-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sw/Y/hkBFdj5HJ8xTRZTUbeB48lQz9pmu8YZxyLz5f/rS2ugfBlI0hILhZG4CS7U 9sp+UJ+jDnlTw9gbAl18WQ== 0000847557-02-000006.txt : 20020415 0000847557-02-000006.hdr.sgml : 20020415 ACCESSION NUMBER: 0000847557-02-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INCOME PARTNERS V C LTD PARTNERSHIP CENTRAL INDEX KEY: 0000847559 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043077437 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19134 FILM NUMBER: 02597013 BUSINESS ADDRESS: STREET 1: 98 NORTH WASHINGTON ST. CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6175421200 MAIL ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 10-K 1 doc1.txt 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, 2001 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-19134 ------- AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP ------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-3057303 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 88 Broad Street, Boston, MA 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 -------------- Securities registered pursuant to Section 12(b) of the Act NONE ---- Title of each class Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the Act: 930,443 Units Representing Limited Partnership Interest -------------------------------------------------------- (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 herein, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Not applicable. Securities are nonvoting for this purpose. Refer to Item 12 for further information. AMERICAN INCOME PARTNERS V-C 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 9 PART II Item 5. Market for the Partnership's Securities and Related Security Holder Matters 10 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures about Market Risks 16 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38 PART III Item 10. Directors and Executive Officers of the Partnership 39 Item 11. Executive Compensation 40 Item 12. Security Ownership of Certain Beneficial Owners and Management 41 Item 13. Certain Relationships and Related Transactions 41 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 43
PART I Item 1. Business. - ------------------- (a) General Development of Business American Income Partners V-C Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on December 27, 1989 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing IV Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On May 21, 1990, the Partnership issued 930,443 units, representing assignments of limited partnership interests (the "Units"), to 1,550 investors. Unitholders and Limited Partners (other than the Initial Limited Partner) are collectively referred to as Recognized Owners. The Partnership has one General Partner, AFG Leasing IV Incorporated, a Massachusetts corporation and 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 EFG. 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", or the "Partnership Agreement"). (b) Financial Information about Industry Segments The Partnership is engaged in only one operating industry segment: financial services. Historically, the Partnership has acquired capital equipment and leased the equipment 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. Industry segment data is not applicable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 herein. (c) Narrative Description of Business The Partnership was organized to acquire a diversified portfolio of capital equipment subject to various full payout and operating leases and to lease the equipment to third parties as income-producing investments. More specifically, the Partnership's primary investment objectives were to acquire and lease equipment that would: 1. Generate quarterly cash distributions; 2. Preserve and protect invested capital; and 3. Maintain substantial residual value for ultimate sale. 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 May 21, 1990. The initial purchase of equipment and the associated lease commitments occurred on May 22, 1990. The Restated Agreement, as amended, provides that the Partnership is expected to terminate no later than December 31, 2001. 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 General Partner does not expect that the Partnership will be dissolved until such time that the Class Action Lawsuit is settled or adjudicated. 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 equipment, (ii) manage the leasing, re-leasing, financing, and refinancing of equipment, and (iii) arrange the resale of equipment. The Manager is compensated for such services as provided for in the Restated Agreement, as amended. 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. The Partnership's investment in equipment is, and will continue to be, subject to various risks, including physical deterioration, technological obsolescence, credit quality and defaults by lessees. A principal business risk of owning and leasing equipment is the possibility that aggregate lease revenues and equipment sale proceeds will be insufficient to provide an acceptable rate of return on invested capital after payment of all debt service costs and operating expenses. Another risk is that the credit quality of the lease may deteriorate after a lease is made. In addition, the leasing industry is very competitive. The Partnership is subject to considerable competition when re-leasing or selling equipment at the expiration of its 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 limited partnerships and trusts organized and managed similarly to the Partnership and including other EFG sponsored partnerships and trusts, which may seek to re-lease or sell equipment within their own portfolios to the same customers as the Partnership. The terrorist attacks on September 11, 2001 and the commencement of hostilities thereafter may adversely affect the Partnership's ability to re-lease or sell equipment. In addition, default by a lessee under a lease may cause equipment 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 equipment. This could result in the loss of anticipated revenue. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 2001, 2000 and 1999 is incorporated herein by reference to Note 2 to the financial statements included in Item 8 herein. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. In connection with a preliminary settlement agreement for a Class Action Lawsuit, 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 $2,390,000 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 unrelated Florida-based real estate company. Echelon Residential Holding's interest in Echelon Residential LLC is pledged pursuant to a pledge agreement to the partnerships as collateral for the loans. The loan 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. During the second quarter of 2001, the General Partner determined that recoverability of the loan receivable had been impaired and at June 30, 2001 recorded an impairment of $209,125, reflecting the General Partner's current assessment of the amount of loss that is likely to be incurred by the Partnership. In addition to the write-down recorded at June 30, 2001, the Partnership reserved all accrued interest of $387,897 recorded on the loan receivable from inception through March 31, 2001 and ceased accruing interest on its loan receivable from Echelon Residential Holdings, effective April 1, 2001. The total impairment of $597,022 is recorded as write-down of impaired loan and interest receivable in the accompanying Statement of Operations for the year ended December 31, 2001. The write-down of the loan receivable from Echelon Residential Holdings and the related accrued interest was precipitated principally by a slowing U.S. economy and its effects on the real estate development industry. The economic outlook for the properties that existed when the loan was funded has deteriorated and inhibited the ability of Echelon Residential Holdings' management to secure low-cost sources of development capital, including but not limited to joint-venture or equity partners. In response to these developments and lower risk tolerances in the credit markets, the management of Echelon Residential Holdings decided in the second quarter of 2001 to concentrate its prospective development activities within the southeastern United States and, therefore, to dispose of development sites located elsewhere. In May 2001, Echelon Residential Holdings closed its Texas-based development office; and since the beginning of 2001, the company has sold five of nine properties (two in July 2001, one in October 2001, one in November 2001 and one in February 2002). As a result of these developments, the General Partner does not believe that Echelon Residential Holdings will realize the profit levels originally believed to be achievable from either selling these properties as a group or developing all of them as multi-family residential communities. The Restated Agreement, as amended, prohibits the Partnership from making loans to the General Partner or its affiliates. Since the acquisition of several parcels of real estate from the owner had to occur prior to the admission of certain independent third parties as equity owners, Echelon Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC, were formed in anticipation of their admission. The General Partner agreed to an officer of the Manager serving as the initial equity holder of Echelon Residential Holdings and as an unpaid manager of Echelon Residential Holdings. The officer made a $185,465 equity investment in Echelon Residential Holdings. His return on his equity investment is restricted to the same rate of return as the partnerships realize on their loans. There is a risk that the court may object to the General Partner's action in structuring the loan in this way since the officer may be deemed an affiliate and the loans in violation of the prohibition against loans to affiliates in the Partnership Agreement and the court's statement in its order permitting New Investments that all other provisions of the Partnership Agreements governing the investment objectives and policies of the Partnership shall remain in full force and effect. The court may require the partnerships to restructure or divest the loan. The Investment Company Act of 1940 (the "1940 Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Partnership has active business operations in the financial services industry, including equipment leasing and the loan to Echelon Residential Holdings. The Partnership does not intend to engage in investment activities in a manner or to an extent that would require the Partnership to register as an investment company under the 1940 Act. However, it is possible that the Partnership unintentionally may have engaged, or may in the future, engage in an activity or activities that may be construed to fall within the scope of the 1940 Act. The General Partner is engaged in discussions with the staff of the Securities and Exchange Commission ("SEC") regarding whether or not the Partnership may be an inadvertent investment company as a consequence of the above-referenced loan. The 1940 Act, among other things, prohibits an unregistered investment company from offering securities for sale or engaging in any business in interstate commerce and, consequently, leases and contracts entered into by partnerships that are unregistered investment companies may be voidable. The General Partner has consulted counsel and believes that the Partnership is not an investment company. If the Partnership were determined to be an unregistered investment company, its business would be adversely affected. The General Partner has determined to take action to resolve the Partnership's status under the 1940 Act by means that may include disposing or acquiring certain assets that it might not otherwise dispose or acquire. (d) Financial Information about Foreign and Domestic Operations and Export Sales Not applicable. Item 2. Properties. - --------------------- None. Item 3. Legal Proceedings. - ----------------------------- Action involving Rosenblum, et al. - -------------------------------------- In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group -------------------------------------------------- Limited Partnership, et al., in the United States District Court for the - ----------------------------- Southern District of Florida (the "Court") on behalf of a proposed class of - ------- investors in 28 equipment leasing programs sponsored by EFG, including the - ---- Partnership (collectively, the "Nominal Defendants"), against EFG and a number - ---- of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis - - ---------------------------------- Financial Group Limited Partnership, et al., in the Superior Court of the - ----------------------------------------------- Commonwealth of Massachusetts on behalf of the Nominal Defendants against the - ------ Defendants. Both actions are referred to herein collectively as the "Class - -- Action Lawsuit". - -- The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On August 20, 1998, the court preliminarily approved a Stipulation of Settlement setting forth terms pursuant to which a settlement of the Class Action Lawsuit was intended to be achieved and which, among other things, was at the time expected to reduce the burdens and expenses attendant to continuing litigation. Subsequently an Amended Stipulation of Settlement was approved by the court. 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 remained pending due, in part, to the complexity of the proposed settlement pertaining to this class. On March 6, 2000, the court preliminarily approved a Second Amended Stipulation that modified certain of the settlement terms applying to the settlement of the Partnership sub-class contained in the Amended Stipulation. The settlement of the Partnership sub-class was premised on the consolidation of the Partnerships' net assets (the "Consolidation"), subject to certain conditions, into a single successor company ("Newco"). The potential benefits and risks of the Consolidation were to be presented in a Solicitation Statement that would be mailed to all of the partners of the Exchange Partnerships as soon as the associated regulatory review process was 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. One of the principal objectives of the Consolidation was to create a company that would have the potential to generate more value for the benefit of existing limited partners than other alternatives, including continuing the Partnership's customary business operations until all of its assets are disposed in the ordinary course of business. To facilitate the realization of this objective, the Amended Stipulation provided, among other things, that commencing March 22, 1999, the Exchange Partnerships could collectively invest up to 40% of the total aggregate net asset values of all of the Exchange Partnerships in any investment, including additional equipment and other business activities that the general partners of the Exchange Partnerships and EFG reasonably believed to be consistent with the anticipated business interests and objectives of Newco, subject to certain limitations. The Second Amended Stipulation, among other things, quantified the 40% limitation using a whole dollar amount of $32 million in the aggregate. On March 8, 2000, the Exchange Partnerships collectively made a $32 million loan as permitted by the Second Amended Stipulation approved by the Court. The Partnership's portion of the aggregate loan is $2,390,000. The loan consists of a term loan to Echelon Residential Holdings, a newly-formed real estate company that is owned by several independent investors and, in his individual capacity, James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates of the General Partner made loans to Echelon Residential Holdings in their individual capacities. Echelon Residential Holdings, through a wholly owned subsidiary (Echelon Residential LLC), used the loan proceeds, along with the loan proceeds from similar loans by ten affiliated partnerships representing $32 million in the aggregate, to acquire various real estate assets from Echelon International Corporation, an unrelated Florida-based real estate company. The loan has a term of 30 months maturing on September 8, 2002 and bears interest at the annual rate of 14% for the first 24 months and 18% for the final six months of the term. Interest accrues and compounds monthly but is not payable until maturity. Echelon Residential Holdings has pledged its membership interests in Echelon Residential LLC to the Exchange Partnerships as collateral for the loan. In the absence of the Court's authorization to enter into new investment activities, the Partnership's Restated Agreement, as amended, would not permit such activities without the approval of limited partners owning a majority of the Partnership's outstanding Units. Consistent with the Amended Stipulation, the Second Amended Stipulation provides terms for unwinding any new investment transactions in the event that the Consolidation is not effected or the Partnership objects to its participation in the Consolidation. While the Court's August 20, 1998 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, 1999 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, 1998 Order which enjoined the General Partners of the Partnerships from, among other things, recording any transfers not in accordance with the Court's order remains effective. On March 12, 2001, after a status conference and hearing, the Court issued an order that required the parties, no later than May 15, 2001, to advise the Court on (a) whether the SEC has completed its review of the solicitation statement and related materials submitted to the SEC in connection with the proposed settlement, and (b) whether parties request the Court to schedule a hearing for final approval of the proposed settlement or are withdrawing the proposed settlement from judicial consideration and resuming the litigation of the Plaintiffs' claims. The Court also directed the parties to use their best efforts to assist the SEC so that its regulatory review may be completed on or before May 15, 2001. On May 11, 2001, the general partners of the Partnerships that are nominal defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from the Associate Director and Chief Counsel of the Division of Investment Management of the SEC informing the general partners that the staff of the Division believes that American Income Partners V-A Limited Partnership, American Income Partners V-B Limited Partnership, AmericanIncome Partners V-C Limited Partnership, American Income Partners V-D Limited Partnership, American Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND II International Limited Partnership (the "Designated Partnerships") are investment companies as defined in Section 3(a)(1)(C) of the 1940 Act. The SEC staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered investment company, among other things, to offer, sell, purchase, or acquire any security or engage in any business in interstate commerce. Accordingly, Section 7 would prohibit any partnership that is an unregistered investment company from engaging in any business in interstate commerce, except transactions that are merely incidental to its dissolution. The SEC staff asked that the general partners advise them within the next 30 days as to what steps the Designated Partnerships will take to address their status under the 1940 Act. The SEC staff asserted that the notes evidencing the loans to Echelon Residential Holdings are investment securities and the ownership of the notes by said partnerships cause them to be investment companies and that, in the case of American Income Partners V-A Limited Partnership and V-B Limited Partnership, they may have become investment companies when they received the securities of Semele Group Inc. ("Semele") as part of the compensation for the sale of a vessel to Semele in 1997. The general partners have consulted with counsel who specializes in the 1940 Act and, based on counsel's advice, do not believe that the Designated Partnerships are investment companies. The letter also stated that the Division is considering whether to commence enforcement action with respect to this matter. Noting that the parties to the Class Action Lawsuit were scheduled to appear before the court in the near future to consider a proposed settlement, and that the SEC staff believed that its views, as expressed in the letter, would be relevant to the specific matters that will be considered by the court at the hearing, the SEC staff submitted the letter to the court for its consideration. On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status Report pursuant to the Court's March 12, 2001 Order. Defendants reported that, notwithstanding the parties' best efforts, the staff of the SEC has not completed its review of the solicitation statement in connection with the proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants stated their belief that the parties should continue to pursue the court's final approval of the proposed settlement. Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on May 15, 2001 in which they reported that the SEC review has not been concluded and that they notified the Defendants that they would not agree to continue to stay the further prosecution of the litigation in favor of the settlement and that they intend to seek court approval to immediately resume active prosecution of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that the "[p]laintiffs continue to believe that the settlement is in the best interests of the Operating Partnership Sub-class. However, since the SEC has yet to complete its review of the proxy, the Plaintiffs do not believe that the litigation should continue to be stayed so that the SEC may continue its regulatory review for an indefinite period of time." Subsequently, after a status conference on May 31, 2001, the court issued an order on June 4, 2001 setting a trial date of March 4, 2002, referring the case to mediation and referring discovery to a magistrate judge. The Defendant's and Plaintiff's Counsel continued to negotiate toward a settlement and have reached agreement on a Revised Stipulation of Settlement (the "Revised Settlement") that does not involve a Consolidation. As part of the Revised Settlement, EFG has agreed to buy the loans made by the Exchange Partnerships to Echelon Residential Holdings for an aggregate of $32 million plus interest at 7.5% per annum, if they are not repaid prior to or at their scheduled maturity date. The Revised Settlement also provides for the liquidation of the Exchange Partnerships' assets, a cash distribution and the dissolution of the Partnerships including the liquidation and dissolution of this Partnership. The court held a hearing on March 1, 2002 to consider the Revised Settlement. After the hearing, the court issued an order preliminarily approving the Revised Settlement and providing for the mailing of notice to the Operating Partnership Sub-Class of a hearing on June 7, 2002 to determine whether the settlement on the terms and conditions set forth in the Revised Settlement is fair, reasonable and adequate and should be finally approved by the court and a final judgment entered in the matter. There can be no assurance that the Revised Settlement of the sub-class involving the Exchange Partnerships will receive final Court approval and be effected. 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. Assuming the proposed settlement were effected according to its terms, the Partnership's share of legal fees and expenses related to the Class Action Lawsuit and the Consolidation was estimated to be approximately $467,000, of which approximately $287,000 was expensed by the Partnership in 1998 and additional amounts of $89,000, $41,000, and $50,000 were expensed by the Partnership in 2001, 2000, and 1999, respectively. 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: Action involving Transmeridian Airlines - ------------------------------------------ On November 9, 1998, First Security Bank, N.A., as trustee of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs), 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. Transmeridian filed counterclaims for breach of contract, quantum meruit, conversion, breach of the implied covenant of good faith and fair dealing, and violation of M.G.L. c. 93A. The Plaintiffs subsequently 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. The Plaintiffs sought damages for, among other things, breach of contract arising out of Transmeridian's refusal to repair or replace burned engine blades found in one engine during a pre-return inspection of an aircraft leased by Transmeridian from the Plaintiffs. The estimated cost to repair the engine and lease a substitute engine during the repair period was approximately $488,000. Repairs were completed in June 1999. Plaintiffs were required to advance the cost of repairing the engine and leasing a substitute engine and could not be certain whether the guaranties will be enforced. Therefore, the Partnership expensed its share of these costs of approximately $7,000 and $23,000 in 1999 and 1998, respectively. The Plaintiffs also sought damages for the costs incurred with respect to the damages to an aircraft involved in an on-ground accident in October 1998. The cost to repair the aircraft was estimated to be at least $350,000. In addition, the Plaintiff was required to lease two substitute engines at a cost of $82,000 per month. During the year ended December 31, 1999, the Plaintiff 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. As of September 11, 1999, Transmeridian ceased paying rent on this aircraft. The Plaintiffs also sought to recover insurance coverage for this loss and to enforce written guaranties issued by Apple Vacations that guaranteed Transmeridian's performance under the lease agreement and recovery of all costs, lost revenue and monetary damages in connection with these claims. On September 22, 2000, Transmeridian filed a petition for bankruptcy reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Northern District of Georgia in Atlanta (the "Bankruptcy Court"). This filing automatically stayed all pending litigation against Transmeridian, including this action. In January 2001, Transmeridian filed a reorganization plan and disclosure statement indicating that little if any money will be available for distribution to unsecured creditors like the Partnership. As of March 13, 2002, the parties settled all claims involved in this lawsuit and in a related lawsuit involving affiliated entities but not the Partnership pending in the United States District Court for the Southern District of Texas (Houston Division) (the "Texas Action"). The material terms of settlement provide: (i) in exchange for payment of $2,100,000 from Apple to the Plaintiffs all claims arising from or related to the lawsuit and the Texas Action are dismissed with prejudice; (ii) the Plaintiffs shall have Allowed Claims against the bankruptcy estate of Transmeridian in the aggregate amount of $2,700,000; (iii) the Plaintiff will be paid $400,000 from the insurance proceeds relating to the aircraft loss; and (iv) each of the parties will receive mutual releases of all claims and counterclaims. The Partnership has received and recorded $32,000 in the first quarter of 2002, as its share of the $2,100,000 payment. The Partnership has not yet received or recorded its share of the $400,000 from the insurance proceeds. Additionally, the Partnership recognized $49,440 as income in the fourth quarter of 2001 that had been held in escrow pending the resolution of the litigation. Action involving Northwest Airlines, Inc. - --------------------------------------------- On September 22, 1995, Investors Asset Holding Corp. and First Security Bank, N.A., trustees of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs"), filed an action in United States District Court for the District of Massachusetts against a lessee of the Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that Northwest did not fulfill its maintenance and return obligations under its Lease Agreements with the Plaintiffs and seeks declaratory judgment concerning Northwest's obligations and monetary damages. Northwest filed an Answer to the Plaintiffs' Complaint and a motion to transfer the venue of this proceeding to Minnesota. The Court denied Northwest's motion. On June 29, 1998, a United States Magistrate Judge recommended entry of partial summary judgment in favor of the Plaintiffs. Northwest appealed this decision. On April 15, 1999, the United States District Court Judge adopted the Magistrate Judge's recommendation and entered partial summary judgment in favor of the Plaintiffs on their claims for declaratory judgment. In February 2001 the District Court also denied summary judgment on certain of the Plaintiffs' other claims, including their tort claims for conversion. This matter was tried during August 2001. Subsequent to the evidentiary hearings, the parties submitted proposed findings. Final argument was held on October 29, 2001. The court has the matter under advisement. Item 4. Submission of Matters to a Vote of Security Holders. - ---------------------------------------------------------------------- None. 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, 2001, there were 1,431 record holders of Units in the Partnership. (c) Dividend History and Restrictions Historically, the amount of cash distributions to be 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. Generally, cash distributions have been paid within 15 days after the completion of each calendar quarter. The Partnership is a Nominal Defendant in a Class Action Lawsuit. Commencing with the first quarter of 2000, the General Partner suspended 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 were no distributions declared in either 2001 or 2000. 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 equipment upon lease expiration. In addition to the need for funds in connection with the Class Action Lawsuit, liquidity is especially important as the Partnership sells equipment, as the remaining equipment base 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 assets. 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) amounts realized from any loss or destruction of equipment which the General Partner determines shall be reinvested in similar equipment for the remainder of the original lease term of the lost or destroyed equipment, or in isolated instances, in other equipment, if the General Partner determines that investment of such proceeds will significantly improve the diversity of the Partnership's equipment portfolio, and subject in either case to satisfaction of all existing indebtedness secured by such equipment to the extent deemed necessary or appropriate by the General Partner, or (b) the proceeds from the sale of an interest in equipment pursuant to any agreement governing a joint venture which the General Partner determines will be invested in additional equipment or interests in equipment and which ultimately are so reinvested 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 reduced by (i)(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 an item of equipment 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 whether or not then due and payable) 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 equipment sold, which are secured by liens on such equipment, 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 11% (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 11% (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. - ------------------------------------ The following data should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements included in Item 8 herein. For each of the five years in the period ended December 31, 2001:
Summary of Operations 2001 2000 1999 1998 1997 - ----------------------------- ----------- ---------- ---------- ---------- ---------- Lease revenue . . . . . . . . $ 218,401 $ 300,301 $ 526,388 $ 695,210 $1,192,858 Total income. . . . . . . . . $ 434,597 $ 781,895 $1,178,588 $1,349,744 $1,335,351 Interest income . . . . . . . $ 143,231 $ 388,979 $ 167,124 $ 118,339 $ 81,917 Net income (loss) . . . . . . $ (542,785) $ 529,244 $ 852,737 $ 735,038 $ 563,044 Per Unit: Net income (loss) $ (0.55) $ 0.54 $ 0.87 $ 0.75 $ 0.57 Cash distributions declared. $ -- $ -- $ 0.34 $ 0.34 $ 0.42 Financial Position - ----------------------------- Total assets. . . . . . . . . $3,432,949 $3,966,204 $3,530,622 $3,244,118 $2,387,283 Total long-term obligations . $ -- $ -- $ -- $ -- $ -- Partners' capital . . . . . . $3,187,452 $3,730,237 $3,200,993 $2,678,829 $2,274,364
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. - --------------- Year ended December 31, 2001 compared to the year ended December 31, 2000 and the year ended December 31, 2000 compared to the year ended December 31, 1999 Certain statements in this Form 10-K of the Partnership that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the outcome of the Class Action Lawsuit, the remarketing of the Partnership's equipment and the performance of the Partnership's non-equipment assets. Overview - -------- The Partnership was organized in 1989 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. Pursuant to the Restated Agreement, as amended, the Partnership was scheduled to be dissolved by December 31, 2001. However, the General Partner does not expect that the Partnership will be dissolved until such time that the Class Action Lawsuit is settled or adjudicated. The 1940 Act places restrictions on the capital structure and business activities of companies registered thereunder. The Partnership has active business operations in the financial services industry, including equipment leasing, the loan to Echelon Residential Holdings and its ownership of securities of Semele. The Partnership does not intend to engage in investment activities in a manner or to an extent that would require the Partnership to register as an investment company under the 1940 Act. However, it is possible that the Partnership unintentionally may have engaged, or may in the future, engage in an activity or activities that may be construed to fall within the scope of the 1940 Act. The General Partner is engaged in discussions with the staff of the SEC regarding whether or not the Partnership may be an inadvertent investment company as a consequence of the above-referenced loan. The 1940 Act, among other things, prohibits an unregistered investment company from offering securities for sale or engaging in any business in interstate commerce and, consequently, leases and contracts entered into by partnerships that are unregistered investment companies may be voidable. The General Partner has consulted counsel and believes that the Partnership is not an investment company. If the Partnership were determined to be an unregistered investment company, its business would be adversely affected. The General Partner has determined to take action to resolve the Partnership's status under the 1940 Act by means that may include disposing or acquiring certain assets that it might not otherwise dispose or acquire. Critical Accounting Policies and Estimates - ---------------------------------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the General Partner to make estimates and assumptions that affect the amounts reported in the financial statements. On a regular basis, the General Partner reviews these estimates and assumptions including those related to revenue recognition, asset lives and depreciation, allowance for doubtful accounts, allowance for loan loss, impairment of long-lived assets and contingencies. These estimates are based on the General Partner's historical experience and on various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The General Partner believes, however, that the estimates, including those for the above-listed items, are reasonable. The General Partner believes the following critical accounting policies, among others, are subject to significant judgments and estimates used in the preparation of these financial statements: Revenue Recognition: Rents are payable to the Partnership monthly or quarterly - --------------------- and no significant amounts are calculated on factors other than the passage of time. The majority of the Partnership's leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Asset lives and depreciation method: The Partnership's primary business involves - ------------------------------------ the purchase and subsequent lease of long-lived equipment. The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of the primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Allowance for loan losses: The Partnership periodically evaluates the collectibility of its loan's contractual principal and interest and the existence of loan impairment indicators, including contemporaneous economic conditions, situations which could affect the borrower's ability to repay its obligation, the estimated value of the underlying collateral, and other relevant factors. Real estate values are discounted using a present value methodology over the period between the financial reporting date and the estimated disposition date of each property. A loan is considered to be impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement, which includes both principal and interest. A provision for loan losses is charged to earnings based on the judgment of the General Partner of the amount necessary to maintain the allowance for loan losses at a level adequate to absorb probable losses. Impairment of long-lived assets: On a regular basis, the General Partner - ----------------------------------- reviews the net carrying value of equipment to determine whether it can be - ------ recovered from undiscounted future cash flows. 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 and are reflected separately on the accompanying Statement of Operations as write-down of equipment. Inherent in the Partnership's estimate of net realizable values are assumptions regarding estimated future cash flows. If these assumptions or estimates change in the future, the Partnership could be required to record impairment charges for these assets. Contingencies and litigation: The Partnership is subject to legal proceedings - ------------------------------- involving ordinary and routine claims related to its business. In addition, the Partnership is also involved in a class action lawsuit. The ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements. Estimates for losses from litigation are made after consultation with outside counsel. If estimates of potential losses increase or the related facts and circumstances change in the future, the Partnership may be required to adjust amounts recorded in its financial statements. Results of Operations - ----------------------- For the year ended December 31, 2001, the Partnership recognized lease revenue of $218,401 compared to $300,301 and $526,388 for the years ended December 31, 2000 and 1999, respectively. The decrease in lease revenue from 1999 to 2001 resulted from lease term expirations and equipment sales. In the future, lease revenue will continue to decline due to lease term expirations and equipment sales. Prior to the quarter ended June 30, 1999, the Partnership's equipment portfolio included certain assets in which the Partnership held a proportionate ownership interest. In such cases, the remaining interests were owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. The Partnership and each affiliate individually reported, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income for the year ended December 31, 2001 was $143,231 compared to $388,979 and $167,124 for the years ended December 31, 2000 and 1999, respectively. Interest income is generated principally from temporary investment of rental receipts and equipment sale proceeds in short-term investments and interest earned on the loan receivable from Echelon Residential Holdings. The amount of future interest income from the short-term instruments is expected to fluctuate as a result of changing interest rates and the amount of cash available for investment, among other factors. Interest income included $95,000 and $292,897 for the years ended December 31, 2001 and 2000, respectively, earned on the loan receivable from Echelon Residential Holdings. During the second quarter of 2001, the General Partner determined that recoverability of the loan receivable had been impaired and at June 30, 2001 recorded an impairment of $209,125, reflecting the General Partner's current assessment of the amount of loss that is likely to be incurred by the Partnership. In addition to the write-down recorded at June 30, 2001, the Partnership reserved all accrued interest of $387,897 recorded on the loan receivable from inception through March 31, 2001 and ceased accruing interest on its loan receivable from Echelon Residential Holdings, effective April 1, 2001. The total impairment of $597,022 is recorded as write-down of impaired loan and interest receivable in the year ended December 31, 2001. In the fourth quarter of 2001, a court judgment was entered in favor of the Partnership and certain affiliates related to the Transmeridian litigation. As a result, the Partnership recognized $49,440 as other income that was previously held in escrow. In addition, the Partnership received settlement proceeds of approximately $32,000 from the defendants in March 2002, which will be recognized as other income in the first quarter of 2002. See Note 7 - Legal Proceedings. During the year ended December 31, 2001, the Partnership sold fully depreciated equipment to existing lessees and third parties, which resulted in a net gain, for financial reporting purposes, of $23,525, compared to a net gain in the year ended December 31, 2000 of $92,615, on equipment having a net book value of $2,186. During the year ended December 31 1999, the Partnership sold fully depreciated equipment to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $485,076. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Partnership and which will maximize total cash returns for each asset. The total economic value realized for each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Partnership classifies such residual rental payments as lease revenue. 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 equipment. Depreciation expense was $24,050 and $26,236 for the years ended December 31, 2000 and 1999, respectively. The Partnership's equipment was fully depreciated during 2000. For financial reporting purposes, to the extent that an asset was held on primary lease term, the Partnership depreciated the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of the primary lease expiration. To the extent that an asset was held beyond its primary lease term, the Partnership continued to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Management fees were $10,920, $14,066 and $25,370 for the years ended December 31, 2001, 2000 and 1999, respectively. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Operating expenses were $369,440, $214,535 and $274,245 for the years ended December 31, 2001, 2000 and 1999, respectively. The increase in operating expenses from 2000 to 2001 is primarily due to an increase in administrative and professional service costs. For the years ended December 31, 2001, 2000 and 1999, operating expenses included approximately $89,000, $41,000 and $50,000, respectively, related to the Class Action Lawsuit. Other operating expenses consist principally of professional service costs, such as audit and legal fees, as well as printing, distribution and other remarketing expenses. In certain cases, equipment storage or repairs and maintenance costs may be incurred in connection with equipment being remarketed. Liquidity and Capital Resources and Discussion of Cash Flows - -------------------------------------------------------------------- The Partnership by its nature is a limited life entity. The Partnership's principal operating activities have resulted from asset rental transactions. Accordingly, the Partnership's principal source of cash from operations is generally provided by the collection of periodic rents. These cash inflows are used to pay management fees and operating costs. Operating activities generated net cash inflows of $12,443, $180,869 and $321,217 for the years ended December 31, 2001, 2000 and 1999, respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenue and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities also will decline as the Partnership remarkets its equipment. The amount of future cash from interest income is expected to fluctuate as a result of changing interest rates and the level of cash available for investment, among other factors. The loan to Echelon Residential Holdings and accrued interest thereon is due in full at maturity on September 8, 2002 (see discussion below). Cash realized from asset disposal transactions is reported under investing activities on the accompanying Statement of Cash Flows. During 2001, the Partnership realized $23,525 in equipment sale proceeds compared to $94,801 and $485,076 in 2000 and 1999, respectively. Sales proceeds in 1999 included $408,000 related to the Partnership's interest in two Boeing 727-251 ADV aircraft. Future inflows of cash from asset 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 equipment being sold, its condition and age, and future market conditions. At December 31, 2001, the Partnership was due aggregate future minimum lease payments of $74,810 from contractual lease agreements. At the expiration of the individual renewal lease terms underlying the Partnership's future minimum lease payments, the Partnership will sell the equipment 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 equipment 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 equipment. In the latter instances, the equipment could be re-leased to another lessee or sold to a third-party. In connection with a preliminary settlement agreement for a Class Action Lawsuit, 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 $2,390,00 to a newly formed real estate company, Echelon Residential Holdings to finance the acquisition of real estate assets by that company. Echelon Residential Holdings, through a wholly owned subsidiary (Echelon Residential LLC), used the loan proceeds, along with the loan proceeds from similar loans by ten affiliated partnerships representing $32 million in the aggregate, to acquire various real estate assets from Echelon International Corporation, an unrelated Florida-based real estate company. Echelon Residential Holding's interest in Echelon Residential LLC is pledged pursuant to a pledge agreement to the partnerships as collateral for the loans. The loan has a term of 30 months, maturing on September 8, 2002, and an annual interest rate of 14% for the first 24 months and 18% for the final six months. Interest accrues and compounds monthly and is payable at maturity. The loan made by the Partnership to Echelon Residential Holdings is, and will continue to be, subject to various risks, including the risk of default by Echelon Residential Holdings, which could require the Partnership to foreclose under the pledge agreement on its interests in Echelon Residential LLC. The ability of Echelon Residential Holdings to make loan payments and the amount the Partnership may realize after a default would be dependent upon the risks generally associated with the real estate lending business including, without limitation, the existence of senior financing or other liens on the properties, general or local economic conditions, property values, the sale of properties, interest rates, real estate taxes, other operating expenses, the supply and demand for properties involved, zoning and environmental laws and regulations, rent control laws and other governmental rules. A default by Echelon Residential Holdings could have a material adverse effect on the future cash flow and operating results of the Partnership. The Partnership periodically evaluates the collectibility of the loan's contractual principal and interest and the existence of loan impairment indicators. The write-down of the loan receivable from Echelon Residential Holdings and the related accrued interest discussed above was precipitated principally by a slowing U.S. economy and its effects on the real estate development industry. The economic outlook for the properties that existed when the loan was funded has deteriorated and inhibited the ability of Echelon Residential Holdings' management to secure low-cost sources of development capital, including but not limited to joint-venture or equity partners. In response to these developments and lower risk tolerances in the credit markets, the management of Echelon Residential Holdings decided in the second quarter of 2001 to concentrate its prospective development activities within the southeastern United States and, therefore, to dispose of development sites located elsewhere. In May 2001, Echelon Residential Holdings closed its Texas-based development office; and since the beginning of 2001, the company has sold five of nine properties (two in July 2001, one in October 2001, one in November 2001 and one in February 2002). As a result of these developments, the General Partner does not believe that Echelon Residential Holdings will realize the profit levels originally believed to be achievable from either selling these properties as a group or developing all of them as multi-family residential communities. The Restated Agreement, as amended, prohibits the Partnership from making loans to the General Partner or its affiliates. Since the acquisition of several parcels of real estate from the owner had to occur prior to the admission of certain independent third parties as equity owners, Echelon Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC, were formed in anticipation of their admission. The General Partner agreed to an officer of the Manager serving as the initial equity holder of Echelon Residential Holdings and as an unpaid manager of Echelon Residential Holdings. The officer made a $185,465 equity investment in Echelon Residential Holdings. His return on his equity investment is restricted to the same rate of return as the partnerships realize on their loans. There is a risk that the court may object to the General Partner's action in structuring the loan in this way since the officer may be deemed an affiliate and the loans in violation of the prohibition against loans to affiliates in the Partnership Agreement and the court's statement in its order permitting New Investments that all other provisions of the Partnership Agreements governing the investment objectives and policies of the Partnership shall remain in full force and effect. The court may require the partnerships to restructure or divest the loan. 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 equipment 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 equipment, because the remaining equipment base 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 assets. Cash distributions to the General Partner and Recognized Owners had been declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is reported under financing activities on the accompanying Statement of Cash Flows. No distributions were declared during the years ended December 31, 2001 and 2000. 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. Cash distributions when paid to the Recognized Owners consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, the residual value realized for each asset at its disposal date and the performance of the Partnership's non-equipment assets. 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. 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. Such items consist 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, 2001. 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, 2001, the General Partner had a positive tax capital account balance. The outcome of the Class Action Lawsuit will be the principal factor in determining the future of the Partnership's operations. Commencing with the first quarter of 2000, the General Partner suspended 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risks. - ----------------------------------------------------------------------------- The Partnership's financial statements include financial instruments that are exposed to interest rate risks. The Partnership's loan to Echelon Residential Holdings matures on September 8, 2002, currently earns interest at a fixed annual rate of 14% and will earn a fixed annual rate of 18% for the last 6 months of the loan, with interest due at maturity. Investments earning a fixed rate of interest may have their fair market value adversely impacted due to a rise in interest rates. The effect of interest rate fluctuations on the Partnership in 2001 was not material. However, during the second quarter of 2001, the General Partner determined that recoverability of the loan receivable had been impaired and at June 30, 2001 recorded an impairment of $209,125, reflecting the General Partner's then assessment of the amount of loss likely to be incurred by the Partnership. In addition to the write-down recorded at June 30, 2001, the Partnership reserved all accrued interest of $387,897 recorded on the loan receivable from inception through March 31, 2001 and ceased accruing interest on its loan receivable from Echelon Residential Holdings, effective April 1, 2001. Item 8. Financial Statements and Supplementary Data. - ---------------------------------------------------------- Financial Statements:
Report of Independent Certified Public Accountants . 18 Statement of Financial Position at December 31, 2001 and 2000. . . . . . . . . . . . 19 Statement of Operations for the years ended December 31, 2001, 2000 and 1999 20 Statement of Changes in Partners' Capital for the years ended December 31, 2001, 2000 and 1999 21 Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999 22 Notes to the Financial Statements. . . . . . . . . 23 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed. . . . . . . . 35 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings. . . . . . . . 36 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 . . . . . . . . . . . . . . . . 37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Partners of American Income Partners V-C Limited Partnership: We have audited the accompanying balance sheets of American Income Partners V-C Limited Partnership as of December 31, 2001 and 2000, 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, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule 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 American Income Partners V-C Limited Partnership at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. 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 at Item 8 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.. /S/ ERNST & YOUNG LLP Tampa, Florida March 26, 2002 AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2001 AND 2000
2001 2000 ASSETS Cash and cash equivalents $1,228,515 $1,192,547 Rents receivable 5,960 3,745 Accounts receivable - affiliate 15,826 87,015 Prepaid expenses 1,773 - Interest receivable - loan, net of allowance of $387,897 at December 31, 2001 - 292,897 Loan receivable, net of allowance of $209,125 at December 31, 2001 2,180,875 2,390,000 Equipment at cost, net of accumulated depreciation of $2,334,870 and $2,501,133 at December 31, 2001 and 2000, respectively - - ----------- ----------- Total assets $3,432,949 $3,966,204 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Accrued liabilities $ 218,338 $ 206,228 Accrued liabilities - affiliate 11,659 14,239 Deferred rental income 15,500 15,500 ----------- ----------- Total liabilities 245,497 235,967 ----------- ----------- Partners' capital (deficit): General Partner (872,138) (844,999) Limited Partnership Interests (930,443 Units; initial purchase price of $25 each) 4,059,590 4,575,236 ----------- ----------- Total partners' capital 3,187,452 3,730,237 ----------- ----------- Total liabilities and partners' capital $3,432,949 $3,966,204 =========== ===========
The accompanying notes are an integral part of these financial statements AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 INCOME Lease revenue $ 218,401 $300,301 $ 526,388 Interest income 48,231 96,082 167,124 Interest income - loan 95,000 292,897 - Other income 49,440 - - Gain on sale of equipment 23,525 92,615 485,076 ---------- -------- ---------- Total income 434,597 781,895 1,178,588 ---------- -------- ---------- EXPENSES Depreciation - 24,050 26,236 Equipment management fees - affiliate 10,920 14,066 25,370 Operating expenses - affiliate 369,440 214,535 274,245 Write-down of impaired loan and interest receivable 597,022 - - ---------- -------- ---------- Total expenses 977,382 252,651 325,851 ---------- -------- ---------- Net income (loss) $(542,785) $529,244 $ 852,737 ========== ======== ========== Net income (loss) per limited partnership unit $ (0.55) $ 0.54 $ 0.87 ========== ======== ========== Cash distributions declared per limited partnership unit $ - $ - $ 0.34 ========== ======== ==========
The accompanying notes are an integral part of these financial statements AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
General Partner Limited Partners Amount Units Amount Total ---------- ---------------- ----------- ----------- Balance at December 31, 1998 $(897,569) 930,443 $3,576,398 $2,678,829 Net income - 1999 42,637 - 810,100 852,737 Cash distributions declared (16,529) - (314,044) (330,573) ---------- ---------------- ----------- ----------- Balance at December 31, 1999 (871,461) 930,443 4,072,454 3,200,993 Net income - 2000 26,462 - 502,782 529,244 ---------- ---------------- ----------- ----------- Balance at December 31, 2000 (844,999) 930,443 4,575,236 3,730,237 Net loss - 2001 (27,139) - (515,646) (542,785) ---------- ---------------- ----------- ----------- Balance at December 31, 2001 $(872,138) 930,443 $4,059,590 $3,187,452 ========== ================ =========== ===========
The accompanying notes are an integral part of these financial statements AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income (loss) $ (542,785) $ 529,244 $ 852,737 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation - 24,050 26,236 Gain on sale of equipment (23,525) (92,615) (485,076) Write-down of impaired loan and interest receivable 597,022 - - Changes in assets and liabilities: Rents receivable (2,215) 83,255 (69,948) Accounts receivable - affiliate 71,189 (59,149) 232,928 Prepaid expenses (1,773) - - Interest receivable - loan (95,000) (292,897) - Accrued liabilities 12,110 (12,339) (52,373) Accrued liabilities - affiliate (2,580) 3,820 2,183 Deferred rental income - (2,500) 15,530 Other liabilities - - (201,000) ----------- ------------ ----------- Net cash provided by operating activities 12,443 180,869 321,217 ----------- ------------ ----------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Proceeds from equipment sales 23,525 94,801 485,076 Loan receivable - (2,390,000) - ----------- ------------ ----------- Net cash provided by (used in) investing activities 23,525 (2,295,199) 485,076 ----------- ------------ ----------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Distributions paid - (82,643) (330,573) ----------- ------------ ----------- Net cash used in financing activities - (82,643) (330,573) ----------- ------------ ----------- Net increase (decrease) in cash and cash equivalents 35,968 (2,196,973) 475,720 Cash and cash equivalents at beginning of year 1,192,547 3,389,520 2,913,800 ----------- ------------ ----------- Cash and cash equivalents at end of year $1,228,515 $ 1,192,547 $3,389,520 =========== ============ ===========
The accompanying notes are an integral part of these financial statements - ------ AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS - --------------------------------------------------- American Income Partners V-C Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on December 27, 1989 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing IV Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On May 21, 1990, the Partnership issued 930,443 units, representing assignments of limited partnership interests (the "Units"), to 1,550 investors. Unitholders and Limited Partners (other than the Initial Limited Partner) are collectively referred to as Recognized Owners. The Partnership has one General Partner, AFG Leasing IV Incorporated, a Massachusetts corporation and 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 EFG. 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"). Significant operations commenced May 22, 1990 when the Partnership made its initial equipment purchase. Pursuant to the Restated Agreement, as amended, Distributable Cash From Operations and Distributable Cash From Sales or Refinancings will be allocated 95% to the Recognized Owners and 5% to the General Partner. Under the terms of a management agreement between the Partnership and AF/AIP Programs Limited Partnership and the terms of an identical management agreement between AF/AIP Programs Limited Partnership and EFG (collectively, the "Management Agreement"), management services are provided by EFG to the Partnership at fees based upon acquisitions of equipment and revenues from leases. 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. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------------- Cash and Cash Equivalents - ---------------------------- The Partnership classifies as cash and cash equivalent amounts on deposits in banks and liquid investment instruments purchased with an original maturity of three months or less. Revenue Recognition - -------------------- Effective January 1, 2000, the Partnership 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 Partnership's financial statements. Rents are payable to the Partnership monthly or quarterly and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. 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. Future minimum rents of $74,810 are due as follows:
For the year ending December 31, 2002 $64,380 2003 10,430 ------- . Total $74,810 =======
Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 -------- -------- -------- Zeigler Coal Holding Company. $186,000 $193,500 $216,000 Mobil Oil Company . . . . . . $ -- $ 38,620 $ -- Rexam Beverage Can Company. . $ -- $ 31,648 $ -- Ford Motor Company. . . . . . $ -- $ -- $105,750 Westinghouse Electric Company $ -- $ -- $ 66,600 - -----------------------------
Use of Estimates - ------------------ The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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 equipment was acquired from EFG, one of its Affiliates or from third-party sellers. Equipment Cost means the actual cost paid by the Partnership to acquire the equipment, including acquisition fees. Where equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment. Where the seller of the equipment was a third party, Equipment Cost reflects the seller's invoice price. Depreciation - ------------ The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of the primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. Remarketing and Maintenance Expenses - --------------------------------------- The Partnership expenses storage and remarketing costs associated with equipment under lease as incurred. Generally, the costs of scheduled inspections and repairs and routine maintenance for equipment under lease are the responsibility of the lessee. In certain situations, the Partnership may be responsible for reimbursing the lessee for a portion of such costs paid by the lessee prior to the redelivery date (i.e., the expiration of the lease term) or may be entitled to receive additional payments from the lessee based on the terms and conditions set forth in the lease arrangement which considers, among other things, the amount of time remaining until the next scheduled maintenance event. The Partnership records the amount payable or receivable, with a corresponding charge or credit to operations. Allowance for Loan Losses - ---------------------------- In accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), the Partnership periodically evaluates the collectibility of its loan's contractual principal and interest and the existence of loan impairment indicators, including contemporaneous economic conditions, situations which could affect the borrower's ability to repay its obligation, the estimated value of the underlying collateral, and other relevant factors. Real estate values are discounted using a present value methodology over the period between the financial reporting date and the estimated disposition date of each property. A loan is considered to be impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement, which includes both principal and interest. A provision for loan losses is charged to earnings based on the judgment of the Partnership's management of the amount necessary to maintain the allowance for loan losses at a level adequate to absorb probable losses. Impairment of Long-Lived Assets - ---------------------------------- The carrying values of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. If this review results in an impairment, as determined based on the estimated undiscounted cash flow, the carrying value of the related long-lived asset is adjusted to fair value. 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. Contingencies - ------------- It is the Partnership's policy to recognize a liability for goods and services during the period when the goods or services are received. To the extent that the Partnership has a contingent liability, meaning generally a liability the payment of which is subject to the outcome of a future event, the Partnership recognizes a liability in accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS No. 5 requires the recognition of contingent liabilities when the amount of liability can be reasonably estimated and the liability is probable. The Partnership is a Nominal Defendant in a Class Action Lawsuit. The Defendant's and Plaintiff's Counsel have negotiated a Revised Settlement. As part of the Revised Settlement, EFG has agreed to buy the loans made by the Partnership and 10 affiliated partnerships (the ''Exchange Partnerships'') to Echelon Residential Holdings for an aggregate of $32 million plus interest at 7.5% per annum, if they are not repaid prior to or at their scheduled maturity date. The Revised Settlement also provides for the liquidation of the Exchange Partnerships' assets, a cash distribution and the dissolution of the Partnerships including the liquidation and dissolution of this Partnership. The court held a hearing on March 1, 2002 to consider the Revised Settlement. After the hearing, the court issued an order preliminarily approving the Revised Settlement and providing for the mailing of notice to the Operating Partnership Sub-Class of a hearing on June 7, 2002 to determine whether the settlement on the terms and conditions set forth in the Revised Settlement is fair, reasonable and adequate and should be finally approved by the court and a final judgment entered in the matter. The Partnership's estimated exposure for costs anticipated to be incurred in pursuing the settlement proposal is approximately $467,000 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. The Partnership expensed approximately $287,000 for these costs in 1998 following the Court's approval of the initial settlement plan. The cost estimate is subject to change and is monitored by the General Partner based upon the progress of the litigation and other pertinent information. As a result, the Partnership expensed additional amounts of approximately $89,000, $41,000 and $50,000 for such costs in 2001, 2000 and 1999, respectively. See Note 7 for additional discussion. The Investment Company Act of 1940 (the "1940 Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Partnership has active business operations in the financial services industry, including equipment leasing and the loan to Echelon Residential Holdings. The Partnership does not intend to engage in investment activities in a manner or to an extent that would require the Partnership to register as an investment company under the 1940 Act. However, it is possible that the Partnership unintentionally may have engaged, or may in the future, engage in an activity or activities that may be construed to fall within the scope of the 1940 Act. The General Partner is engaged in discussions with the staff of the Securities and Exchange Commission ("SEC") regarding whether or not the Partnership may be an inadvertent investment company as a consequence of the above-referenced loan. The 1940 Act, among other things, prohibits an unregistered investment company from offering securities for sale or engaging in any business in interstate commerce and, consequently, leases and contracts entered into by partnerships that are unregistered investment companies may be voidable. The General Partner has consulted counsel and believes that the Partnership is not an investment company. If the Partnership were determined to be an unregistered investment company, its business would be adversely affected. The General Partner has determined to take action to resolve the Partnership's status under the 1940 Act by means that may include disposing or acquiring certain assets that it might not otherwise dispose or acquire. Allocation of Profits and Losses - ------------------------------------ For financial statement purposes, net income or loss is allocated to each Partner according to their respective ownership percentages (95% to the Recognized Owners and 5% to the General Partner). See Note 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 930,443 units outstanding during the years ended December 31, 2001, 2000 and 1999 and computed after allocation of the General Partner's 5% share of net income (loss) and cash distributions. Provision for Income Taxes - ----------------------------- No provision or benefit from income taxes is included in the accompanying financial statements. The Partners are responsible for reporting their proportionate shares of the Partnership's taxable income or loss and other tax attributes on their separate tax returns. New Accounting Pronouncements - ------------------------------- Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Partnership believes the adoption of SFAS No. 141 has not had a material impact on its financial statements. Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), was issued in July 2001 and is effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. SFAS No. 142 also includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 requires the Partnership to complete a transitional goodwill impairment test six months from the date of adoption. The Partnership believes the adoption of SFAS No. 142 will not have a material impact on its financial statements. Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), was issued in October 2001 and replaces Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of Accounting Principles Bulletin Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business", for the disposal of segments of a business. SFAS No. 144 requires that those long-lived assets be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Partnership believes that the adoption of SFAS No. 144 will not have a material impact on its financial statements. NOTE 3 - EQUIPMENT - --------------------- The following is a summary of equipment owned by the Partnership at December 31, 2001. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 2001 under contracted lease terms. A Remaining Lease Term equal to zero reflects equipment either held for sale or re-lease or being leased on a month-to-month basis.
. Remaining . Lease Term Equipment Equipment Type (Months) at Cost Location - --------------------------------------------- ----------- ------------ ----------- Construction and mining 3 $ 2,076,589 DE/WY Motor vehicles 19 212,027 NJ Materials handling 0 46,254 GA/NC/NY/SC ------------ Total equipment cost . . . . . . . . . . . - 2,334,870 Accumulated depreciation . - (2,334,870) ------------ Equipment, net of accumulated depreciation - $ -- ============
Generally, the costs associated with maintaining, insuring and operating the Partnership's equipment are incurred by the respective lessees pursuant to terms specified in their individual lease agreements with the Partnership. As equipment is sold to third parties, or otherwise disposed of, the Partnership recognizes a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment is dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. At December 31, 2001, all of the Partnership's equipment was subject to contracted leases or being leased on a month-to-month basis. NOTE 4 - LOAN RECEIVABLE - ---------------------------- On March 8, 2000, the Exchange Partnerships collectively loaned $32 million to Echelon Residential Holdings LLC (''Echelon Residential Holdings''), a newly formed real estate company. Echelon Residential Holdings is owned by several investors, including James A. Coyne, Executive Vice President of the general partner of EFG. In addition, certain affiliates of the General Partner made loans to Echelon Residential Holdings in their individual capacities. In the Class Action Lawsuit, there is a risk that the court may object to the General Partner's action in structuring the loan in this way since the EFG officer may be deemed an affiliate and the loans in violation of the prohibition against loans to affiliates in the Partnership Agreement and the court's statement in its order permitting New Investments that all other provisions of the Partnership Agreements governing the investment objectives and policies of the Partnership shall remain in full force and effect. The court may require the partnerships to restructure or divest the loan. The Partnership's original loan was $2,390,000. Echelon Residential Holdings, through a wholly-owned subsidiary (Echelon Residential LLC), used the loan proceeds to acquire various real estate assets from Echelon International Corporation, a Florida-based real estate company. The loan has a term of 30 months, maturing on September 8, 2002, and an annual interest rate of 14% for the first 24 months and 18% for the final six months. Interest accrues and compounds monthly and is payable at maturity. In connection with the transaction, Echelon Residential Holdings has pledged a security interest in all of its right, title and interest in and to its membership interests in Echelon Residential LLC to the Exchange Partnerships as collateral. Echelon Residential Holdings has no material business interests other than those connected with the real estate properties owned by Echelon Residential LLC. The summarized financial information for Echelon Residential Holdings as of December 31, 2001 and 2000, and for the year ended December 31, 2001 and the period March 8, 2000 (commencement of operations) through December 31, 2000 is as follows:
2001 2000 ------------- ------------ Total assets .. . . . . . . . . . . . $ 85,380,902 $68,580,891 Total liabilities . . . . . . . . . . $ 94,352,739 $70,183,162 Minority interest . . . . . . . . . . $ 1,570,223 $ 2,257,367 Total deficit .. . . . . . . . . . . $(10,542,060) $(3,859,638) Total revenues .. . . . . . . . . . . $ 14,564,771 $ 5,230,212 Total expenses, minority interest and equity in loss of unconsolidated joint venture. . . . . . . . . . . . $ 23,137,076 $11,936,238 Net loss .. . . . . . . . . . . . . . $ (8,572,305) $(6,706,026)
During the second quarter of 2001, the General Partner determined that recoverability of the loan receivable had been impaired and at June 30, 2001 recorded an impairment of $209,125, reflecting the General Partner's current assessment of the amount of loss that is likely to be incurred by the Partnership. In addition to the write-down recorded at June 30, 2001, the Partnership reserved all accrued interest of $387,897 recorded on the loan receivable from inception through March 31, 2001 and ceased accruing interest on its loan receivable from Echelon Residential Holdings, effective April 1, 2001. The total impairment of $597,022 is recorded as write-down of impaired loan and interest in the year ended December 31, 2001. The write-down of the loan receivable from Echelon Residential Holdings and the related accrued interest was precipitated principally by a slowing U.S. economy and its effects on the real estate development industry. The economic outlook for the properties that existed when the loan was funded has deteriorated and inhibited the ability of Echelon Residential Holdings' management to secure low-cost sources of development capital, including but not limited to joint-venture or equity partners. In response to these developments and lower risk tolerances in the credit markets, the management of Echelon Residential Holdings decided in the second quarter of 2001 to concentrate its prospective development activities within the southeastern United States and, therefore, to dispose of development sites located elsewhere. In May 2001, Echelon Residential Holdings closed its Texas-based development office; and since the beginning of 2001, the company has sold five of nine properties (two in July 2001, one in October 2001, one in November 2001 and one in February 2002). As a result of these developments, the General Partner does not believe that Echelon Residential Holdings will realize the profit levels originally believed to be achievable from either selling these properties as a group or developing all of them as multi-family residential communities. NOTE 5 - 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 the years ended December 31, 2001, 2000 and 1999 which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
2001 2000 1999 -------- -------- -------- Equipment management fees. . . . . . . . . . . . . . $ 10,920 $ 14,066 $ 25,370 Administrative charges . . . . . . . . . . . . . . . 43,832 75,414 81,682 Reimbursable operating expenses due to third parties 325,608 139,121 192,563 -------- -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . $380,360 $228,601 $299,615 ======== ======== ========
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 2.23% 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 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 equipment was acquired from EFG, one of its Affiliates or from third-party sellers. The Partnership's Purchase Price was determined by the method described in Note 2, "Equipment on Lease". All rents and proceeds from the sale of equipment are paid directly to EFG. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 2001, the Partnership was owed $15,826 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 2002. Certain affiliates of the General Partner own Units in the Partnership as follows:
Number of Percent of Total Affiliate Units Owned Outstanding Units Atlantic Acquisition Limited Partnership 59,877 6.44% - ---------------------------------------- ----------- ------------------ Old North Capital Limited Partnership 7,850 0.84% - ---------------------------------------- ----------- ------------------
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995. The general partners of AALP and ONC are controlled by Gary D. Engle. EFG owns limited partnership interests, representing substantially all of the economic benefit, in AALP and the limited partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and CEO of Semele and President, Chief Executive Officer, sole shareholder and Director of EFG's general partner. 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 purposes, the Partnership allocates net income or net loss, in accordance with the provisions of such agreement. The Restated Agreement, as amended, requires that upon dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance, which may exist in the General Partner's tax capital account. At December 31, 2001, the General Partner had a positive tax capital 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, 2001, 2000 and 1999:
2001 2000 1999 ---------- --------- ---------- Net income (loss). . . . . . . . . . . . $(542,785) $529,244 $ 852,737 Write-down of loan receivable. . . 209,125 -- -- Financial statement depreciation in excess of (less than) tax depreciation. -- 16,826 (43,437) Deferred rental income. . . . . . . . . -- (2,500) 15,530 Other . . . . . . . . . . . . . . . . . (28,804) (12,256) (117,658) ---------- --------- ---------- Net income (loss) for federal income tax reporting purposes. . . . . . . . . $(362,464) $531,314 $ 707,172 ========== ========= ==========
The principal component of "Other" consists of the difference between the tax and financial statement gain and loss on equipment disposals. The following is a reconciliation between partners' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2001 and 2000:
2001 2000 ---------- ---------- Partners' capital. . . . . . . . . . . . . . . . . . . . . . $3,187,452 $3,730,237 Add back selling commissions and organization and offering costs . . . . . . . . . . . . . . . . . . . 2,611,871 2,611,871 Cumulative difference between federal income tax and financial statement income (loss). . . . . . . . . . 195,811 15,490 ---------- ---------- Partners' capital for federal income tax reporting purposes. $5,995,134 $6,357,598 ========== ==========
Cumulative difference between federal income tax and financial statement income (loss) represent timing differences. NOTE 7 - LEGAL PROCEEDINGS - ------------------------------ Action involving Rosenblum, et al. - -------------------------------------- In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group -------------------------------------------------- Limited Partnership, et al., in the United States District Court for the - ----------------------------- Southern District of Florida (the "Court") on behalf of a proposed class of - ------- investors in 28 equipment leasing programs sponsored by EFG, including the - ---- Partnership (collectively, the "Nominal Defendants"), against EFG and a number - ---- of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis - - ---------------------------------- Financial Group Limited Partnership, et al., in the Superior Court of the - ----------------------------------------------- Commonwealth of Massachusetts on behalf of the Nominal Defendants against the - ------ Defendants. Both actions are referred to herein collectively as the "Class - -- Action Lawsuit". - -- The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On August 20, 1998, the court preliminarily approved a Stipulation of Settlement setting forth terms pursuant to which a settlement of the Class Action Lawsuit was intended to be achieved and which, among other things, was at the time expected to reduce the burdens and expenses attendant to continuing litigation. Subsequently an Amended Stipulation of Settlement was approved by the court. 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 remained pending due, in part, to the complexity of the proposed settlement pertaining to this class. The settlement of the Partnership sub-class was premised on the consolidation of the Partnerships' net assets (the "Consolidation"), subject to certain conditions, into a single successor company. The potential benefits and risks of the Consolidation were to be presented in a Solicitation Statement that would be mailed to all of the partners of the Exchange Partnerships as soon as the associated Securities and Exchange Commission review process was completed. On May 15, 2001, Defendants' Counsel reported to the court that, notwithstanding the parties' best efforts, the review of the solicitation statement by the staff of the SEC in connection with the proposed settlement of the Class Action Lawsuit had not been completed. Nonetheless, the Defendants stated their belief that the parties should continue to pursue the court's final approval of the proposed settlement. Plaintiffs' Counsel also reported that the SEC review has not been concluded and that they had notified the Defendants that they would not agree to continue to stay the further prosecution of the litigation in favor of the settlement and that they intended to seek court approval to immediately resume active prosecution of the claims of the Plaintiffs. Subsequently, the court issued an order setting a trial date of March 4, 2002, referring the case to mediation and referring discovery to a magistrate judge. The Defendant's and Plaintiff's Counsel continued to negotiate toward a settlement and have reached agreement on a Revised Stipulation of Settlement (the "Revised Settlement") that does not involve a Consolidation. As part of the Revised Settlement, EFG has agreed to buy the loans made by the Exchange Partnerships to Echelon Residential Holdings for an aggregate of $32 million plus interest at 7.5% per annum, if they are not repaid prior to or at their scheduled maturity date. The Revised Settlement also provides for the liquidation of the Exchange Partnerships' assets, a cash distribution and the dissolution of the Partnerships including the liquidation and dissolution of this Partnership. The court held a hearing on March 1, 2002 to consider the Revised Settlement. After the hearing, the court issued an order preliminarily approving the Revised Settlement and providing for the mailing of notice to the Operating Partnership Sub-Class of a hearing on June 7, 2002 to determine whether the settlement on the terms and conditions set forth in the Revised Settlement is fair, reasonable and adequate and should be finally approved by the court and a final judgment entered in the matter. The Partnership's share of legal fees and expenses related to the Class Action Lawsuit and the Consolidation was estimated to be approximately $467,000, of which approximately $287,000 was expensed by the Partnership in 1998 and additional amounts of $89,000, $41,000, and $50,000 were expensed by the Partnership in 2001, 2000, and 1999, respectively. 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: Action involving Transmeridian Airlines - ------------------------------------------ On November 9, 1998, First Security Bank, N.A., as trustee of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs), 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 Plaintiffs sought damages for, among other things, breaches of contract arising out of the lease of two aircraft to Transmeridian. One breach involved Transmeridian's refusal to repair or replace burned engine blades found in one engine during a pre-return inspection of an aircraft leased from the Plaintiffs. The estimated cost to repair the engine and lease a substitute engine during the repair period for the first aircraft as approximately $488,000. Repairs were completed in June 1999. Plaintiffs were required to advance the cost of repairing the engine and leasing a substitute engine and could not be certain whether the guaranties will be enforced. Therefore, the Partnership expensed its share of these costs of approximately $7,000 and $23,000 in 1999 and 1998, respectively. The second breach involved an aircraft that was damaged in October 1998 in an on-ground accident. The cost to repair the aircraft was estimated to be at least $350,000. In addition, the Plaintiff was required to lease two substitute engines at a cost of $82,000 per month. During the year ended December 31, 1999, the Plaintiff 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. As of September 11, 1999, Transmeridian ceased paying rent on this aircraft. The Plaintiffs also sought to recover insurance coverage for the damage and to enforce written guaranties issued by Apple Vacations that guaranteed Transmeridian's performance under the lease agreement and recovery of all costs, lost revenue and monetary damages in connection with these claims. As of March 13, 2002, the parties settled all claims involved in this lawsuit and in a related lawsuit involving affiliated entities but not the Partnership pending in the United States District Court for the Southern District of Texas (Houston Division) (the "Texas Action"). The material terms of settlement provide: (i) in exchange for payment of $2,100,000 from Apple to the Plaintiffs all claims arising from or related to the lawsuit and the Texas Action are dismissed with prejudice; (ii) the Plaintiffs shall have Allowed Claims against the bankruptcy estate of Transmeridian in the aggregate amount of $2,700,000; (iii) the Plaintiffs will be paid $400,000 from the insurance proceeds relating to the aircraft loss; and (iv) each of the parties will receive mutual releases of all claims and counterclaims. The Partnership has received and recorded $32,000 in the first quarter of 2002, as its share of the $2,100,000 payment. The Partnership has not yet received or recorded its share of the $400,000 from the insurance proceeds. Additionally, the Partnership recognized $49,440 as income in the fourth quarter of 2001 that had been held in escrow pending the resolution of the litigation. Action involving Northwest Airlines, Inc. - --------------------------------------------- On September 22, 1995, Investors Asset Holding Corp. and First Security Bank, N.A., trustees of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs"), filed an action in United States District Court for the District of Massachusetts against a lessee of the Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that Northwest did not fulfill its maintenance and return obligations under its Lease Agreements with the Plaintiffs and seeks declaratory judgment concerning Northwest's obligations and monetary damages. Northwest filed an Answer to the Plaintiffs' Complaint and a motion to transfer the venue of this proceeding to Minnesota. The Court denied Northwest's motion. On June 29, 1998, a United States Magistrate Judge recommended entry of partial summary judgment in favor of the Plaintiffs. Northwest appealed this decision. On April 15, 1999, the United States District Court Judge adopted the Magistrate Judge's recommendation and entered partial summary judgment in favor of the Plaintiffs on their claims for declaratory judgment. In February 2001 the District Court also denied summary judgment on certain of the Plaintiffs' other claims, including their tort claims for conversion. This matter was tried during August 2001. Subsequent to the evidentiary hearings, the parties submitted proposed findings. Final argument was held on October 29, 2001. The court has the matter under advisement. NOTE 8 - QUARTERLY RESULTS OF OPERATIONS (Unaudited) - ----------------------------------------------------------- The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000: Three Months Ended
March 31, June 30, September 30, December 31, Total ---------- ---------- --------------- ------------- ---------- 2001 ---------- Total lease revenue . . . . $ 57,872 $ 52,215 $ 53,210 $ 55,104 $ 218,401 Net income (loss) . . . . . 82,055 (643,581) (24,575) 43,316 (542,785) Net income (loss) per limited partnership unit. 0.08 (0.66) (0.03) 0.04 (0.55) 2000 ---------- Total lease revenue . . . . $ 84,318 $ 77,355 $ 72,844 $ 65,784 $ 300,301 Net income. . . . . . . . . 102,668 169,553 95,338 161,685 529,244 Net income per limited partnership unit. 0.10 0.17 0.10 0.17 0.54
The Partnership's net loss in the three months ended June 30, 2001, is primarily the result of a write-down of the impaired loan and interest receivable from Echelon Residential Holdings of $597,022. - ------ ADDITIONAL FINANCIAL INFORMATION AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 The Partnership classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment 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 equipment, in addition to any month-to-month revenues, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment 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 equipment. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999 -------- -------- ---------- Rents earned prior to disposal of equipment, net of interest charges $366,725 $896,157 $4,789,486 Sale proceeds realized upon disposition of equipment 23,525 94,801 485,076 -------- -------- ---------- Total cash generated from rents and equipment sale proceeds 390,250 990,958 5,274,562 Original acquisition cost of equipment disposed 166,263 479,189 3,782,679 -------- -------- ---------- Excess of total cash generated to cost of equipment disposed $223,987 $511,769 $1,491,883 ======== ======== ==========
AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS FOR THE YEAR ENDED DECEMBER 31, 2001
. Sales and Operations Refinancings Total ------------ ------------- ----------- Net income (loss) $ (566,310) $ 23,525 $ (542,785) Add: Management fees 10,920 - 10,920 Write-down of impaired loan and interest receivable 597,022 - 597,022 Book value of disposed equipment - - - ------------ ------------- ----------- Cash from operations, sales and refinancings 41,632 23,525 65,157 Less: Management fees (10,920) - (10,920) ------------ ------------- ----------- Distributable cash from operations, sales and refinancings 30,712 23,525 54,237 Other sources and uses of cash: Cash and cash equivalents at beginning of year 1,192,547 - 1,192,547 Net change in receivables and accruals (18,269) - (18,269) ------------ ------------- ----------- Cash and cash equivalents at end of year $ 1,204,990 $ 23,525 $1,228,515 ============ ============= ===========
AMERICAN INCOME PARTNERS V-C 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 FOR THE YEAR ENDED DECEMBER 31, 2001 For the year ended December 31, 2001, the Partnership reimbursed the General Partner and its Affiliates for the following costs: Operating expenses $ 359,910 Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure. - ---------------------- None. 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 Leasing IV Incorporated 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 Limited Partners 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, 2002 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (See Item 13) - -------------------------------------------------------------------------------
Name Title Age Term - ---------------------- -------------------------------------------- --- --------- Geoffrey A. MacDonald Chairman of the general . Until a . partner of EFG and a Director . successor . of the General Partner 53 is duly . . . elected Gary D. Engle President and Chief Executive . and . Officer of the general partner of EFG . qualified . and President and a Director . . of the General Partner 53 Michael J. Butterfield Executive Vice President and Chief . Operating Officer of the general partner . of EFG and Treasurer of the General Partner 42 Gail D. Ofgant Senior Vice President, Lease Operations . of the general partner of EFG and . Senior Vice President of the General Partner 36
(c) Identification of Certain Significant Persons - ----------------------------------------------------------- None - --------- (d) Family Relationship - ------------------------------ No family relationship exists among any of the foregoing Partners, - -------------------------------------------------------------------------------- Directors or Executive Officers. - ----------------------------------- (e) Business Experience - -------------------------- Mr. MacDonald, age 53, has been a Director of the General Partner since 1987 and - -------------------------------------------------------------------------------- served as its President from 1988 through August 2001. Mr. MacDonald is also - -------------------------------------------------------------------------------- Chairman of the Board of the general partner of EFG. 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. 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 53, is Director and President of the General Partner and sole - -------------------------------------------------------------------------------- shareholder, Director, President and Chief Executive Officer of Equis - ----------------------------------------------------------------------------- Corporation, the general partner of EFG. 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 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 42, has served as Treasurer of the General Partner since - -------------------------------------------------------------------------------- 1996. Joining EFG in June 1992, Mr. Butterfield is currently Executive Vice - -------------------------------------------------------------------------------- President, Chief Operating Officer, Treasurer and Clerk of the general partner - -------------------------------------------------------------------------------- of EFG. Mr. Butterfield is also Chief Financial Officer and Treasurer of Semele - -------------------------------------------------------------------------------- and Vice President, Finance and Clerk of Equis/Echelon Management Corporation, - -------------------------------------------------------------------------------- the manager of Echelon Residential LLC. 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 36, has served as Senior Vice President of the General Partner - -------------------------------------------------------------------------------- since 1997. Ms. Ogant joined EFG in July 1989 and held various positions in the - -------------------------------------------------------------------------------- organization before becoming Senior Vice President of the general partner of EFG - -------------------------------------------------------------------------------- in 1998. Ms. Ofgant is Senior Vice President and Assistant Clerk of - ------------------------------------------------------------------------------ Equis/Echelon Management Corporation, the manager of Echelon Residential LLC. - -------------------------------------------------------------------------------- From 1987 to 1989, Ms. Ofgant was employed by Security Pacific National Trust - -------------------------------------------------------------------------------- Company. Ms. Ofgant holds a B.S. degree from Providence College. - ------------------------------------------------------------------------- (f) Involvement in Certain Legal Proceedings - ------------------------------------------------------ None. - ---------- (g) Promoters and Control Persons - ------------------------------------------ Not applicable. - --------------------- Item 11. Executive Compensation. - ----------------------------------- (a) Cash Compensation Currently, the Partnership has no employees. However, under the terms of the Restated Agreement, as amended, the Partnership is obligated to pay all costs of personnel employed full or part-time by the Partnership, including officers or employees of the General Partner or its Affiliates. There is no plan at the present time to make any officers 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 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 Note 5 to the financial statements included in Item 8, herein. (d) Stock Options and Stock Appreciation Rights. Not applicable. (e) Long-Term Incentive Plan Awards Table. Not applicable. (f) Defined Benefit or Actuarial Plan Disclosure. 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 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). As of March 15, 2002, the following person or group owns beneficially more than 5% of the Partnership's 930,443 outstanding Units:
. Name and Amount Percent Title Address of of Beneficial of of Class Beneficial Owner Ownership Class - ------------------------ ---------------------------------------- ------------- -------- Units Representing Atlantic Acquisition Limited Partnership Limited Partnership 88 Broad Street 59,877 Units 6.44% Interests Boston, MA 02110
EFG owns limited partnership interests, representing substantially all of the economic benefit, in Atlantic Acquisition Limited Partnership ("AALP"). The general partner of AALP is controlled by Gary D. Engle and Mr. Engle is President, Chief Executive Officer, sole shareholder and Director of EFG's general partner. See Item 10 and Item 13 of this report. 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 Leasing IV Incorporated, 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, 2001, 2000 and 1999, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
2001 2000 1999 -------- -------- -------- Equipment management fees . . . $ 10,920 $ 14,066 $ 25,370 Administrative charges. . . . . 43,832 75,414 81,682 Reimbursable operating expenses due to third parties. . . . 325,608 139,121 192,563 -------- -------- -------- Total $380,360 $228,601 $299,615 ======== ======== ========
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 2.23% 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 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 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 equipment was purchased from EFG, one of its affiliates or from third-party sellers. The Partnership's acquisition cost was determined by the method described in Note 2 to the financial statements included in Item 8, herein. All rents and proceeds from the sale of equipment are paid directly to EFG. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 2001, the Partnership was owed $15,826 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 2002. Certain affiliates of the General Partner own Units in the Partnership as follows:
Number of Percent of Total Affiliate Units Owned Outstanding Units Atlantic Acquisition Limited Partnership 59,877 6.44% - ---------------------------------------- ----------- ------------------ Old North Capital Limited Partnership 7,850 0.84% - ---------------------------------------- ----------- ------------------
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995. The general partners of AALP and ONC are controlled by Gary D. Engle. EFG owns limited partnership interests, representing substantially all of the economic benefit, in AALP and the limited partnership interests in ONC are owned by Semele. Gary D. Engle is Chairman and CEO of Semele and President, Chief Executive Officer, sole shareholder and Director of EFG's general partner. The discussions of the loan to Echelon Residential Holdings in Items 1(b) and 1(c) above are incorporated herein by reference. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Partnership None. (d) Transactions with Promoters Not applicable. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - ------------------------------------------------------------------------------- (a) Documents filed as part of this report: (1) All Financial Statements: The financial statements are filed as part of this report under Item 8 "Financial Statements and Supplementary Data". (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts:
Allowance for interest receivable - --------------------------------- Balance at December 31, 2000 $ - Additions to allowance 387,897 -------- Balance at December 31, 2001 $387,897 ======== Allowance for loan receivable - --------------------------------- Balance at December 31, 2000 $ - Additions to allowance 209,125 -------- Balance at December 31, 2001 $209,125 ========
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (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. 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) was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 2.7 and is incorporated herein by reference. 2.8 Order Setting Trial Date and Discovery Deadlines, Referring Case to Mediation and Referring Discovery to United States Magistrate Judge (June 4, 2001) was filed in the Registrant's Annual Report on Form 10-K/A, Amendment No. 2, for the year ended December 31, 2000 as Exhibit 2.8 and is incorporated herein by reference. 2.9 Plaintiffs' and Defendants' Joint Motion for Preliminary Approval of Revised Stipulation of Settlement and request for hearing is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as Exhibit 2.9 and is included herein. 2.10 Plaintiffs' and Defendants' Joint Memorandum in Support of Joint Motion for Preliminary Approval of Revised Stipulation of Settlement is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as Exhibit 2.10 and is included herein. 2.11 Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement (March 1, 2002) is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as Exhibit 2.11 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. 33-27828) and is incorporated herein by reference. 10.1 Promissory Note in the principal amount of $2,390,000 dated March 8, 2000 between the Registrant, as lender, and Echelon Residential Holdings LLC, as borrower, was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.1 and is incorporated herein by reference. 10.2 Pledge Agreement dated March 8, 2000 between Echelon Residential Holdings LLC (Pledgor) and American Income Partners V-A Limited Partnership, as Agent for itself and the Registrant was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.2 and is incorporated herein by reference. 99(a) Lease agreement with Westinghouse Electric Company 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(b) Lease agreement with Zeigler Cole Holding Company was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99(g) and is incorporated herein by reference. 99(c) Lease agreement with Rose's Stores, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99(h) and is incorporated herein by reference. 99(d) Lease agreement with Rexam Beverage Can Company (formerly known as American National Can Company) was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 99 (d) and is incorporated herein by reference. 99(e) Lease agreement with Mobil Oil Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 99 (e) and is incorporated herein by reference. (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, 2001 and 2000 and for the year ended December 31, 2001 and for the period March 8, 2000 (Date of Inception) through December 31, 2000 and Independent Auditors' Report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, by the following persons, on behalf of the registrant and in the capacities and on the dates indicated. AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP By: AFG Leasing IV Incorporated, 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 the general partner of EFG President and Chief Executive Officer and a Director of the General Partner of the general partner of EFG, . and President and a Director of . the General Partner . (Principal Executive Officer) Date: March 29, 2002 Date: March 29, 2002 - ----------------------------------------------------- -------------------------------------- By: /s/ Michael J. Butterfield - ----------------------------------------------------- Michael J. Butterfield Executive Vice President and Chief Operating Officer of the general partner of EFG and Treasurer of the General Partner (Principal Financial and Accounting Officer) Date: March 29, 2002 - -----------------------------------------------------
EX-2.9 3 doc2.txt Exhibit 2.9 ----------- B545305.1 IN THE UNITED STATES DISTRICT COURT FOR THE 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, v. 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 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, 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. JOINT MOTION FOR PRELIMINARY APPROVAL OF REVISED STIPULATION OF SETTLEMENT AND REQUEST FOR A HEARING ------------------------- Plaintiffs and Defendants jointly move this Court, pursuant to Fed. R. Civ. P. 23(e), for an order preliminarily approving the proposed settlement set forth in the Revised Stipulation of Settlement dated January 29, 2002, conditionally certifying the settlement class and providing for notice of, and a final fairness hearing on, the proposed settlement. As grounds for its Motion, Plaintiffs and Defendants state as follows: 1. On January 15, 1998, the Plaintiffs commenced this action by filing a Derivative and Class Action Complaint (the "Complaint"). The Plaintiffs are owners of Units and/or Interests in one or more of the twenty-eight investment programs managed and controlled by affiliates of defendant Equis Financial Group Limited Partnership, as successor-in-interest to American Finance Group ("Equis"). The Plaintiffs asserted claims derivatively on behalf of all of the investment programs named as Nominal Defendants in the Action -- twenty-four (24) limited partnerships and four (4) investment trusts -- and directly on behalf of a proposed class of persons who owned Units or Interests of the Nominal Defendants. 2. On August 20, 1998, the Court preliminarily approved a Stipulation of Settlement and conditionally certified a Settlement Class consisting of three sub-classes. The three sub-classes include: (a) the "RSL Sub-Class"; (b) the "Operating Partnership Sub-Class"; and (c) the "Trust Sub-Class." After a final fairness hearing, the Court entered a final order and judgment on May 26, 1999, approving the settlement with respect to the RSL and Trust Sub-Classes, and those settlement proceeds have been distributed to the Class Members. Therefore, the remaining allegations of the Complaint relate solely to the eleven (11) operating partnerships (the "Operating Partnerships"). 3. The original Settlement terms included, among other things, a proposed transaction whereby the eleven Operating Partnerships' Units would be exchanged for the common stock of a new publicly-traded corporation (the "Exchange Transaction") that would be formed to acquire the Operating Partnerships' assets and to engage in financial services ("Newco"). In accordance with the original Settlement, the Defendants prepared a consent solicitation statement to obtain approval of the proposed Exchange Transaction and filed the statement for review by the United States Securities and Exchange Commission ("SEC"). 4. After encountering numerous delays in the SEC review process, the parties entered into an Amended Stipulation of Settlement dated March 15, 1999 (the "Amended Stipulation"), and requested the Court's permission to allow the Operating Partnerships to reinvest a certain portion of the money (40% of the total aggregate net asset value of the Partnerships) they received from the leases and sales of equipment ("New Investments"). As the parties informed the Court, they believed that the inability to reinvest cash during the SEC's review process would likely cause the Operating Partnerships to lose business opportunities that could be available to the new public company. Accordingly, the Court's March 22, 1999 Order also permitted the Operating Partnerships to make certain New Investments on two conditions. First, in the event that an Operating Partnership acquired New Investments and was not a party to the exchange, Newco would acquire all such New Investments from such Non-Participating Partnership for an amount equal to the Non-Participating Partnership's net equity investment in such New Investments plus an annualized return thereon of 7.5%. Second, in the event that a Partnership acquired New Investments and the exchange was not consummated, the General Partners were required to (i) use their best efforts to divest all such New Investments in an orderly and timely fashion, and (ii) cancel or return to each Partnership any accumulated or deferred fees on New Investments. 5. Thereafter, the SEC review extended over many months with the parties unable to resolve certain issues to the staff's satisfaction. The Defendants determined that the additional expense and time necessary to resolve those issues and complete the Exchange Transaction would be excessive. Accordingly, the Defendants and Class Counsel have negotiated a Revised Stipulation of Settlement ("Revised Stipulation") which, among other things, requires the Defendants to pursue the sale of all remaining assets and the liquidation of the Operating Partnerships and eliminates the proposed Exchange Transaction and the need to disseminate a consent solicitation statement (the "Settlement"). As described more fully in the Revised Stipulation, the proposed Settlement consists principally of three parts: (i) a minimum $15 million cash distribution to the Settlement Class members; (ii) an orderly liquidation and sale of the remaining assets and dissolution of the Operating Partnerships; and (iii) the Defendants' purchase of the Echelon Notes for a price equal to their aggregate outstanding $32 million principal amount plus an annualized return of 7.5% simple interest. 6. The parties request that the Court set a hearing date for the preliminary approval of the proposed Settlement at the Court's earliest possible convenience, and thereafter set a hearing date for the final approval of the proposed Settlement. 7. An unopposed order for preliminary approval of the Settlement, conditionally certifying the settlement class and providing for notice of, and a final fairness hearing on, the proposed Settlement, is attached as Exhibit 1. WHEREFORE, the parties request that the Court enter an order: 1. Set a hearing date for the preliminary approval of the proposed Settlement at the Court's earliest possible convenience; 2. Preliminarily approving the proposed Settlement, conditionally certifying settlement class and providing for notice of, and hearing on, the proposed Settlement; and 3. Grant such other further relief the Court deems just and proper. Respectfully submitted, this __ day of February 2002, ATTORNEYS FOR DEFENDANTS: RICHMAN GREER WEIL BRUMBAUGH MIRABITO & CHRISTENSEN, P.A. Gerald F. Richman, Esq. 250 Australian Ave. South - Suite 1504 West Palm Beach, Florida 33401 Tel. (561) 803-3500 and NIXON PEABODY LLP Deborah L. Thaxter, P.C. Gregory P. Deschenes 101 Federal Street Boston, MA 02110-1832 Tel. (617) 345-1000 ATTORNEYS FOR PLAINTIFFS: LERNER & PEARCE, P.A. Allan M. Lerner 2888 East Oakland Park Boulevard Ft. Lauderdale, FL 33306 (954) 563-8111 _________________________________ WECHSLER 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 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 Dated: February __, 2002 The Partnership Agreements prohibited the reinvestment of cash except in limited circumstances. In a letter dated May 10, 2001 sent to this Court, the SEC staff asserted that certain of the Operating Partnerships were "investment companies," as defined in Section 3(a)(1)(c) of the Investment Company Act of 1940, as amended (the "1940 Act"). Defendants and Class Counsel believe that the proposed liquidation and dissolution of the partnerships will satisfactorily resolve the issues the SEC raised concerning the possible violation of the 1940 Act. EX-2.10 4 doc3.txt Exhibit 2.10 ------------ B543092.1 IN THE UNITED STATES DISTRICT COURT FOR THE 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, v. 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 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, 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. MEMORANDUM IN SUPPORT OF JOINT MOTION FOR PRELIMINARY APPROVAL OF REVISED STIPULATION OF SETTLEMENT I. INTRODUCTION ------------ Plaintiffs ("Plaintiffs" or "Class Counsel") and Defendants submit this Joint Memorandum in support of their Joint Motion for preliminary approval of the Revised Stipulation of Settlement dated January 29, 2002. II. BACKGROUND ---------- A. THE ACTION On January 15, 1998, the Plaintiffs commenced this action by filing a Derivative and Class Action Complaint (the "Complaint"). The Plaintiffs are owners of Units and/or Interests in one or more of the twenty-eight investment programs managed and controlled by affiliates of defendant Equis Financial Group Limited Partnership, as successor-in-interest to American Finance Group ("Equis"). The Plaintiffs asserted claims derivatively on behalf of all of the investment programs named as Nominal Defendants in the Action -- twenty-four (24) limited partnerships and four (4) investment trusts -- and directly on behalf of a proposed class of persons who owned Units or Interests of the Nominal Defendants. On August 20, 1998, the Court preliminarily approved a Stipulation of Settlement and conditionally certified a Settlement Class consisting of three sub-classes. The three sub-classes include: (a) the "RSL Sub-Class"; (b) the "Operating Partnership Sub-Class"; and (c) the "Trust Sub-Class." In addition, the Court conditionally certified the Operating Partnership Sub-Class as a settlement class under Fed. R. Civ. P. 23(b)(2). The parties signed an Amended Stipulation of Settlement on March 15, 1999. The Stipulation was amended to permit the settlement to go forward of all claims in the Action other than those asserted on behalf of the eleven (11) operating partnerships (the "Operating Partnerships") while the United States Securities and Exchange Commission ("SEC") completed its review of the consent solicitation statement to be used to obtain approval of the Exchange Transaction. After a final fairness hearing, the Court entered a final order and judgment on May 26, 1999, approving the settlement with respect to the RSL and Trust Sub-Classes, and those settlement proceeds have been distributed to the Class Members. The remaining allegations of the Complaint relate solely to the Operating Partnerships. Plaintiffs, on behalf of the Operating Partnerships and owners of Units in such Partnerships, asserted claims arising out of acts, errors, omissions, practices, and course of conduct allegedly engaged in by the Defendants in connection with the operation and management of the Nominal Defendants, including, but not limited to, common law fraud, breach of contract, breach of fiduciary duties, and violations of the Partnership Agreements that govern each of the Nominal Defendants (the "Governing Agreements"), and sought, among other things, compensatory and punitive damages and various forms of injunctive relief, including the liquidation of the Operating Partnerships. Plaintiffs alleged that the Defendants engaged in a common plan and scheme in which they, among other things, breached their fiduciary duties of loyalty, good faith and due diligence by (a) misappropriating assets of the Nominal Defendants by causing them to, inter alia, sell or exchange assets for inadequate consideration, enter into unnecessary and wasteful transactions, and pay fees and reimbursements of expenses to the Defendants and their affiliates in amounts that greatly exceeded the value of the services provided and/or the amounts permitted to be paid under the respective Governing Agreements, (b) failing to explore and/or pursue transactions designed to provide liquidity for, and/or maximize the value of, the Units and Interests, such as the sale of the various assets and/or the liquidation of the Partnerships, and (c) usurping business opportunities that belonged to the Operating Partnerships and the profits derived there from. B. PROCEDURAL HISTORY On July 16, 1998, following months of rigorous arm's-length negotiations, the Parties entered into a Stipulation of Settlement (the "Settlement"). The Settlement terms included, among other things, a proposed transaction whereby the eleven Operating Partnerships' Units would be exchanged for the common stock of a new publicly-traded corporation (the "Exchange Transaction") that would be formed to acquire the Operating Partnerships' assets and to engage in financial services ("Newco"). On August 20, 1998, the Court preliminarily approved the Stipulation of Settlement, conditionally certified the Settlement Class, and three sub-classes described above, and provided for Notice of, and Hearing on, the proposed Settlement. Shortly thereafter, the Defendants prepared a consent solicitation statement to obtain approval of the proposed Exchange Transaction and filed the statement for review by the SEC. After encountering numerous 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, the Court entered an order modifying the preliminary approval order and bifurcated the settlement process into two phases. In the first phase, the Court approved the settlement with respect to the claims brought by the so-called RSL and Trust Sub-Classes. In the second phase, the parties seek the Court's final approval of the settlement with respect to the claims brought by the Operating Partnership Sub-Class. Because of delays caused by the SEC's review process, the parties also requested the Court's permission to allow the Operating Partnerships to reinvest a certain portion of the money (40% of the total aggregate net asset value of the Partnerships) they received from the leases and sales of equipment ("New Investments"). As the parties informed the Court, they believed that the inability to reinvest cash during the SEC's review process would likely cause the Operating Partnerships to lose business opportunities that could be available to the new public company. Accordingly, the Court's March 22, 1999 Order also permitted the Operating Partnerships to make certain New Investments on two conditions. First, in the event that an Operating Partnership acquired New Investments and was not a party to the exchange, Newco would acquire all such New Investments from such Non-Participating Partnership for an amount equal to the Non-Participating Partnership's net equity investment in such New Investments plus an annualized return thereon of 7.5%. Second, in the event that a Partnership acquired New Investments and the exchange was not consummated, the General Partners were required to (i) use their best efforts to divest all such New Investments in an orderly and timely fashion, and (ii) cancel or return to each Partnership any accumulated or deferred fees on New Investments. Thereafter, a Second Amended Stipulation of Settlement (the "Second Amended Stipulation") was signed by the parties on February 24, 2000. These amendments were necessary because the financial values upon which the allocations of Newco shares were based had become outdated during the lengthy SEC review process. Specifically, the updated valuations and allocations resulted, among other things, in Equis receiving a substantially reduced allocation of Newco shares (from 22.335% to 14.72%). C. REVISED SETTLEMENT STIPULATION Thereafter, the SEC review extended over many months with the parties unable to resolve certain issues to the staff's satisfaction. The Defendants determined that the additional expense and time necessary to resolve those issues and complete the Exchange Transaction would be excessive. Accordingly, the Defendants and Class Counsel have negotiated a Revised Stipulation of Settlement ("Revised Stipulation") which, among other things, requires the Defendants to pursue the sale of all remaining assets and the liquidation of the Operating Partnerships and eliminates the proposed Exchange Transaction and the need to disseminate a consent solicitation statement. Plaintiffs and Class Counsel have conducted a comprehensive investigation of the facts and of the applicable law. Based on such investigation, Plaintiffs and Class Counsel have concluded that the proposed Settlement of the action on the terms and conditions of the Revised Stipulation is fair, reasonable, and adequate and is in the best interests of the Operating Partnership Sub-Class, having taken into account the risks and difficulties involved in attempting to establish a right of recovery on behalf of the Class against the Defendants, the expense and length of time necessary to continue the litigation through trial and the appeals that would inevitably follow, and the uncertainty inherent in any complex litigation. The proposed Settlement of the action is the product of extensive, good faith, and arm's-length negotiations between Class Counsel and counsel for the Defendants. As described below, the proposed Settlement consists principally of three parts: (i) a minimum $15 million cash distribution to the Operating Partnership Sub-Class members; (ii) an orderly liquidation and sale of the remaining assets and dissolution of the Operating Partnerships; and (iii) the Defendants' purchase of the Echelon Notes for a price equal to their aggregate outstanding $32 million principal amount plus an annualized return of 7.5% simple interest. Accordingly, for the reasons set forth more fully below, the parties request that the Court rule that the proposed Settlement is preliminarily approved as being within the range of reasonableness, such that notice thereof should be given to all members of the Operating Partnership Sub-Class. III. THE PROPOSED SETTLEMENT ----------------------- A. CONSIDERATION TO THE OPERATING PARTNERSHIP SUB-CLASS. --------------------------------------------------------- If the Settlement is approved by the Court, the Operating Partnership Sub-Class Members will receive the following monetary and therapeutic benefits: 1. LIQUIDATION OF ASSETS AND DISSOLUTION OF THE OPERATING PARTNERSHIPS. ------------------------------------------------------------------- The Defendants have agreed to dissolve each of the Operating Partnerships and liquidate their remaining assets on or before thirty (30) days following the first date on which the Final Judgment and Order entered by the Court becomes final, binding and non-appealable (the "Effective Date"). Upon dissolution, the General Partners shall (a) cause the cancellation of each Operating Partnership's Certificate of Limited Partnership; (b) apply and distribute all cash and proceeds in accordance with the provisions set forth in their respective Limited Partnership Agreements, after reserving cash amounts for any contingent or existing sales, use and property tax or other types of liabilities that are reasonably estimated for each such Operating Partnership; and (c) liquidate each of the Operating Partnership's assets. All cash other than the cash reserves referred to in (ii) above and any assets that could not be sold for cash prior to dissolution shall be placed in a Liquidating Trust for the benefit of the Operating Partnership Sub-Class to be established upon the dissolution of the Operating Partnerships with an independent, nationally-recognized financial institution as its trustee. All of the net proceeds from the sale of assets of the Liquidating Trust and cash, less reserves for any contingent liabilities, shall be distributed to the beneficiaries of the Liquidating Trust no later than December 31, 2003. 2. CASH DISTRIBUTION TO OPERATING PARTNERSHIP SUB-CLASS. On or before ----------------------------------------------------- thirty (30) days following the Effective Date, the Defendants have agreed to collectively pay on a pro rata basis a minimum aggregate amount of $15 million (less any cash distributions made prior to that date), as is set forth in the Schedule below: SCHEDULE OF MINIMUM $15 MILLION CASH DISTRIBUTION
Minimum Operating Partnership Distribution $ 15,000,000 - ------------------------------------------------------------- ------------- American Income Partners V-A Limited Partnership $ 158,000 American Income Partners V-B Limited Partnership 2,216,000 American Income Partners V-C Limited Partnership 821,000 American Income Partners V-D Limited Partnership 692,000 American Income Fund 1-A, a Massachusetts Limited Partnership 304,000 American Income Fund 1-B, a Massachusetts Limited Partnership 282,000 American Income Fund 1-C, a Massachusetts Limited Partnership 1,601,000 American Income Fund 1-D, a Massachusetts Limited Partnership 1,661,000 American Income Fund 1-E, a Massachusetts Limited Partnership 1,819,000 AIRFUND International Limited Partnership 1,996,000 AIRFUND II International Limited Partnership 3,450,000 Total $ 15,000,000
3. SALE OF EQUIPMENT ASSETS. The Defendants have agreed to market --------------------------- immediately the Equipment of the Operating Partnerships, and will endeavor to sell all such Equipment on or before the Effective Date. Any Equipment not sold by the Effective Date shall be placed in the Liquidating Trust, and the proceeds from the sale of such Equipment by the Liquidating Trustee will be distributed to the former General Partners and Limited Partners of the Operating Partnerships. 4. SALE OF THE SEMELE NOTES AND GUARANTEED PAYMENT OF 30% OF AGGREGATE -------------------------------------------------------------------- PRINCIPAL PLUS ACCRUED INTEREST. The Defendants have agreed to actively pursue - -------------------------------- the sale or repayment of the Semele Notes in the ordinary course before the Effective Date; provided, however, any such repayment or sale prior to that date shall be at face value plus accrued interest. The Semele Notes' original maturity of April 30, 2000 was extended to April 30, 2003. The Defendants also agree that if five (5) days before the Effective Date at least 30% of the aggregate principal amount of the Semele Notes and the related accrued interest has not been paid on the Semele Notes, the Defendants shall cause Semele Group, Inc. or a related party to purchase such additional aggregate principal amount of the Semele Notes at face value plus accrued interest as is necessary to reduce the aggregate initial principal amount of the Semele Notes by 30%. The balance of the Semele Notes not purchased shall be placed in the Liquidating Trust and the Liquidating Trustee will sell such Notes in an orderly fashion with the objective of maximizing the sale price. The proceeds from the sale of the Semele Notes will be distributed by the Liquidating Trustee to the former partners of the five Operating Partnerships on a pro rata basis. 5. SALE OF THE SEMELE GROUP, INC. STOCK AND GUARANTEED RECEIPT OF AT -------------------------------------------------------------------- LEAST $5.00 PER SHARE. The Semele Group, Inc. stock ("Semele Stock") will be placed in the Liquidating Trust and be sold by the Liquidating Trustee on or after June 30, 2003 in an orderly fashion over the next sixty (60) days with the objective of maximizing the sale price of such shares. If the average sale price for the Semele Stock is less than $5.00 per share at June 30, 2003, Equis shall pay to the Liquidating Trust the difference between $5.00 per share and the average sale price realized from the sale of the Semele Stock. The proceeds will thereafter be distributed on a pro rata basis to the former partners of the five Operating Partnerships. 6. SALE OF THE ECHELON NOTES. The Court's March 22, 1999 Order provides ----------------------------- that the Operating Partnerships may collectively invest up to $32 million of the total aggregate net asset values of all the Operating Partnerships, in any investment, including, but not limited to additional equipment and other business activities, that the General Partners and Equis reasonably believe to be consistent with the operating objectives and business interests of Newco in connection with the Exchange Transaction discussed above (the "New Investments"), subject to certain limitations. Among other things, the Court's Order provides that (a) in the event that an Operating Partnership has acquired New Investments and is not a party to the Exchange Transaction, Newco shall acquire all such New Investments from such Non-Participating Partnership for an amount equal to the Non-Participating Partnership's net equity investment in such New Investments plus an annualized return thereon of 7.5%; and (b) in the event that a Partnership has acquired New Investments and the Exchange Transaction is not consummated, the General Partners shall (i) use their best efforts to divest all such New Investments in an orderly and timely fashion, and (ii) cancel or return to each Partnership any accumulated or deferred fees on New Investments. Pursuant to the Court's Order authorizing New Investments in anticipation of the Exchange Transaction, on March 8, 2000, the Operating Partnerships made a loan aggregating $32 million (the "Loan") to Echelon Residential Holdings LLC (the "Borrower"), a newly formed entity. The proceeds of the Loan were contributed by the Borrower to its wholly-owned subsidiary, Echelon Residential LLC ("Residential"), which purchased ten real estate development properties from Echelon International Corporation, an independent seller. The proceeds of the Loan were contributed by the Borrower to Residential and used with funds from other investors to acquire the properties and to provide working capital. The properties consisted of eight parcels of land either under construction or development as multi-family housing and interests in two joint ventures, each of which holds a parcel of land under construction as multi-family housing. The Loan is evidenced by Promissory Notes from the Borrower in favor of each of the Operating Partnerships payable in the principal amounts listed by Partnership in the table below. The Promissory Notes are due to mature on September 8, 2002 (the "Maturity Date"). Interest on the Loan is at a rate of 14% per annum for the first 24 months and increases to 18% for the remaining six months of the 30-month term. Interest on the unpaid balance accrues and compounds on a monthly basis but is not due and payable until maturity on September 8, 2002. The Promissory Notes may be prepaid, in whole or in part, at any time, without premium or penalty. In the event of default, the Partnerships may declare the Promissory Notes to be immediately due and payable. The principal amount of the Promissory Notes for each of the Operating Partnerships is set forth below:
Principal Amount of Operating Partnership Promissory Notes - ------------------------------------------------------------- -------------------- 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 1-A, a Massachusetts Limited Partnership 1,650,000 American Income Fund 1-B, a Massachusetts Limited Partnership 1,310,000 American Income Fund 1-C, a Massachusetts Limited Partnership 2,780,000 American Income Fund 1-D, a Massachusetts Limited Partnership 3,050,000 American Income Fund 1-E, a Massachusetts Limited Partnership 4,790,000 AIRFUND International Limited Partnership 1,800,000 AIRFUND II International Limited Partnership 3,640,000 -------------------- Total $ 32,000,000 ====================
The payment of the Promissory Notes by the Borrower to the Operating Partnerships is secured by a Pledge Agreement pursuant to which the Borrower, as pledgor, granted a security interest to American Income Partners V-A Limited Partnership, as collateral agent for itself and each of the other Partnerships, in all of the Borrower's right, title and interest in its membership interests in Residential, its wholly-owned subsidiary, together with (i) all payment and distributions owing or payable to the Borrower on account of its interest as a member of Residential, (ii) all of Borrower's rights and interests under the operating agreement of Residential including all voting and management rights, (iii) all other rights, interests, property or claims of Residential to which Borrower may be entitled as a member of Residential, and (iv) any and all proceeds and products of the foregoing. No fees were paid to Equis, the General Partners, or any other affiliated entities for negotiating or effecting the purchase of the properties or the Loan. Since the Loan was funded, the economic outlook for the properties has deteriorated and, as a result, the Borrower's management was unable to secure low-cost sources of development capital, including, but not limited to, joint venture or equity partners. Five of the development properties have been sold. In their 10-Q Reports for the quarterly period ended September 30, 2001 filed with the SEC, the Operating Partnerships reported a write-down of the Loan and interest receivable in the aggregate of $7,993,603 as of June 30, 2001. Consequently, as of June 30, 2001, the Loan is carried on the books of the Operating Partnerships at an aggregate of $29.2 million. The write-down was precipitated principally by a slowing U.S. economy and its effects on the real estate development industry. Pursuant to the Settlement, Equis and the General Partners have agreed to purchase shall purchase the Echelon Notes not later than the last day of the first fiscal quarter after the Effective Date(the "Note Payment Date") for a price equal to their aggregate outstanding $32 million principal amount plus an annualized return of 7.5% simple interest (calculated on the basis of the $32 million original aggregate principal amount of the Echelon Notes less any payments during the term of such notes) from the origination date of March 8, 2000 until the date on which the Echelon Notes are purchased (the "Echelon Note Purchase Price"). The Defendants have agreed to cause Residential not to make any distributions in respect of its common equity interests while any outstanding principal and accrued interest of the Echelon Notes is payable to the Operating Partnerships or the Liquidating Trust, as the case may be. For the purpose of calculating the Echelon Note Purchase Price, any payments made in respect to the Echelon Notes prior to the purchase of the notes by Equis and the General Partners shall be applied as a reduction in principal amount pro rata of the Echelon Notes and the 7.5% rate of return will cease to accrue on such payments after their receipt. The Echelon Note Purchase Price will be (a) not less than the fair value of the properties based upon an appraisal conducted prior to the Note Payment Date by an independent, nationally recognized, accredited appraiser, and (b) more than $32 million plus interest calculated at a 7.5% annual rate of return on the outstanding principal amount during the term of the Echelon Notes. Upon receipt of the Echelon Note Purchase Price, the Operating Partnerships will assign and deliver their respective Echelon Notes to Equis and the General Partners along with a full release of the Payor's obligations to the Operating Partnerships under the Echelon Notes. In the event the Echelon Note Purchase Price has not been paid for the Echelon Notes by Equis and the General Partners by the Maturity Date of September 8, 2002, the Operating Partnerships shall forebear from foreclosing on the Echelon Notes, until the earlier of the purchase of the Echelon Notes by Equis and the General Partners on the Note Payment Date or the rejection, termination or cancellation of the Revised Stipulation. 7. ADDITIONAL SECURITY FOR PAYMENT OF ECHELON NOTES. ------------------------------------------------------ (A) ESTABLISHMENT OF MINIMUM OF $8 MILLION CASH ACCOUNT AS COLLATERAL FOR ------------------------------------------------------------------------ THE ECHELON NOTE PURCHASE PRICE. --------------------------------- In order to assure timely payment of the Echelon Note Purchase Price on or before the Note Payment Date, (i) the Defendants, prior to the date that the Class Notice is mailed to the Class, will deposit an aggregate amount of $8 million in a cash collateral account with an independent, nationally-recognized financial institution as Account Agent (who may also serve as the Liquidating Trustee of the Liquidating Trust); and (ii) Equis, upon receipt from the General Partners of cash distributions from the Operating Partnerships, shall promptly deposit 50% of such distributions in the cash collateral account with the Account Agent. (In accordance with the governing provisions of the respective Limited Partnership Agreements, the General Partners generally receive 5% of distributions, except in the case of AIRFUND II where the General Partner receives 1% of distributions, which are then dividended to Equis. The aggregate distributions to the General Partners from the liquidation of the Operating Partnerships are expected to exceed $3 million.) (B) EQUIS AND GENERAL PARTNERS' OBLIGATIONS TO MAINTAIN $12 MILLION MINIMUM ------------------------------------------------------------------------ NET WORTH. - ---------- Equis has agreed to maintain a net worth of not less than $12 million (exclusive of the $8 million cash deposited by the Defendants in the cash collateral account pursuant to subparagraph (7)(a) above) from the date of mailing of the Class Notice (the "Notice Date") until the Note Payment Date as evidenced by the delivery to Lead Plaintiffs' Counsel of a certificate of the chief financial officer of Equis dated as of the close of the last fiscal quarter prior to the date of said Class Notice. From the Notice Date until the Note Payment Date, Equis shall not make any distributions or pay any dividends, in cash or in kind, to its partners (other than an aggregate not to exceed $59,000 per month to officers in lieu of salaries). If, at the close of business on the Note Payment Date, Equis and the General Partners have not purchased the Echelon Notes and the total payments on the Echelon Notes from Equis, the General Partners and Echelon Residential Holdings LLC combined with the funds deposited in the cash collateral account to that date are less than the then outstanding aggregate principal amount and interest accrued at 7.5%, due on the Echelon Notes, the Liquidating Trustee shall take such action as it in its discretion deems appropriate to protect the interests of the beneficiaries of the Liquidating Trust, including, but not limited to, foreclosing on the Echelon Notes and bringing suit against Echelon Residential Holdings LLC to recover all unpaid and overdue principal and accrued interest on the Echelon Notes. In the event that the Liquidating Trustee's foreclosure and suit against Echelon Residential Holdings LLC yields a recovery of less than the Echelon Note Purchase Price, Equis and the General Partners shall be liable to the Liquidating Trustee only for the difference between (a) the actual damages recovered by the Liquidating Trustee from Echelon Residential Holdings LLC in its foreclosure and suit on the Echelon Notes, and (b) the Echelon Note Purchase Price. All reasonable expenses and fees incurred by the Operating Partnerships, the Liquidating Trust and its Liquidating Trustee, or their successors or assigns, incurred in taking such actions, including reasonable counsel fees and expenses, shall be borne by Echelon Residential Holdings LLC, Equis and the General Partners. B. OTHER SETTLEMENT TERMS AND CONDITIONS. ------------------------------------------ 1. RELIANCE ON SECTION 47(B)(1) OF THE 1940 ACT. In entering into the -------------------------------------------------- Revised Stipulation, the Defendants have relied on Section 47(b)(1) of the 1940 Act, and in seeking the Court's approval of the Settlement, the Defendants request that it find under the circumstances that enforcement of any contract that may have been made in, or whose performance may involve a, violation of the 1940 Act, would produce a more equitable result than the non-enforcement and would not be inconsistent with the purposes of the 1940 Act. 2. NON "OPT-OUT" CLASS. --------------------- The parties will request that the Court certify the Operating Partnership Sub-Class under Rule 23(b)(1) and (2) so that Operating Partnership Sub-Class Members may object to the fairness of the proposed Settlement, but may not opt-out of, or exclude themselves from, the Operating Partnership Sub-Class. IV. ARGUMENT --------- A. LEGAL STANDARD FOR PRELIMINARY APPROVAL The approval of a proposed settlement of a class action lawsuit is a matter within the broad discretion of the trial court. Class Plaintiffs v. City of --------------------------- Seattle, 955 F.2d 1268, 1276 (9th Cir. 1992). Preliminary approval does not ---- --- require the court to answer the ultimate question of whether a proposed settlement is fair, reasonable and adequate and in the best interests of the Class. Rather, the determination is made only after notice of the proposed ----- settlement has been given and class members have an opportunity to express their views of the settlement. See 3B J. Moore, Moore's Federal Practice, 23.80 --- ------------------------ [2.-1], at 23-479 (2d ed. 1993). The question of whether a proposed settlement is fair, reasonable and adequate necessarily requires the Court to weigh the "likelihood of success on the merits against the amount and form of the relief offered in the settlement." Carson v. American Brands, Inc., 450 U.S. 79, 88 n.14 (1981) (citing Protective - -------------------------------- ---------- Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. - ---------------------------------------------------------------------- 414, 424-25 (1968)). In considering the preliminary approval of a proposed settlement, courts do not attempt to decide the merits of the case or resolve unsettled legal questions. Id.; South Carolina National Bank v. Stone, 749 - - --- --------------------------------------- F.Supp. 1419, 1424 (D.S.C. 1990). The question of fairness at this stage of the proceedings turns on whether the proposed settlement was achieved through "arm's length negotiations" by counsel who have "the experience and ability necessary to effect the representation of the class' interest." South Carolina National ----------------------- Bank, 749 F.Supp. at 1424 (quoting Weinberger v. Kendrick, 698 F.2d 61, 74 (2d --- ---------------------- Cir. 1982), cert. denied, 464 U.S. 88 (1983)). Therefore, many courts recognize ----- ------ that the opinion of experienced counsel is entitled to considerable weight. Id.; --- Behrens v. Wometco Enterprises, 118 F.R.D. 534, 539 (S.D. Fla. 1983) (deference - ------------------------------- afforded to opinions of class counsel in class actions). A number of factors are to be considered in evaluating a settlement for purposes of preliminary approval. No single factor is determinative, but rather all factors should be considered. These criteria have been summarized as follows: If the preliminary evaluation of the proposed settlement does not disclose grounds to doubt its fairness or other obvious deficiencies, such as unduly preferential treatment of class representatives or of segments of the class, or excessive compensations for attorneys, and appears to fall within the range of possible approval, the court should direct that notice under Rule 23(e) be given to the class members of a formal fairness hearing, at which arguments and evidence may be presented in support of and in opposition to the settlement. Manual for Complex Litigation, Third, 30.41, at 237. - ---------------------------------------- Here, Plaintiffs' Class Counsel have extensive experience in class action litigation, and believe this Settlement is fair, reasonable and adequate in light of the circumstances of this case and that Notice should thus be provided to the Class. This conclusion should be afforded considerable weight by this Court, particularly since the Settlement is the result of months of extensive and informed arm's length negotiations. B. THIS COURT SHOULD PRELIMINARILY APPROVE THE PROPOSED SETTLEMENT AS "WITHIN THE RANGE OF POSSIBLE APPROVAL" AND DIRECT THAT NOTICE BE GIVEN TO ALL MEMBERS OF THE OPERATING PARTNERSHIP SUB-CLASS. The proposed Settlement meets all the criteria for preliminary approval and is clearly "within the range of possible approval." Manual for Complex -------------------- Litigation, Third, 30.41, at 237. As set forth in the Revised Stipulation, ---------- the proposed Settlement provides a number of monetary and therapeutic benefits to the Operating Partnership Sub-Class Members, including: - - As requested in the Complaint, the Defendants have agreed to the orderly liquidation of the remaining assets and dissolution of the Operating Partnerships; - - the Defendants have agreed to collectively pay a minimum aggregate amount of $15 million; - - the Defendants have agreed to sell the Semele Notes and have guaranteed payment of 30% of the Notes' aggregate principal plus accrued interest; and - - the Defendants have agreed to sell the Semele Group, Inc. stock and have guaranteed payment of at least $5.00 per share. In addition, the Defendants have agreed to purchase the Echelon Notes for a price equal to their aggregate outstanding $32 million principal amount plus an annualized return of 7.5% simple interest. The Court's March 22, 1999 Order provides that in the event that an Operating Partnership has acquired New Investments and the exchange is not consummated, the General Partners shall (i) use their best efforts to divest all such New Investments in an orderly and timely fashion, and (ii) cancel or return to each Partnership any accumulated or deferred fees on New Investments. The Order further provides that in the event that an Operating Partnership has acquired New Investments and is not a party to the exchange, Newco shall acquire all such New Investments from such Non-Participating Partnership for an amount equal to the Non-Participating Partnership's net equity investment in such New Investments plus an annualized return thereon of 7.5%. The Echelon Notes in the amount of $32 million would ordinarily mature on September 8, 2002. As part of the consideration of the proposed Settlement, and in exchange for the Operating Partnerships' forbearance, the Defendants have agreed to purchase the Echelon Notes for a price equal to their aggregate outstanding $32 million principal amount plus an annualized return of 7.5% simple interest. In the event the exchange were not consummated, the General Partners were required only to use their "best efforts to divest all such New Investments in an orderly and timely fashion." Here, under the terms of the proposed Settlement, the Defendants are doing better than their "best efforts." Even though the Defendants were not required to do so, they are providing a 7.5% annualized return on New Investments. Using a 7.5% annualized return as a benchmark is consistent the investment return the parties had previously agreed upon, and this Court had ordered, in the event a Partnership elected not to participate in the exchange. In addition, the Defendants are providing security for payment of the Echelon Notes in the form of a cash collateral account holding a minimum of $8 million in cash and Equis' agreement to maintain a minimum $12 million net worth. If the Operating Partnerships chose instead to hold the Echelon Notes and foreclose on the properties at the September 8, 2002 maturity date, they (and therefore the Operating Partnership Sub-Class members) would undoubtedly suffer a substantial loss. As mentioned above, a recent appraisal of the remaining properties demonstrated an impairment of the Echelon Notes. As a result, the Operating Partnerships have already reported a write-down of the Loan and interest receivable in the aggregate of $7,993,603 as of June 30, 2001, and the Loan is carried on the books of the Operating Partnerships as of June 30, 2001 at an aggregate of $29.2 million. Five of the development properties have already been sold. Thus, if the Notes were sold in the open market, they would have to be severely discounted. The proposed Settlement further protects the Limited Partners because it requires that the Echelon Notes Purchase Price will not be less than an appraisal to be performed on the properties. Finally, as set forth in the table below, the 7.5 % annualized return is superior to the rates of return for the 1-year U.S. Treasury Bill rate, the Prime Commercial Loan rate and the LIBOR rate: 1-YEAR U.S. T-BILL PRIME RATE LIBOR RATE (AS OF 9/25/01) (CURRENT) (AS OF 1/24/02) 2.360% 4.75% 2.380% ------ ----- ----- C. THIS COURT SHOULD PRELIMINARILY CERTIFY THE OPERATING PARTNERSHIP SUB-CLASS UNDER RULE 23(B)(1) AND (2). As was done previously in the Court's August 20, 1998 Preliminary Approval Order, the Court should enter a preliminary approval order certifying the Operating Partnership Sub-Class under Federal Rules of Civil Procedure 23(b)(1) and (2). The need for mandatory - as opposed to "opt out" - certification arises from the nature of the derivative and equitable relief sought by Plaintiffs with respect to the Operating Partnership Sub-Class and the terms of the resulting Settlement. Plaintiffs challenged the Defendants' various means utilized in their overall scheme to maximize their own fees at the expense of the Operating Partnerships and Operating Partnership Sub-Class. In settlement of those claims, the parties have agreed to the orderly liquidation of the remaining assets and dissolution of the Operating Partnerships. Review of the context of Rule 23 reveals that the Rule 23(b)(3) "opt-out" class is in fact an exception to the general rule that rulings and judgments affecting a certified class binds all class members. The opt-out provision is a recognition of the concept of individualized litigation and the right of each individual to choose his or her forum for, and his or her representation in, litigation that primarily seeks monetary damages to compensate the class. See 3 --- Newberg, supra, 16.15. ----- Where many potential claimants have been similarly damaged or injured, however, this individual choice may cause harm and unfairness to others in the affected group. Mandatory, or non-opt-out, certification reflects a conscious and principled balancing of the procedural rights of the individual litigant against the rights and interests of the group of similarly situated litigants at large. See, e.g., Hernandez v. Motor Vessel Skyward, 61 F.R.D. 558 (S.D. Fla. --- ---- --------------------------------- 1979), aff'd mem., 507 F.2d 1278 (5th Cir. 1975). ----- ---- Here, the prosecution in separate actions by individual Operating Partnership Sub-Class members would create a risk of inconsistent or varying adjudications with respect to individual class members, which would establish incompatible standards of conduct for the Defendants, and adjudications with respect to individual Sub-Class members, which would as a practical matter be dispositive of the rights of other members of the Sub-Class. See Fed. R. Civ. --- P. 23(b)(1). Further, the Defendants allegedly have acted or refused to act on grounds generally applicable to the Sub-Class, making appropriate final injunctive relief or corresponding declaratory relief with respect to the Sub-Class as a whole. See Fed. R. Civ. P. 23(b)(2). --- If individual Operating Partnership Sub-Class members were permitted to opt out and then pursue separate actions, the Defendants may find themselves obligated, on the one hand, to carry out the liquidation and dissolution of the partnerships, and provide all of the additional benefits on the terms provided for by the Settlement, while on the other, individual Operating Partnership Sub-Class members might seek to obtain relief which would preclude the Defendants from taking the very actions which the Settlement contemplates. Defendants would not agree to implement the terms of the Settlement if individual Operating Partnership Sub-Class members were permitted to retain all of the benefits of the Settlement and still be allowed to pursue individual actions that include claims that Defendants' actions in pursuing the Settlement were not authorized and/or proper. Moreover, the relief provided by the proposed Settlement - the liquidation of the remaining assets and dissolution of the Operating Partnerships and the reformation of the Echelon Notes - is in the nature of a derivative remedy providing equitable or injunctive relief. Accordingly, certification of the Operating Partnership Sub-Class under Rules 23(b)(1) and (2) is proper here. CONCLUSION ---------- For the foregoing reasons, Plaintiffs and Defendants request that this Court grant the Joint Motion for an Order Preliminarily Approving the Revised Settlement of Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, And Hearing On, The Proposed Settlement. Respectfully submitted, this __ day of February 2002, ATTORNEYS FOR DEFENDANTS: RICHMAN GREER WEIL BRUMBAUGH MIRABITO & CHRISTENSEN, P.A. Gerald F. Richman, Esq. 250 Australian Ave. South - Suite 1504 West Palm Beach, Florida 33401 Tel. (561) 803-3500 and NIXON PEABODY LLP Deborah L. Thaxter, P.C. Gregory P. Deschenes 101 Federal Street Boston, MA 02110-1832 Tel. (617) 345-1000 ATTORNEYS FOR PLAINTIFFS: LERNER & PEARCE, P.A. Allan M. Lerner 2888 East Oakland Park Boulevard Ft. Lauderdale, FL 33306 (954) 563-8111 _________________________________ WECHSLER 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 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 Dated: February __, 2002 THE PARTNERSHIP AGREEMENTS PROHIBITED THE REINVESTMENT OF CASH EXCEPT IN LIMITED CIRCUMSTANCES. IN A LETTER DATED MAY 10, 2001 SENT TO THIS COURT, THE SEC STAFF ASSERTED THAT CERTAIN OF THE OPERATING PARTNERSHIPS WERE "INVESTMENT COMPANIES," AS DEFINED IN SECTION 3(A)(1)(C) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "1940 ACT"). DEFENDANTS AND CLASS COUNSEL BELIEVE THAT THE PROPOSED LIQUIDATION AND DISSOLUTION OF THE PARTNERSHIPS WILL SATISFACTORILY RESOLVE THE ISSUES THE SEC RAISED CONCERNING THE POSSIBLE VIOLATION OF THE 1940 ACT. THE REASON FOR THE DELAY IN THE LIQUIDATION OF THE SEMELE STOCK IS THAT THE STOCK MUST BE HELD UNTIL JUNE 30, 2003, TO PRESERVE THE TAX BENEFIT OF THE NET OPERATING LOSS ("NOL"). EX-2.11 5 doc4.txt Exhibit 2.11 ------------ B544959v1 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 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, 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. ORDER PRELIMINARILY APPROVING SETTLEMENT, CONDITIONALLY CERTIFYING SETTLEMENT CLASS AND PROVIDING FOR NOTICE OF, AND HEARING ON, THE PROPOSED SETTLEMENT ------------------------------------------------------ WHEREAS, the parties to the above-captioned action (the "Action"), having made application, pursuant to Fed. R. Civ. P. 23(e), for an order approving the settlement of this Action, in accordance with the Revised Stipulation of Settlement dated January 29, 2002 (the "Revised Stipulation"), which, together with the exhibits annexed thereto, sets forth the terms and conditions for a proposed settlement of the Action with regard to the Operating Partnership Sub-Class ("Settlement") and for dismissal of the Action in its entirety with prejudice; and the Court, having read and considered the Revised Stipulation and the exhibits annexed thereto; NOW, THEREFORE, IT IS HEREBY ORDERED: 1. For purposes of this Preliminary Order, the Court adopts and incorporates by reference the definitions contained in the Revised Stipulation. 2. The Court does hereby preliminarily approve the Revised Stipulation and the Settlement set forth therein as being within the range of reasonableness and fair, just and adequate. 3. A hearing (the "Hearing") shall be held before this Court on Friday, June 7, 2002, at 701 Clematis Street, West Palm Beach, Florida, 3:30 p.m., in Courtroom 5, to determine whether the proposed Settlement of the Action on the terms and conditions provided for in the Revised Stipulation, with respect to the Operating Partnership Sub-Class, is fair, reasonable and adequate and should be finally approved by the Court; whether a final judgment as provided in the Revised Stipulation should be entered herein with respect to the claims brought by the Operating Partnership Sub-Class; and whether Class Counsel's 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. 4. The Court approves, as to form and content, the Notice of Class Action Determination, Proposed Settlement and Fairness Hearing (the "Notice"), annexed to the Revised Stipulation as Exhibit "A", and finds that the mailing of the Notice substantially in the manner and form set forth in paragraph 5 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 under the circumstances, and constitutes due and sufficient notice to all persons entitled thereto. 5. (a) Upon entry of this Order, the Defendants shall cause a copy of the Notice, substantially in the form annexed to the Revised Stipulation as Exhibit "A", 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 Operating Partnership Sub-Class Members shall be paid as set forth in the Revised 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 Revised Stipulation or this Order. 6. Operating Partnership Sub-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. 7. Pending final determination of whether the Settlement should be approved, neither the Class Plaintiffs nor any Operating Partnership Sub-Class Member, either directly, derivatively, in a representative capacity or 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. 8. Pending final determination of whether the Settlement should be approved, the Class Plaintiffs and all other Operating Partnership Sub-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; or (ii) 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 of investors in any Operating Partnership to any person for the purpose of conducting a tender offer. 9. Any Member of the Operating Partnership Sub-Class may appear at the Settlement Hearing 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 Operating Partnership Sub-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 Operating Partnership Sub-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 Operating Partnership Sub-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 from making any objection to the fairness or adequacy of the proposed Settlement as incorporated in the Revised Stipulation and the award of attorneys' fees and expenses to Class Counsel, unless otherwise ordered by the Court. 10. The Court reserves the right to continue the date of the Hearing and any continuation thereof without further notice to the Members of the Operating Partnership Sub-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 1st day of March, 2002. /s/ Daniel T.K. Hurley --- -------------------- Daniel T.K. Hurley United States District Judge Copies To All Counsel Of Record -----END PRIVACY-ENHANCED MESSAGE-----