-----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, F3mg+3RCQQk0xdqAEzU40D/Dy+9BAJ0RVJWQsdszCXpaj20uRtD+XpxB2rVQu8AH I/3fPH8cFv3yTt74B0RPNQ== 0000847557-02-000018.txt : 20020415 0000847557-02-000018.hdr.sgml : 20020415 ACCESSION NUMBER: 0000847557-02-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INCOME FUND I-D LTD PARTNERSHIP CENTRAL INDEX KEY: 0000868680 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043122696 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20030 FILM NUMBER: 02597284 BUSINESS ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6178545800 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 0-20030 ------- AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP ------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3122696 (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: 829,521.30 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 FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP FORM 10-K TABLE OF CONTENTS
Page PART I Item 1. Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for the Partnership's Securities and Related Security Holder Matters 9 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A. Quantitative and Qualitative Disclosures about Market Risks 20 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43 PART III Item 10. Directors and Executive Officers of the Partnership 44 Item 11. Executive Compensation 45 Item 12. Security Ownership of Certain Beneficial Owners and Management 46 Item 13. Certain Relationships and Related Transactions 46 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 49
PART I Item 1. Business. - ------------------- (a) General Development of Business AMERICAN INCOME FUND I-D, a Massachusetts Limited Partnership, (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on May 30, 1991 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 VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On August 30, 1991, the Partnership issued 829,521.30 units of limited partnership interest (the "Units") to 1,234 investors. Included in the 829,521.30 units are 1,572.30 bonus units. The Partnership has one General Partner, AFG Leasing VI Incorporated, a Massachusetts corporation formed in 1990 and an affiliate of Equis Financial Group Limited Partnership (formerly known as American Finance Group), a Massachusetts limited partnership ("EFG" or the "Manager"). 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 Partnership 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 August 30, 1991. Significant operations commenced coincident with the Partnership's initial purchase of equipment and the associated lease commitments on August 30, 1991. The Restated Agreement, as amended, provides that the Partnership will terminate no later than December 31, 2002. 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'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. The Partnership holds a note receivable from and common stock in Semele Group Inc. ("Semele"). The note receivable is subject to a number of risks including, Semele's ability to make loan payments which is dependent upon the liquidity of Semele and primarily Semele's ability to sell or refinance its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The market value of the Partnership's investment in Semele common stock has generally declined since the Partnership's initial investment in 1997. In 1998 and 2001, the General Partner determined that the decline in market value of the stock was other-than-temporary and wrote down the Partnership's investment. Subsequent to December 31, 2001, the market value of the Semele common stock has remained relatively constant. The market value of the stock could decline in the future. Gary D. Engle, President and Chief Executive Officer of the general partner of EFG, and President and a Director of the General Partner, is Chairman and Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of the general partner of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. 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 $3,050,000 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 $266,875, 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 $495,015 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 $761,890 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, 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 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. - ----------------------------- 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 $3,050,000. 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 $496,000, of which approximately $316,000 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. 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 1,193 record holders 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 were 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 Limited Partners 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 Limited Partners 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 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. In particular, the Partnership must contemplate the potential liquidity risks associated with its investment in commercial jet aircraft. The management and remarketing of aircraft can involve, among other things, significant costs and lengthy remarketing initiatives. Although the Partnership's lessees are required to maintain the aircraft during the period of lease contract, repair, maintenance, and/or refurbishment costs at lease expiration can be substantial. For example, an aircraft that is returned to the Partnership meeting minimum airworthiness standards, such as flight hours or engine cycles, nonetheless may require heavy maintenance in order to bring its engines, airframe and other hardware up to standards that will permit its prospective use in commercial air transportation. At December 31, 2001, the Partnership's equipment portfolio included ownership interests in four commercial jet aircraft, one of which is a Boeing 737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is prohibited from operating in the United States unless it is retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation Administration. During 2000, this aircraft was re-leased to Air Slovakia BWJ, Ltd., through September 2003. In January 2002 this lease was amended, which includes a revised lease expiration date of August 2002. The remaining three aircraft in the Partnership's portfolio already are Stage 3 compliant. Two of these aircraft have lease terms expiring in September 2004 and June 2005, respectively, and the third aircraft was returned to the General Partner upon its lease expiration in April 2001. Recent changes in the economic condition of the airline industry have adversely affected the demand for and market values for commercial jet aircraft. These changes could adversely affect the operations of the Partnership and the residual value of its commercial jet aircraft. Currently, all of the commercial jet aircraft in which the Partnership has a proportionate ownership interest are subject to contracted lease agreements except one McDonnell Douglas MD-82 aircraft, which was returned to the General Partner upon its lease expiration in April 2001. The General Partner is attempting to remarket this aircraft. In October 2000, the Partnership and certain of its affiliates executed a conditional sales agreement with Royal Aviation Inc. for the sale of the Partnership's interest in a Boeing 737-2H4 aircraft. The sale of the aircraft was recorded by the Partnership as a sales-type lease, with a lease term expiring in January 2002. In the fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a result, has defaulted on this conditional sales agreement. The General Partner is negotiating for the return of the aircraft. 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) general expenses and current liabilities from the Partnership (other than any portion of the Equipment Management Fee which is required to be accrued and the Subordinated Remarketing Fee) and (c) 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 Limited Partners of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings equals the aggregate amount of the Limited Partners' original capital contributions plus a cumulative annual distribution 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 Limited Partners exceed the amount required to satisfy the cumulative annual distribution of 11% (compounded quarterly) on the Limited Partners' 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 - --------------------------------------- ------------ ----------- ----------- ----------- ----------- Operating and sales-type lease revenue. $ 1,558,368 $ 1,475,587 $ 2,394,891 $ 2,695,965 $ 4,364,091 Total income. . . . . . . . . . . . . . $ 1,883,518 $ 2,349,395 $ 3,125,432 $ 3,111,970 $ 4,271,246 Interest income . . . . . . . . . . . . $ 310,004 $ 595,789 $ 304,091 $ 264,986 $ 134,242 Net income (loss) . . . . . . . . . . . $(1,299,057) $ 536,274 $ 1,118,389 $ 439,380 $ 1,143,233 Per Unit: Net income (loss). . . . . . . . . . . $ (1.49) $ 0.61 $ 1.28 $ 0.50 $ 1.31 Cash distributions declared. . . . . . $ -- $ -- $ 0.75 $ 0.75 $ 0.94 Financial Position - --------------------------------------- Total assets. . . . . . . . . . . . . . $11,918,672 $13,335,205 $13,303,076 $13,946,980 $14,869,863 Total long-term obligations . . . . . . $ 2,230,418 $ 2,492,344 $ 2,864,284 $ 4,192,148 $ 5,334,349 Partners' capital . . . . . . . . . . . $ 8,900,816 $10,187,124 $ 9,729,894 $ 9,200,096 $ 9,191,217
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 1991 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 is scheduled to be dissolved by December 31, 2002. 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. Lease payments for the sales-type lease are due monthly and the related revenue is recognized by a method which produces a constant periodic rate of return on the outstanding investment in the lease. 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 doubtful accounts: The Partnership maintains allowances for - ----------------------------------- doubtful accounts for estimated losses resulting from the inability of the - ----- lessees to make the lease payments required under the contracted lease - ----- agreements. These estimates are primarily based on the amount of time that has - ----- elapsed since the related payments were due as well as specific knowledge related to the ability of the lessees to make the required payments. If the financial condition of the Partnership's lessees were to deteriorate, additional allowances could be required that would increase expenses. Conversely, if the financial condition of the lessees were to improve or if legal remedies to collect past due amounts were successful, the allowance for doubtful accounts could be reduced, thereby decreasing expenses. 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 operating lease revenue of $1,540,587 compared to $1,472,283 and $2,394,891 for the years ended December 31, 2000 and 1999, respectively. The increase in operating lease revenue from 2000 to 2001 resulted primarily from the September 2000 re-lease of two aircraft and receipt of lease termination proceeds, as discussed below. The decrease in operating lease revenue from 1999 to 2000 resulted primarily from the expiration of lease terms related to the Partnership's interest in three Boeing 737-2H4 aircraft and a McDonnell Douglas MD-82 aircraft. In the future, operating lease revenue is expected to decline due to lease term expirations and equipment sales. See discussion below related to the Partnership's sales-type lease revenue for the year ended December 31, 2001 and 2000. The Partnership's equipment portfolio includes certain assets in which the Partnership holds a proportionate ownership interest. In such cases, the remaining interests are 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 report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. The lease terms related to the three Boeing 737-2H4 aircraft, in which the Partnership held a proportionate interest, expired on December 31, 1999 and the aircraft were stored pending their remarketing. In July 2000, one of the Boeing 737-2H4 aircraft was sold resulting in $339,105 of proceeds to the Partnerships and a net gain, for financial statement purposes, of $57,174 for the Partnership's proportional interest in the aircraft. In September 2000, a second Boeing 737-2H4 aircraft was re-leased with a lease term expiring in September 2003. In January 2002 this lease was amended, which includes a revised lease expiration date of August 2002. The Partnership recognized operating lease revenues of $149,554, $59,808, and $167,706, related to this aircraft during the years ended December 31, 2001, 2000 and 1999, respectively. The Partnership entered into a conditional sales agreement to sell its interest in the remaining Boeing 737-2H4 aircraft as described below. The lease term associated with a McDonnell Douglas MD-82 aircraft, in which the Partnership holds an ownership interest, expired in January 2000. The aircraft was re-leased in September 2000 to Aerovias De Mexico, S.A. de C.V., with a lease term expiring in September 2004. The Partnership recognized operating lease revenues of $284,942, $117,630, and $207,534, related to this aircraft during the years ended December 31, 2001, 2000 and 1999, respectively. In June 2001, the Partnership and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The Reno Programs received an early termination fee of $840,000 and a payment of $400,000 for certain maintenance required under the existing lease agreement. The Partnership's share of the early termination fee was $216,888, which was recognized as operating lease revenue during the year ended December 31, 2001 and its share of the maintenance payment was $103,280, which was accrued as a maintenance obligation at December 31, 2001. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs are to receive rents of $6,240,000 over the lease term, of which the Partnership's share is $1,611,168. During the years ended December 31, 2001, 2000 and 1999, the Partnership recognized operating lease revenue including the early termination fee discussed above of $638,827, $466,002,and $448,665, respectively, related to its interest in this aircraft. The General Partner is attempting to remarket the second McDonnell Douglas MD-82 aircraft, in which the Partnership holds an ownership interest. The lease term associated with this aircraft expired in April 2001 and the aircraft is currently off lease. The Partnership recognized operating lease revenue of $137,139, $307,967 and $206,167, related to this aircraft during the years ended December 31, 2001, 2000 and 1999, respectively. In October 2000, the Partnership and certain of its affiliates executed a conditional sales agreement with Royal Aviation Inc. for the sale of the Partnership's interest in a Boeing 737-2H4 aircraft and recorded a net gain on sale of equipment, for financial statement purposes, of $121,333. This aircraft had been off lease from January 2000 through the date of the conditional sale. The title to the aircraft was to transfer to Royal Aviation Inc., at the expiration of the lease term. The sale of the aircraft was recorded by the Partnership as a sales-type lease, with a lease term expiring in January 2002. For the years ended December 31, 2001 and 2000, the Partnership recognized sales-type lease revenue of $17,781 and $3,304, respectively. In the fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a result, has defaulted on the conditional sales agreement. The General Partner is negotiating for the return of the aircraft. As of December 31, 2001, no allowance on the investment in sales-type lease was deemed necessary based on the comparison of estimated fair value of the Partnership's interest in the aircraft and the Partnership's net investment in the sales-type lease. Interest income for the year ended December 31, 2001 was $310,004 compared to $595,789 and $304,091 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 instruments 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 $121,234 and $373,781 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 $266,875, 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 $495,015 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 $761,890 is recorded as write-down of impaired loan and interest receivable in the year ended December 31, 2001. Interest income included $89,841 in each of the years ended December 31, 2001, 2000 and 1999 earned on a note receivable from Semele (see Note 6 to the financial statements included in Item 8). The note receivable from Semele (the "Semele Note") is scheduled to mature in April 2003. 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 $15,146, compared to a net gain in the year ended December 31, 2000 excluding the aircraft sale and conditional sale discussed above, of $156,686 on equipment having a net book value of $285,491. During the year ended December 31, 1999, the Partnership sold equipment having a net book value of $1,927 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $426,450. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Partnership, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. 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 gains or losses reported in the financial statements is not necessarily indicative of the total residual value the Partnership achieved from leasing the equipment. Depreciation expense was $670,073, $719,145 and $1,119,242 for the years ended December 31, 2001, 2000 and 1999, respectively. For financial reporting purposes, 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 at the date of the primary lease expiration 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 equipment 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. During the year ended December 31, 2001, the Partnership also recorded a write-down of equipment, representing an impairment to the carrying value of the Partnership's interest in a McDonnell Douglas MD-82 aircraft returned in April 2001 and currently off lease. The resulting charge of $324,000 was based on a comparison of estimated fair value and carrying value of the Partnership's interest in the aircraft. The estimate of the fair value was based on (i) information provided by a third-party aircraft broker and (ii) EFG's assessment of prevailing market conditions for similar aircraft. Aircraft condition, age, passenger capacity, distance capability, fuel efficiency, and other factors influence market demand and market values for passenger jet aircraft. Interest expense was $157,130, $267,446 and $269,910 for the years ended December 31, 2001, 2000 and 1999, respectively. Interest expense will decline as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. See additional discussion below regarding the refinancing of certain of the debt in 2001. Management fees were $87,396, $70,654 and $113,344 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. Write-down of investment securities-affiliate was $90,774 for the year ended December 31, 2001. At both March 31, 2001 and December 31, 2001, the General Partner determined that the decline in market value of its Semele common stock was other-than-temporary. As a result, on March 31, 2001, the Partnership wrote down the carrying value of the Semele common stock to $3.3125 per share (the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date the stock traded closest to March 31, 2001). At December 31, 2001, the Partnership again wrote down the carrying value of the Semele common stock to $1.90 per share (the quoted price of Semele stock on OTC Bulletin Board on the date the stock traded closest to December 31, 2001). See further discussion below. Operating expenses were $1,091,312, $755,876 and $504,547 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. In addition, operating expenses in 2001 included approximately $471,000 of remarketing costs related to the re-lease of an aircraft in June 2001 and storage of another aircraft which was returned to the General Partner in April 2001, upon its lease expiration. The primary reason for the increase in operating expenses from 1999 to 2000 was storage, remarketing and maintenance costs associated with the Partnership's aircraft. In 2000 and 1999, the Partnership accrued approximately $143,000 and $194,000, respectively, for the reconfiguration costs and completion of a D-Check incurred to facilitate the remarketing of the McDonnell Douglas MD-82 aircraft released in September 2000. In 2000, the Partnership also accrued approximately $194,000 for a required D-check for a second McDonnell Douglas MD-82 aircraft. Operating expenses in 2001, 2000 and 1999 also 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 other legal fees, as well as printing, distribution and other remarketing expenses. Liquidity and Capital Resources and Discussion of Cash Flows - -------------------------------------------------------------------- The events of September 11, 2001 and the slowing U.S. economy could have an adverse effect on market values for the Partnership's assets and the Partnership's ability to negotiate future lease agreements. Notwithstanding the foregoing, it currently is not possible for the General Partner to determine the long-term effects, if any, that these events may have on the economic performance of the Partnership's equipment portfolio. Approximately 74% of the Partnership's equipment portfolio consists of commercial jet aircraft. The events of September 11, 2001 adversely affected market demand for both new and used commercial aircraft and weakened the financial position of most airlines. No direct damage occurred to any of the Partnership's assets as a result of these events and while it is currently not possible for the General Partner to determine the ultimate long-term economic consequences of these events to the Partnership, the General Partner expects that the resulting decline in air travel will suppress market prices for used aircraft in the short term and could inhibit the viability of the airline industry. In the event of a default by an aircraft lessee, the Partnership could suffer material losses. At December 31, 2001, the Partnership has collected substantially all rents owed from aircraft lessees. The General Partner is monitoring the situation and will continue to evaluate potential implications to the Partnership's financial position and future liquidity. The Partnership by its nature is a limited life entity. The Partnership's principal operating activities derive from asset rental transactions. Accordingly, the Partnership's principal source of cash from operations is provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash inflows of $964,152, $653,908 and $2,093,710 in 2001, 2000 and 1999, respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenues and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities will also continue to decline as the Partnership remarkets its equipment. The Partnership, however, may continue to incur significant costs to facilitate the successful remarketing of its aircraft in the future. 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. For the year ended December 31, 2001, the Partnership realized net cash proceeds of $15,146 compared to $442,177 in 2000 and $428,377 in 1999. 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 $2,277,640 from contractual operating lease agreements, a portion of which will be used to amortize the principal balance of notes payable of $2,230,418. At the expiration of the individual primary and renewal lease terms underlying the Partnership's future minimum lease payments for operating leases, 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 $3,050,000 to a newly formed real estate company, Echelon Residential Holdings to finance the acquisition of real estate assets by that company. Echelon Residential Holdings, through a wholly owned subsidiary (Echelon Residential LLC), used the loan proceeds, along with the loan proceeds from similar loans by ten affiliated partnerships representing $32 million in the aggregate, to acquire various real estate assets from Echelon International Corporation, an 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. As a result of an exchange transaction in 1997, the Partnership is the beneficial owner of 40,797 shares of Semele common stock and a beneficial interest in the Semele Note of $898,405. The Semele Note bears an annual interest rate of 10% and is scheduled to mature in April 2003. The note also requires mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre of land near Malibu, California. The exchange in 1997 involved the sale by five partnerships and certain other affiliates of their beneficial interests in three cargo vessels to Semele in exchange for cash, Semele common stock and the Semele Note. At the time of the transaction, Semele was a public company unaffiliated with the general partners and the partnerships. Subsequently, as part of the exchange transaction, Semele solicited the consent of its shareholders to, among other things, engage EFG to provide administrative services and to elect certain affiliates of EFG and the general partners as members of the board of directors. At that point, Semele became affiliated with EFG and the general partners. The maturity date of the Semele Note has been extended. Since the Semele Note was received as consideration for the sale of the cargo vessels to an unaffiliated party and the extension of the maturity of the Semele Note is documented in an amendment to the existing Semele Note and not as a new loan, the general partners of the owner partnerships do not consider the Semele Note to be within the prohibition in the Partnership Agreements against loans to or from the General Partner and its affiliates. Nonetheless, the extension of the maturity date might be construed to be the making of a loan to an affiliate of the General Partner in violation of the Partnership Agreements of the owner partnerships and to be a violation of the court's order with respect to New Investments that all other provisions of the Partnership Agreements shall remain in full force and effect. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", marketable equity securities classified as available-for-sale are carried at fair value. During the year ended December 31, 1999, the Partnership increase the carrying value of its investment in Semele common stock to $5.75 per share (the quoted price of the Semele stock on NASDAQ SmallCap Market at December 31, 1999), resulting in an unrealized gain of $66,295. At December 31, 2000, the Partnership decreased the carrying value of its investment in Semele common stock to $3.8125 per share (the quoted price of the Semele stock on NASDAQ Small Cap market at the date the stock traded closest to December 31, 2000), resulting in an unrealized loss of $79,044. The unrealized gain in 1999 and the unrealized loss in 2000 were each reported as a component of comprehensive income, included in the Statement of Changes in Partners' Capital. At both March 31, 2001 and December 31, 2001, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the carrying value of the Semele stock to its quoted price on the NASDAQ SmallCap market and OTC Bulletin Board, on the date the stock traded closest March 31, 2001 and December 31, 2001, respectively, for a total realized loss of $90,774 in 2001. The Semele Note and the Semele common stock are subject to a number of risks including, Semele's ability to make loan payments which is dependent upon the liquidity of Semele and primarily Semele's ability to sell or refinance its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The market value of the Partnership's investment in Semele common stock has generally declined since the Partnership's initial investment in 1997. In 1998 and 2001, the General Partner determined that the decline in market value of the stock was other-than-temporary and wrote down the Partnership's investment. Subsequent to December 31, 2001, the market value of the Semele common stock has remained relatively constant. The market value of the stock could decline in the future. Gary D. Engle, President and Chief Executive Officer of the general partner of EFG, and President and a Director of the General Partner, is Chairman and Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of the general partner of EFG is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. The Partnership obtained long-term financing in connection with certain equipment leases. The origination of such indebtedness and the subsequent repayments of principal are reported as components of financing activities on the accompanying Statements of Cash Flows. Each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental payments are collected, a portion or all of the rental payment is used to repay the associated indebtedness. In the future, the amount of cash used to repay debt obligations will decline as the principal balance of notes payable is reduced through the collection and application of rents. In addition, the Partnership has a balloon payment obligation as discussed below. In February 2001, the Partnership and certain affiliated investment programs (collectively, the "Programs") refinanced the outstanding indebtedness and accrued interest related to the aircraft on lease to Aerovias De Mexico, S.A. de C.V. In addition to refinancing the Programs' total existing indebtedness and accrued interest of $4,758,845, the Programs received additional debt proceeds of $3,400,177. The Partnership's aggregate share of the refinanced and new indebtedness was $1,174,165 including $684,845 used to repay the existing indebtedness on the refinanced aircraft. The Partnership used a portion of its share of the additional proceeds of $489,320 to repay the outstanding balance of the indebtedness and accrued interest related to the aircraft then on lease to Finnair OY of $126,782 and certain aircraft reconfiguration costs that the Partnership had accrued at December 31, 2000. The new indebtedness bears a fixed interest rate of 7.65%, principal is amortized monthly and the Partnership has a balloon payment obligation at the expiration of the lease term of $391,567 in September 2004. During the year ended December 31, 2000, the Partnership refinanced the indebtedness associated with the same aircraft and in addition to refinancing the existing indebtedness, received additional proceeds of $194,987. In June 2001, the Partnership and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Reno Programs executed a debt agreement with a new lender collateralized by the aircraft and assignment of the Aerovias de Mexico, S.A. de C.V. lease payments. The Reno Programs received debt proceeds of $5,316,482, of which the Partnership's share was $1,372,708. The Partnership used the new debt proceeds and a portion of certain other receipts from Reno to repay the outstanding balance of the existing indebtedness related to the aircraft of $1,437,109 and accrued interest and fees of $21,410. 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. In particular, the Partnership must contemplate the potential liquidity risks associated with its investment in commercial jet aircraft. The management and remarketing of aircraft can involve, among other things, significant costs and lengthy remarketing initiatives. Although the Partnership's lessees are required to maintain the aircraft during the period of lease contract, repair, maintenance, and/or refurbishment costs at lease expiration can be substantial. For example, an aircraft that is returned to the Partnership meeting minimum airworthiness standards, such as flight hours or engine cycles, nonetheless may require heavy maintenance in order to bring its engines, airframe and other hardware up to standards that will permit its prospective use in commercial air transportation. At December 31, 2001, the Partnership's equipment portfolio included ownership interests in four commercial jet aircraft, one of which is a Boeing 737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is prohibited from operating in the United States unless it is retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation Administration. During 2000, this aircraft was re-leased to Air Slovakia BWJ, Ltd., through September 2003. In January 2002 this lease was amended, which includes a revised lease expiration date of August 2002. The remaining three aircraft in the Partnership's portfolio already are Stage 3 compliant. Two of these aircraft have lease terms expiring in September 2004 and June 2005, respectively, and the third aircraft was returned to the General Partner upon its lease expiration in April 2001. Recent changes in the economic condition of the airline industry have adversely affected the demand for and market values for commercial jet aircraft. These changes could adversely affect the operations of the Partnership and the residual value of its commercial jet aircraft. Currently, all of the commercial jet aircraft in which the Partnership has a proportionate ownership interest are subject to contracted lease agreements except one McDonnell Douglas MD-82 aircraft, which was returned to the General Partner upon its lease expiration in April 2001. The General Partner is attempting to remarket this aircraft. Cash distributions to the General and Limited Partners had been declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is presented as a component of financing activities on the accompanying Statement of Cash Flows. No cash distributions were declared during the years ended December 31, 2001 and 2000. In any given year, it is possible that Limited Partners 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 Limited Partners adequate to cover any tax obligation. Cash distributions when paid to the Limited Partners 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 and the treatment of unrealized gains or losses on investment securities for book and tax purposes. 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. The proposed settlement to that lawsuit, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. 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 notes payable bear interest rates of 7.03% and 7.65%, and amortize monthly through September 2005. The fair market value of fixed interest rate on debt may be adversely impacted due to a decrease in interest rates. The effect of interest rate fluctuations on the Partnership for the year ended December 31, 2001 was not material. 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 $266,875, 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 $495,015 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 . 21 Statement of Financial Position at December 31, 2001 and 2000. . . . . . . . . . . . 22 Statement of Operations for the years ended December 31, 2001, 2000 and 1999 23 Statement of Changes in Partners' Capital for the years ended December 31, 2001, 2000 and 1999 24 Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999 25 Notes to the Financial Statements. . . . . . . . . . 26 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed. . . . . . . . 40 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings. . . . . . . . 41 Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required by Section 9.4 of the Amended and Restated Agreement and Certificate of Limited Partnership . . . . . . . . . . . . . . . . 42
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- To the Partners of American Income Fund I-D, a Massachusetts Limited Partnership: We have audited the accompanying balance sheets of American Income Fund I-D, a Massachusetts 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 Fund I-D, a Massachusetts 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 FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2001 AND 2000
2001 2000 ASSETS Cash and cash equivalents $ 2,604,913 $ 1,887,541 Rents receivable, net of allowance of $58,257 at December 31, 2001 128,745 170,594 Accounts receivable - other - 47,490 Accounts receivable - affiliate 50,494 111,179 Interest receivable - affiliate 22,644 - Prepaid expenses 1,468 - Interest receivable - loan, net of allowance of $495,015 at December 31, 2001 - 373,781 Loan receivable, net of allowance of $266,875 at December 31, 2001 2,783,125 3,050,000 Net investment in sales-type lease 23,549 318,788 Note receivable - affiliate 898,405 898,405 Investment securities - affiliate 77,514 155,539 Equipment at cost, net of accumulated depreciation of $6,019,430 and $5,321,963 at December 31, 2001 and 2000, respectively 5,327,815 6,321,888 ------------ ------------ Total assets $11,918,672 $13,335,205 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Notes payable $ 2,230,418 $ 2,492,344 Accrued interest 7,747 12,283 Accrued liabilities 651,469 573,250 Accrued liabilities - affiliate 124,726 24,120 Deferred rental income 3,496 46,084 ------------ ------------ Total liabilities 3,017,856 3,148,081 ------------ ------------ Partners' capital (deficit): General Partner (472,763) (408,447) Limited Partnership Interests (829,521.30 Units; initial purchase price of $25 each) 9,373,579 10,595,571 ------------ ------------ Total partners' capital 8,900,816 10,187,124 ------------ ------------ Total liabilities and partners' capital $11,918,672 $13,335,205 ============ ============
The accompanying notes are an integral part of these financial statements AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 INCOME Operating lease revenue $ 1,540,587 $1,472,283 $2,394,891 Sales-type lease revenue 17,781 3,304 - Interest income 98,929 132,167 214,250 Interest income - loan 121,234 373,781 - Interest income - affiliate 89,841 89,841 89,841 Gain on sale of equipment 15,146 278,019 426,450 ------------ ---------- ---------- Total income 1,883,518 2,349,395 3,125,432 ------------ ---------- ---------- EXPENSES Depreciation 670,073 719,145 1,119,242 Write-down of equipment 324,000 - - Interest expense 157,130 267,446 269,910 Equipment management fees - affiliate 87,396 70,654 113,344 Operating expenses - affiliate 1,091,312 755,876 504,547 Write-down of impaired loan and interest receivable 761,890 - - Write-down of investment securities - affiliate 90,774 - - ------------ ---------- ---------- Total expenses 3,182,575 1,813,121 2,007,043 ------------ ---------- ---------- Net income (loss) $(1,299,057) $ 536,274 $1,118,389 ============ ========== ========== Net income (loss) per limited partnership unit $ (1.49) $ 0.61 $ 1.28 ============ ========== ========== Cash distributions declared per limited partnership unit $ - $ - $ 0.75 ============ ========== ==========
The accompanying notes are an integral part of these financial statements AMERICAN INCOME FUND I-D, A MASSACHUSETTS 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 $(457,798) 829,521.30 $ 9,657,894 $ 9,200,096 Net income - 1999 55,919 - 1,062,470 1,118,389 Unrealized gain on investment securities - affiliate 3,315 - 62,980 66,295 ---------- ---------------- ------------ ------------ Comprehensive income 59,234 - 1,125,450 1,184,684 ---------- ---------------- ------------ ------------ Cash distributions declared (32,744) - (622,142) (654,886) ---------- ---------------- ------------ ------------ Balance at December 31, 1999 (431,308) 829,521 10,161,202 9,729,894 Net income - 2000 26,813 - 509,461 536,274 Unrealized loss on investment securities - affiliate (3,952) - (75,092) (79,044) ---------- ---------------- ------------ ------------ Comprehensive income 22,861 - 434,369 457,230 ---------- ---------------- ------------ ------------ Balance at December 31, 2000 (408,447) 829,521 10,595,571 10,187,124 Net loss - 2001 (64,953) - (1,234,104) (1,299,057) Less: Reclassification adjustment for write-down of investment securities - affiliate 637 - 12,112 12,749 ---------- ---------------- ------------ ------------ Comprehensive loss (64,316) - (1,221,992) (1,286,308) ---------- ---------------- ------------ ------------ Balance at December 31, 2001 $(472,763) 829,521.30 $ 9,373,579 $ 8,900,816 ========== ================ ============ ============
The accompanying notes are an integral part of these financial statements AMERICAN INCOME FUND I-D, A MASSACHUSETTS 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) $(1,299,057) $ 536,274 $ 1,118,389 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 670,073 719,145 1,119,242 Bad debt expense 58,257 - - Write-down of equipment 324,000 - - Sales-type lease revenue (17,781) (3,304) - Gain on sale of equipment (15,146) (278,019) (426,450) Write-down of impaired loan and interest receivable 761,890 - - Write-down of investment securities - affiliate 90,774 - - Changes in assets and liabilities: Rents receivable (16,408) (88,488) 177,321 Accounts receivable - other 47,490 (47,490) - Accounts receivable - affiliate 60,685 841 (48,954) Interest receivable - affiliate (22,644) - - Prepaid expenses (1,468) - - Interest receivable - loan (121,234) (373,781) - Collections on net investment in sales-type lease 313,020 78,169 - Accrued interest (4,536) (7,605) (12,376) Accrued liabilities 78,219 134,669 161,081 Accrued liabilities - affiliate 100,606 5,730 1,825 Deferred rental income (42,588) (22,233) 3,632 ------------ ------------ ------------ Net cash provided by operating activities 964,152 653,908 2,093,710 ------------ ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Proceeds from equipment sales 15,146 442,177 428,377 Loan receivable - (3,050,000) - ------------ ------------ ------------ Net cash provided by (used in) investing activities 15,146 (2,607,823) 428,377 ------------ ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Proceeds from notes payable 1,862,028 194,987 - Principal payments - notes payable (2,123,954) (566,927) (1,327,864) Distributions paid - (163,722) (654,886) ------------ ------------ ------------ Net cash used in financing activities (261,926) (535,662) (1,982,750) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 717,372 (2,489,577) 539,337 Cash and cash equivalents at beginning of year 1,887,541 4,377,118 3,837,781 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 2,604,913 $ 1,887,541 $ 4,377,118 ============ ============ ============ SUPPLEMENTAL INFORMATION Cash paid during the year for interest $ 161,666 $ 275,051 $ 282,286 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Equipment sold on sales-type lease $ - $ 393,653 $ - ============ ============ ============
See Note 6 to the financial statements regarding the carrying value of the Partnership's investment securities - affiliate. See Note 8 to the financial statements regarding the refinancing of one of the Partnership's notes payable in February 2001. The accompanying notes are an integral part of these financial statements AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS - --------------------------------------------------- American Income Fund I-D, a Massachusetts Limited Partnership, (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on May 30, 1991, 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 VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On August 30, 1991, the Partnership issued 829,521.30 units of limited partnership interest (the "Units") to 1,234 investors. Included in the 829,521.30 units were 1,572.30 bonus units. The Partnership's General Partner, AFG Leasing VI Incorporated, is a Massachusetts corporation formed in 1990 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 on August 30, 1991 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 Limited Partners and 5% to the General Partner. Under the terms of a Management Agreement between the Partnership and EFG, management services are provided by EFG to the Partnership at fees 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 Equipment Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were established in December 1994 by Mr. Engle for the sole purpose of acquiring the business of AFG. 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, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The majority of 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 from operating leases of $2,277,640 are due as follows:
For the year ending December 31, 2002 829,323 2003 687,734 2004 592,753 2005 167,830 ---------- . Total $2,277,640 ==========
Future minimum rents for operating leases does not include the operating leases for which the lease payments are based on the usage of the equipment leased. In June 2001, the Partnership and certain affiliated investment programs (collectively, the "Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. The Programs received an early termination fee of $840,000 and a payment of $400,000 for certain maintenance required under the existing lease agreement. The Partnership's share of the early termination fee was $216,888, which was recognized as operating lease revenue during the year ended December 31, 2001 and its share of the maintenance payment was $103,280, which is accrued as a maintenance obligation at December 31, 2001. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. The Programs are to receive rents of $6,240,000 over the lease term, of which the Partnership's share is $1,611,168. In January 2002, the Programs executed a lease amendment with the existing lessee, Air Slovakia BWJ Ltd. ("Air Slovakia") to restructure the lease of a Boeing 737 aircraft, which had been scheduled to expire in September 2003. In accordance with the lease amendment, the lease term was revised and the lease will terminate in August 2002. Lease payments for the sales-type lease are due monthly and the related revenue is recognized by a method which produces a constant periodic rate of return on the outstanding investment in the lease. Unearned income is recognized as sales-type lease revenue over the lease term using the interest method. Revenue from major individual lessees which accounted for 10% or more of total lease revenue during the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 -------- -------- -------- Aerovias De Mexico S.A. de C.V $496,408 $ -- $ -- Reno Air, Inc. . . . . . . . . $427,361 $466,002 $448,665 Finnair OY . . . . . . . . . . $ -- $336,157 $615,207 General Motors Corporation . . $ -- $218,994 $362,823 Southwest Airlines, Inc. . . . $ -- $ -- $504,986
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 aircraft and other equipment under lease as incurred. Generally, the costs of scheduled inspections and repairs and routine maintenance for aircraft and other equipment under lease are the responsibility of the lessee. For aircraft under lease, scheduled airframe inspections and repairs, such as "D checks", are generally the responsibility of the lessee. In certain situations, the Partnership may be responsible for reimbursing the lessee for a portion of such costs paid by the lessee prior to the redelivery date (i.e., the expiration of the lease term) or may be entitled to receive additional payments from the lessee based on the terms and conditions set forth in the lease arrangement which considers, among other things, the amount of time remaining until the next scheduled maintenance event. The Partnership records the amount payable or receivable, with a corresponding charge or credit to operations. Investment Securities - Affiliate - ------------------------------------ The Partnership's investment in Semele Group Inc. ("Semele") is considered to be available-for-sale and as such is carried at fair value with unrealized gains and losses reported as a separate component of partners' capital. Other-than-temporary declines in market value are recorded as write-down of investment in the Statement of Operations. Unrealized gains or losses on the Partnership's available-for-sale securities, are required to be included in comprehensive income (loss). 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 loans' 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. Net Investment in Sales-Type Lease - -------------------------------------- For leases that qualify as sales-type leases, the Partnership recognizes profit or loss at lease inception to the extent the fair value of the property leased differs from the carrying value. For balance sheet purposes, the aggregate lease payments receivable are recorded on the balance sheet net of unearned income as net investment in sales-type lease. Unearned income is recognized as sales-type lease revenue over the lease term on the interest method. 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 $496,000 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 $316,000 of 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 during 2001, 2000 and 1999, respectively. See Note 10 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, 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 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. See Note 10 concerning the Revised Settlement and the proposed liquidation of assets and dissolution of the Partnership. 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 Limited Partners and 5% to the General Partner). See Note 9 for allocation of income or loss for income tax purposes. Accumulated Other Comprehensive Income (Loss) - ------------------------------------------------- Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," effective in 1998, requires the disclosure of comprehensive income (loss) to reflect changes in partners' capital that result from transactions and economic events from non-owner sources. Accumulated other comprehensive income (loss) for the years ended December 31, 2001, 2000 and 1999 represents the Partnership's unrealized gains (losses) on the investment in Semele:
2001 2000 1999 --------- --------- ------- Beginning balance $(12,749) $ 66,295 $ - Adjustments related to the Partnership's investment in Semele 12,749 (79,044) 66,295 --------- --------- ------- Ending balance $ -- $(12,749) $66,295 ========= ========= =======
Net Income (Loss) and Cash Distributions Per Unit - -------------------------------------------------------- Net income (loss) and cash distributions per Unit are based on 829,521.30 Units outstanding during each of the three years in the period ended December 31, 2001 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 and is presented as a range when more than one lease agreement is contained in the stated equipment category. 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 - --------------------------------------------- ----------- ------------ --------------------- Aircraft 0-42 $ 8,384,248 Foreign Trailers/intermodal containers. . . . . . . . 12-18 2,028,929 CA/OK Materials handling. . . . . . . . . . . . . . 0 836,986 CA/IA/IL/IN/MI/MO/NC/ . . NV/NY/OH/PA/SC Furniture and fixtures. . . . . . . . . . . . 0 97,082 NY ------------ Total equipment cost . . . . . . . . . . . - 11,347,245 Accumulated depreciation . - (6,019,430) ------------ Equipment, net of accumulated depreciation - $ 5,327,815 ============
In certain cases, the cost of the Partnership's equipment represents a proportionate ownership interest. The remaining interests are owned by EFG or an affiliated equipment leasing program sponsored by EFG. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. 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. At December 31, 2001, the Partnership's equipment portfolio included equipment having a proportionate original cost of approximately $10,413,000, representing approximately 92% of total equipment cost. Certain of the equipment and related lease payment streams were used to secure term loans with third-party lenders. The preceding summary of equipment includes leveraged equipment having an original cost of approximately $5,522,000 and a net book value of approximately $3,841,000 at December 31, 2001. 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. The summary above includes equipment held for re-lease or sale with an original cost of approximately $2,014,000 and a net book value of $907,000 at December 31, 2001, which represents the McDonnell Douglas MD-82 aircraft returned in April 2001. The General Partner is actively seeking the sale or re-lease of all equipment not on lease. The Partnership accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which was issued in March 1995. SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the assets may not be recoverable from undiscounted future cash flows. During the year ended December 31, 2001, the Partnership recorded a write-down of equipment, representing an impairment to the carrying value of the Partnership's interest in the McDonnell Douglas MD-82 aircraft discussed above. The resulting charge of $324,000 was based on a comparison of estimated fair value and carrying value of the Partnership's interest in the aircraft. NOTE 4 - LOAN RECEIVABLE - ---------------------------- On March 8, 2000, the Exchange Partnerships collectively loaned $32 million to 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 $3,050,000. 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, an unrelated 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 $266,875, 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 $495,015 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 $761,890 is recorded as write-down of impaired loan and interest receivable 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 - NET INVESTMENT IN SALES-TYPE LEASE - -------------------------------------------------- The Partnership's net investment in a sales-type lease is the result of the conditional sale of the Partnership's proportionate interest in a Boeing 737 aircraft executed in October 2000. The title to the aircraft was to transfer to Royal Aviation Inc., at the expiration of the lease term. The sale of the aircraft was recorded by the Partnership as a sales-type lease, with a lease term expiring in January 2002. For the year ended December 31, 2000, the Partnership recorded a net gain on sale of equipment, for financial statement purposes, of $121,333 for the Partnership's proportional interest in the aircraft and recognized sales-type lease revenue of $17,781 and $3,304 for the years ended December 31, 2001 and 2000, respectively. The net book value of equipment sold on the sales-type lease totaled $393,653, which was a non-cash transaction. The components of the net investment in the sales-type lease are as follows:
Total minimum lease payments to be received $26,085 Less: Unearned income . . . . . . . . . . . . 2,536 ------- Net investment in sales-type lease $23,549 =======
Unearned income is being amortized to revenue over the lease term, expiring in January 2002. In the fourth quarter of 2001, Royal Aviation Inc. declared bankruptcy and as a result, has defaulted on this conditional sales agreement. The General Partner is negotiating for the return of the aircraft. As of December 31, 2001, no allowance on the investment in sales-type lease was deemed necessary based on the comparison of estimated fair value of the Partnership's interest in the aircraft and the Partnership's net investment in the sales-type lease. NOTE 6 - INVESTMENT SECURITIES - AFFILIATE AND NOTE RECEIVABLE - AFFILIATE - -------------------------------------------------------------------------------- As a result of an exchange transaction in 1997, the Partnership is the beneficial owner of 40,797 shares of Semele common stock. The Partnership also received a beneficial interest in a note receivable from Semele ("the Semele Note") of $898,405 in connection with the exchange. The exchange in 1997 involved the sale by five partnerships and certain other affiliates of their beneficial interests in three cargo vessels to Semele in exchange for cash, Semele common stock and the Semele Note. At the time of the transaction, Semele was a public company unaffiliated with the general partners and the partnerships. Subsequently, as part of the exchange transaction, Semele solicited the consent of its shareholders to, among other things, engage EFG to provide administrative services and to elect certain affiliates of EFG and the general partners as members of the board of directors. See Note 7. At that point, Semele became affiliated with EFG and the general partners. The maturity date of the Semele Note has been extended. Since the Semele Note was received as consideration for the sale of the cargo vessels to an unaffiliated party and the extension of the maturity of the Semele Note is documented in an amendment to the existing Semele Note and not as a new loan, the general partners of the owner partnerships do not consider the Semele Note to be within the prohibition in the Partnership Agreements against loans to or from the General Partner and its affiliates. Nonetheless, the extension of the maturity date might be construed to be the making of a loan to an affiliate of the General Partner in violation of the Partnership Agreements of the owner partnerships and to be a violation of the court's order with respect to New Investments that all other provisions of the Partnership Agreements shall remain in full force and effect. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1999, the Partnership increased the carrying value of its investment in Semele common stock to $5.75 per share (the quoted price of the Semele stock on NASDAQ Small Cap market at December 31, 1999), resulting in an unrealized gain of $66,295. At December 31, 2000, the Partnership decreased the carrying value of its investment in Semele common stock to $3.8125 per share (the quoted price of the Semele stock on NASDAQ Small Cap market at the date the stock traded closest to December 31, 2000), resulting in an unrealized loss of $79,044. The unrealized gain in 1999 and the unrealized loss in 2000 were each reported as a component of comprehensive income, included in the Statement of Changes in Participants' Capital. At both March 31, 2001 and December 31, 2001, the General Partner determined that the decline in market value of its Semele common stock was other-than-temporary. As a result, on March 31, 2001, the Partnership wrote down the carrying value of the Semele common stock to $3.3125 per share (the quoted price of the Semele stock on the NASDAQ SmallCap Market on the date the stock traded closest to March 31, 2001). At December 31, 2001, the Partnership again wrote down the carrying value of the Semele common stock to $1.90 per share (the quoted price of Semele stock on OTC Bulletin Board on the date the stock traded closest to December 31, 2001), resulting in a total realized loss of $90,774 for 2001. The Semele Note bears an annual interest rate of 10% and is scheduled to mature in April 2003. The note also requires mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre of land near Malibu, California. The Partnership recognized interest income related to the Semele Note of $89,841 in each of the years ended December 31, 2001, 2000 and 1999. NOTE 7 - 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 . . . $ 87,396 $ 70,654 $113,344 Administrative charges. . . . . 90,321 135,849 118,693 Reimbursable operating expenses due to third parties . . . . 1,000,991 620,027 385,854 ---------- -------- -------- Total. . . . . . . . . . . . . $1,178,708 $826,530 $617,891 ========== ======== ========
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 revenues received by the Partnership. Both acquisition and management fees are subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. All equipment was acquired from EFG, one of its affiliates, including other equipment leasing programs sponsored by EFG, 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 either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 2001, the Partnership was owed $50,494 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 35,049 4.23% - ---------------------------------------- ----------- ------------------ Old North Capital Limited Partnership 1,511 0.18% - ---------------------------------------- ----------- ------------------
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 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 Chief Executive Officer of Semele and President, Chief Executive Officer, sole shareholder and Director of EFG's general partner. James A. Coyne, Executive Vice President of the general partner of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. NOTE 8 - NOTES PAYABLE - -------------------------- Notes payable at December 31, 2001 consisted of two installment notes totaling $2,230,418 payable to banks and institutional lenders which bear an interest rate of either 7.03% or 7.65%. Both of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments. The installment notes amortize monthly and in addition, the Partnership has a balloon payment obligation at the expiration of the lease term related to one of the two aircraft leased to Aerovias de Mexico, S.A. de C.V. of 391,567 in September 2004. In February 2001, the Partnership and certain affiliated investment programs (collectively "the Programs") refinanced the outstanding indebtedness and accrued interest related to the aircraft on lease to Aerovias de Mexico, S.A. de C.V. In addition to refinancing the Programs' total existing indebtedness and accrued interest of $4,758,845, the Programs received additional debt proceeds of $3,400,177. The Partnership's aggregate share of the refinanced and new indebtedness was $1,174,165 including $684,845 used to repay the existing indebtedness on the refinanced aircraft. The Partnership used a portion of its share of the additional proceeds of $489,320 to repay the outstanding balance of the indebtedness and accrued interest related to the aircraft on lease to Finnair OY of $126,782 and certain aircraft reconfiguration costs that the Partnership had accrued at December 31, 2000. In June 2001, the Partnership and certain affiliated investment programs (collectively, the "Reno Programs") executed an agreement with the existing lessee, Reno Air, Inc. ("Reno"), to early terminate the lease of a McDonnell Douglas MD-87 aircraft that had been scheduled to expire in January 2003. Coincident with the termination of the Reno lease, the aircraft was re-leased to Aerovias de Mexico, S.A. de C.V. for a term of four years. (See Note 2 - Revenue Recognition). The Reno Programs executed a debt agreement with a new lender collateralized by the aircraft and assignment of the Aerovias de Mexico, S.A. de C.V. lease payments. The Reno Programs received debt proceeds of $5,316,482, of which the Partnership's share was $1,372,708. The Partnership used the new debt proceeds and a portion of certain other receipts from Reno to repay the outstanding balance of the existing indebtedness related to the aircraft of $1,437,109 and accrued interest and fees of $21,410. Management believes that the carrying amount of notes payable approximates fair value at December 31, 2001 based on its experience and understanding of the market for instruments with similar terms. The annual maturities of the notes payable are as follows:
For the year ending December 31, 2002 $ 543,582 2003 582,871 2004 932,346 2005 171,619 ---------- . Total $2,230,418 ==========
NOTE 9 - 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 Limited Partners 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 account balance. The following is a reconciliation between net income (loss) reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ------------ --------- ----------- Net income (loss) . . . . . . . . . . . . . . . . $(1,299,057) $536,274 $1,118,389 Write-down of loan receivable. . . . . . . . . . 266,875 -- -- Bad debt expense . 58,257 -- -- Write-down of investment securities - affiliate. . . . . . . . . . . . . . . . 90,774 -- -- Financial statement depreciation in excess of (less than) tax depreciation. (47,066) 183,187 (482,989) Deferred rental income . . . . . . . . . . . . . (42,588) (22,233) 3,632 Other. . . . . . . . . . . . . . . . . . . . . . 27,486 85,282 9,472 ------------ --------- ----------- Net income (loss) for federal income tax reporting purposes . . . . . . . . . . . . . . . $ (945,319) $782,510 $ 648,504 ============ ========= ===========
The principal component of "Other" consists of the difference between the tax - -------------------------------------------------------------------------------- and financial statement gain or 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. . . . . . . . . . . . . . . . . . . . . . $ 8,900,816 $10,187,124 Add back selling commissions and organization and offering costs . . . . . . . . . . . . . . . . . . . 2,323,619 2,323,619 Unrealized loss on investment securities - affiliate. . . . -- 12,749 Cumulative difference between federal income tax and financial statement income (loss). . . . . . . . . . (3,389,010) (3,742,748) ------------ ------------ Partners' capital for federal income tax reporting purposes. $ 7,835,425 $ 8,780,744 ============ ============
Unrealized gain on investment securities and cumulative difference between - -------------------------------------------------------------------------------- federal income tax and financial statement income (loss) represent timing - -------------------------------------------------------------------------------- differences. - ------------ NOTE 10 - LEGAL PROCEEDINGS - ------------------------------- In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned Leonard Rosenblum, et al. v. Equis Financial Group -------------------------------------------------- Limited Partnership, et al., in the United States District Court for the - ----------------------------- Southern District of Florida (the "Court") on behalf of a proposed class of - ------- investors in 28 equipment leasing programs sponsored by EFG, including the - ---- Partnership (collectively, the "Nominal Defendants"), against EFG and a number - ---- of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis - - ---------------------------------- Financial Group Limited Partnership, et al., in the Superior Court of the - ----------------------------------------------- Commonwealth of Massachusetts on behalf of the Nominal Defendants against the - ------ Defendants. Both actions are referred to herein collectively as the "Class - -- Action Lawsuit". - -- The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On 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 $496,000, of which approximately $316,000 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. NOTE 11 - 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 operating and sales-type lease revenue. $ 383,288 $ 553,150 $ 332,797 $ 289,133 $ 1,558,368 Net income (loss) . . . . . . . . . . . . . . 181,224 (970,714) (268,510) (241,057) (1,299,057) Net income (loss) per limited partnership unit. . . . . . . . . . 0.21 (1.11) (0.31) (0.28) (1.49) 2000 ---------- Total operating and sales-type lease revenue. $ 355,850 $ 373,877 $ 324,219 $ 421,641 $ 1,475,587 Net income (loss) . . . . . . . . . . . . . . 85,934 228,591 (51,803) 273,552 536,274 Net income (loss) per limited partnership unit. . . . . . . . . . 0.10 0.26 (0.06) 0.31 0.61
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 and a write-down of equipment of $761,890 and $280,000, respectively. 54 ADDITIONAL FINANCIAL INFORMATION AMERICAN INCOME FUND I-D, A MASSACHUSETTS 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 revenue, 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 $395,791 $3,268,440 $2,730,799 Sale proceeds realized upon disposition of equipment 15,146 442,177 428,377 -------- ---------- ---------- Total cash generated from rents and equipment sale proceeds 410,937 3,710,617 3,159,176 Original acquisition cost of equipment disposed 296,606 2,925,539 2,082,078 -------- ---------- ---------- Excess of total cash generated to cost of equipment disposed $114,331 $ 785,078 $1,077,098 ======== ========== ==========
AMERICAN INCOME FUND I-D, A MASSACHUSETTS 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) $(1,314,203) $ 15,146 $(1,299,057) Add: Depreciation 670,073 - 670,073 Collections on investment in sales-type lease 313,020 - 313,020 Bad debt expense 58,257 - 58,257 Write-down of equipment 324,000 - 324,000 Management fees 87,396 - 87,396 Write-down of impaired loan and interest receivable 761,890 - 761,890 Write-down of investment securities - affiliate 90,774 - 90,774 Book value of disposed equipment - - - Less: Sales-type lease revenue (17,781) - (17,781) Principal reduction of notes payable (2,123,954) - (2,123,954) ------------ ------------- ------------ Cash from operations, sales and refinancings (1,150,528) 15,146 (1,135,382) Less: Management fees (87,396) - (87,396) ------------ ------------- ------------ Distributable cash from operations, sales and refinancings (1,237,924) 15,146 (1,222,778) Other sources and uses of cash: Cash and cash equivalents at beginning of year 1,887,541 - 1,887,541 Net change in receivables and accruals 78,122 - 78,122 Net proceeds from notes payable refinancing - 1,862,028 1,862,028 ------------ ------------- ------------ Cash and cash equivalents at end of year $ 727,739 $ 1,877,174 $ 2,604,913 ============ ============= ============
AMERICAN INCOME FUND I-D, A MASSACHUSETTS LIMITED PARTNERSHIP SCHEDULE OF COSTS REIMBURSED TO THE GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED BY SECTION 9.4 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 $ 912,487 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 VI 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 1990 and - -------------------------------------------------------------------------------- also served as its President from 1990 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 1998. Ms. Ofgant 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 9.4(c) of the Restated Agreement, as amended, the Partnership incurs a monthly charge for personnel costs of the Manager for persons engaged in providing administrative services to the Partnership. A description of the remuneration paid by the Partnership to the Manager for such services is included in Item 13 herein, and in Note 7 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 securities outstanding possessing traditional voting rights. However, as provided in Section 10.2(a) of the Restated Agreement, as amended (subject to Sections 10.2(b) and 10.3), a majority interest of the Limited Partners has voting rights with respect to: 1. Amendment of the Restated Agreement; 2. Termination of the Partnership; 3. Removal of the General Partner; and 4. Approval or disapproval of the sale of all, or substantially all, of the assets of the Partnership (except in the orderly liquidation of the Partnership upon its termination and dissolution). No person or group is known by the General Partner to own beneficially more than 5% of the Partnership's 829,521.30 outstanding Units as of March 15, 2002. 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 VI 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 . . . $ 87,396 $ 70,654 $113,344 Administrative charges. . . . . 90,321 135,849 118,693 Reimbursable operating expenses due to third parties . . . . 1,000,991 620,027 385,854 ---------- -------- -------- Total $1,178,708 $826,530 $617,891 ========== ======== ========
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 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. All 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. As a result of an exchange in 1997, the Partnership is the beneficial owner of 40,797 shares of Semele common stock and holds a beneficial interest in a note from Semele (the "Semele Note") of $898,405. The Semele Note matures in April 2003 and bears an annual interest rate of 10% with mandatory principal reductions prior to maturity, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. For further discussion, see Note 6, "Investment Securities - Affiliate and Note Receivable - Affiliate to the financial statements included in Item 8 herein and Item 10. Management believes fair value of the Semele Note approximates its carrying value. The exchange in 1997 involved the sale by five partnerships and certain other affiliates of their beneficial interests in three cargo vessels to Semele in exchange for cash, Semele common stock and the Semele Note. At the time of the transaction, Semele was a public company unaffiliated with the general partners and the partnerships. Subsequently, as part of the exchange transaction, Semele solicited the consent of its shareholders to, among other things, engage EFG to provide administrative services and to elect certain affiliates of EFG and the general partners as members of the board of directors. At that point, Semele became affiliated with EFG and the general partners. The maturity date of the Semele Note has been extended. Since the Semele Note was received as consideration for the sale of the cargo vessels to an unaffiliated party and the extension of the maturity of the Semele Note is documented in an amendment to the existing Semele Note and not as a new loan, the general partners of the owner partnerships do not consider the Semele Note to be within the prohibition in the Partnership Agreements against loans to or from the General Partner and its affiliates. Nonetheless, the extension of the maturity date might be construed to be the making of a loan to an affiliate of the General Partner in violation of the Partnership Agreements of the owner partnerships and to be a violation of the court's order with respect to New Investments that all other provisions of the Partnership Agreements shall remain in full force and effect. All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 2001, the Partnership was owed $50,494 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 35,049 4.23% - ---------------------------------------- ----------- ------------------ Old North Capital Limited Partnership 1,511 0.18% - ---------------------------------------- ----------- ------------------
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, of AALP and the limited partnership interests in ONC are owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele, President and Chief Executive Officer of the general partner of EFG and sole shareholder and Director of EFG's general partner. James A. Coyne, Executive Vice President of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. The discussions of the loan to Echelon Residential Holdings in Items 1(b) and 1(c) above are incorporated herein by reference. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Partnership None. (d) Transactions with Promoters Not applicable. 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 rents receivable - --------------------------------- Balance at December 31, 2000 $ - Additions to allowance 58,257 -------- Balance at December 31, 2001 $ 58,257 ======== Allowance for interest receivable - --------------------------------- Balance at December 31, 2000 $ - Additions to allowance 495,015 -------- Balance at December 31, 2001 $495,015 ======== Allowance for loan receivable - --------------------------------- Balance at December 31, 2000 $ - Additions to allowance 266,875 -------- Balance at December 31, 2001 $266,875 ========
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, was included in Registration Statement on Form S-1 (No. 33-35148) and is incorporated herein by reference. 10.1 Promissory Note in the principal amount of $3,050,000 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. 10.3 Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II), dated May 31, 1997 was filed as in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 10.3 and is incorporated herein by reference. 10.4 The First Allonge to Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II), dated March 21, 2000 was filed as in the Registrant's Annual Report on Form 10-K for the year ended December 31,2000 as Exhibit 10.4 and is incorporated herein by reference. 10.5 The Second Allonge to Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II), dated March 12, 2001 was filed as in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 10.5 and is incorporated herein by reference. 99(a) Lease agreement with General Motors Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (d) and is incorporated herein by reference. 99(b) Lease agreement with General Motors Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (e) and is incorporated herein by reference. 99(c) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (f) and is incorporated herein by reference. 99(d) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (g) and is incorporated herein by reference. 99(e) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (h) and is incorporated herein by reference. 99(f) Lease agreement with Finnair OY, was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (i) and is incorporated herein by reference. 99(g) Lease agreement with Finnair OY, was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (j) and is incorporated herein by reference. 99(h) Lease agreement with Reno Air, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (k) and is incorporated herein by reference. 99(i) Lease agreement with Trans Ocean Container Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31,1998 as Exhibit 99 (j) and is incorporated herein by reference. 99(j) Lease agreement with Air Slovakia BWJ, Ltd. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 99 (j) and is incorporated herein by reference. 99(k) Lease agreement with Aerovias de Mexico, S.A. de C.V. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 99 (k) and is incorporated herein by reference. 99(l) Aircraft Conditional Sale agreement with Royal Aviation Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 99 (l) and is incorporated herein by reference. 99 (m) Lease agreement with Aerovias De Mexico, S.A. de C.V. was filed in the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2001 as Exhibit 1 and is incorporated herein by reference. 99 (n) Lease agreement with Air Slovakia BWJ, Ltd. is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 as Exhibit 99 (n) and is included herein. (b) Reports on Form 8-K None. (c) Other Exhibits None. (d) Financial Statement Schedules: Consolidated Financial Statements for Echelon Residential Holdings LLC as of December 31, 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 FUND I-D, a Massachusetts Limited Partnership By: AFG Leasing VI 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 ------------ 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 EX-99 6 doc5.txt Exhibit 99(n) Side Letter to Lease Agreement Air Slovakia / Wells Fargo Boeing 737-200A / MSN 21722 / OM-ERA Page Slovakia Lease.doc SIDE LETTER TO LEASE AGREEMENT ------------------------------ THIS SIDE LETTER TO LEASE AGREEMENT (this "SIDE LETTER") is made as of ----------- January 6, 2002 by and between WELLS FARGO BANK NORTHWEST, N.A. (formerly known as First Security Bank, National Association), not in its individual capacity except as expressly set forth herein, but solely as trustee for the benefit of the Beneficiaries pursuant to the Trust Agreement (in such capacity, the "LESSOR", and in its individual capacity, "WELLS FARGO") and AIR SLOVAKIA BWJ, ----------- LTD, a corporation incorporated pursuant to the laws of The Slovak Republic ("LESSEE"). ---- RECITALS Side Letter to Lease Agreement Air Slovakia / Wells Fargo Boeing 737-200A / MSN 21722 / OM-ERA Page Slovakia Lease.doc A. Lessee and Lessor have previously entered into that certain Lease Agreement 21722 dated August 31, 2000, as supplemented by that certain Certificate of Acceptance dated September 6, 2000, that certain Certificate of Delivery Condition, dated September 6, 2000, that certain Letter Agreement dated January 4, 2001, and that certain Letter Agreement dated June 6, 2001 (collectively, the "LEASE"). ----- B. Pursuant to the Lease, Lessee is currently leasing from Lessor one (1) used Boeing model 737-200A aircraft bearing manufacturer's serial number 21722 and Slovakian registration mark OM-ERA, together with two (2) installed Pratt & Whitney JT8D-9A engines bearing manufacturer's serial number 707430 and 665325 (collectively, the "AIRCRAFT"). -------- C. Lessor and Lessee now desire to record certain agreements with respect to the Lease and the contemplated transfer of title of the Aircraft by Lessor to Lessee. AGREEMENT 1. DEFINITIONS. Capitalized terms not otherwise defined herein shall have ----------- the meanings given to them in the Lease. 2. TERM-OUT PERIOD. Subject to the terms and conditions of this Side ---------------- Letter, Lessee and Lessor have agreed to abate the Basic Rent due from Lessee to Lessor for the period commencing on January 6, 2002 and ending August 6, 2002 ("TERM-OUT PERIOD"), and in its place, Lessee will pay the following ---------------- amounts to Lessor (collectively, the "TERM-OUT PAYMENTS"): ------------------
DUE DATE TERM-OUT PAYMENT ======================== ================ January 6, 2002 US$25,000 ======================== ================ February 6, 2002 US$30,000 - ------------------------ ---------------- March 6, 2002 US$35,000 - ------------------------ ---------------- April 6, 2002 US$70,000 - ------------------------ ---------------- May 6, 2002 US$75,000 - ------------------------ ---------------- June 6, 2002 US$93,000 - ------------------------ ---------------- July 6, 2002 US$93,000 - ------------------------ ---------------- August 6, 2002 US$94,417 - ------------------------ ---------------- TOTAL TERM-OUT PAYMENTS: US$515,417 - ------------------------ ----------------
3. ADDITIONAL RENT. Lessor and Lessee agree that throughout the Term-Out ---------------- Period, Lessee shall continue to pay Additional Rent in accordance with the terms of the Lease. Notwithstanding the foregoing, Lessee and Lessor both acknowledge and agree that Lessee shall not be entitled to any reimbursement of any Additional Rent previously paid by Lessee during the Term of the Lease or paid by Lessee during the Term-Out Period, as the case may be. 4. LEASE TERMINATION AND TRANSFER OF TITLE. So long as Lessor has received ---------------------------------------- all of the Term-Out Payments on the respective due date as set forth in Section 2 hereof (or as a result of Lessee exercising its Prepayment Option as contemplated in Section 5 hereof) and so long as all of the other conditions of this Side Letter have been met, Lessor shall transfer title of the Aircraft to Lessee subject to the following: a. Closing. On the date of title transfer (the "CLOSING DATE") Lessor and ------- ------------ Lessee agree to terminate the Lease by executing the Lease Termination Agreement in the form set forth as Exhibit A hereto (the "LEASE TERMINATION ---------- ----------------- AGREEMENT"), and Lessor will convey to Lessee by Bill of Sale, in the form set forth as Exhibit B hereto (the "BILL OF SALE"), all of Lessor's right, title and --------- ------------ interest in the Aircraft to Lessee, in accordance with the terms of this Side Letter. b. ClosingProcedures. On or prior to the Closing Date: ----------------- (i) Lessee shall deliver to Lessor the documents listed in Section 8(b) hereof; (ii) Lessor shall deliver to Lessee the documents listed in Section 8(a) hereof; (iii) Lessor shall have received all of the Term-Out Payments from Lessee; and (iv) Lessee shall have directed Lessor to retain, and shall have released all of Lessee's right, title and interest in and to, (a) all Security Deposit amounts held by Lessor as of the Closing Date; (b) all Additional Rent held by Lessor as of December 31, 2001 (total of US$206,906); and (c) up to US$75,000 of the Additional Rent paid by Lessee to Lessor during the Term-Out Period, with any Additional Rent in excess of US$75,000 to be returned to Lessee following the transfer of title as contemplated herein. 5. PREPAYMENT OPTION. During the Term-Out Period and subject to the terms ------------------ hereof, Lessee, at its option, shall have the right to prepay the then remaining Term-Out Payments and thus accelerate the Closing Date to the date that such prepayment is made (the "Prepayment Option"). Lessor and Lessee acknowledge that a 10% interest factor was used to calculate the specific Term-Out Payment amounts set forth in Section 2 hereof, and further agree that should Lessee elect to exercise this Prepayment Option, Lessee and Lessor shall recalculate the final amount due by adding together the remaining Term-Out Payment amounts and deducting therefrom the appropriate interest amount based upon the actual Closing Date. In order to exercise this Prepayment Option, Lessee must: a. provide Lessor with no less than thirty (30) Business Days' notice of its intention to prepay any remaining Term-Out Payments; and b. not be in default under any of the terms of the Lease or this Side Letter, including but not limited to Lessee having paid to Lessor all of the Additional Rent payments due to Lessor during the Term-Out Period. Lessee and Lessor further acknowledge and agree that this Prepayment Option shall become null and void in the event Lessor shall terminate this Side Letter in accordance with Section 9 hereof. 6. POSSESSION OF AIRCRAFT ANDCONDITION. Lessee acknowledges that it is the ------------------------------------ current operator of the Aircraft and currently has possession of the Aircraft and the Aircraft Documents. Lessee accepts in all respects the condition of the Aircraft and Aircraft Documents. Risk of loss and damage to or destruction of the Aircraft and Aircraft Documents shall remain with the Lessee from and after the Closing Date. On the Closing Date, the Aircraft shall be transferred to Lessee, "AS IS, WHERE IS", and LESSOR HEREBY DISCLAIMS AND LESSEE HEREBY WAIVES ANY AND ALL REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY, AND ANY WARRANTY ARISING FROM COURSE OF PERFORMANCE OR DEALING OR USAGE OF TRADE, AND ALL OBLIGATION AND LIABILITY IN TORT, NEGLIGENCE AND STRICT LIABILITY, AND AS TO THE AIRWORTHINESS, CONDITION, DESIGN OR OPERATION OF THE AIRCRAFT OR ANY PART THEREOF OR THE CONDITION AND THE COMPLETENESS OF THE AIRCRAFT DOCUMENTS AND RECORDS, AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH WARRANTY, OBLIGATION OR LIABILITY. IN NO EVENT WILL LESSOR BE LIABLE HEREUNDER FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES, INCLUDING BUT NOT LIMITED TO THOSE FOR LOSS OR INTERRUPTION OF USE, REVENUE, PROFIT OR BUSINESS. 7. REPRESENTATIONS AND WARRANTIES. -------------------------------- a. Representations and Warranties of Wells Fargo/Lessor. Wells Fargo --------------------------------------------------------- represents and warrants with respect to Sections 7(a)(i), (iii) and (iv) and Lessor represents and warrants that: (i) Wells Fargo is duly organized and validly existing national banking association under the federal banking laws of the United States of America and has the power and authority to carry on its trust business as presently conducted and to perform its obligations under the Trust Agreement, and this Side Letter has been duly authorized by all necessary trust action on the part of Lessor and does not require any approval of the Lessor that has not bee obtained; (ii) Lessor has full trust power and authority to carry on its business as presently conducted and to execute, deliver and perform its obligations under each of (a) this Side Letter; (b) the Lease Termination Agreement; and (c) the Bill of Sale (collectively, the "TRANSACTION DOCUMENTS") and each of such ---------------------- Transaction Documents has been duly authorized by all necessary action under the Trust Agreement; (iii) the execution, delivery and performance of the Transaction Documents to which it is a party and the consummation of the transactions contemplated thereby have been duly authorized by all necessary trust action of Lessor; (iv) assuming the validity of execution and delivery by any other parties thereto, the Transaction Documents executed and delivered by each of Lessor and Wells Fargo constitute legal, valid and binding obligations of Lessor and Wells Fargo enforceable in accordance with their respective terms except to the extent that such enforceability may be limited by bankruptcy, insolvency or similar laws respecting creditors' rights generally and general principles of equity; (v) the execution and delivery of, the performance of its obligations under, and compliance with the provisions of, the Transaction Documents by Lessor and Wells Fargo will in no way exceed the powers granted to Lessor and Wells Fargo by or violate in any respect any provision of, or cause a breach or default of: (1) law or regulation or any order or decree of any governmental authority, agency or court or generally accepted interpretation thereof or any judgment, decree or permit to which Lessor or Wells Fargo is subject; or (2) the Articles of Association or by-laws of Wells Fargo or the Trust Agreement; or (3) any material mortgage, contract or agreement to which Lessor or Wells Fargo is a party; (vi) there are no pending or, to the knowledge of Lessor, threatened actions or proceedings against Lessor before any court, arbitrator or administrative agency which, if adversely determined would materially adversely affect the ability of Lessor to perform its obligations under this Side Letter or any other Transaction Documents to which it is a party. b. Representations andWarranties of Lessee. Lessee represents and warrants ---------------------------------------- that: (i) it is a duly organized and a validly existing corporation under the laws of the Republic of Slovakia and it has the power and authority to execute and deliver the Transaction Documents to which it is a party and perform its obligations thereunder; (ii) the execution, delivery and performance of the Transaction Documents to which it is a party and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate and other action of Lessee; (iii) assuming the validity of execution and delivery by any other parties thereof, the Transaction Documents executed and delivered by Lessee constitute legal, valid and binding obligations of Lessee enforceable in accordance with their respective terms except to the extent that such enforceability may be limited by bankruptcy, insolvency or similar laws respecting creditors' rights generally and general principles of equity; (iv) the execution and delivery of, the performance of its obligations under, and compliance with the provisions of, the Transaction Documents by Lessee will in no way exceed the powers granted to Lessee by, or violate in any respect any provision of, or cause a breach or default of: (1) any law or regulation or any order or decree of any governmental authority, agency or court or generally accepted interpretation thereof or any judgment, decree or permit to which Lessee is subject; or (2) the Certificate of Incorporation or by-laws of Lessee or any resolution of the directors or shareholder of Lessee; or (3) any material mortgage, contract or other agreements to which Lessee is a party; (v) there are no pending or, to the knowledge of Lessee, threatened actions or proceedings against Lessee before any court, arbitrator or administrative agency which, if adversely determined, would materially adversely affect the ability of Lessee to perform its obligation under this Side Letter or any of the other Transaction Documents to which it is a party; (vi) the execution, delivery and performance by Lessee of the Transaction Documents to which it is a party do not require the consent, approval, order or authorization of, the giving of notice to, the registration with or the taking of any other action in respect of any governmental body; and (vii) Lessee has independently and without reliance on Lessor (other than any representations and warranties expressly made by Lessor in this Side Letter or any other Transaction Document) and based upon such information and materials as it deems appropriate, made its own appraisal of and investigation into the condition and value of the Aircraft and Aircraft Documents. 8. CONDITIONS TO CLOSING. ----------------------- a. Lessee's Closing Conditions. The obligation of Lessee to make all of the --------------------------- Term-Out Payments and terminate the Lease on the Closing Date is subject to the satisfaction (or waiver by Lessee) of each of the following conditions precedent: (i) All approvals and consents of any trustees or holders of any indebtedness or obligations of Lessor that are required in connection with any transaction contemplated by the Transaction Documents shall have been duly obtained. (ii) Each of the Transaction Documents to which Lessor is a party shall have been duly authorized, executed and delivered by Lessor and shall be in full force and effect with respect to the Lessor and executed counterparts shall have been delivered by Lessee. (iii) On the Closing Date (i) the representations and warranties of Lessor contained in Section 7(a) shall be true and accurate in all material respects as though made on and as of such date, and (ii) nothing shall have occurred that will prevent Lessor from performing its obligations under the Transaction Documents. (iv) Lessee shall have received the following documents: (1) an incumbency certificate of Lessor as to the persons authorized to execute and deliver the Transaction Documents to which it is a party and each other document to be executed on behalf of Lessor in connection with the transactions contemplated by the Transaction Documents, including the signatures of such persons; and (2) a certificate, dated the Closing Date, signed by an officer of Lessor, addressed to Lessee and certifying as to each of the matters stated in Sections 7(a)(i) and (iii) hereof. b. Lessor's Closing Conditions. The obligation of Lessor to terminate the ----------------------------- Lease and transfer title to the Aircraft to Lessee on the Closing Date is subject to the satisfaction (or waiver by Lessor) of each of the following conditions precedent: (i) All approvals and consents of any trustees or holders of any indebtedness or obligations of Lessee that are required in connection with any transaction contemplated by the Transaction Documents shall have been duly obtained. (ii) Each of the Transaction Documents to which Lessee is a party shall have been duly authorized, executed and delivered by Lessee and shall be in full force and effect with respect to the Lessee and executed counterparts shall have been delivered by Lessor. (iii) On the Closing Date (i) the representations and warranties of Lessee contained in Section 7(b) shall be true and accurate as though made on and as of such date, and (ii) nothing shall have occurred that will prevent Lessee from performing its obligations under the Transaction Documents. (iv) Lessor shall have received the following documents: (1) an incumbency certificate of Lessee as to the persons authorized to execute and deliver the Transaction Documents to which it is a party and each other document to be executed on behalf of Lessee in connection with the transactions contemplated by the Transaction Documents, including the signatures of such persons; (2) a certificate, dated the Closing Date, signed by a Director of Lessee, addressed to Lessor and certifying as to each of the matters stated in Sections 7b(i) and (iii); and (3) a broker's letter of undertaking and insurance certificate complying with the provisions of Section 13 hereof. (v) Lessor shall have received all of the Term-Out Payments, and Lessee shall have instructed Lessor to retain the Security Deposit and Additional Rent held by Lessor as per Section 4b(iv) hereof. 9. NO DEFAULT / TERMINATION OF SIDE LETTER. Lessor's obligation to transfer --------------------------------------- title to the Aircraft to Lessee in accordance with the terms hereof is subject to there being no Default or Event of Default hereunder or under the Lease relating to Lessee's non-payment of the Term-Out Payments or Additional Rent. For purposes of clarification, Lessee and Lessor both acknowledge and agree that in the event Lessee should fail to make any of the Term-Out Payments as set forth herein or fail to pay the Additional Rent in accordance with the terms of the Lease, such payment failures shall constitute an Event of Default and Lessor shall, at its sole option, be entitled to terminate this Side Letter. In the event Lessor terminates this Side Letter in accordance with the preceding sentence, all terms and provisions of the Lease shall remain in full force and effect and all obligations of the Lessor, as lessor, and Lessee, as lessee thereunder, shall continue to the same extent as if this Side Letter had not been executed, and Lessor shall be entitled to exercise all of its rights and remedies under this Side Letter and under the Lease. Notwithstanding the foregoing, each party covenants to the other to use its best commercial efforts to fulfill the conditions necessary to effectuate the closing of the transactions contemplated hereby. 10. PAST DUE BASIC RENT AMOUNTS. Lessee and Lessor acknowledge and agree ------------------------------ that Lessee has failed to make previous Basic Rent payments to Lessor in accordance with terms of the Lease. In the event this Side Letter is terminated by Lessor in accordance with the terms of Section 9 hereof, it is understood and agreed that Lessor shall not be deemed in any way to have waived the obligation of Lessee to pay these past due Basic Rent amounts, and Lessee shall be obligated to pay all such past due Basic Rent amounts and shall also be obligated to pay to Lessor the difference between (i) any Basic Rent amounts which were abated during the Term-Out Period in accordance with this Side Letter and (ii) the actual amount of the Term-Out Payments paid by Lessee to Lessor in accordance with the terms of this Side Letter. In addition to paying such past due Basic Rent amounts, Lessee shall pay to Lessor interest at the Default Rate on such amount(s) accruing from the original due date of such amount(s) to the date of actual payment of such amount(s). Notwithstanding the foregoing, Lessor agrees that so long as Lessee is in compliance with all of the conditions set forth in this Side Letter, specifically including, but not limited to Lessee's obligation to pay the Term-Out Payments and all Additional Rent payments, Lessor shall not declare an Event of Default under the Lease relating to Lessee's non-payment of any Basic Rent and Additional Rent amounts due prior to the date of this Side Letter. 11. AD COST SHARING. Lessor and Lessee agree that during the Term-Out ----------------- Period, Lessor shall not be obligated to contribute to any AD costs, as contemplated in Section 7.4 of the Lease. 12. RELEASE;OPERATIONAL INDEMNIFICATION. ------------------------------------ a. Release. Lessee herby releases Lessor, Wells Fargo and all additional ------- Indemnitees from all claims by Lessee or any successor or assign of Lessee for injury to or for death of any person or damage to property (including personnel and property of Lessee, Lessor, Wells Fargo or any other Indemnitees) directly or indirectly arising out of the use, operation, control, storage or condition of the Aircraft and Aircraft Documents and for any defects (latent or patent) in the Aircraft and Aircraft Documents. b. Operational Indemnification. Lessee agrees to indemnify, reimburse and ---------------------------- hold harmless, on an After-Tax Basis (as hereinafter defined), Lessor, Wells Fargo, and all additional Indemnitees from and against any and all claims, damages, losses, liabilities, demands, suits, judgments, causes of action, legal proceedings, whether civil or criminal, penalties, fines, other sanction and any costs and expenses in connection therewith including costs of investigation and reasonable attorneys' fees and expenses (any and all of which are hereinafter referred to as "CLAIMS") which may result from or arise in any ------ manner out of or in relation to an event occurring from and which arise out of or relate to (i) the ownership, leasing, subleasing, possession, disposition, use or operation of the Aircraft or (ii) any defect in the Aircraft including defects arising from any testing, maintenance, service, repair or overhaul of the Aircraft whether or not the Aircraft is at the time in the possession of Lessee and regardless of where the Aircraft may be located. (For purposes of this Side Letter, "AFTER-TAX BASIS" shall mean on a basis such that any payment --------------- received or deemed to have been received by any Person shall be supplemented by a further amount paid to that Person, so that the recipient is held harmless on an after-tax basis from all taxes, penalties, fines, interest and other charges taking into account any related credits or deductions resulting from the receipt (actual or constructive) of such payments imposed by or under any governmental authority.) 13. INSURANCE. Lessee agrees to name Lessor, Wells Fargo, and all --------- additional Indemnitees as additional insureds under its comprehensive aviation - liability insurance policy for a period of two years from the Closing Date and the amount of coverage under such policy shall be not less than US$500,000,000, except for coverage for third party war risk liability which shall be limited to US$50,000,000 or such higher amounts as may become available in the international insurance markets. 14. TAXES; CLOSING LOCATION; FEES AND EXPENSES. ----------------------------------------------- a. Taxes. Lessee agrees to assume responsibility for and to pay sales, use, ----- value added, property, ad valorem, franchise or other taxes, licenses, customs, inspection or other fees, bonds, permits or certificates assessed or levied by any federal, state, provincial or local or other taxing authority now or hereafter imposed upon or arising out of the sale, delivery, registration, use or ownership of the Aircraft, but excluding any such taxes imposed on the income of Lessor ("TAXES"), regardless of who is responsible therefore at law ----- and Lessee shall hold Lessor harmless in respect thereof and shall reimburse Lessor, on an After-Tax Basis, on demand for any such Taxes. Lessee's obligations under this Section 14(a) shall survive the transfer of title of the Aircraft as contemplated hereunder. b. Closing Location. Lessor and Lessee shall cooperate and shall take all ----------------- actions reasonably requested by the other to ensure that the Aircraft is located on the Closing Date in a jurisdiction that eliminates or minimizes, to the maximum extent possible, the imposition upon Lessor or Lessee of any Taxes arising out of the transfer of title of the Aircraft pursuant to this Side Letter. c. Fees and Expenses. Lessee shall be responsible for all expenses ------------------- incurred, including but not limited to legal fees, whether incurred by or on - behalf of Lessee or Lessor, in connection with the negotiation, preparation and execution of this Side Letter and in connection with the subsequent preparation and execution of the Bill of Sale and the Lease Termination Agreement and the transfer of title of the Aircraft, whether or not the transactions contemplated thereby are finalized. 15. MISCELLANEOUS. ------------- a. Notices. All notices required or permitted hereunder shall be in writing ------- and may be either personally delivered, faxed, telexed or sent by a reputable international courier service addressed as follows: (i) If to Lessor: Wells Fargo Bank Northwest, N.A. 79 South Main Street Salt Lake City, Utah 84111 USA Attention: Corporate Trust Department Telephone: +1-801-246-5630 Telefax: +1-801-246-5053 with a copy to the Beneficiaries at: c/o Equis Financial Group, Inc. 88 Broad Street Boston, Massachusetts 02110 USA Attention: Operations Department Telephone: +1-617-854-5862 Telefax: +1-617-695-0956 with an additional copy to: Sigma Aircraft Management LLC 232 East 50th Street New York, New York 10022 USA Attention: Mr. Anders Hebrand Telephone: +1-212-752-9800 Telefax: +1-212-752-9801 (ii) If to Lessee: Air Slovakia BWJ, Ltd. Letisko M.R. Stefanika Ivanska cesta P.O. Box 2 82001 Bratislava Attention: Jan Janok Telephone: +421-7-4342-2742 Telefax: +421-7-4342-2742 or at such other address as either party gives to the other from time to time through proper notice. Any such notice shall be effective and shall be deemed to have been given when received at the addresses set forth above, as such addresses are modified as set forth above. b. Assignment of Warranties and Records. On the Closing Date, pursuant to -------------------------------------- the terms of this Side Letter, Lessor shall be deemed to have irrevocably assigned to Lessee all of Lessor's rights under any warranty, express or implied, service policy or product agreement of any manufacturer, of any maintenance and overhaul agency or of any subcontractor, supplier or vendor of any item of the Aircraft to the extent that such rights are assignable and are not extinguished as a result of this Side Letter or such assignment. Lessor makes no representation or warranty to Lessee as to whether any such rights are assignable. From time to time upon the reasonable request and at the sole cost and expense (including counsel fees, if any) of Lessee, Lessor shall give notice to any such manufacturer, maintenance and overhaul agency, subcontractor, supplier or vendor of the assignment of such warranties to Lessee. c. Nonwaiver; Remedies Cumulative. Forbearance or indulgence by any party -------------------------------- in any regard whatsoever shall not constitute a waiver of the covenant or condition to which such forbearance or indulgence may relate, and until complete performance thereof, or the written waiver thereof, the forbearing or indulging party shall be entitled to invoke any right or remedy available to it under this Side Letter or by law or in equity or otherwise despite such forbearance or indulgence. No right or remedy of any party provided for herein is exclusive of any other right or remedy, but all such rights and remedies are cumulative of every other right and remedy provided for herein, at law, in equity, by statute, or otherwise, and may be exercised concurrently or separately from time to time. The prevailing party shall be entitled to reasonable attorneys' fees and forum costs. d. Applicable Law. This Side Letter shall in all respects be governed by, --------------- and construed in accordance with, the laws of the State of New York (without regard to any conflicts of law rule which might result in the application of the laws of any other jurisdiction), applicable to contracts entered into and to be performed entirely in the State of New York by residents of such state, including all matters of construction, validity and performance. e. Severability. Any provision of this Side Letter which may be prohibited ------------ or unenforceable in any jurisdiction shall be ineffective to the extent of such prohibition or unenforceability in such jurisdiction only, without invalidating the remaining provisions hereof in such jurisdiction and without invalidating any of the provisions hereof in any other jurisdiction. f. Waiver of Jury Trial. EACH OF LESSEE AND LESSOR HEREBY KNOWINGLY, ----------------------- VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS SIDE LETTER OR ANY OTHER TRANSACTION DOCUMENT. g. Jurisdiction. Each of Lessor and Lessee hereby irrevocably submits to an ------------ accepts the exclusive jurisdiction of the United States District Court for the Southern District of New York and the New York Supreme Court, New York County, in each case located in the Borough of Manhattan (the "AGREED COURTS") ------------- with regard to any action or proceeding arising out of or relating to this Side Letter or any other Transaction Document. Final judgment against Lessor or Lessee rendered by any Agreed Court in any suit shall be conclusive and may be enforced in any other jurisdiction by suit on a judgment, a certified or true copy of which shall be conclusive evidence of the facts and of the amount of any indebtedness or liability of such party. h. Waiver. Each of Lessor and Lessee irrevocably waives any objection which ------ it may now or hereafter have to the laying of venue of any suit, action or proceeding brought in any Agreed Court and further irrevocably waives any claim that any such suit, action or proceeding brought in any Agreed Court has been brought in an inconvenient forum. (i) Without prejudice to any other mode of service, Lessee (i) appoints LEXIS Document Services, 125 Park Avenue, 23rd Floor, New York, New York 10017 as its agent for service of process relating to any proceedings before the Agreed Courts in connection with this Side Letter and agrees to maintain the process agent in New York, New York notified to Lessor, and (ii) agrees that failure by a process agent to notify Lessor of the process shall not invalidate the proceedings concerned. (ii) Without prejudice to any other mode of service, each of Lessor and Lessee consents to the service of process relating to any proceedings involving, directly or indirectly, any matter arising out of or relating to this Side Letter by U.S. Postal Service registered mail (prepaid, return receipt requested) of a copy of the process to Lessee's address identified in Section 15(a)(ii). i. Survival. All representations, warranties, indemnities and agreements of -------- the Lessor and Lessee under this Side Letter shall survive the termination of the Lease and the transfer of title of the Aircraft on the Closing Date. j. Further Assurances. Lessor and Lessee will promptly, at any time and ------------------- from time to time, execute and deliver to each other such further instruments and documents, and take such further action, as Lessor or Lessee, as the case may be, may from time to time reasonably request and which is necessary to carry out this Side Letter and to establish and protect the rights, interests, and remedies created in favor of Lessor or Lessee provided such documents are prepared at the sole cost and expense of the requesting party and such documents are in form and substance reasonably acceptable to the party requested to execute same. k. Written Changes Only. No term or provision of this Side Letter nor any ---------------------- right or remedy hereunder may be changed or waived orally, but only by an instrument in writing signed by both parties. l. Exclusivity. This Side Letter and the other Transaction Documents are ----------- the complete and exclusive agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior oral and written communications, proposals, agreements, representations, statements, negotiations and undertakings between the parties hereto with respect to the subject matter hereof. m. No Broker. Lessee and Lessor each hereby represents to the other that it --------- has not directly or indirectly employed or otherwise procured any broker in connection with the transfer of title of the Aircraft contemplated hereby for whose compensation the other party is responsible or liable. Each party agrees to pay, indemnify and hold harmless the other party from and against any and all liabilities, losses, costs, damages, claims and expenses (including reasonable attorneys' fees and litigation costs) the other party shall ever suffer, incur or be threatened with because of any claim by any broker or agent claiming by, through or under the indemnifying party, whether or not meritorious, for any fee, commission or other compensation with respect to the purchase or sale of the Aircraft. n. Confidentiality. Each party to this Side Letter agrees that it will --------------- treat this Side Letter, each of the other Transaction Documents, and the contents thereof as privileged and confidential and will not disclose, or cause to be disclosed, the terms hereof or thereof to any Person, except that any such information may be disclosed (a) to the extent necessary in connection with the enforcement of such party's rights under any Transaction Documents, (b) to such party's agents, attorneys and accountants in the course of performing customary professional services, (c) to the extent required pursuant to applicable law or by any governmental authority, (d) to the extent that prior to such disclosure, such information is publicly available, (e) to the Beneficiaries, any financing party of the Lessee and to such party's agents, attorneys and accountants and (f) with the prior written consent of Lessee and Lessor. o. Counterparts. This document may be executed in counterparts, each of ------------ which shall be deemed an original and all of which together shall constitute but one and the same original. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, Lessor and Lessee, each pursuant to due authority, have caused this Side Letter to Lease Agreement to be executed by their duly authorized officers as of the day and year first above written. LESSOR: WELLS FARGO BANK NORTHWEST, N.A. (formerly First Security Bank, National Association), not in its individual capacity, but solely as the Owner Trustee By: ___________________________ Name: _________________________ Title: __________________________ LESSEE: AIR SLOVAKIA BWJ, LTD. By: ____________________________ Name: __________________________ Title: ___________________________ EXHIBIT A LEASE TERMINATION AGREEMENT This LEASE TERMINATION AGREEMENT, dated as of ____________________, 2002, is entered into between WELLS FARGO BANK NORTHWEST, N.A. (formerly First Security Bank, National Association), not in its individual capacity but solely as Owner Trustee, hereinafter called the "Lessor", and AIR SLOVAKIA BWJ, LTD., hereinafter called the "Lessee". WHEREAS, Lessor and Lessee are parties to that certain Lease Agreement dated as of August 31, 2000 as at any time amended or supplemented (collectively, the "Lease"); WHEREAS, the Lease relates to one (1) Boeing Model 737-200A Aircraft bearing Slovakian Registration Mark OM-ERA, and manufacturer's serial number 21722; two (2) Pratt & Whitney model JT8D-9A engines bearing manufacturer's serial numbers 707430 and 665325; WHEREAS, Lessor and Lessee desire to terminate the Lease. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledge, the parties hereto agree as follows: 1. The Lease is hereby terminated with respect to the Aircraft, without prejudice to any indemnities, rights or obligations which are expressly provided to survive the term of the Lease. 2. Lessee hereby releases all right, title and interest in and to the Security Deposit and any and all Additional Rent held by Lessor and directs Lessor to retain said Security Deposit and Additional Rent. 3. This Lease Termination Agreement shall be governed by and construed in accordance with the laws of the state of New York. 4. This Lease Termination Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which counterparts shall constitute one and the same Lease Termination Agreement. IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Termination Agreement to be duly executed as of the day and year first above written. LESSOR: WELLS FARGO BANK NORTHWEST, N.A. (formerly First Security Bank, National Association), not in its individual capacity, but solely as the Owner Trustee By: ___________________________ Name: _________________________ Title: __________________________ LESSEE: AIR SLOVAKIA BWJ, LTD. By: ____________________________ Name: __________________________ Title: ___________________________ EXHIBIT B BILL OF SALE The undersigned, WELLS FARGO BANK NORTHWEST, N.A. (formerly First Security Bank, National Association), not in its individual capacity but solely as the Owner Trustee under Trust Agreement No. III dated as of December 30, 1991 ("Seller") in consideration of TEN UNITED STATES DOLLARS (US$10.00) and other good and valuable consideration does hereby grant, bargain, sell, assign, transfer and set over unto AIR SLOVAKIA BWJ, LTD. ("Buyer"), its successors and assigns, all right, title and interest of Seller in and to the following described aircraft (the "Aircraft"). Manufacturer and Model: Boeing Model 737-200A Manufacturer's Serial Number: 21722 Slovakian Registration Mark: OM-ERA including two JT8D-9A engines bearing manufacturer's serial nos. 707430 and 665325, systems, avionics, instruments and equipment as appertain to and are now on board the Aircraft and the Aircraft Documents. Seller hereby represents and warrants to Buyer, its successors and assigns that Seller has title to the Aircraft as was conveyed to it, and the Aircraft is free and clear of any liens created by or through Seller. EXCEPT FOR THE FOREGOING WARRANTY OF TITLE, THE AIRCRAFT IS SOLD TO BUYER ON AN "AS IS" AND "WHERE IS" BASIS. SELLER MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE INCLUDING BUT NOT LIMITED TO ANY WARRANTY AS TO CONDITION, VALUE, DESIGN, QUALITY, OPERATION, SUITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. Defined terms used herein and not otherwise defined shall have the meaning given such terms in that certain Side Letter to Lease Agreement dated as of January 6, 2002, between Seller, as lessor, and Buyer, as lessee. IN WITNESS WHEREOF, the Seller has caused this Bill of Sale to be executed and delivered by its duly authorized officer as of the ___ day of __________________ 2002. WELLS FARGO BANK NORTHWEST, N.A. (formerly First Security Bank, National Association), not in its individual capacity, but solely as the Owner Trustee By:____________________________________ Name: Title: -----END PRIVACY-ENHANCED MESSAGE-----