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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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-18368
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AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3037350
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 BROAD STREET, 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:
3,040,000 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 2000 (Part I and II)
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 5
Item 3. Legal Proceedings.............................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............................ 6
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder Matters.... 7
Item 6. Selected Financial Data........................................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 9
Item 8. Financial Statements and Supplementary Data.................................... 9
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 9
PART III
Item 10. Directors and Executive Officers of the Partnership............................ 10
Item 11. Executive Compensation......................................................... 11
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 12
Item 13. Certain Relationships and Related Transactions................................. 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 15-17
2
PART I
ITEM 1. BUSINESS.
(a) General Development of Business
AIRFUND International Limited Partnership (the "Partnership") was organized
as a limited partnership under the Massachusetts Uniform Limited Partnership Act
(the "Uniform Act") on January 31, 1989 for the purpose of acquiring and leasing
to third parties a specified portfolio of used commercial aircraft. Partners'
capital initially consisted of contributions of $1,000 from the General Partner
(AFG Aircraft Management Corporation, a Massachusetts corporation) and $100 from
the Initial Limited Partner (AFG Assignor Corporation, a Massachusetts
corporation). On July 26, 1989, the Partnership issued 3,040,000 units
representing assignments of limited partnership interests (the "Units") to 4,147
investors. Unit holders and Limited Partners (other than the Initial Limited
Partner) are collectively referred to as Recognized Owners. The General Partner
is an affiliate of Equis Financial Group Limited Partnership (formerly known as
American Finance Group), a Massachusetts limited partnership ("EFG"). The common
stock of the General Partner is owned by AF/AIP Programs Limited Partnership, of
which EFG and a wholly-owned affiliate are the 99% limited partners and AFG
Programs, Inc., a Massachusetts corporation which is wholly-owned by Geoffrey A.
MacDonald, is the 1% general partner. The capital contribution of the General
Partner, in consideration of its general partner interests, was $1,000. The
General Partner is not required to make any other capital contributions except
as may be required under the Uniform Act and Section 6.1(b) of the Amended and
Restated Agreement and Certificate of Limited Partnership (the "Restated
Agreement, as amended").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one operating industry segment:
financial services. Historically, the Partnership has acquired used commercial
aircraft and leased the aircraft to creditworthy lessees on a full-payout or
operating lease basis. Full-payout leases are those in which aggregate
undiscounted noncancellable rents equal or exceed the acquisition cost of the
leased equipment. Operating leases are those in which the aggregate undiscounted
noncancellable rental payments are less than the acquisition cost of the leased
equipment. In the year ended December 31, 2000, the Partnership also entered
into a sales-type lease, described in Note 2 to the financial statements
included in Item 14 herein. Industry segment data is not applicable.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" incorporated herein by reference to the 2000 Annual
Report.
In connection with a preliminary settlement agreement for a Class Action
Lawsuit described in Note 9 to the financial statements, included in Item 14
herein, the court permitted the Partnership to invest in any new investment,
including but not limited to new equipment or other business activities, subject
to certain limitations. On March 8, 2000, the Partnership loaned $1,800,000 to a
newly formed real estate company, Echelon Residential Holdings LLC ("Echelon
Residential Holdings") to finance the acquisition of real estate assets by that
company. Echelon Residential Holdings, through a wholly owned subsidiary
("Echelon Residential LLC"), used the loan proceeds, along with the loan
proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from Echelon
International Corporation, an independent Florida-based real estate company.
Echelon Residential Holding's interest in Echelon Residential LLC is pledged
pursuant to a pledge agreement to the partnerships as collateral for the loans.
(c) Narrative Description of Business
The Partnership was organized to acquire a specified portfolio of used
commercial jet aircraft subject to various full-payout and operating leases and
to lease the aircraft to third parties as income-producing investments. More
specifically, the Partnership's primary investment objectives were to acquire
and lease aircraft, that would:
1. Generate quarterly cash distributions;
2. Preserve and protect Partnership capital; and
3. Maintain substantial residual value for ultimate sale of the aircraft.
3
The Partnership has the additional objective of providing certain federal
income tax benefits.
The Closing date of the Offering of Units of the Partnership was July 26,
1989. The initial purchase of the aircraft and the associated lease commitments
occurred on July 27, 1989. The acquisition of the Partnership's aircraft and its
associated leases is 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, 2004. However, the
Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of
which could significantly alter the nature of the Partnership's organization and
its future business operations.
The Partnership has no employees; however, it is managed pursuant to a
Management Agreement with EFG or one of its affiliates (the "Manager"). The
Manager's role, among other things, is to (i) evaluate, select, negotiate, and
consummate the acquisition of aircraft, (ii) manage the leasing, re-leasing,
financing, and refinancing of aircraft, and (iii) arrange the resale of
aircraft. The Manager is compensated for such services as provided for in the
Restated Agreement, as amended, described in Item 13, herein and in Note 6 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 credit quality and defaults by lessees. A principal business
risk of owning and leasing aircraft is the possibility that aggregate lease
revenues and aircraft sale proceeds will be insufficient to provide an
acceptable rate of return on invested capital after payment of all operating
expenses. Another risk is that the credit quality of the lessee may deteriorate
after a lease is made. In addition, the leasing industry is very competitive.
The Partnership is subject to considerable competition when the aircraft are
re-leased or sold at the expiration of current lease terms. The Partnership must
compete with lease programs offered directly by manufacturers and other
equipment leasing companies, many of which have greater resources, including
lease programs organized and managed similarly to the Partnership and including
other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell
aircraft within their own portfolios to the same customers as the Partnership.
In addition, default by a lessee under a lease may cause aircraft to be returned
to the Partnership at a time when the General Partner or the Manager is unable
to arrange for the re-lease or sale of such aircraft. This could result in the
loss of a material portion of anticipated revenues. Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
All of the Partnership's aircraft currently operate in international
markets. All rents due under the leases of these aircraft are denominated in
U.S. dollars. However, the operation of the aircraft in international markets
exposes the Partnership to certain political, credit and economic risks.
Regulatory requirements of other countries governing aircraft registration,
maintenance, liability of lessors and other matters may apply. Political
instability, changes in national policy, competitive pressures, fuel shortages,
recessions and other political and economic events adversely affecting world or
regional trading markets or a particular foreign lessee could also create the
risk that a foreign lessee would be unable to perform its obligations to the
Partnership. The recognition in foreign courts of judgments obtained in United
States courts may be difficult or impossible to obtain and foreign procedural
rules may otherwise delay such recognition. It may be difficult for the
Partnership to obtain possession of aircraft used outside the United States in
the event of default by the lessee or to enforce its rights under the related
lease. Moreover, foreign jurisdictions may confiscate or expropriate aircraft
without paying adequate compensation.
Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft is dependent upon many factors, including EFG's ability to sell
and re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any given time. Accordingly, EFG will attempt to monitor
changes in the airline industry in order to identify opportunities which may be
advantageous to the Partnership and which will maximize total cash returns for
each aircraft.
The General Partner will determine when each aircraft should be sold and
the terms of such sale based upon numerous factors with a view toward achieving
the investment objectives of the Partnership. The General Partner is authorized
to sell the aircraft prior to the expiration of the initial lease terms and
intends to monitor and evaluate the market for resale of the aircraft to
determine whether an aircraft should remain in the Partnership's portfolio or be
sold. As an alternative to sale, the Partnership may enter re-lease agreements
when considered advantageous by the General Partner and the Manager.
The loan made by the Partnership to Echelon Residential Holdings is, and
will continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon Residential
Holdings could have a material adverse effect on the future cash flow and
operating results of the Partnership.
4
The Restated Agreement, as amended, prohibits the Partnership from making
loans to the General Partner or its affiliates. Since the acquisition of the
several parcels of real estate from the owner had to occur prior to the
admission of certain independent third parties as equity owners, Echelon
Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC,
were formed in anticipation of their admission. The General Partner agreed to an
officer of the Manager serving as the initial equity holder of Echelon
Residential Holdings and as an unpaid manager. The officer made a $185,465
equity investment in Echelon Residential Holdings. His return on his equity
investment is restricted to the same rate of return as the partnerships realize
on their loans. There is a risk that the court may object to the general
partner's action in structuring the loan in this way and may require the
partnerships to restructure or divest the loan.
The Investment Company Act of 1940 (the "Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing and the loan to Echelon Residential
Holdings. The Partnership does not intend to engage in investment activities in
a manner or to an extent that would require the Partnership to register as an
investment company under the Act. However, it is possible that the Partnership
may unintentionally engage in an activity or activities that may be construed to
fall within the scope of the Act. If the Partnership were to be determined to be
an investment company, its business would be adversely affected. If necessary,
the Partnership intends to avoid being deemed an investment company by disposing
of or acquiring certain assets that it might not otherwise dispose of or
acquire.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 2000, 1999 and 1998 is
incorporated herein by reference to Note 2 to the financial statements included
in Item 14. 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.
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
Item 14.
ITEM 3. LEGAL PROCEEDINGS.
Incorporated herein by reference to Note 9 to the financial statements in
Item 14.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
6
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, 2000, there were 3,894 record holders of Units in the
Partnership.
(c) Dividend History and Restrictions
Historically, the amount of cash distributions paid to the Partners had
been determined on a quarterly basis. Each quarter's distribution may have
varied in amount and was made 95% to the Limited Partners and 5% to the General
Partner. The Partnership did not declare distributions in any of the years ended
December 31, 2000, 1999 and 1998.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 9 to the accompanying financial statements, included in Item 14, herein.
The proposed settlement to that lawsuit, if effected, will materially change the
future organizational structure and business interests of the Partnership, as
well as its cash distribution policies. The General Partner has continued to
suspend the payment of quarterly cash distributions pending final resolution of
the Class Action Lawsuit. Accordingly, future cash distributions are not
expected to be paid until the Class Action Lawsuit is settled or adjudicated.
In any given year, it is possible that Recognized Owners will be
allocated taxable income in excess of distributed cash. This discrepancy between
tax obligations and cash distributions may or may not continue in the future,
and cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket aircraft upon lease expiration. In addition to
the need for funds in connection with the Class Action Lawsuit, liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining aircraft portfolio consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft.
The management and remarketing of aircraft can involve, among other things,
significant costs and lengthy remarketing initiatives. Although the
Partnership's lessees are required to maintain the aircraft during the period of
lease contract, repair, maintenance, and/or refurbishment costs at lease
expiration can be substantial. For example, an aircraft that is returned to the
Partnership meeting minimum airworthiness standards, such as flight hours or
engine cycles, nonetheless may require heavy maintenance in order to bring its
engines, airframe and other hardware up to standards that will permit its
prospective use in commercial air transportation.
At December 31, 2000, the Partnership's equipment portfolio included
ownership interests in three commercial jet aircraft, one of which is a Boeing
737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003. The remaining two aircraft in the Partnership's
portfolio already are Stage 3 compliant. These aircraft have lease terms
expiring in April 2001 and September 2004, respectively.
7
Cash distributions consist of Distributable Cash from Operations and
Distributable Cash from Sales or Refinancing.
"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 reinvests in
additional aircraft, and (b) amounts realized from any loss or destruction of
any aircraft which the General Partner reinvests in replacement 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 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 accrued) 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.
"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.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference to the section entitled "Selected
Financial Data" in the 2000 Annual Report.
8
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
2000 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated herein by reference to the financial statements and
supplementary data included in the 2000 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP.
(a-b) Identification of Directors and Executive Officers
The Partnership has no Directors or Officers. As indicated in Item 1 of
this report, AFG Aircraft Management Corporation is the sole General Partner of
the Partnership. Under the Restated Agreement, as amended, the General Partner
is solely responsible for the operation of the Partnership's properties. The
Recognized Owners have no right to participate in the control of the
Partnership's general operations, but they do have certain voting rights, as
described in Item 12 herein. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 2001 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (SEE ITEM 13)
NAME TITLE AGE TERM
- ------------------------------------ ----------------------------------------------- ------- ---------------
Geoffrey A. MacDonald Chairman of EFG Until a
and President and a Director successor
of the General Partner 52 is duly
elected
Gary D. Engle President and Chief Executive and
Officer of EFG and a Director qualified
of the General Partner 52
Michael J. Butterfield Executive Vice President and Chief
Operating Officer of EFG and Treasurer
of the General Partner 41
Gail D. Ofgant Senior Vice President, Lease Operations
of EFG and Senior Vice President
of the General Partner 35
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Partners,
Directors or Executive Officers.
10
(e) Business Experience
Mr. MacDonald, age 52, is Chairman of EFG and has been President of the
General Partner since 1988 and a Director of the General Partner since 1988. Mr.
McDonald was a co-founder of EFG's predecessor, American Finance Group, which
was established in 1980. Mr. MacDonald is a member of the Board of Managers of
Echelon Development Holdings LLC and President of American Finance Group
Securities Corporation. Prior to co-founding American Finance Group, Mr.
MacDonald held various positions in the equipment leasing industry and the
ethical pharmaceutical industry with Eli Lilly & Company. Mr. MacDonald holds an
M.B.A. from Boston College and a B.A. degree from the University of
Massachusetts (Amherst).
Mr. Engle, age 52, is President and Chief Executive Officer of EFG, sole
shareholder and Director of its general partner, Equis Corporation, and a Vice
President and Director of several of EFG's subsidiaries and affiliates. Mr.
Engle has been a Director of the General Partner since 1991 and is President of
AFG Realty Corporation. Mr. Engle is also Chairman and Chief Executive Officer
of Semele Group Inc. ("Semele") and a member of the Board of Managers of Echelon
Development Holdings LLC. Mr. Engle controls the general partners of Atlantic
Acquisition Limited Partnership ("AALP") and Old North Capital Limited
Partnership ("ONC"). Mr. Engle joined EFG in 1990 as an Executive Vice President
and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle
co-founded Cobb Partners Development, Inc., a real estate and mortgage banking
company, where he was a principal from 1987 to 1989. From 1980 to 1987, Mr.
Engle was Senior Vice President and Chief Financial Officer of Arvida Disney
Company, a large-scale community development organization owned by Walt Disney
Company. Prior to 1980, Mr. Engle served in various management consulting and
institutional brokerage capacities. Mr. Engle has an M.B.A. degree from Harvard
University and a B.S. degree from the University of Massachusetts (Amherst).
Mr. Butterfield, age 41, is Executive Vice President and Chief Operating
Officer of EFG and has served as Vice President and Treasurer of the General
Partner since 1996. Mr. Butterfield also serves as Vice President and Treasurer
of subsidiaries and affiliates of EFG. Mr. Butterfield is also Chief Financial
Officer of Semele and Vice President, Finance and Clerk of Equis/Echelon
Management Corporation, the manager of Echelon Residential LLC. Mr. Butterfield
joined EFG in June 1992 and became a Vice President in 1996 and Executive Vice
President and Chief Operating Officer in 2000. Prior to joining EFG, Mr.
Butterfield was an audit manager with Ernst & Young LLP, which he joined in
1987. Mr. Butterfield was also employed in public accounting and industry
positions in New Zealand and London (UK) prior to coming to the United States in
1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.)
professional qualification in New Zealand and has completed his C.P.A.
requirements in the United States. Mr. Butterfield holds a Bachelor of Commerce
degree from the University of Otago, Dunedin, New Zealand.
Ms. Ofgant, age 35, is Senior Vice President, Lease Operations of EFG and
has served as Senior Vice President of the General Partner since 1998. Ms.
Ofgant also serves as Senior Vice President for certain EFG's affiliates,
including the General Partner. Ms. Ofgant is Senior Vice President and Assistant
Clerk of Equis/Echelon Management Corporation, the manager of Echelon
Residential LLC. Ms. Ofgant joined EFG in July 1989 and held various positions
with the company before becoming Senior Vice President in 1998. From 1987 to
1989, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms.
Ofgant holds a B.S. degree from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION.
(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of
the Restated Agreement, as amended, the Partnership is obligated to pay all
costs of personnel employed full or part-time by the Partnership,
11
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 General Partner
and its Affiliates for such services is included in Item 13, herein and in Note
6 to the financial statements included in Item 14, herein.
(d) Stock Options and Stock Appreciation Rights.
Not applicable.
(e) Long-Term Incentive Plan Awards Table.
Not applicable.
(f) Defined Benefit or Actuarial Plan Disclosure.
Not applicable.
(g) Compensation of Directors
None.
(h) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the General Partner
or its Affiliates which results or may result from their resignation, retirement
or any other termination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
By virtue of its organization as a limited partnership, the Partnership has
no outstanding securities possessing traditional voting rights. However, as
provided for in Section 11.2(a) of the Restated Agreement, as amended (subject
to Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners has
voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
3. Removal of the General Partner; and
4. Approval or disapproval of the sale of all, or substantially all, of
the assets of the Partnership (except in the orderly liquidation of
the Partnership upon its termination and dissolution).
12
As of March 15, 2001, the following person or group owns beneficially more
than 5% of the Partnership's 3,040,000 outstanding Units:
NAME AND AMOUNT PERCENT
TITLE ADDRESS OF OF BENEFICIAL OF
OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------------------- --------------------------------------- -------------------------- -------------
Units Representing Old North Capital Limited Partnership
Limited Partnership 88 Broad Street 205,040 Units 6.74%
Interests Boston, MA 02110
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele. Gary D.
Engle is Chairman and CEO of Semele.
The ownership and organization of EFG is described in Item 1 of this
report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The General Partner of the Partnership is AFG Aircraft Management
Corporation, an affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
2000, 1999 and 1998, which were accrued or paid by the Partnership to EFG or its
Affiliates, are as follows:
2000 1999 1998
---------- ---------- ----------
Equipment management fees ................ $ 87,443 $ 168,128 $ 180,232
Administrative charges ................... 67,207 70,081 53,004
Reimbursable operating expenses
Due to third parties ................ 1,756,597 919,805 476,803
---------- ---------- ----------
Total .......... $1,911,247 $1,158,014 $ 710,039
========== ========== ==========
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 1.6% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental
revenues received by the Partnership. Both acquisition and management fees are
subject to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(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 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 account prior to remittance to the Partnership. At December 31, 2000,
the Partnership was owed $110,767 by EFG for such funds and the interest
thereon. These funds were remitted to the Partnership in January 2001.
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.
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
13
EFG. AF/AIP Programs Limited Partnership also entered into a nonexclusive
confirmatory agreement with EFG's former majority-owned subsidiary, AIRFUND
Corporation ("AFC"), for the provision of aircraft remarketing services.
An affiliate of the General Partner owns Units in the Partnership as
follows:
- -------------------------------------------- --------------------- ---------------------
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- -------------------------------------------- --------------------- ---------------------
Old North Capital Limited Partnership 205,040 6.74%
- -------------------------------------------- --------------------- ---------------------
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995. The general partner of ONC is controlled by Gary D.
Engle and the limited partnership interests of ONC are owned by Semele. Gary D.
Engle is Chairman and Chief Executive Officer of Semele. See Items 10 and 13 of
this report.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
Not applicable.
14
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, 2000 and 1999................................*
Statement of Operations
for the years ended December 31, 2000, 1999 and 1998.........*
Statement of Changes in Partners' Capital
for the years ended December 31, 2000, 1999 and 1998.........*
Statement of Cash Flows
for the years ended December 31, 2000, 1999 and 1998.........*
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 2000
Annual Report to security holders for the year ended December 31, 2000 (see
Part II).
15
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 was filed in the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999 as Exhibit 2.5 and is incorporated herein by reference.
2.6 Second Modified Order Preliminarily Approving Settlement,
Conditionally Certifying Settlement Class and Providing for Notice
of, and Hearing on, the Proposed Settlement (March 5, 2000) was
filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 as Exhibit 2.6 and is incorporated herein by
reference.
2.7 Proposed Order Granting Joint Motion to Continue Final Approval
Settlement Hearing (March 13, 2001) is filed in the Registrant's
Annual Report for the year ended December 31, 2000 and is included
herein.
4 Amended and Restated Agreement and Certificate of Limited
Partnership included as Exhibit A to the Prospectus, which was
included in Registration Statement on Form S-1 (No. 33-25334).
10.1 Promissory Note in the principal amount of $1,800,000 dated March 8,
2000 between the Registrant, as lender, and Echelon Residential
Holdings LLC, as borrower, was filed in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999 as Exhibit
10.1 and is incorporated herein by reference.
10.2 Pledge Agreement dated March 8, 2000 between Echelon Residential
Holdings LLC (Pledgor) and American Income Partners V-A Limited
Partnership, as Agent for itself and the Registrant, was filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999 as Exhibit 10.2 and is incorporated herein by
reference.
13 The 2000 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 Southwest Airlines, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995 as Exhibit 99 (d) and is incorporated herein by reference.
16
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, 1995 as Exhibit 99 (d) 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, 1995 as Exhibit 99 (d) and is incorporated herein by reference.
99(d) Lease agreement with Finnair OY was filed in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996 as Exhibit
99 (e) 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, 1996 as Exhibit
99 (f) and is incorporated herein by reference.
99(f) Lease agreement with Aerovias de Mexico S.A. de C.V. is filed in the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2000 and is included herein.
99(g) Aircraft Conditional Sale agreement with Royal Aviation Inc. is
filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 and is included herein.
99(h) Lease agreement with Air Slovakia BWJ, Ltd is filed in the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2000 and is included herein.
(b) Reports on Form 8-K
None.
(c) Other Exhibits
None.
(d) Financial Statement Schedules:
Consolidated Financial Statements for Echelon Residential Holdings LLC
as of December 31, 2000 and for the Period March 8, 2000 (Date of
Inception) through December 31, 2000 and Independent Auditors' Report.
17
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 International Limited Partnership
By: AFG Aircraft Management Corporation,
a Massachusetts corporation and the
General Partner of the Registrant.
By: /s/ GEOFFREY A. MACDONALD By: /s/ GARY D. ENGLE
----------------------------- -----------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman of EFG and President and Chief Executive
President and a Director Officer of EFG and a Director
of the General Partner of the General Partner
(Principal Executive Officer)
Date: MARCH 31, 2001 Date: MARCH 31, 2001
----------------------------- ------------------------
By: /s/ MICHAEL J. BUTTERFIELD
-------------------------------
Michael J. Butterfield
Executive Vice President and Chief
Operating Officer of EFG and
Treasurer of the General Partner
(Principal Financial and Accounting
Officer)
Date: MARCH 31, 2001
----------------------------
18
SCHEDULE 14(d)
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
AND FOR THE PERIOD MARCH 8, 2000 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2000
AND INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
To the Members of
Echelon Residential Holdings LLC:
We have audited the accompanying consolidated balance sheet of Echelon
Residential Holdings LLC, a Delaware limited liability company ("the Company")
as of December 31, 2000 and the related consolidated statement of operations,
members' equity (deficiency) and cash flows for the period March 8, 2000 (date
of inception) through December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2000, and the results of its operations and its cash flows for the period March
8, 2000 (date of inception) through December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Tampa, Florida
March 23, 2001
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
- -------------------------------------------------------------------------------
ASSETS
REAL ESTATE - Net (Notes 1 and 2) $ 61,092,202
CASH AND CASH EQUIVALENTS (Note 1) 3,789,198
RESTRICTED CASH (Note 1) 8,703
RESTRICTED INVESTMENTS (Note 1) 2,155,160
ACCOUNTS RECEIVABLE - Affiliates (Note 7) 115,521
PREPAID EXPENSES AND OTHER LONG-TERM ASSETS 69,417
CORPORATE EQUIPMENT - Net of accumulated depreciation of $57,733 286,784
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE (Note 3) 1,063,906
------------
TOTAL ASSETS $ 68,580,891
============
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES:
Accounts payable $ 10,984
Contractor payable 1,752,830
Accounts payable - Affiliates (Note 7) 114,180
Accrued expenses 797,832
Retainage payable 1,125,865
Security deposits 8,625
Interest payable 4,385,805
Construction loans (Note 4) 26,837,740
Other long-term liabilities 109,411
Notes payable (Note 5) 35,039,890
------------
Total liabilities 70,183,162
COMMITMENTS & CONTINGENCIES (Notes 4 and 9)
MINORITY INTEREST (Note 6) 2,257,367
MEMBERS' EQUITY (DEFICIENCY) (Note 1) (3,859,638)
------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 68,580,891
============
See notes to consolidated financial statements
- 2 -
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- --------------------------------------------------------------------------------
SALES AND REVENUES:
Real estate operations:
Rental revenues $ 230,834
Management fees 695,162
Developer fees 985,141
Sale of development property 3,104,532
Investment income 191,543
Other income 23,000
------------
Total sales and revenues 5,230,212
------------
EXPENSES:
Rental and other operations 558,561
Cost of development property sold 3,317,880
Write-down of land held for development or sale 635,437
Depreciation expense 148,861
Interest expense on long-term debt - net of amounts
capitalized of $606,990 4,460,345
General and administrative expenses 2,937,514
------------
Total expenses 12,058,598
------------
EQUITY IN LOSS OF UNCONSOLIDATED JOINT VENTURE (148,023)
MINORITY INTEREST 270,383
------------
NET LOSS $ (6,706,026)
============
See notes to consolidated financial statements.
- 3 -
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- --------------------------------------------------------------------------------
CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (6,706,026)
Adjustment to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation 148,861
Loss on sale of development property 213,348
Minority interest (270,383)
Equity in loss of unconsolidated joint venture 148,023
Write-down of land held for development or sale 635,437
Changes in working capital:
Accounts payable, accrued expenses and other liabilities (4,343,190)
Interest payable 4,385,805
Other working capital changes 311,588
------------
Net cash used in operating activities (5,476,537)
------------
CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Increase in restricted cash and restricted investments (2,163,863)
Net proceeds from sale of development property 3,104,532
Payments related to construction in progress (29,601,108)
------------
Net cash used in investing activities (28,660,439)
------------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Issuance of notes payable 6,244,000
Repayment of notes payable (5,474,000)
Proceeds from construction loans 26,585,765
Members' capital contributions 2,651,162
------------
Net cash provided by financing activities 30,006,927
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,130,049)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,919,247
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,789,198
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 681,530
============
See notes to consolidated financial statements.
- 4 -
ECHELON RESIDENTIAL HOLDINGS LLC
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY (DEFICIENCY)
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- --------------------------------------------------------------------------------
INITIAL PARTICIPATING
MEMBERS MEMBERS TOTAL
----------- ------------- -----------
BALANCE AT MARCH 8, 2000 $ 195,226 $ -- $ 195,226
Members' capital contributions -- 2,651,162 2,651,162
Net loss (5,600,020) (1,106,006) (6,706,026)
----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 $(5,404,794) $ 1,545,156 $(3,859,638)
=========== =========== ===========
See notes to consolidated financial statements.
- 5 -
ECHELON RESIDENTIAL HOLDINGS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND - On March 7, 2000, EIN Acquisition Corporation ("EIN
Acquisition") closed on a Tender Offer ("Tender Offer") for all of the
outstanding shares of Echelon International Corporation ("Echelon") for a
cash price of $34.00 per share. Immediately after the close of the Tender
Offer, EIN Acquisition merged into Echelon (the "Merger"), with Echelon
being the surviving entity.
In conjunction with the Tender Offer, Echelon had entered into various
contracts to sell or convey various real estate assets and investments in
two real estate joint ventures to third parties. Subsequent to the Merger
on March 8, 2000, Echelon closed on existing contracts to sell or convey
its real estate assets and investments in two real estate joint ventures.
Specific real estate assets and investments in two real estate joint
ventures were sold to Echelon Residential LLC ("Echelon Residential"), a
wholly owned limited liability subsidiary of Echelon Residential Holdings
LLC ("Echelon Residential Holdings" or the "Company"). Echelon Residential
will own, manage, and develop or sell these purchased multi-family
residential properties.
The acquisition of the assets by Echelon Residential was accounted for as
an asset purchase under Accounting Principles Board Opinion No. 16 ("APB
No. 16"). In accordance with APB No. 16, Echelon Residential allocated the
total purchase price to the assets acquired and liabilities assumed based
on the estimated fair market values at the date of acquisition. Since the
purchase price of the business was less than the fair market value of the
net assets acquired, the credit excess was allocated on a pro-rata basis
to the real estate, corporate equipment and the investment in an
unconsolidated joint venture. There are no contingencies or other matters
that could materially affect the allocation of the purchase cost. The
results of operations of the acquired real estate assets and investments
in two real estate joint ventures are included in the consolidated results
of Echelon Residential Holdings from the acquisition date.
The Company's summarized consolidated balance sheet, reflecting the above
acquisition of assets, as of March 8, 2000 is as follows:
ASSETS:
Real estate $34,164,672
Cash and cash equivalents 7,919,247
Investment in unconsolidated joint venture 1,211,929
Other assets 832,417
-----------
Total assets $44,128,265
===========
LIABILITIES AND MEMBERS' EQUITY:
Accounts payable and other liabilities $ 6,883,424
Construction loans 251,975
Notes payable 34,269,890
-----------
Total liabilities 41,405,289
Minority interest 2,527,750
Members' equity 195,226
-----------
Total liabilities and members' equity $44,128,265
===========
The Company's fiscal year end is December 31.
- 6 -
DESCRIPTION OF BUSINESS - Echelon Residential Holdings was formed on
February 29, 2000, under the laws of the state of Delaware and operates in
one industry segment: owning, leasing, developing, and managing real
estate. There were no activities of Echelon Residential Holdings from
February 29, 2000 through March 8, 2000. The Company is governed by its
Amended and Restated Limited Liability Company Agreement ("the Agreement")
dated June 23, 2000. At March 8, 2000, members' equity included capital
contributions from the initial members of the Company, James A. Coyne and
Charles E. Cobb, Jr. ("Initial Members"), who made collective capital
contributions of $195,226. On June 23, 2000, the participating members,
Darryl A. LeClair and Susan G. Johnson ("Participating Members") made
capital contributions totaling $2,651,162. The collective Participating
Members' capital contributions are comprised of Participating A Capital of
$2,591,093, Participating B Capital of $45,052 and additional capital
contributions of $15,017.
Subsequent to the initial capital contributions above, the Agreement was
executed and includes a provision whereby the members have no further
obligation to contribute additional amounts of capital to the Company. If
the Company requires additional funds, the Board of Managers is to notify
the members. Each member has the right to contribute a pro rata share of
such additional funds, based on the relative equity contributions made by
each member. In addition, the liability of the members of the Company is
limited to the members' total capital contributions.
In accordance with the Agreement, the Participating Members earn a
cumulative compounding annual return on their unreturned capital (as
defined), at a per annum rate equal to 14% for Participating A capital and
15% for Participating B capital, commencing on June 23, 2000. Preferred
returns will be paid to the Participating Members in accordance with the
terms of the Agreement. Payout of preferred returns (if any) is contingent
upon the cumulative performance of the Company. See Note 9 - COMMITMENTS
AND CONTINGENCIES.
Per the Agreement, the Company is to distribute its cash flow (if any)
periodically, but not less frequently than quarterly. The losses and
profits of the Company are generally allocated to the members as follows:
a) losses are generally allocable 77.9% to members other than
Participating Members and 22.1% to Participating Members, and
b) profits are generally allocated the same way except for a
priority income allocation to the Participating Members to
cover priority cash distributions made on their Participating
Capital.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Echelon Residential Holdings, its
wholly owned subsidiary and a 60% interest in a joint venture. All
intercompany balances have been eliminated. Investments for which the
Company has a 20% to 50% ownership interest are accounted for using the
equity method.
The Company has recorded a minority interest in the Company's consolidated
financial statements to reflect the ownership of its partner in the joint
venture.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates. Significant estimates include the
recoverability of real estate held for sale.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
hand, demand deposits, and short-term investments with original maturities
of three months or less.
- 7 -
RESTRICTED CASH - Restricted cash represents security deposits at
multi-family residential communities held in separate noninterest-bearing
depository accounts.
RESTRICTED INVESTMENTS - Restricted investments represent certificates of
deposit with maturities greater than three months. These investments are
held by financial institutions that require such deposits in support of
standby letters of credit.
REAL ESTATE - Real estate additions are recorded at cost. Interest and
real estate taxes incurred during construction periods are capitalized and
depreciated on the same basis as the related assets. Costs directly
related to the acquisition, development or improvement of real estate, and
certain indirect development costs have also been capitalized.
Depreciation is calculated on a straight-line basis over the estimated
lives of the assets as follows:
ESTIMATED
USEFUL LIVES
Buildings 35 years
Furniture, fixtures, and equipment 3-10 years
IMPAIRMENT OF LONG-LIVED ASSETS - The carrying value of long-lived assets,
including property and equipment, will be reviewed for impairment whenever
events or changes in circumstances indicate that the recorded value cannot
be recovered from undiscounted future cash flows.
REVENUE RECOGNITION - The Company recognizes revenue on the sale of real
estate properties when title has passed to the buyer and all contingencies
have been removed. Rental revenues, management fees and developer fees are
recognized when earned.
INCOME TAXES - Under the provisions of the Internal Revenue Code and
applicable state laws, the Company is not directly subject to income
taxes; the results of its operations are included in the tax returns of
its members.
NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company adopted SFAS No. 133 effective January 1, 2001. There was no
impact on the Company's financial position, results of operations or
liquidity resulting from the adoption of SFAS No. 133.
Effective March 8, 2000 (date of inception), the Company adopted the
provisions of Securities Exchange Commission Staff Accounting Bulletin
101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB
No. 101 provides guidance for the recognition, presentation and disclosure
of revenue in financial statements. The adoption of SAB No. 101 had no
impact on the Company's financial statements.
- 8 -
RECLASSIFICATIONS - Certain amounts previously reported in the March 8,
2000 consolidated balance sheet have been reclassified to conform to the
December 31, 2000 presentation.
2. REAL ESTATE - NET
As of December 31, 2000, real estate consists of the following:
Land and land improvements held for development or sale $ 15,676,581
------------
Real estate under development:
Land and land improvements 8,302,770
Construction in progress 14,694,874
------------
22,997,644
------------
Income producing real estate:
Land and land improvements 2,303,890
Buildings and improvements 19,720,463
Equipment and other 484,752
Accumulated depreciation (91,128)
------------
22,417,977
------------
$ 61,092,202
============
For the period March 8, 2000 (date of inception) through December 31,
2000, the Company recorded a write-down of land held for development or
sale of $635,437 in the consolidated statement of operations. Land held
for development or sale was determined to have been impaired because the
estimated cash flows are less than the carrying value of the two parcels
of land. The estimated fair value of these two parcels of land was based
on letters of intent from third-party purchasers, dated October 2000 and
December 2000, to purchase the two parcels of land.
As of December 31, 2000, the Company's land and land improvements held for
development or sale includes five parcels of improved and unimproved land
for the development of multi-family residential communities. The land is
located in urban areas in Memphis, Tennessee; Dallas, Texas; Denver,
Colorado and Colorado Springs, Colorado.
As of December 31, 2000, real estate under development includes the
following three multi-family residential communities:
CONSTRUCTION ACTUAL/ESTIMATED
RENTABLE LAND COMMENCEMENT DATE FIRST UNITS
PROJECT NAME LOCATION UNITS ACREAGE DATE AVAILABLE
------------ ----------- -------- ------- ------------ ----------------
ECHELON AT THE BALLPARK Memphis, TN 385 5 Q1 2000 Q1 2001
ECHELON AT LAKESIDE Plano, TX 181 12 Q3 1999 Q3 2000
ECHELON AT UPTOWN Orlando, FL 244 3 Q2 2001 Q2 2002
As discussed in Note 6, INVESTMENT IN CONSOLIDATED JOINT VENTURE
PARTNERSHIP, ECHELON AT LAKESIDE commenced operations during the period
March 8, 2000 (date of inception) through December 31, 2000 and portions
of the project remained under construction as of December 31, 2000.
As of December 31, 2000, real estate includes $606,990 of interest
capitalized during the period March 8, 2000 (date of inception) through
December 31, 2000.
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3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
In July 1999, Fannie Mae's American Communities Fund agreed to invest with
a wholly owned subsidiary of Echelon in the development of ECHELON AT
CHENEY PLACE, a 303-unit multi-family residential community currently
under construction in downtown Orlando, Florida. Echelon's 20% interest in
the joint venture was purchased by Echelon Residential, in conjunction
with the real estate assets purchased as discussed in Note 1, SUMMARY OF
BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES. The Company accounts for its
investment in the joint venture under the equity method. Concurrent with
the execution of the joint venture agreement with Fannie Mae's American
Communities Fund, the joint venture executed an agreement with Wachovia
Bank, N.A. for a $21,500,000 loan to fund the construction of ECHELON AT
CHENEY PLACE. The loan is guaranteed by Echelon Residential.
Construction of ECHELON AT CHENEY PLACE began in late July 1999 and
construction continued on portions of the project through December 31,
2000. For the period March 8, 2000 (date of inception) through December
31, 2000, the Company recorded its share of losses for ECHELON AT CHENEY
PLACE, from the initial operations of the project, as a reduction of the
investment in unconsolidated joint venture. As of December 31, 2000, total
capital expenditures and construction loan draws for the project were
$24,834,193 and $18,408,921, respectively. Through December 31, 2000, the
Company's capital contributions to the joint venture totaled $1,386,000.
The total of net losses and purchase price adjustment allocated to the
investment in unconsolidated joint venture is $322,094.
4. CONSTRUCTION LOANS
As of December 31, 2000, the Company's construction loans outstanding are
as follows:
Bank of America $ 17,614,845
First Union National Bank of Florida 9,222,895
------------
$ 26,837,740
============
The Company has a $20,000,000 construction loan with Bank of America to
fund the construction of ECHELON AT LAKESIDE. The loan is guaranteed by
Echelon Residential. The interest rate is LIBOR plus 1.85% (8.4875% as of
December 31, 2000), and the loan matures in September 2002. As of December
31, 2000, the Company has made $17,614,845 of construction draws on this
loan. See further discussion of the development of ECHELON AT LAKESIDE
included in Note 6, INVESTMENT IN CONSOLIDATED JOINT VENTURE PARTNERSHIP.
Accrued interest on the Bank of America construction loan is $125,685 as
of December 31, 2000.
The Company has a $26,075,000 construction loan with First Union National
Bank of Florida to fund the construction of ECHELON AT THE BALLPARK, a
385-unit multi-family residential community currently under construction
in downtown Memphis, Tennessee. The loan is guaranteed by Echelon
Residential. The interest rate is LIBOR plus 1.65% (8.2125% as of December
31, 2000) with monthly interest payments required through the term of the
loan, which expires on June 2002. As of December 31, 2000, the Company has
made construction draws of $9,222,895. Accrued interest on the First Union
National Bank construction loan is $8,258 as of December 31, 2000.
The Company's significant financial covenants include minimum net worth
and liquidity requirements. As of December 31, 2000, the Company was in
compliance with all financial covenants contained in its debt agreements.
In the opinion of management, the carrying value of the Company's
construction loans approximates their fair value based on management's
estimates for similar issues, giving consideration to quality,
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interest rates, maturity and other significant characteristics. Although
management is not aware of any factors that would significantly affect the
estimated fair value of the construction loans, the amounts have not been
comprehensively revalued for purposes of these consolidated financial
statements since December 31, 2000 and current estimates of fair value may
differ significantly.
See Note 10, SUBSEQUENT EVENT, for discussion of a construction loan
executed for the construction of ECHELON AT UPTOWN, in February 2001.
5. NOTES PAYABLE
As of December 31, 2000, notes payable outstanding are as follows:
American Income Partners V-A Limited Partnership $ 2,160,000
American Income Partners V-B Limited Partnership 5,700,000
American Income Partners V-C Limited Partnership 2,390,000
American Income Partners V-D Limited Partnership 2,730,000
American Income Fund I-A, a Massachusetts Limited Partnership 1,650,000
American Income Fund I-B, a Massachusetts Limited Partnership 1,310,000
American Income Fund I-C, a Massachusetts Limited Partnership 2,780,000
American Income Fund I-D, a Massachusetts Limited Partnership 3,050,000
American Income Fund I-E, a Massachusetts Limited Partnership 4,790,000
AIRFUND International Limited Partnership 1,800,000
AIRFUND II International Limited Partnership 3,640,000
-----------
Subtotal 32,000,000
Series A Note 1,684,211
Series B Notes 585,679
Note payable - Echelon Development Holdings LLC 770,000
-----------
$35,039,890
===========
On March 8, 2000, the Company executed $32,000,000 in notes payable with
11 partnerships. The Company contributed the proceeds from the notes
payable to Echelon Residential to acquire various real estate assets from
Echelon, as discussed in Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES. These partnerships are managed by their general
partners who have engaged Equis Financial Group ("EFG") as the
partnerships' manager. Mr. James A. Coyne is Executive Vice President of
EFG and is an equity investor in the Company. Mr. Coyne, in his individual
capacity, is the only equity investor in the Company related to EFG. These
notes payable have a term of 30 months, maturing on September 8, 2002, and
an annual interest rate of 14% for the first 24 months and 18% for the
final six months. No principal payments are required prior to the
scheduled maturity. Interest accrues and compounds monthly and is payable
at maturity. Accrued interest on these notes is $3,907,798 as of December
31, 2000. The Company has assigned and pledged a security interest in all
of its rights, title, and interest in its membership interests in Echelon
Residential to the 11 partnerships as collateral.
On March 8, 2000, the Company executed a Series A Note with Cobb Partners
Limited. The Series A Note has a term of 30 months, maturing on September
8, 2002, and an annual interest rate of 14% for the first 24 months and
18% for the final six months. No principal payments are required prior to
the scheduled maturity. Accrued interest on the Series A Note is $205,674
as of December 31, 2000. Interest accrues and compounds monthly and is
payable at maturity. The Company also executed
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Series B Notes with several individuals, who are employees or investors of
EFG. The Series B Notes have an annual interest rate of 15% and mature on
June 30, 2004. No principal payments are required prior to the scheduled
maturity. Interest accrues and compounds monthly and is payable at
maturity. The Series B Notes are subordinated to the $32,000,000 notes
payable and the Series A Note. Accrued interest on the Series B Notes is
$76,920 as of December 31, 2000.
On December 29, 2000, the Company executed a $770,000 note payable to
Echelon Development Holdings LLC ("Echelon Development Holdings"). The
note payable has a term of 24 months, maturing on December 29, 2002, and
an annual interest rate of 10%. Interest accrues and compounds daily and
is payable on December 31st of each year the note payable is outstanding.
The Company repaid the note, plus interest of $6,751, on January 30, 2001.
In the opinion of management, the carrying value of the Company's notes
payable approximates the fair value based on management's estimates for
similar issues, giving consideration to quality, interest rates, maturity
and other significant characteristics.
6. INVESTMENT IN CONSOLIDATED JOINT VENTURE PARTNERSHIP
In September 1999, a wholly owned subsidiary of Echelon entered into a
joint venture agreement with Turner Heritage Investments, Ltd. ("Turner")
for the development of ECHELON AT LAKESIDE, a 181-unit multi-family
residential community currently under construction in Plano, Texas, which
is near Dallas. Echelon's 60% interest in the joint venture was purchased
by Echelon Residential, in conjunction with the transaction discussed in
Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES.
Construction of ECHELON AT LAKESIDE began in October 1999 and continued on
portions of the project through December 31, 2000. As of December 31,
2000, total capital expenditures for the project were $23,927,413.
Through December 31, 2000, the Company's capital contributions totaled
$2,592,000 and Turner contributed land valued at $2,592,000 to the joint
venture. The Company's interest represents a controlling interest, and
accordingly, for financial reporting purposes, the assets, liabilities,
retained deficit, and current period results of operations of the joint
venture for the period March 8, 2000 (date of inception) through December
31, 2000, are included in the Company's consolidated financial statements,
and Turner's partnership interest in the joint venture has been recorded
as a minority interest. See further discussion of debt financing for
ECHELON AT LAKESIDE included in Note 4, CONSTRUCTION LOANS.
7. RELATED PARTY TRANSACTIONS
In conjunction with the purchase of Echelon's interest in the joint
venture formed for the development of ECHELON AT LAKESIDE, Echelon
Residential also assumed the development agreement, an asset management
agreement and a property management and leasing agreement with Lakeside
Baywater Enterprises Limited Partnership, the joint venture partnership.
In accordance with the development agreement, Echelon Residential has been
engaged as the developer for ECHELON AT LAKESIDE and receives a
development fee, payable in arrears, in monthly installments of $44,371.
In accordance with the asset management agreement, Echelon Residential
receives a monthly asset management fee, computed in arrears, equal to 1%
of the ECHELON AT LAKESIDE monthly gross income. Under the terms of the
property management and leasing agreement, Echelon Residential also
receives a monthly management fee, computed in arrears, equal to 4% of the
ECHELON AT LAKESIDE monthly gross income.
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For the period March 8, 2000 (date of inception) through December 31,
2000, Echelon Residential recognized $388,212 in development, asset
management, and property management revenues from ECHELON AT LAKESIDE.
In conjunction with the purchase of Echelon's interest in the joint
venture formed for the development of ECHELON AT CHENEY PLACE, Echelon
Residential also assumed agreements which include the payment of a
development fee, a property management and leasing agreement and an
incentive management fee with Cheney Place LLC, the joint venture
partnership. In accordance with these agreements, Echelon Residential has
been engaged as the developer for ECHELON AT CHENEY PLACE and receives a
monthly development fee equal to 5% of the hard construction costs
incurred during the month. Echelon Residential is also the property
manager and leasing agent for the property and will receive a monthly
management fee, computed in arrears, equal to $7,500 per month for two
months prior to the opening of the clubhouse. For the next nine months
thereafter, Echelon Residential will receive the greater of a) 3% of the
effective monthly gross income or b) 3% of the effective monthly gross
income that would be collected if 75% of ECHELON AT CHENEY PLACE were
occupied at rents equaling the average pro forma base rent. Thereafter,
the monthly management fee will be calculated as 3% of the effective
monthly gross income of ECHELON AT CHENEY PLACE. The incentive management
fee is equal to 2% of ECHELON AT CHENEY PLACE'S effective gross income, as
defined. For the period March 8, 2000 (date of inception) through December
31, 2000, Echelon Residential recognized $392,695 in development, property
management and incentive management fee revenues from ECHELON AT CHENEY
PLACE.
Echelon Property Management LLC, a wholly owned subsidiary of Echelon
Residential, has contracted to manage several operating multi-family
residential communities currently leased by Echelon Commercial LLC
("Echelon Commercial"), a wholly owned limited liability subsidiary of
Echelon Development LLC. Echelon Development LLC is a wholly owned limited
liability subsidiary of Echelon Development Holdings LLC. Several of the
equity investors in Echelon Residential Holdings are also equity investors
in Echelon Development Holdings LLC. For the period March 8, 2000 (date of
inception) through December 31, 2000, Echelon Residential recognized
$587,908 in property management revenues from the management of
multi-family properties leased by Echelon Commercial.
As of December 31, 2000, the Company had accounts receivable balances of
$51,880 due from Echelon Commercial LLC, $19,455 due from ECHELON AT
CHENEY PLACE and $44,186 from other related parties. These amounts were
repaid by the end of February 2001.
8. RETIREMENT PLAN
Echelon Residential is the sponsor of the Echelon 401(k) Savings Plan
("Savings Plan") under Section 401(k) of the Internal Revenue Service Code
(the "Code"), to which participants may contribute a percentage of their
pay up to limits established by the Code. The Company may make
discretionary contributions to the Savings Plan. The Company did not
contribute to the Savings Plan during the period March 8, 2000 (date of
inception) through December 31, 2000. As of January 1, 2001, the Company
initiated an option in the Savings Plan to include a mandatory matching
contribution from the Company.
9. COMMITMENTS AND CONTINGENCIES
As of December 31, 2000, two multi-family residential communities were
under construction and had remaining commitments of $12,985,656 with
construction contractors.
On December 29, 2000, the Company executed a $5,000,000 revolving
promissory note with Echelon Development Holdings. The revolving
promissory note has a term of 24 months, maturing on December 29, 2002,
and an annual interest rate of 10%. Interest accrues and compounds daily
and is
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payable on December 31st of each year the note is outstanding. As of
December 31, 2000, there were no amounts outstanding on the revolving
promissory note.
As discussed in Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES, the Company maintains preferred return accounts for the
Participating Members. As of December 31, 2000, the preferred return
balances for Participating A and B Capital were $198,597 and $3,709,
respectively. These amounts have not been paid and therefore, have not
been reflected as a reduction of Participating A and B Capital in the
December 31, 2000 consolidated financial statements.
The joint venture formed for the development of ECHELON AT LAKESIDE
maintains preferred return accounts for the limited partners, Echelon LP,
a wholly owned limited liability subsidiary of Echelon Residential, and
Turner. The payment of any preferred returns to Echelon LP would be
eliminated upon consolidation. As of December 31, 2000, the preferred
return balance for Turner was $312,669. This amount has not been paid and
therefore, has not been reflected as a reduction of member's equity in the
December 31, 2000 consolidated financial statements.
10. SUBSEQUENT EVENT
In February 2001, the Company closed on a $18,600,000 loan from SouthTrust
Bank for the construction financing of ECHELON AT UPTOWN, a 244-unit
multi-family residential community to be developed in downtown Orlando,
Florida. The interest rate is LIBOR plus 1.75% with monthly interest
payments required over the 36-month initial term of the loan. The loan is
guaranteed by Echelon Residential and construction is expected to commence
in the second quarter of 2001.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
period March 8, 2000 (date of inception) through December 31, 2000:
PERIOD THREE MONTHS ENDED
MARCH 8 - ----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
---------- ------------ ------------- ------------- ------------
Total revenues............ $ 147,078 $ 758,673 $ 659,867 $ 3,664,594 $ 5,230,212
Net loss.................. $(328,623) $(1,359,326) $(1,855,757) $(3,162,320) $(6,706,026)
******
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EXHIBIT INDEX
2000 Form 10-K
EXHIBIT PAGE
- ------- ----
2.7 Proposed Order Granting Joint Motion to Continue Final
Approval Settlement Hearing (March 13, 2001). 1-
13 The 2000 Annual Report to security holders, a copy of
which is furnished for the information of the
Securities and Exchange Commission.
23 Consent of Independent Auditors.
99(f) Lease agreement with Aerovias de Mexico S.A. de C.V.
99(g) Aircraft Conditional Sale agreement with Royal
Aviation Inc.
99(h) Lease agreement with Air Slovakia BWJ, Ltd.