereunder shall bear interest at a rate equal to the lesser of
eighteen percent (18.0%) per annum or the maximum rate permitted by law until
such expenditures are repaid or this Note and such amounts are paid in full to
the Payee.
Notwithstanding any other provision hereof, the Maker shall not be
required to pay any amount pursuant hereto which is in excess of the maximum
amount permitted under applicable law. It is the intention of the parties hereto
to conform strictly to any applicable usury law, and it is agreed that if any
amount contracted for, chargeable or receivable under this Note shall exceed the
maximum amount permitted under any such law, any such excess shall be deemed a
mistake and cancelled automatically and, if theretofore paid, shall be refunded
to the Maker or, at the Payee's sole option, shall be applied as set forth
above.
<PAGE>
All notices required or permitted to be given hereunder shall be given in
the writing and shall be effective when mailed, postage prepaid, by registered
or certified mail, addressed in the case of the Maker to it at the address of
the Maker set forth above and in the case of the Payee to it at the address of
the Payee set forth above or to such other address as either the Maker or the
Payee may from time to time specify by like notice.
All of the provisions of this Note shall be binding upon and inure to the
benefit of the Maker and the Payee and their respective successors and assigns.
This Note shall be governed by and construed in accordance with the internal
laws of The Commonwealth of Massachusetts.
The Maker and every indorser and guarantor hereof hereby consents to any
extension of time of payment hereof, release of all or any part of the security
for the payment hereof, or release of any party liable for this obligation, and
waives presentment for payment, demand, protest and notice of dishonor. Any such
extension or release may be made without notice to the Maker and without
discharging their liability.
IN WITNESS WHEREOF, the Maker has executed and delivered this Note, under
seal, on the day and year first written above.
ECHELON RESIDENTIAL HOLDINGS LLC
/s/ James A. Coyne
-----------------------
James A. Coyne, Manager
<PAGE>
Exhibit 10.2
PLEDGE AGREEMENT
(PARTNERSHIPS)
FOR VALUE RECEIVED, the undersigned, Echelon Residential Holdings
LLC, a Delaware limited liability company (the "Pledgor") and the sole member of
Echelon Residential LLC, a Delaware limited liability company ("Residential"),
hereby assigns and pledges to American Income Partners V-A Limited Partnership,
a Massachusetts limited partnership, in its capacity as collateral agent (the
"Agent") for itself and each of American Income Partners V-B Limited
Partnership, a Massachusetts limited partnership, American Income Partners V-C
Limited Partnership, a Massachusetts limited partnership, American Income
Partners V-D Limited Partnership, a Massachusetts limited partnership, American
Income Fund I-A Limited Partnership, a Massachusetts limited partnership,
American Income Fund I-B Limited Partnership, a Massachusetts limited
partnership, American Income Fund I-C Limited Partnership, a Massachusetts
limited partnership, American Income Fund I-D Limited Partnership, a
Massachusetts limited partnership, American Income Fund I-E Limited Partnership,
a Massachusetts limited partnership, AIRFUND International Limited Partnership,
a Massachusetts limited partnership and AIRFUND II International Limited
Partnership, a Massachusetts limited partnership and their respective successors
and assigns (collectively, the "Lenders"), and grants to the Agent a security
interest in all of the Pledgor's right, title and interest in and to its
membership interests in Residential, wherever located and whether now owned or
hereafter acquired, together with (i) all payments and distributions, whether in
cash, property or otherwise, at any time owing or payable to the Pledgor on
account of its interest as a member of Residential, (ii) all of the Pledgor's
rights and interests under the operating agreement of Residential (the
"Operating Agreement"), including all voting and management rights and all
rights to grant or withhold consents or approvals, (iii) all rights of access
and inspection to and use of all books and records, including computer software
and computer software programs, of Residential, (iv) all other rights,
interests, property or claims to which the Pledgor may be entitled to in its
capacity as a member of Residential, (v) any and all substitutions and
replacements thereof, including any securities or other instruments into which
any of the foregoing may at any time and from time to time be converted or
exchanged, and (vi) any and all proceeds and products of the foregoing, cash and
non-cash (collectively, the "Pledged Interest"). The Pledgor irrevocably waives
any and all provisions of the Operating Agreement that (i) prohibit, restrict,
condition or otherwise affect the grant hereunder of any lien, security interest
or encumbrance on the Pledged Interest or any enforcement action which may be
taken in respect of any such lien, security interest or encumbrance, or (ii)
otherwise conflict with the terms of this Pledge Agreement.
This Pledge Agreement is entered into in connection with and secures the
payment of amounts due to the Lenders from the Pledgor pursuant to those certain
Promissory Notes of even date herewith (each a "Note" and collectively, the
"Notes") made by the Pledgor in favor of each of the Lenders, together with all
covenants and agreements contained herein (collectively, the "Secured
Liabilities").
<PAGE>
The Pledgor and each of the Lenders hereby represent, warrant, covenant
and agree as follows:
1. Pledgor hereby represents and warrants that (i) the Operating
Agreement, a true, correct and complete copy of which is attached hereto as
Exhibit A, is in full force and effect and has not been amended or modified in
any respect, except for such amendments or modifications as are attached to the
copy thereof delivered herewith; (ii) it is a duly constituted and is the sole
member of Residential pursuant to the Operating Agreement, although such
membership is not evidenced by any certificate issued by Residential; (iii) the
Pledged Interest are validly issued, non-assessable and fully paid membership
interests in Residential; (iv) Pledgor has full right, power and authority to
make this Pledge Agreement (including the provisions enabling the Agent, upon
the occurrence of an Event of Default, to exercise the voting or other rights
provided for herein, under the Operating Agreement and under applicable law,
without the consent, approval or authorization of, or notice to, any other
person, including any regulatory authority or any person having any interest in
Residential, except for such consents as have been duly received; and (v) this
Pledge Agreement has been duly executed and delivered by the Pledgor and is the
legal, valid and binding obligation of the Pledgor enforceable in accordance
with its terms.
2. Pledgor shall protect and preserve the Pledged Interest. Pledgor will
not permit or agree to any amendment or modification of the Operating Agreement,
or waive any rights or benefits under the Operating Agreement, without the prior
written consent of the Agent. Pledgor hereby represents and warrants that
Pledgor has and will continue to have good and marketable title to the Pledged
Interest, free and clear of all liens, encumbrances and security interests,
except those created hereby, and agrees to preserve such unencumbered title and
the Lenders' security interest in the Pledged Interest and to defend it against
all parties. Risk of loss of, damage to, or destruction of, the Pledged Interest
shall be the responsibility of Pledgor, although the Agent shall exercise
reasonable care in the custody and preservation of the Pledged Interest in its
possession to the extent applicable. The Agent shall be deemed to have exercised
such reasonable care if it takes such action for that purpose as the Pledgor
shall reasonably request in writing, but no omission to do any act not requested
by the Pledgor shall be deemed a failure to exercise reasonable care, and no
omission to comply with any request of the Pledgor shall of itself be deemed a
failure to exercise reasonable care. The Pledgor shall execute and deliver to
the Agent and the Lenders any financing statements, continuation statements,
assignments, or other instruments, or take any other action deemed necessary by
the Agent or the Lenders to perfect or continue the perfection of its security
interest in the Pledged Interest. The Agent is hereby irrevocably appointed
attorney-in-fact of the Pledgor to do all acts and things which the Agent may
deem necessary or advisable to perfect and continue perfected their security
interest in the Pledged Interest. The address of the Pledgor is listed below the
Pledgor's signature hereto.
3. This Pledge Agreement has been entered into under and pursuant to the
Massachusetts Uniform Commercial Code, except that perfection and the effect of
perfection of Secured Party's security interest in collateral in another
jurisdiction will be governed by the Uniform Commercial Code ("UCC") of such
other jurisdiction, and the Agent has all the rights
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<PAGE>
and remedies of a secured party under the Uniform Commercial Code or applicable
legislation of the applicable jurisdiction. If any one or more of the provisions
hereof should for any reason be invalid, illegal or unenforceable in any
respect, the remaining provisions contained herein shall not in any way be
affected or impaired thereby, and such invalid, illegal, or unenforceable
provision shall be deemed modified to the extent necessary to render it valid
while most nearly preserving its original intent. The Pledgor has (i) caused
Residential to duly register the security interest granted hereby on
Residential's books and has furnished the Agent with evidence thereof in form
and substance satisfactory to the Agent, (ii) has duly executed and caused any
financing statements with respect to the Pledged Interest to be filed in such a
manner and in such places as may be required by applicable law in order to fully
protect the rights of the Agent and the Lenders hereunder and (iii) will cause
any financing statements with respect to the Pledged Interest at all times to be
kept recorded and filed at the Pledgor's sole cost and expense in such a manner
and in such places as may be required by law in order to fully perfect the
interests and protect the rights of the Agent and the Lenders hereunder.
4. Any one or more of the following events shall constitute an "Event of
Default" hereunder: (i) the Pledgor shall fail to comply with, observe or
perform any obligation hereunder or shall fail to make any payment when due
under any Note; (ii) any representation or warranty made or furnished to the
Agent or the Lenders by or on behalf of the Pledgor in connection with this
Pledge Agreement or any document or instrument furnished, or to be furnished, in
connection herewith or therewith, proves to have been untrue in any material
respect when so made or furnished; (iii) the Pledgor shall commence a voluntary
case under the federal bankruptcy laws (as now or hereafter in effect), file a
petition seeking to take advantage of any other laws relating to bankruptcy,
insolvency, reorganization, winding up or composition for adjustment of debts or
the marshaling of assets ("Bankruptcy Laws"), consent to or fail to contest in a
timely and appropriate manner, any petition filed against the Pledgor in any
involuntary case under any Bankruptcy Laws or other laws, apply for, consent to,
indicate its approval of, acquiesce to or fail to contest in a timely and
appropriate manner, the appointment of, or the taking of possession by, a
receiver, custodian, trustee, or liquidator for the Pledgor or of a substantial
part of the Pledgor's property, admit in writing its inability to pay debts as
they become due, make a general assignment for the benefit of creditors, make a
conveyance fraudulent as to creditors under any state or federal law, or take
any action for the purpose of effecting any of the foregoing; (iv) a case or
other proceeding shall be commenced against the Pledgor in any court of
competent jurisdiction seeking relief under any Bankruptcy Laws, (v) the
appointment of a trustee, receiver, custodian, liquidator or the like for the
Pledgor, or of all or any substantial part of its assets; or (vi) the Pledgor
shall fail to perform any of its obligations under the Operating Agreement.
5. During the continuance of an Event of Default, the Agent shall have, in
addition to the rights, powers and authorizations to collect the sums assigned
hereunder, all rights and remedies of a secured party under the Uniform
Commercial Code and under other applicable law with respect to the Pledged
Interest, including, without limitation, the following rights and remedies: (i)
the Agent may, in its sole discretion, exercise any management or voting rights
relating to the Pledged Interest (whether or not the same shall have been
transferred into its name
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<PAGE>
or the name of its nominee or nominees) for any lawful purpose, including for
the amendment or modification of the Operating Agreement or other governing
documents or the liquidation of the assets of Residential, give all consents,
waivers, approvals, and ratifications in respect of such Pledged Interest, and
otherwise act with respect thereto as though it were the outright owner thereof
(the Pledgor hereby irrevocably constituting and appointing the Lenders the
proxy and attorney-in-fact of the Pledgor, with full power and authority of
substitution, to do so); (ii) the Agent may, in its sole discretion, demand, sue
for, collect, compromise, or settle any rights or claims in respect of the
Pledged Interest; (iii) the Agent may, in its sole discretion, sell, resell,
assign, deliver, or otherwise dispose of any or all of the Pledged Interest, for
cash or credit or both and upon such terms, in such manner, at such place or
places, at such time or times, and to such persons or entities as the Agent
think expedient, all without demand for performance by the Pledgor or any notice
or advertisement whatsoever except as expressly provided herein or as may
otherwise be required by applicable law; and (iv) the Agent may, in its sole
discretion, cause all or any part of the Pledged Interest held by it to be
transferred into its name or the name of its nominee or nominees.
The proceeds of any collection, sale or other disposition of the Pledged
Interest or any part thereof shall, after the Agent has made all deductions of
expenses, including but not limited to attorneys' fees and other expenses
incurred in connection with repossession, collection, sale, or disposition of
the Pledged Interest or in connection with the enforcement of Agent's rights
with respect to the Pledged Interest in any insolvency, bankruptcy or
reorganization proceedings, be applied against any of the Secured Liabilities,
whether or not all the same shall be then due and payable, in such manner as the
Agent and the Lenders shall in their sole discretion determine.
No single or partial exercise by the Agent of any right, power or remedy
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. Each right, power and remedy herein
specifically granted to the Agent or otherwise available to them shall be
cumulative, and shall be in addition to every other right, power, and remedy
herein specifically given or now or hereafter existing at law, in equity, or
otherwise. Each such right, power and remedy, whether specifically granted
herein or otherwise existing, may be exercised at any time and from time to time
and as often and in such order as may be deemed expedient by the Agent in its
sole discretion. Nothing contained in this Agreement shall be construed to
require the Agent to take any action with respect to the Pledged Interest,
whether by way of foreclosure or otherwise and except as required by any
Operating Agreement, in order to permit the Agent to become a substitute member
of Residential under the Operating Agreement.
6. If any notification of intended sale of any of the Pledged Interest is
required by law, such notification shall be deemed reasonable if mailed at least
ten (10) days before such sale, postage prepaid, (i) addressed to the Pledgor at
its notice address herein, and (ii) to any other secured party from whom the
Agent or the Lenders have received (prior to notification of the Pledgor or the
Pledgor's renunciation of his rights after default) written notice of a claim of
an interest in the Pledged Interest.
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<PAGE>
7. Any delay or omission by the Agent or the Lenders to exercise any
rights or powers arising from any default or any partial exercise thereof shall
not impair any such rights or powers, nor shall the same be construed to be a
waiver thereof or any acquiescence therein, nor shall any action or non-action
by the Agent or the Lenders in the event of any default alter or impair the
rights of the Agent or the Lenders in respect of any subsequent default, or
impair or affect any rights or powers resulting therefrom. This Pledge Agreement
shall remain in full force and effect until such time as all amounts due under
the Notes shall have been fully and irrevocably paid in full.
8. All notices, statements, requests, and demands given to or made upon
the any party hereto shall be given or made to such party at the address of such
party as set forth below its signature block herein.
9. The provisions of this Pledge Agreement shall be binding upon the
Pledgor, the Agent and the Lenders, and their respective heirs, personal
representatives, successors and assigns.
10. The Agent is hereby appointed by the Indemnities as their collateral
agent and each of the Lenders irrevocably authorize the Agent to act as the
collateral agent of such Lender. The Agent shall not have a fiduciary
relationship in respect of any Lender by reason of this Pledge Agreement, and
the nature of Agent's duties shall be mechanical and administrative in nature
only.
The Agent shall have and may exercise such powers hereunder as are
specifically delegated to or required by at least two-thirds of the Lenders (the
"Required Lenders") by the terms hereof or under any related document, together
with such powers as are reasonably incidental thereto. The Agent shall have no
implied duties to the Lenders or any obligation to the Lenders to take any
action hereunder except any action hereunder specifically provided hereunder or
under any related document to be taken by the Lenders. Notwithstanding the
foregoing, if the Agent shall receive a specific written instruction which shall
be inconsistent in any way with the foregoing, or which contradicts or
purportedly supersedes a previous instruction, the Agent agrees to honor and be
bound by such written instruction.
Neither the Agent nor any of its directors, officers, agents or employees
shall be liable to the Lenders for any action taken or omitted to be taken by it
or them hereunder except for its or their own gross negligence or willful
misconduct.
The Lenders agree to keep the Agent informed on a prompt and timely basis
of any information required by the Agent to perform its duties hereunder and
under any related documents.
If the Agent shall request instructions from the Lenders with respect to
any act or action (including failure to act) in connection with this Pledge
Agreement or any related documents, the Agent shall be entitled to refrain from
such act or taking such action unless and until the Agent
5
<PAGE>
shall have received instructions from the Required Lenders, and the Agent shall
not incur liability to any person by reason of so refraining.
The Agent may consult with legal counsel, independent public accountants
and any other experts selected by it. Notwithstanding anything herein to the
contrary, neither the Agent nor its directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken by any of them in
good faith reliance upon the advice of such persons.
The Lenders severally (on the basis of the pro rata principal amounts of
each of the Notes) agree to reimburse and indemnify the Agent for and against
any expenses incurred by the Agent on behalf of the Lenders in connection with
the administration and enforcement of this Pledge Agreement and any related
documents and any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against the Agent in
performing its duties hereunder or under any related documents or in any way
relating to or arising out of this Pledge Agreement or any related documents;
provided, however that the Lenders shall not be liable for any of the foregoing
to the extent they arise from the gross negligence or willful misconduct of the
Agent.
This Agent may be removed by the Lenders at any time upon delivery of
written notice to the Agent and the Pledgor.
[Remainder of page left blank intentionally.]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have caused their authorized representatives to execute this Pledge Agreement
under seal as of the 8th day of March, 2000.
ECHELON RESIDENTIAL
HOLDINGS LLC
By: /s/ James A. Coyne
------------------
James A. Coyne, Member
Address: 450 Carillon Parkway,
Suite 200
St. Petersburg, FL 33716
AMERICAN INCOME PARTNERS V-A
LIMITED PARTNERSHIP
By: AFG Leasing IV Incorporation, their
general partner
By: /s/ Gail D. Ofgant
------------------
Gail Ofgant, Senior Vice President
Address: 88 Broad Street
Boston, MA 02110
The undersigned hereby acknowledges the foregoing Pledge Agreement and
consents to the terms contained therein.
ECHELON RESIDENTIAL LLC
By: Equis/Echelon Management Corp.,
its Manager
By: /s/ Michael J. Butterfield
--------------------------
Michael J. Butterfield, Vice Pres.
Address: 450 Carillon Parkway, Suite 200
St. Petersburg, FL 33716
7
<PAGE>
Exhibit 13
AIRFUND II International Limited Partnership
Annual Report to the Partners, December 31, 1999
<PAGE>
AIRFUND II International Limited Partnership
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
----
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-8
FINANCIAL STATEMENTS:
Report of Independent Auditors 9
Statement of Financial Position
at December 31, 1999 and 1998 10
Statement of Operations
for the years ended December 31, 1999, 1998 and 1997 11
Statement of Changes in Partners' Capital
for the years ended December 31, 1999, 1998 and 1997 12
Statement of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 13
Notes to the Financial Statements 14-27
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 28
Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings 29
Schedule of Costs Reimbursed to the General Partner
and its Affiliates as Required by Section 10.4 of the Amended
and Restated Agreement and Certificate of Limited Partnership 30
<PAGE>
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the years in the five year period ended December 31, 1999:
<TABLE>
<CAPTION>
Summary of
Operations 1999 1998 1997 1996 1995
- -------------------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Lease revenue $1,841,170 $ 3,130,704 $ 3,224,618 $ 4,706,774 $ 6,585,836
Net income (loss) $1,892,009 $(1,208,085) $(1,762,752) $(3,649,940) $(5,286,053)
Per Unit:
Net income (loss) $ 0.66 $ (0.42) $ (0.62) $ (1.28) $ (1.85)
Cash distributions $ -- $ -- $ -- $ 2.25 $ 1.75
Financial Position
- ------------------
Total assets $9,112,479 $ 8,076,569 $ 9,765,106 $13,163,812 $21,432,133
Total long-term
obligations $ 981,775 $ 1,896,665 $ 2,677,520 $ 3,419,785 $ 1,432,396
Partners' capital $7,524,051 $ 5,632,042 $ 6,840,127 $ 8,602,879 $18,637,361
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1999 compared to the year ended
December 31, 1998 and the year ended December 31, 1998
compared to the year ended December 31, 1997
Certain statements in this annual report of AIRFUND II International
Limited Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of factors that could cause actual results to
differ materially from those expressed in any forward-looking statements made
herein. These factors include, but are not limited to, the outcome of the Class
Action Lawsuit described in Note 7 to the accompanying financial statements and
the remarketing of the Partnership's equipment.
Overview
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. During 1990 and 1991, the Partnership purchased
four commercial jet aircraft and a proportionate interest in two additional
aircraft which were leased by major carriers engaged in passenger
transportation. Initially, each aircraft generated rental revenue pursuant to
primary-term lease agreements. Subsequently, all of the aircraft in the
Partnership's original portfolio have been re-leased, renewed, exchanged for
other aircraft, or sold. In addition, see below for discussion related to the
detention and subsequent loss of one of the Partnership's aircraft in the United
Kingdom. At December 31, 1999, the Partnership owned one aircraft, two aircraft
engines and proportionate interests in five additional aircraft. In addition,
the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of
which could significantly alter the nature of the Partnership's organization and
its future business operations. See Note 7 to the accompanying financial
statements. Pursuant to the Amended and Restated Agreement and Certificate of
Limited Partnership (the "Restated Agreement, as amended"), the Partnership is
scheduled to be dissolved by December 31, 2005.
Year 2000 Issue
The Partnership uses information systems provided by Equis Financial Group
Limited Partnership ("EFG") and has no information systems of its own. EFG
completed all Year 2000 readiness work prior to December 31, 1999 and did not
experience any significant problems. Additionally, EFG is not aware of any
outside customer or vendor that experienced a Year 2000 issue that would have a
material effect on the Partnership's results of operations, liquidity, or
financial position. However, EFG has no means of ensuring that all customers,
vendors and third-party servicers have conformed to Year 2000 standards. The
effect of this risk to the Partnership is not determinable.
Results of Operations
For the year ended December 31, 1999, the Partnership recognized lease
revenue of $1,841,170 compared to $3,130,704 and $3,224,618 for the years ended
December 31, 1998 and 1997, respectively. The decrease in lease revenue from
1998 to 1999 was due primarily to the non-payment of rents by the lessee of the
Partnership's Lockheed L-1011-100 aircraft and that lessee's subsequent
liquidation (see below), the non-payment of rents by the lessee of the
Partnership's Boeing 727-251 ADV aircraft (see below) and the sale of its Boeing
727-208 ADV aircraft and its interest in a Lockheed L-1011-50 aircraft in April
1999 and April 1998, respectively. The decrease in the Partnership's lease
revenue from 1997 to 1998 was due primarily to the sale of the Partnership's
interest in the Lockheed L-1011-50 aircraft and a scheduled reduction in the
lease rent payable under the lease agreement related to the Partnership's Boeing
727-251 ADV aircraft. Such decrease was partially offset by an increase in lease
revenue recognized related to the Partnership's Lockheed L-1011-100 aircraft
(see below). In the future, the Partnership's aggregate lease revenue is
expected to decline due to the expiration of the lease terms related to the
Partnership's remaining aircraft and the ultimate sale of those aircraft.
3
<PAGE>
The leases related to the three Boeing 737-2H4 aircraft, in which the
Partnership holds proportionate interests, expired on December 31, 1999 and
collectively provided lease revenue of $94,392 per quarter to the Partnership.
The three aircraft are current being stored in a warehouse while the General
Partner attempts to remarket these aircraft (see additional discussion below).
The two McDonnell-Douglas MD-82 aircraft, in which the Partnership holds a
proportionate interest, are currently on lease to Finnair OY (the "Finnair
Aircraft"). These leases, which were renewed upon the expiration of the primary
lease terms in April 1999, expire in January 2000 and April 2001 and each
generates lease revenue of approximately $80,000 per quarter to the Partnership.
The Partnership's Boeing 727-251 ADV aircraft was damaged in an on-ground
accident in October 1998 while being leased on a month-to-month basis by
Transmeridian Airlines, Inc. ("Transmeridian"). This lease had been generating
lease revenue of $70,000 per month to the Partnership. In September 1999,
Transmeridian ceased paying rent with respect to this aircraft. See discussion
below and Notes 7 and 8 to the accompanying financial statements for details
regarding legal action undertaken by the Partnership related to this situation
and the remarketing of this aircraft in 2000. The Partnership recognized lease
revenue of $560,000, $876,667 and $971,500 related to this aircraft during the
years ended December 31, 1999, 1998 and 1997, respectively.
In August 1998, Classic Airways Limited ("Classic") ceased paying rent with
respect to the Partnership's Lockheed L-1011-100 jet aircraft. In October 1998,
Classic filed for receivership in the United Kingdom ("UK") and was placed in
liquidation (see further discussion below). The Partnership earned lease revenue
in the amount of approximately $320,000 and $145,000 related to this aircraft
during the years ended December 31, 1998 and 1997, respectively.
At December 31, 1999, the Partnership held proportionate ownership
interests in the Southwest Aircraft and the Finnair Aircraft (see Note 3 to the
accompanying financial statements). The remaining interests are owned by other
affiliated partnerships sponsored by EFG. All partnerships individually report,
in proportion to their respective ownership interests, their respective shares
of assets, liabilities, revenues and expenses associated with the aircraft.
Interest income for the year ended December 31, 1999 was $267,788 compared
to $158,844 and $110,635 for the years ended December 31, 1998 and 1997,
respectively. Interest income is typically generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments.
In April 1999, the Partnership sold its Boeing 727-208 ADV aircraft,
previously leased to American Trans Air, Inc. ("ATA"), to the lessee for net
proceeds of $3,109,500. The aircraft was fully depreciated at the time of sale,
resulting in a net gain, for financial statement purposes, of $3,109,500. The
Partnership recognized lease revenue of approximately $246,000, $762,000 and
$770,000 related to this aircraft for the year ended December 31, 1999, 1998 and
1997, respectively.
In April 1998, the Partnership sold its proportionate interest in a
Lockheed L-1011-50 aircraft to Aer Lease Limited ("Aer Lease") for net proceeds
of $553,699. The Partnership's interest in the aircraft had a net book value of
$426,434 at the time of disposal, resulting in a net gain for financial
statement purposes, of $127,265. The Partnership recognized aggregate lease
revenue of approximately $155,000 related to this aircraft during the years
ended December 31, 1998 and 1997, respectively.
The ultimate realization of residual value for any aircraft will be
dependent upon many factors, including EFG's ability to sell and re-lease the
aircraft. Changes in market conditions, industry trends, technological advances,
and other events could converge to enhance or detract from asset values at any
given time. EFG attempts to monitor these changes and the airline industry in
order to identify opportunities which may be advantageous to the Partnership and
which will maximize total cash returns for each aircraft.
The total economic value realized for each aircraft is comprised of all
primary lease term revenue generated from that aircraft, together with its
residual value. The latter consists of cash proceeds realized upon the
aircraft's sale in addition to all other cash receipts obtained from renting the
aircraft on a re-lease, renewal or month-to-month basis. Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
aircraft.
4
<PAGE>
Interest expense was $120,701 or 6.6% of lease revenue in 1999 compared to
$200,679 or 6.4% of lease revenue in 1998 and $268,916 or 8.3% of lease revenue
in 1997. Interest expense in future periods will continue to decline as the
principal balance of notes payable is reduced through the application of rent
receipts to outstanding debt. See additional discussion below regarding the
refinancing of certain indebtedness in 2000.
Management fees were 5% of lease revenue during 1999, 1998 and 1997 and
will not change as a percentage of lease revenue in future periods.
Operating expenses were $2,059,346, $1,815,947 and $1,290,508 for the years
ended December 31, 1999, 1998 and 1997, respectively. Operating expenses in the
year ended December 31, 1999 include engine leasing costs of $984,000 incurred
related to the aircraft leased to Transmeridian and legal costs related to the
Partnership's ongoing litigation (refer to Note 7 to the accompanying financial
statements). In addition, during 1999, the Partnership accrued approximately
$201,000 for the completion of a D-Check incurred to facilitate the remarketing
of the Finnair Aircraft having a lease agreement which expired in January 2000
(see Note 8 to the accompanying financial statements). Operating expenses in
1999 also include approximately $50,000 accrued for certain legal and
Consolidation expenses related to the Class Action Lawsuit described in Note 7
to the financial statements. During the year ended December 31, 1998, the
Partnership incurred or accrued approximately $332,000 for such expenses related
to the Class Action Lawsuit. In addition, the increase in operating expenses
from 1997 to 1998 also resulted from legal costs incurred in connection with
legal proceedings related to Northwest Airlines, Inc. and Classic (refer to Note
7 to the financial statements). In 1997, the Partnership's operating expenses
included significant heavy maintenance expenses incurred to facilitate the
remarketing of certain of its aircraft. Other operating expenses consist
principally of professional service costs, such as audit and other legal fees,
as well as insurance, printing, distribution and other remarketing expenses.
Depreciation was $1,054,343, $2,451,737 and $3,377,350 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Liquidity and Capital Resources and Discussion of Cash Flows
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 7 to the accompanying financial statements, the
Partnership is permitted to invest in new equipment or other business
activities, subject to certain limitations. On March 8, 2000, the Partnership
invested $3,640,000 in a debt instrument that matures in September 2002. (See
Notes 7 and 8 to the accompanying financial statements for additional
information concerning this transaction.)
The Partnership by its nature is a limited life entity. As an aircraft
equipment leasing program, the Partnership's principal operating activities
derive from aircraft rental transactions. Accordingly, the Partnership's
principal source of cash from operations is provided by the collection of
periodic rents. These cash inflows are used to satisfy debt service obligations
associated with leveraged leases, and to pay management fees and operating
costs. Operating activities generated net cash inflows of $99,270, $1,550,424
and $496,997 in 1999, 1998 and 1997, respectively. Future renewal, re-lease and
aircraft sales activities will continue to cause a decline in the Partnership's
lease revenues and corresponding sources of operating cash. The Partnership has
also expended substantial funds in the years ended December 31, 1999, 1998 and
1997 related to legal costs, aircraft refurbishment and remarketing expenses and
engine lease costs. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities will decline as the
Partnership remarkets its aircraft. The Partnership, however, will continue to
incur costs to facilitate the successful remarketing of its aircraft in the
future. Ultimately, the Partnership will dispose of all aircraft under lease.
This will occur principally through sale transactions whereby each aircraft will
be sold to the existing lessee or to a third party. Generally, this will occur
upon expiration of each aircraft's primary or renewal/re-lease term.
Cash realized from aircraft disposal transactions is reported under
investing activities on the accompanying Statement of Cash Flows. In 1999, the
Partnership received sales proceeds of $3,109,500 related to its Boeing 727-208
ADV aircraft formerly leased to ATA. During the year ended December 31, 1998,
the Partnership sold its interest in a Lockheed L-1011-50 aircraft and realized
net cash proceeds of $553,699. There were no aircraft sales during 1997. Future
inflows of cash from aircraft disposals will vary in timing and amount and will
be influenced by many factors including, but not limited to, the frequency and
timing of lease expirations, the type of aircraft being sold, their condition
and age, and future market conditions.
5
<PAGE>
At December 31, 1999, the Partnership was due aggregate future minimum
lease payments of $397,318 from contractual lease agreements (see Note 2 to the
financial statements), a portion of which will be used to amortize the principal
balance of notes payable of $981,775 (see Note 5 to the financial statements).
At the expiration of the individual lease terms underlying the Partnership's
future minimum lease payments, the Partnership will sell its aircraft or enter
re-lease or renewal agreements when considered advantageous by the General
Partner and EFG. Such future remarketing activities will result in the
realization of additional cash inflows in the form of aircraft sale proceeds or
rents from renewals and re-leases, the timing and extent of which cannot be
predicted with certainty. This is because the timing and extent of remarketing
events often is dependent upon the needs and interests of the existing lessees.
Some lessees may choose to renew their lease contracts, while others may elect
to return the aircraft. In the latter instances, the aircraft could be re-leased
to another lessee or sold to a third party. Accordingly, as the terms of the
currently existing contractual lease agreements expire, the cash flows of the
Partnership will become less predictable. In addition, the Partnership will need
cash outflows to satisfy interest on indebtedness and to pay management fees and
operating expenses.
The Partnership's Boeing 727-251 ADV aircraft formerly leased by
Transmeridian is currently being stored at a repair facility in Louisiana. In
March 2000, the Partnership accepted an offer to sell this aircraft to a third
party for $750,000 (see Note 8 to the financial statements). This sale, which is
subject to certain conditions, is expected to close in the second quarter of
2000.
In August 1998, a lessee of the Partnership, Classic, ceased paying rent
to the Partnership with respect to a Lockheed L-1011-100 Aircraft (the
"Aircraft") and the Partnership terminated the lease. Classic then filed for
receivership in the United Kingdom ("UK") and was placed in liquidation.
Prior to its liquidation, Classic had incurred and failed to pay significant
airport ground fees to BAA plc, Eurocontrol, and CAA (collectively, the
"Airport Authorities"). Classic's failure to pay such charges resulted in
detention of the Aircraft by BAA plc. The total of ground fees and expenses
asserted by the Airport Authorities, which continued to accrue after the
detention began, exceeded $1,500,000 at November 30, 1999. Prior to that
date, the General Partner had attempted to reach a negotiated settlement with
the Airport Authorities so that the Aircraft could be returned to the
Partnership. Those negotiations were unsuccessful and the General Partner
determined that the amount of fees owed to the Airport Authorities was in
excess of the Aircraft's value and, therefore, it would not be in the
Partnership's best interests to pay these fees.
BAA plc obtained a judgment from a UK Court entitling it to sell the
aircraft to satisfy the unpaid charges and, on December 8, 1999, the Aircraft
was sold at auction. It is believed that the sale price was insufficient to
satisfy the aggregate fees owed to the Airport Authorities. Accordingly, the
Partnership will not realize any portion of the sale proceeds obtained by BAA
plc nor any future residual value from the Aircraft. Notwithstanding the
foregoing, the Partnership continues to hold the Aircraft's records, which may
have some value independent of the value of the Aircraft, as well as two engines
that had been removed from the Aircraft for maintenance prior to Classic's
liquidation. The value of these items is being evaluated presently. At the date
of Classic's liquidation, the Partnership had accrued $160,000 of rental income
which had not been collected from Classic and all of which was written off as
uncollectible in the third quarter of 1998. The Aircraft, including the two
engines that were removed for maintenance, had been fully depreciated prior to
the auction by BAA plc. Subsequent to the auction, the Aircraft (except for the
two engines) was written off by the Partnership.
The Partnership obtained long-term financing in connection with the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, they are used to repay principal and interest.
The debt related to the Southwest Aircraft was fully amortized during 1999.
In December 1998, the Partnership and certain affiliated investment
programs owning interests in two McDonnell Douglas MD-82 aircraft (collectively,
the "Programs") entered into lease extension agreements with Finnair OY. The
lease extensions, effective upon the expiration of the existing primary lease
terms on April 28, 1999, extended the leases for nine months and two years,
respectively. All of the future minimum lease payments contracted to be received
by the Partnership (see above) result from these lease extensions.
6
<PAGE>
On April 29, 1999, the Programs entered into agreements with a third-party
lender to extend the maturity dates of the Programs' indebtedness related to the
Finnair Aircraft. Consistent with the extension terms of the lease agreements
related to the Finnair Aircraft discussed above, the maturity dates of the
indebtedness were extended to January 2000 and April 2001, respectively. The
Partnership has balloon payment obligations of $499,815 and $133,261 related to
this indebtedness that is due on the respective maturity dates. In February
2000, the Programs refinanced the indebtedness maturing in January 2000 (see
Note 8 to the financial statements).
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket aircraft upon lease expiration. Liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining aircraft portfolio consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft.
The management and remarketing of aircraft can involve, among other things,
significant costs and lengthy remarketing initiatives. Although the
Partnership's lessees are required to maintain the aircraft during the period of
lease contract, repair, maintenance, and/or refurbishment costs at lease
expiration can be substantial. For example, an aircraft that is returned to the
Partnership meeting minimum airworthiness standards, such as flight hours or
engine cycles, nonetheless may require heavy maintenance in order to bring its
engines, airframe and other hardware up to standards that will permit its
prospective use in commercial air transportation. At December 31, 1999, the
Partnership had ownership interests in six commercial jet aircraft (and two
aircraft engines). Three of the aircraft are Boeing 737 aircraft formerly leased
to Southwest Airlines, Inc. The lease agreements for each of these aircraft
expired on December 31, 1999 and Southwest elected to return the aircraft. A
fourth aircraft, a Boeing 727 aircraft formerly leased to Transmeridian, is
being stored at a repair facility in Louisiana. Each of these aircraft are Stage
2 aircraft, meaning that they are prohibited from operating in the United States
after December 31, 1999 unless they are retro-fitted with hush-kits to meet
Stage 3 noise regulations promulgated by the Federal Aviation Administration.
The cost to hush-kit an aircraft, such as the Partnership's Boeing 727 and
Boeing 737s, can approach $2 million. At this time, the General Partner is
attempting to remarket these assets without further capital investment by either
re-leasing the aircraft to a user outside of the United States or selling the
aircraft as they are without retro-fitting the aircraft to conform to Stage 3
standards. The remaining two aircraft in the Partnership's portfolio already are
Stage 3 compliant. One of these aircraft had a lease term that expired in
January 2000 and is being held in storage pending the outcome of ongoing
remarketing efforts. The other aircraft has a lease term expiring in April 2001.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the financial statements). For instance, selling commissions and
organization and offering costs pertaining to syndication of the Partnership's
limited partnership units are not deductible for federal income tax purposes,
but are recorded as a reduction of partners' capital for financial reporting
purposes. Therefore, such differences are permanent differences between capital
accounts for financial reporting and federal income tax purposes. Other
differences between the bases of capital accounts for federal income tax and
financial reporting purposes occur due to timing differences consisting of the
cumulative difference between income or loss for tax purposes and financial
statement income or loss. The principal component of the cumulative difference
between financial statement income or loss and tax income or loss results from
different depreciation policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at December 31, 1999. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 1999, the General Partner had a positive tax capital account
balance.
7
<PAGE>
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 7 to the accompanying financial statements. The proposed settlement to
that lawsuit, if effected, will materially change the future organizational
structure and business interests of the Partnership, as well as its cash
distribution policies. The General Partner believes that it will be in the
Partnership's best interests to continue to suspend the payment of quarterly
cash distributions pending final resolution of the Class Action Lawsuit.
Accordingly, future cash distributions are not expected to be paid until the
Class Action Lawsuit is adjudicated.
8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of AIRFUND II International Limited Partnership:
We have audited the accompanying statements of financial position of
AIRFUND II International Limited Partnership, as of December 31, 1999 and 1998,
and the related statements of operations, changes in partners' capital, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AIRFUND II International
Limited Partnership at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Partners is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 20, 2000
9
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,719,642 $ 3,425,762
Rents receivable -- 39,933
Accounts receivable - affiliate 1,476 71,178
Other assets 31,742 125,734
Equipment at cost, net of accumulated
depreciation of $18,449,875 and
$40,968,380 at December 31, 1999
and 1998, respectively 3,359,619 4,413,962
------------- -------------
Total assets $ 9,112,479 $ 8,076,569
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 981,775 $ 1,896,665
Accrued interest 13,356 25,126
Accrued liabilities 463,324 458,485
Accrued liabilities - affiliate 78,593 16,254
Deferred rental income 51,380 47,997
------------- -------------
Total liabilities 1,588,428 2,444,527
------------- -------------
Partners' capital (deficit):
General Partner (2,619,254) (2,713,854)
Limited Partnership Interests
(2,714,647 Units; initial purchase
price of $25 each) 10,143,305 8,345,896
------------- -------------
Total partners' capital 7,524,051 5,632,042
------------- -------------
Total liabilities and partners' capital $ 9,112,479 $ 8,076,569
============= =============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
10
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Lease revenue $ 1,841,170 $ 3,130,704 $ 3,224,618
Interest income 267,788 158,844 110,635
Gain on sale of equipment 3,109,500 127,265 --
------------ ------------ ------------
Total income 5,218,458 3,416,813 3,335,253
------------ ------------ ------------
Expenses:
Depreciation 1,054,343 2,451,737 3,377,350
Interest expense 120,701 200,679 268,916
Equipment management fees -
affiliate 92,059 156,535 161,231
Operating expenses -
affiliate 2,059,346 1,815,947 1,290,508
------------ ------------ ------------
Total expenses 3,326,449 4,624,898 5,098,005
------------ ------------ ------------
Net income (loss) $ 1,892,009 $ (1,208,085) $ (1,762,752)
============ ============ ============
Net income (loss)
per limited partnership unit $ 0.66 $ (0.42) $ (0.62)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
11
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL for the years
ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
General Recognized Owners
Partner ---------------------------
Amount Units Amount Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ (2,565,312) 2,714,647 $ 11,168,191 $ 8,602,879)
Net loss - 1997 (88,138) -- (1,674,614) (1,762,752
------------ ------------ ------------ ------------
Balance at December 31, 1997 (2,653,450) 2,714,647 9,493,577 6,840,127
Net loss - 1998 (60,404) -- (1,147,681) (1,208,085)
------------ ------------ ------------ ------------
Balance at December 31, 1998 (2,713,854) 2,714,647 8,345,896 5,632,042
Net income - 1999 94,600 -- 1,797,409 1,892,009
------------ ------------ ------------ ------------
Balance at December 31, 1999 $ (2,619,254) 2,714,647 $ 10,143,305 $ 7,524,051
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
12
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 1,892,009 $(1,208,085) $(1,762,752)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 1,054,343 2,451,737 3,377,350
Gain on sale of equipment (3,109,500) (127,265) --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 39,933 25,187 (65,120)
Accounts receivable - affiliate 69,702 234,181 (158,792)
Other assets 93,992 (125,734) --
Increase (decrease) in:
Accrued interest (11,770) (4,492) (6,311)
Accrued liabilities 4,839 450,235 (533,284)
Accrued liabilities - affiliate 62,339 (26,270) (446,494)
Deferred rental income 3,383 (119,070) 92,400
----------- ----------- -----------
Net cash from operating activities 99,270 1,550,424 496,997
----------- ----------- -----------
Cash flow from investing activities:
Proceeds from equipment sales 3,109,500 553,699 --
----------- ----------- -----------
Net cash from investing activities 3,109,500 553,699 --
----------- ----------- -----------
Cash flow used in financing activities:
Principal payments - notes payable (914,890) (780,855) (742,265)
----------- ----------- -----------
Net cash used in financing activities (914,890) (780,855) (742,265)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 2,293,880 1,323,268 (245,268)
Cash and cash equivalents at beginning of year 3,425,762 2,102,494 2,347,762
----------- ----------- -----------
Cash and cash equivalents at end of year $ 5,719,642 $ 3,425,762 $ 2,102,494
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 132,471 $ 205,171 $ 275,227
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
13
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
AIRFUND II International Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on July 20, 1989 for the purpose of
acquiring and leasing to third parties a specified portfolio of used commercial
aircraft. Partners' capital initially consisted of contributions of $1,000 from
the General Partner (AFG Aircraft Management Corporation, a Massachusetts
corporation) and $100 from the Initial Limited Partner (AFG Assignor
Corporation, a Massachusetts corporation). The Partnership issued 2,714,647
units, representing assignments of limited partnership interests (the "Units"),
to 4,192 investors. Unitholders and Limited Partners (other than the Initial
Limited Partner) are collectively referred to as Recognized Owners. The General
Partner is an affiliate of Equis Financial Group Limited Partnership (formerly
known as American Finance Group), a Massachusetts limited partnership ("EFG").
The common stock of the General Partner is owned by AF/AIP Programs Limited
Partnership. EFG and a wholly owned affiliate are the 99% limited partners and
AFG Programs, Inc., a Massachusetts corporation that is wholly-owned by Geoffrey
A. MacDonald, is the 1% general partner. The General Partner is not required to
make any other capital contributions to the Partnership except as may be
required under the Uniform Act and Section 6.1(b) of the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended").
EFG is a Massachusetts partnership formerly known as American Finance Group
("AFG"). AFG was established in 1988 as a Massachusetts general partnership and
succeeded American Finance Group, Inc., a Massachusetts corporation organized in
1980. EFG and its subsidiaries (collectively, the "Company") are engaged in
various aspects of the equipment leasing business, including EFG's role as
Equipment Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis
Corporation and GDE LP were established in December 1994 by Mr. Engle for the
sole purpose of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG.
On June 28, 1991, the Offering of Units of the Partnership was concluded.
The Partnership issued an aggregate of 2,714,647 Units in six Interim Closings
during the period May 17, 1990 through June 28, 1991. The initial purchase of
the aircraft and the associated lease commitments occurred on May 18, 1990.
Additional purchases of aircraft (or proportionate interests in aircraft)
occurred subsequent to each Closing. The six Interim Closings which occurred in
1990 and 1991 and the associated Units issued, purchase price and number of
investors who became Recognized Owners of the Partnership are summarized below.
14
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
Recognized
Closing Date Units Issued Purchase Price Owners
------------ ------------ -------------- ------
<S> <C> <C> <C>
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
========== ============ ==========
</TABLE>
Pursuant to the Restated Agreement, as amended, distributions of
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings of the Partnership shall be made as follows: Prior to Payout, (i)
Distributable Cash From Operations will be distributed 95% to the Recognized
Owners and 5% to the General Partner and (ii) Distributable Cash From Sales or
Refinancings shall be distributed 99% to the Recognized Owners and 1% to the
General Partner. After Payout, (i) all Distributions will be distributed 99% to
the General Partner and 1% to the Recognized Owners until the General Partner
has received an amount equal to 5% of all Distributions made by the Partnership
and (ii) thereafter, all Distributions will be made 90% to the Recognized Owners
and 10% to the General Partner.
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 4).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in federal agency
discount notes and in repurchase agreements with overnight maturities. Under the
terms of the agreements, title to the underlying securities passes to the
Partnership. The securities underlying the agreements are book entry securities.
At December 31, 1999, the Partnership had $5,605,151 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
Revenue Recognition
Rents are payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Partnership's business activities as the
General Partner and EFG would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future noncancellable rental payments associated with the attendant lease
agreements. See also Note 7 regarding the Class Action Lawsuit. Future minimum
rents are $397,318 are due as follows:
15
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
For the year ending December 31, 2000 $ 317,854
2001 79,464
-----------
Total $ 397,318
===========
In December 1998, the Partnership and certain affiliated investment
programs owning interests in two McDonnell Douglas MD-82 aircraft entered into
lease extension agreements with Finnair OY. The lease extensions, effective upon
the expiration of the existing primary lease terms on April 28, 1999, extended
the leases for nine months and two years, respectively. All of the future
minimum lease payments contracted to be received by the Partnership (see above)
result from these lease extensions.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- --------
<S> <C> <C> <C>
Finnair OY
(Two McDonnell-Douglas MD-82) $ 634,658 $ 639,923 $ 639,752
Transmeridian Airlines, Inc.
(One Boeing 727-251 ADV) $ 560,000 $ 876,667 $ 971,500
Southwest Airlines, Inc.
(Three Boeing 737-2H4) $ 380,699 $ 377,568 $ 377,568
American Trans Air, Inc.
(One Boeing 727-208 ADV) $ 245,533 $ 762,000 $ 770,467
Classic Airways Limited
(One Lockheed L-1011-100) $ -- $ 319,960 $ --
</TABLE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
All aircraft were acquired from EFG or one of its Affiliates. Equipment
Cost means the actual cost paid by the Partnership to acquire the aircraft,
including acquisition fees. Equipment cost reflects the actual price paid for
the aircraft by EFG or the Affiliate plus all actual costs incurred by EFG or
the Affiliate while carrying the aircraft less, (a) for all aircraft other than
the Boeing 727-208 ADV aircraft, the amount of all rents received by EFG or the
Affiliate prior to selling the aircraft or, (b) with respect to the Boeing
727-208 ADV aircraft, rents received from the date of the commencement of the
lease of the aircraft until the date of the sale to the Partnership.
Depreciation
The Partnership's depreciation policy is intended to allocate the cost of
aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values
16
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
at the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of equipment to determine whether it exceeds estimated
net realizable value. Adjustments to reduce the net carrying value of equipment
are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value.
The ultimate realization of residual value for any type of aircraft is
dependent upon many factors, including EFG's ability to sell and re-lease
aircraft. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Accrued Liabilities - Affiliate
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (see Note 4).
Contingencies
It is the Partnership's policy to recognize a liability for goods and
services during the period when the goods or services are received. To the
extent that the Partnership has a contingent liability, meaning generally a
liability the payment of which is subject to the outcome of a future event, the
Partnership recognizes a liability in accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS
No. 5 requires the recognition of contingent liabilities when the amount of
liability can be reasonably estimated and the liability is likely to be
incurred.
The Partnership is a Nominal Defendant in a Class Action Lawsuit. In 1998,
a settlement proposal to resolve that litigation was negotiated and remains
pending (see Note 7). The Partnership's estimated exposure for costs anticipated
to be incurred in pursuing the settlement proposal is approximately $382,000
consisting principally of legal fees and other professional service costs. These
costs are expected to be incurred regardless of whether the proposed settlement
ultimately is effected and, therefore, the Partnership accrued approximately
$332,000 of these costs in 1998 following the Court's approval of the settlement
plan. The cost estimate is subject to change and is monitored by the General
Partner based upon the progress of the settlement proposal and other pertinent
information. As a result, the Partnership accrued and expensed an additional
$50,000 for such costs during 1999.
Allocation of Profits and Losses
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
Net Income (Loss) and Cash Distributions Per Unit
Net income (loss) and cash distributions per Unit are based on 2,714,647
Units outstanding during each of the three years in the period ended December
31, 1999 and computed after allocation of the General Partner's 5% share of net
income (loss) and applicable share of cash distributions (see Note 1 for
additional information).
17
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
December 31, 1999. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 1999 under contracted lease terms.
In the opinion of EFG, the acquisition cost of the equipment did not exceed its
fair market value.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
-------------- -------- ------- --------
<S> <C> <C> <C>
One Boeing 727-251 ADV 0 $ 9,732,714 LA
Two Rolls Royce aircraft engines 0 6,000,000 Foreign
Two McDonnell-Douglas MD-82 (Finnair) 1-16 4,157,280 Foreign
Three Boeing 737-2H4 0 1,919,500 TX
------------
Total equipment cost 21,809,494
Accumulated depreciation (18,449,875)
------------
Equipment, net of accumulated depreciation $ 3,359,619
============
</TABLE>
The costs of the two McDonnell-Douglas MD-82 aircraft and the three Boeing
737-2H4 aircraft represent proportionate ownership interests. The remaining
interests are owned by other affiliated partnerships sponsored by EFG. All
partnerships individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the aircraft.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary includes
leveraged equipment having an original cost of approximately $4,157,000 and a
net book value of approximately $2,679,000 at December 31, 1999 (see Note 5).
At December 31, 1999, the three Boeing 737-2H4 jet aircraft, in which the
Partnership holds ownership interests, were held for sale or re-lease. The
aircraft had a cost of approximately $1,920,000 and a net book value of
approximately $681,000 at December 31, 1999. In addition, the Partnership's
Boeing 727-251 ADV aircraft and two Rolls Royce aircraft engines previously
leased to Classic Airways Limited by virtue of its lease of the Lockheed
L-1011-100 aircraft (see Note 7) were also held for sale or re-lease. The Boeing
727-251 ADV aircraft and the aircraft engines were fully depreciated at December
31, 1999 and had an original cost of approximately $9,733,000 and $6,000,000,
respectively. See Note 8 regarding the remarketing of the Boeing 727-251 ADV
aircraft in 2000.
Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
18
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
However, the Partnership has purchased supplemental insurance coverage to reduce
the economic risk arising from certain losses. Specifically, the Partnership is
insured under supplemental policies for "Aircraft Hull Total Loss Only" and
"Aircraft Hull Total Loss Only War and Other Perils."
As aircraft are sold to third parties, or otherwise disposed of, the
Partnership will recognize a gain or loss equal to the difference between the
net book value of the aircraft at the time of sale or disposition and the
proceeds realized upon sale or disposition. The ultimate realization of
estimated residual value in the aircraft is dependent upon, among other things,
EFG's ability to maximize proceeds from selling or re-leasing the aircraft upon
the expiration of the primary lease terms.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1999, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Equipment management fees $ 92,059 $ 156,535 $ 161,231
Administrative charges 71,699 53,676 50,304
Reimbursable operating expenses
due to third parties 1,987,647 1,762,271 1,240,204
------------ ------------ ------------
Total $ 2,151,405 $ 1,972,482 $ 1,451,739
============ ============ ============
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 3.07% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are subject to
certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4 of Restated Agreement, as amended, for persons employed by EFG who are
engaged in providing administrative services to the Partnership. Reimbursable
operating expenses due to third parties represent costs paid by EFG on behalf of
the Partnership which are reimbursed to EFG at actual cost.
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2,
Equipment on Lease.
All rents and the proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1999, the Partnership was owed $1,476 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
2000.
19
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Certain affiliates of the General Partner own Units in the Partnership as
follows:
<TABLE>
<CAPTION>
Number of Percent of Total
Affiliate Units Owned Outstanding Units
--------- ----------- -----------------
<S> <C> <C>
Old North Capital Limited Partnership 40,000 1.47%
</TABLE>
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnerships formed in 1995 and an affiliate of EFG. The general partner of ONC
is controlled by Gary D. Engle. In addition, the limited partnership interests
of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1999 consisted of installment notes payable
to banks of $981,775. The installment notes are non-recourse, with interest
rates ranging between 8.09% and 8.65% and are collateralized by the equipment
and assignment of the related lease payments. All of the notes were originated
in connection with the Finnair Aircraft. The Partnership has balloon payment
obligations at the expiration of the renewal lease terms related to the aircraft
on lease to Finnair OY of $499,815 and $133,261. This indebtedness matures in
January 2000 and April 2001, respectively. (See Note 8 regarding the refinancing
of the indebtedness that matured in January 2000). The carrying amount of notes
payable approximates fair value at December 31, 1999. The annual maturities of
the installment notes payable are as follows:
For the year ending December 31, 2000 $ 775,968
2001 205,807
---------
Total $ 981,775
=========
NOTE 6 - INCOME TAXES
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax reporting purposes, the Partnership allocates net income
or loss in accordance with such agreement. The Restated Agreement, as amended,
requires that upon dissolution of the Partnership, the General Partner will be
required to contribute to the Partnership an amount equal to any negative
balance which may exist in the General Partner's tax capital account. At
December 31, 1999, the General Partner had a positive tax capital account
balance.
The following is a reconciliation between net income (loss) reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1999, 1998 and 1997:
20
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $ 1,892,009 $(1,208,085) $(1,762,752)
Financial statement
depreciation in excess
of (less than) tax
depreciation 673,872 (713,082) (2,136,596)
Deferred rental income 3,383 (119,070) 92,400
Other 64,000 362,435 (998,111)
----------- ----------- -----------
Net income (loss) for federal
income tax reporting
purposes $ 2,633,264 $(1,677,802) $(4,805,059)
=========== =========== ===========
</TABLE>
The principal component of "Other" consists of the difference between the
tax gain or loss on aircraft disposals and the financial statement gain or loss
on aircraft disposals. It also includes reversal of certain maintenance
reserves.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Partners' capital $ 7,524,051 $ 5,632,042
Add back selling commissions and organization
and offering costs 7,085,240 7,085,240
Cumulative difference between federal income
tax and financial statement income (loss) (937,118) (1,678,373)
------------ ------------
Partners' capital for federal income tax
reporting purposes $ 13,672,173 $ 11,038,909
============ ============
</TABLE>
The cumulative difference between federal income tax and financial
statement income (loss) represents a timing difference.
NOTE 7 - LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group
Limited Partnership, et al., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of
21
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
fiduciary duty, and violations of the partnership or trust agreements that
govern each of the Nominal Defendants. The Defendants have denied, and continue
to deny, that any of them have committed or threatened to commit any violations
of law or breached any fiduciary duties to the Plaintiffs or the Nominal
Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
On March 12, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 12, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divided the
Class Action Lawsuit into two separate sub-classes that could be settled
individually. On May 26, 1999, the Court issued an Order and Final Judgment
approving settlement of one of the sub-classes. Settlement of the second
sub-class, involving the Partnership and 10 affiliated partnerships
(collectively referred to as the "Exchange Partnerships"), remains pending due,
in part, to the complexity of the proposed settlement pertaining to this class.
In February 2000, counsel for the Plaintiffs and the Defendants entered
into a second amended stipulation of settlement (the "Second Amended
Stipulation") which modified certain of the settlement terms contained in the
Amended Stipulation. The Second Amended Stipulation was preliminarily approved
by the Court by its "Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing For Notice of, and
Hearing On, the Proposed Settlement" dated March 6, 2000 (the "March 2000
Order"). Prior to issuing a final order approving the settlement of the second
sub-class involving the Partnership, the Court will hold a fairness hearing that
will be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff sub-class
members will receive a Notice of Settlement and other information pertinent to
the settlement of their claims that will be mailed to them in advance of the
fairness hearing.
The settlement of the second sub-class is premised on the consolidation of
the Exchange Partnerships' net assets (the "Consolidation"), subject to certain
conditions, into a single successor company ("Newco"). Under the proposed
Consolidation, the partners of the Exchange Partnerships would receive both
common stock in Newco and a cash distribution; and thereupon the Exchange
Partnerships would be dissolved. In addition, EFG would contribute certain
management contracts, operations personnel, and business opportunities to Newco
and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate principally as a finance company and would use
its best efforts to list its shares on the NASDAQ National Market or another
national exchange or market as soon after the Consolidation as Newco deems that
market conditions and its business operations are suitable for listing its
shares and Newco has satisfied all necessary regulatory and listing
requirements. The potential benefits and risks of the Consolidation will be
presented in a Solicitation Statement that will be mailed to all of the partners
of the Exchange Partnerships as soon as the associated regulatory review process
is completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24, 1998 and remains pending. Class members will be notified of the
actual fairness hearing date when it is confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the Partnership's
customary business operations until all of its assets are disposed in the
ordinary course of business. To facilitate the realization of this objective,
the Amended Stipulation provided, among other things, that
22
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
commencing March 22, 1999, the Exchange Partnerships could collectively invest
up to 40% of the total aggregate net asset values of all of the Exchange
Partnerships in any investment, including additional equipment and other
business activities that the general partners of the Exchange Partnerships and
EFG reasonably believed to be consistent with the anticipated business interests
and objectives of Newco, subject to certain limitations. The Second Amended
Stipulation, among other things, quantified the 40% limitation using a whole
dollar amount of $32 million in the aggregate.
On March 8, 2000, the Exchange Partnerships collectively invested $32
million as permitted by the Second Amended Stipulation approved by the Court.
The Partnership's portion of the aggregate investment is $3,640,000. The
investment consists of a term loan to Echelon Residential Holdings LLC, a
newly-formed real estate development company that will be owned by several
investors, including James A. Coyne, Executive Vice President of EFG. Mr.
Coyne, in his individual capacity, is the only investor in Echelon
Residential Holdings LLC who is related to EFG. The loan proceeds were used
by Echelon Residential Holdings LLC in the formation of a subsidiary, Echelon
Residential LLC, that in turn acquired various real estate assets from
Echelon International Corporation, a Florida based real estate company. The
loan has a term of 30 months maturing on September 7, 2002 and bears interest
at the annual rate of 14% for the first 24 months and 18% for the final six
months of the term. Interest accrues and compounds monthly but is not payable
until maturity. Echelon Residential Holdings LLC has pledged a security
interest in all of its right, title and interest in and to its membership
interests in Echelon Residential LLC to the Exchange Partnerships as
collateral.
In the absence of the Court's authorization to enter into new investment
activities, the Partnership's Restated Agreement, as amended, would not permit
such activities without the approval of limited partners owning a majority of
the Partnership's outstanding Units. Consistent with the Amended Stipulation,
the Second Amended Stipulation provides terms for unwinding any new investment
transactions in the event that the Consolidation is not effected or the
Partnership objects to its participation in the Consolidation.
The Second Amended Stipulation, as well as the Amended Stipulation and the
original Stipulation of Settlement, prescribe certain conditions necessary to
effect a final settlement, including providing the partners of the Exchange
Partnerships with the opportunity to object to the participation of their
partnership in the Consolidation. Assuming the proposed settlement is effected
according to present terms, the Partnership's share of legal fees and expenses
related to the Class Action Lawsuit and the Consolidation is estimated to be
approximately $382,000, of which approximately $332,000 was accrued and expensed
by the Partnership in 1998 and approximately $50,000 was accrued and expensed in
1999.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permitted the partners to transfer Units to family members or as
a result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
There can be no assurance that settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected. There
also can be no assurance that all or any of the Exchange Partnerships will
participate in the Consolidation because if limited partners owning more than
one-third of the outstanding Units of a partnership object to the Consolidation,
then that partnership will be excluded from the Consolidation. Notwithstanding
the extent of delays experienced thus far in achieving a final settlement of the
Class Action Lawsuit with respect to the Exchange Partnerships, the General
Partner and its affiliates, in consultation with
23
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
counsel, continue to feel that there is a reasonable basis to believe that a
final settlement of the sub-class involving the Exchange Partnerships ultimately
will be achieved. However, in the absence of a final settlement approved by the
Court, the Defendants intend to defend vigorously against the claims asserted in
the Class Action Lawsuit. Neither the General Partner nor its affiliates can
predict with any degree of certainty the cost of continuing litigation to the
Partnership or the ultimate outcome.
In addition to the foregoing, the Partnership is a party to other lawsuits
that have arisen out of the conduct of its business, principally involving
disputes or disagreements with lessees over lease terms and conditions as
described below:
First action involving Transmeridian Airlines
On October 11, 1996, Prime Air Inc. d/b/a Transmeridian Airlines (the
"Plaintiff") filed an action in the 61st Judicial District Court of Harris
County, Texas (the "Court") entitled Prime Air, Inc. d/b/a Transmeridian
Airlines v. Investors Asset Holding Corp. ("IAHC"), as Trustee for Airfund II
International Limited Partnership, PLM International ("PLM"), and NavCom
Aviation, Inc. (collectively, the "Defendants"). In that action, the Plaintiff
claimed damages of more than $3 million for alleged breach of contract, fraud,
civil conspiracy, tortious interference of business relations, negligent
misrepresentation, negligence and gross negligence, and punitive damages against
the Defendants in connection with Transmeridian's lease of a Boeing 727-251 ADV
jet aircraft from the Partnership. On November 7, 1996, PLM removed the action
to United States District Court for the Southern District of Texas. On February
14, 1997, the Defendants answered the Plaintiff's Complaint denying the
allegations made therein and asserting various defenses.
On July 31, 1998, the Court granted IAHC's motion to strike Plaintiff's
fraud and negligent misrepresentation claims due to failure to plead with
particularity. Extensive discovery was conducted on the merits of Plaintiff's
claims. The Plaintiff, at one point, provided an expert report seeking
approximately $30 million in damages. The Plaintiff later provided a revised
expert report claiming actual damages of approximately $8.5 million and
Plaintiff continued to seek punitive damages and both pre-judgment and
post-judgment interest. On March 18, 1999, the Court entered summary judgment in
favor of IAHC and PLM on all remaining claims. The Plaintiff subsequently filed
a motion to alter or amend the judgment, or in the alternative, to certify the
Court's Order for Interlocutory Appeal. On April 30, 1999, the Court declined to
alter or amend its judgment and entered final judgment in favor of IAHC and PLM
on all remaining claims. The Plaintiff appealed to the United States Court of
Appeals for the 5th Circuit. (Response briefs by IAHC and PLM were filed on
October 29, 1999.) The General Partner believes that the Plaintiff's claims are
without merit and will continue to defend this action vigorously. While there is
no certainty as to the outcome of this litigation, the General Partner, in
consultation with counsel, believes that there is a reasonable basis to believe
that the summary judgments already granted will be upheld under appeal and that
the Partnership, therefore, will not be adversely affected by the outcome of
this litigation. However, the Partnership has incurred and continues to incur
attorneys' fees and related defense costs with respect to this litigation that
aggregate approximately $1 million since the inception of this litigation in
1996. An action seeking recovery of these costs was filed on behalf of the
Partnership in November 1999. See "Indemnity action against Transmeridian
Airlines and Apple Vacations" described below.
Second action involving Transmeridian Airlines
On November 9, 1998, Investors Asset Holding Corp., as Trustee for the
Partnership (the "Plaintiff"), filed an action in Superior Court of the
Commonwealth of Massachusetts in Suffolk County against Prime Air, Inc. d/b/a
Transmeridian Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and
Apple Vacations, West, Inc., both d/b/a Apple Vacations, asserting various
causes of action for declaratory judgment and breach of contract. The action
subsequently was removed to United States District Court for the District of
Massachusetts. The Plaintiff
24
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
has filed an Amended Complaint asserting claims for breaches of contract and
covenant of good faith and fair dealing against Transmeridian and breach of
guaranty against Apple Vacations.
In October 1998, an aircraft leased by Transmeridian (being the same
aircraft in the above-referenced "First action involving Transmeridian
Airlines") was damaged in an on-ground accident at the Caracas, Venezuela
airport. The aircraft currently is being stored at a repair facility in
Louisiana. The cost to repair the aircraft is estimated to be at least $350,000.
In addition, the Partnership has had to lease two substitute engines at a cost
of $82,000 per month. During the year ended December 31, 1999, the Partnership
incurred total engine lease costs of $984,000. This was partially offset by
lease rents paid by Transmeridian of $560,000 during the same period. However,
as of September 11, 1999, Transmeridian ceased paying rent on this aircraft. The
Plaintiff alleges that Transmeridian, among other things, has impeded the
Partnership's ability to terminate the two engine lease contracts between the
Partnership and a third party. The Plaintiff intends to pursue insurance
coverage and also to enforce written guarantees issued by Apple Vacations that
absolutely and unconditionally guarantee Transmeridian's performance under the
lease and is seeking recovery of all costs, lost revenue and monetary damages in
connection with this matter. Discovery is ongoing and a trial date has been
tentatively scheduled for January 15, 2001. The General Partner plans to
vigorously pursue this action; however, it is too early to predict the
Plaintiff's likelihood of success. See Note 8 - Aircraft Sale - regarding the
remarketing of this aircraft.
Indemnity action against Transmeridian Airlines and Apple Vacations
On November 12, 1999, Investors Asset Holding Corp. ("IAHC"), as trustee
for Airfund II International Limited Partnership, filed an action against
Transmeridian Airlines (f/k/a Prime Air, Inc.) and Atkinson & Mullen Travel,
Inc. (d/b/a Apple Vacations) under Civil Action No. H-99-3804 in the United
States District Court for the Southern District of Texas, Houston Division,
seeking recovery of attorneys' fees and related costs incurred in defending the
action described above under the heading "First action involving Transmeridian
Airlines." The present suit seeks recovery of expenses pursuant to the
indemnification provisions of the lease agreement under which Transmeridian
leased the Boeing 727-251 aircraft. Currently, the amount being sought is
approximately $970,000, plus attorneys' fees. The latter is expected to increase
due to the fact that attorneys' fees and defense costs continue to be incurred
due to Transmeridian's appeal of the summary judgment granted by the Court in
favor of IAHC and PLM (described under "First action involving Transmeridian
Airlines" above). Discovery with respect to this indemnity suit has not yet
commenced. The General Partner cannot predict the outcome of this suit; however,
it is optimistic that a favorable result can be achieved.
Action involving Northwest Airlines, Inc.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that
Northwest did not fulfill its maintenance obligations under its Lease Agreements
with the Plaintiffs and seeks declaratory judgment concerning Northwest's
obligations and monetary damages. Northwest filed an Answer to the Plaintiffs'
Complaint and a motion to transfer the venue of this proceeding to Minnesota.
The Court denied Northwest's motion. On June 29, 1998, a United States
Magistrate Judge recommended entry of partial summary judgment in favor of the
Plaintiffs. Northwest appealed this decision. On April 15, 1999, the United
States District Court Judge adopted the Magistrate Judge's recommendation and
entered partial summary judgment in favor of the Plaintiffs on their claims for
declaratory judgment. The Plaintiffs have made a demand upon Northwest for
settlement. If no settlement is reached, the Plaintiffs will proceed to trial
for an assessment of damages. No firm trial date has been established at this
time; however, if a trial should become necessary, it is not expected to occur
before November 2000. The General Partner believes that the Plaintiff's claims
ultimately will prevail and that the Partnership's financial position will not
be adversely affected by the outcome of this action.
25
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Action involving Classic Airways Limited
In August 1998, a lessee of the Partnership, Classic Airways Limited
("Classic"), ceased paying rent to the Partnership with respect to a Lockheed
L-1011-100 Aircraft (the "Aircraft") and the Partnership terminated the lease.
Classic then filed for receivership in the United Kingdom ("UK") and was placed
in liquidation. Prior to its liquidation, Classic had incurred and failed to pay
significant airport ground fees to BAA plc, Eurocontrol, and CAA (collectively,
the "Airport Authorities"). Classic's failure to pay such charges resulted in
detention of the Aircraft by BAA plc. The total of ground fees and expenses
asserted by the Airport Authorities, which continued to accrue after the
detention began, exceeded $1,500,000 at November 30, 1999. Prior to that date,
the General Partner had attempted to reach a negotiated settlement with the
Airport Authorities so that the Aircraft could be returned to the Partnership.
Those negotiations were unsuccessful and the General Partner determined that the
amount of fees owed to the Airport Authorities was in excess of the Aircraft's
value and, therefore, it would not be in the Partnership's best interests to pay
these fees.
BAA plc obtained a judgment from a UK Court entitling it to sell the
aircraft to satisfy the unpaid charges and, on December 8, 1999, the Aircraft
was sold at auction. It is believed that the sale price was insufficient to
satisfy the aggregate fees owed to the Airport Authorities. Accordingly, the
Partnership will not realize any portion of the sale proceeds obtained by BAA
plc nor any future residual value from the Aircraft. Notwithstanding the
foregoing, the Partnership continues to hold the Aircraft's records, which may
have some value independent of the value of the Aircraft, as well as two engines
that had been removed from the Aircraft for maintenance prior to Classic's
liquidation. The value of these items is being evaluated presently. At the date
of Classic's liquidation, the Partnership had accrued $160,000 of rental income
which had not been collected from Classic and all of which was written off as
uncollectible in the third quarter of 1998. The Aircraft, including the two
engines that were removed for maintenance, had been fully depreciated prior to
the auction by BAA plc. Subsequent to the auction, the Aircraft (except for the
two engines) was written off by the Partnership.
NOTE 8 - SUBSEQUENT EVENTS
Refinancing of Indebtedness
In February 2000, the Partnership and certain affiliated investment
programs (collectively, the "Programs") refinanced the indebtedness maturing in
January 2000 associated with the McDonnell Douglas MD-82 aircraft previously
leased to Finnair OY. The Programs received debt proceeds of $4,720,000 in
aggregate, consisting of $3,370,000 to refinance the existing indebtedness and
an additional $1,350,000 required to perform a D-Check on the aircraft. The note
bears a fluctuating interest rate based on LIBOR plus a margin with interest
payments due monthly. The Partnership's share of the indebtedness is $701,062
which is due at maturity on August 9, 2000. The aircraft was returned in January
2000 upon its lease term expiration and is currently being stored in a warehouse
while it is being remarketed.
Aircraft Sale
On March 20, 2000, the Partnership accepted an offer from a third party to
purchase its Boeing 727-251 ADV aircraft for $750,000. The sale of the aircraft,
which is subject to certain conditions, is expected to close in the second
quarter of 2000. The aircraft had a cost of $9,732,714 and was fully depreciated
at December 31, 1999.
26
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Other
On March 8, 2000, the Exchange Partnerships (see Note 7) collectively
loaned $32 million to Echelon Residential Holdings LLC, a newly-formed real
estate development company that will be owned by several investors, including
James A. Coyne, Executive Vice President of EFG. Mr. Coyne, in his individual
capacity, is the only investor in Echelon Residential Holdings LLC who is
related to EFG.
The Partnership's participation in the loan is $3,640,000. Echelon
Residential Holdings LLC, through a subsidiary (Echelon Residential LLC),
used the loan proceeds to acquire various real estate assets from Echelon
International Corporation, a Florida based real estate company. The loan has
a term of 30 months maturing on September 7, 2002 and bears interest at the
annual rate of 14% for the first 24 months and 18% for the final six months
of the term. Interest accrues and compounds monthly but is not payable until
maturity. In connection with the transaction, Echelon Residential Holdings
LLC has pledged a security interest in all of its right, title and interest
in and to its membership interests in Echelon Residential LLC to the Exchange
Partnerships as collateral.
27
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AIRFUND II International Limited Partnership
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1999, 1998 and 1997
The Partnership classifies all rents from leasing aircraft as lease
revenue. Upon expiration of the primary lease terms, aircraft may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the aircraft, in addition to any month-to-month revenue, represent the total
residual value realized for each aircraft. Therefore, the financial statement
gain or loss, which reflects the difference between the net book value of the
aircraft at the time of sale or disposition and the proceeds realized upon sale
or disposition may not reflect the aggregate residual proceeds realized by the
Partnership for such aircraft.
The following is a summary of cash excess (deficiency) associated with the
aircraft dispositions which occurred in the years ended December 31, 1999 and
1998. No aircraft were disposed of during the year ended December 31, 1997.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Rents earned prior to disposal of aircraft $25,196,334 $ 4,150,170
Sale proceeds realized upon disposition of aircraft 3,109,500 553,699
----------- -----------
Total cash generated from rents and aircraft sale proceeds 28,305,834 4,703,869
Original acquisition cost of aircraft disposed 23,572,848 5,248,872
----------- -----------
Excess (deficiency) of total cash generated to cost of
aircraft disposed $ 4,732,986 $ (545,003)
=========== ===========
</TABLE>
28
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1999
<TABLE>
<CAPTION>
Sales and
Operations Refinancings Total
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $(1,217,491) $ 3,109,500 $ 1,892,009
Add:
Depreciation 1,054,343 -- 1,054,343
Management fees 92,059 -- 92,059
Less:
Principal repayment of notes payable (868,839) (46,051) (914,890)
----------- ----------- -----------
Cash from (used in) operations, sales
and refinancings (939,928) 3,063,449 2,123,521
Less:
Management fees (92,059) -- (92,059)
----------- ----------- -----------
Distributable cash from (used in)
operations, sales and refinancings (1,031,987) 3,063,449 2,031,462
Other sources and uses of cash:
Cash at beginning of year 769,569 2,656,193 3,425,762
Net change in receivables and accruals 262,418 -- 262,418
----------- ----------- -----------
Cash at end of year $ -- $ 5,719,642 $ 5,719,642
=========== =========== ===========
</TABLE>
29
<PAGE>
AIRFUND II International Limited Partnership
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1999
For the year ended December 31, 1999, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $1,989,052
30
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of AIRFUND II International Limited Partnership, of our report dated March
10, 2000, included in the 1999 Annual Report to the Partners of AIRFUND II
International Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,719,642
<SECURITIES> 0
<RECEIVABLES> 1,476
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,752,860
<PP&E> 21,809,494
<DEPRECIATION> (18,449,875)
<TOTAL-ASSETS> 9,112,479
<CURRENT-LIABILITIES> 606,653
<BONDS> 981,775
0
0
<COMMON> 0
<OTHER-SE> 7,524,051
<TOTAL-LIABILITY-AND-EQUITY> 9,112,479
<SALES> 0
<TOTAL-REVENUES> 5,218,458
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,205,748
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,701
<INCOME-PRETAX> 1,892,009
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,892,009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,892,009
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
