<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from------------------------to------------------------
------------------------
For Quarter Ended September 30, 1996 Commission File No. 0-18368
AIRFUND International Limited Partnership
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3037350
- ------------------------------------------ -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 North Washington Street, Boston, MA 02114
- ------------------------------------------ --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
--------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court 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 No
---- ----
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at September 30, 1996 and December 31, 1995 3
Statement of Operations
for the three and nine months ended September 30, 1996 and 1995 4
Statement of Cash Flows
for the nine months ended September 30, 1996 and 1995 5
Notes to the Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
PART II. OTHER INFORMATION:
Items 1 - 6 14
2
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
September 30, 1996 and December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- -------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 4,810,623 $ 1,079,341
Contractual right for equipment -- 4,360,599
Rents receivable -- 562,594
Accounts receivable - affiliate 37,861 353,803
Equipment at cost, net of accumulated
depreciation of $16,095,852 and
$22,741,547 at September 30, 1996
and December 31, 1995, respectively 21,420,043 10,532,269
----------- -----------
Total assets $26,268,527 $16,888,606
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $11,856,875 $ 4,742,968
Accrued interest 103,442 63,568
Accrued liabilities 179,923 40,527
Accrued liabilities - affiliate 23,437 71,661
Deferred rental income 164,789 136,139
Cash distributions payable to partners 4,000,000 600,000
----------- -----------
Total liabilities 16,328,466 5,654,863
----------- -----------
Partners' capital (deficit):
General Partner (1,201,993) (1,137,309)
Limited Partnership Interests
(3,040,000 Units; initial purchase
price of $25 each) 11,142,054 12,371,052
----------- -----------
Total partners' capital 9,940,061 11,233,743
----------- -----------
Total liabilities and partners' $26,268,527 $16,888,606
capital =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the three and nine months ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Income:
Lease revenue $1,295,140 $ 1,144,148 $3,436,490 $ 3,391,548
Interest income 50,213 14,394 212,786 43,393
Gain on sale of equipment 2,783,440 -- 2,783,440 --
Loss on exchange of equipment -- (1,940,918) -- (1,940,918)
---------- ----------- ---------- -----------
Total income (loss) 4,128,793 (782,376) 6,432,716 1,494,023
---------- ----------- ---------- -----------
Expenses:
Depreciation 792,581 648,192 2,448,104 2,094,994
Interest expense 264,302 -- 656,316 --
Equipment management fees
- affiliate 64,757 57,207 171,825 169,577
Operating expenses - affiliate 198,015 25,018 450,153 167,135
---------- ----------- ---------- -----------
Total expenses 1,319,655 730,417 3,726,398 2,431,706
---------- ----------- ---------- -----------
Net income (loss) $2,809,138 $(1,512,793) $2,706,318 $ (937,683)
========== =========== ========== ===========
Net income (loss)
per limited partnership unit $ 0.88 $ (0.47) $ 0.85 $ (0.29)
========== =========== ========== ===========
Cash distributions declared
per limited partnership unit $ 1.25 $ 0.19 $ 1.25 $ 0.81
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 2,706,318 $ (937,683)
Adjustments to reconcile net income (loss) to net cash
from operating activities: 2,448,104 2,094,994
Depreciation (2,783,440) --
Gain on sale of equipment -- 1,940,918
Loss on exchange of equipment
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 562,594 (8,192)
accounts receivable - affiliate 315,942 (8,173)
Increase (decrease) in:
accrued interest 39,874 --
accrued liabilities 139,396 (61,515)
accrued liabilities - affiliate (48,224) (19,029)
deferred rental income 28,650 284,030
----------- -----------
Net cash from operating activities 3,409,214 3,285,350
----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment (240,726) --
Proceeds from equipment sales 3,210,000 --
----------- -----------
Net cash from investing activities 2,969,274 --
----------- -----------
Cash flows used in financing activities:
Principal payments - notes payable (2,047,206) --
Distributions paid (600,000) (3,000,000)
----------- -----------
Net cash used in financing activities (2,647,206) (3,000,000)
----------- -----------
Net increase in cash and cash equivalents 3,731,282 285,350
Cash and cash equivalents at beginning of period 1,079,341 1,067,046
----------- -----------
Cash and cash equivalents at end of period $ 4,810,623 $ 1,352,396
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 616,442 $ --
=========== ===========
Supplemental disclosure of non-cash investing activities:
See Note 5 to the Financial Statements.
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
September 30, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not
include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the footnotes presented in the 1995 Annual Report. Except as disclosed
herein, there has been no material change to the information presented in the
footnotes to the 1995 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at September 30, 1996 and December 31, 1995 and results of operations
for the three and nine month periods ended September 30, 1996 and 1995 have been
made and are reflected.
NOTE 2 - CASH
- -------------
At September 30, 1996, the Partnership had $4,710,000 invested in reverse
repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities.
NOTE 3 - REVENUE RECOGNITION
- ----------------------------
Rents are payable to the Partnership monthly and quarterly and no significant
amounts are calculated on factors other than the passage of time. All leases
are accounted for as operating leases and are noncancellable. Rents received
prior to their due dates are deferred. Future minimum rents of $9,500,378 are
due as follows:
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30, 1997 $3,428,778
1998 3,368,778
1999 2,286,086
2000 416,736
----------
Total $9,500,378
==========
</TABLE>
In September 1995, the Partnership transferred its ownership interest in a
Boeing 747-SP-21 commercial jet aircraft (the "United Aircraft") to the existing
lessee, United Air Lines, Inc., pursuant to the rules for a like-kind exchange
transaction for income tax reporting purposes (See Note 5 herein). In November
1995, the Partnership partially replaced the United Aircraft with a 43.41%
interest in three Boeing 737-2H4 aircraft leased to Southwest Airlines, Inc.
(the "Southwest Aircraft"). The Partnership will receive approximately
$1,250,000 of rental revenue in each of the years in the period ending September
30, 1999, and approximately $417,000 in the year ending September 30, 2000,
pursuant to the Southwest Aircraft lease agreement.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with a 49.17% interest in two McDonnell-Douglas MD-82 Aircraft
leased by Finnair OY (the "Finnair Aircraft"). The Partnership will receive
approximately $2,118,000 of rental revenue in each of the years in the period
ending September 30, 1998 and approximately $1,036,000 in the year ending
September 30, 1999, pursuant to the Finnair Aircraft lease agreement.
6
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by
American Finance Group ("AFG") on behalf of the Partnership and AFG is
reimbursed at its actual cost for such expenditures. Fees and other costs
incurred during each of the nine month periods ended September 30, 1996 and
1995, which were paid or accrued by the Partnership to AFG or its Affiliates,
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Equipment management fees $171,825 $169,577
Administrative charges 15,750 15,750
Reimbursable operating expenses
due to third parties 434,403 151,385
-------- --------
Total $621,978 $336,712
======== ========
</TABLE>
NOTE 5 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at September
30, 1996. In the opinion of AFG, the acquisition cost of the equipment did not
exceed its fair market value.
<TABLE>
<CAPTION>
Lease
Term Equipment
Equipment Type (Months) at Cost
- --------------------------------------- -------------- ----------------
<S> <C> <C>
Two McDonnell-Douglas MD-82 (Finnair) 36 $ 13,762,438
One Boeing 727-251 (Northwest) 18 9,520,359
One Lockheed L-1011-50 (Cathay) -- 7,877,225
Three Boeing 737-2H4 (Southwest) 49 6,355,873
------------
Total equipment cost 37,515,895
Accumulated depreciation (16,095,852)
------------
Equipment, net of accumulated depreciation $ 21,420,043
============
</TABLE>
The cost of the Lockheed L-1011-50 aircraft, the three Boeing 737-2H4 aircraft
and the two McDonnell-Douglas MD-82 aircraft represent proportionate ownership
interests. The remaining interests are owned by other affiliated partnerships
sponsored by AFG. All Partnerships individually report, in proportion to their
respective ownership interests, their respective shares of assets, liabilities,
revenues, and expenses associated with the aircraft.
In September 1995, the Partnership transferred its 76.8% interest in the
United Aircraft, pursuant to the rules for a like-kind exchange for income tax
reporting purposes (See Note 3 herein). In November 1995, the Partnership
partially replaced the United Aircraft with a 43.41% interest in the Southwest
Aircraft, at an aggregate cost of $6,355,873. To acquire the interests in the
Southwest Aircraft, the Partnership obtained financing of $4,742,968 from a
third-party lender and utilized $1,612,905 of the cash consideration received
from the transfer
7
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
of the United Aircraft. The remaining ownership interest of 56.59% in the
Southwest Aircraft is held by affiliated equipment leasing programs sponsored by
AFG.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with a 49.17% ownership interest in the Finnair Aircraft at a
total cost to the Partnership of $13,762,438. To acquire the ownership interest
in the Finnair Aircraft, the Partnership paid $4,601,325 in cash and obtained
financing of $9,161,113 from a third-party lender. The remaining ownership
interests of 50.83% in the Finnair Aircraft are held by affiliated equipment
leasing programs sponsored by AFG.
On June 30, 1996, the Lockheed L-1011-50 aircraft, in which the Partnership
has a proportionate ownership interest, was returned by the lessee. The General
Partner is actively seeking the re-lease of this equipment
NOTE 6 - NOTES PAYABLE
- ----------------------
Notes payable at September 30, 1996 consisted of installment notes payable to
banks of $11,856,875. All of the installment notes are non-recourse, with
interest rates ranging between 8.65% and 8.76% and are collateralized by the
equipment and assignment of the related lease payments. All of the notes were
originated in connection with the Southwest Aircraft and the Finnair Aircraft.
The installment notes related to the Southwest Aircraft will be fully amortized
by noncancellable rents. The Partnership has a balloon payment obligation at
the expiration of the primary lease term related to the Finnair Aircraft. The
carrying amount of notes payable approximates fair value at September 30, 1996.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<CAPTION>
<S> <C>
For the year ending September 30, 1997 $ 2,341,272
1998 2,635,511
1999 6,571,697
2000 308,395
-----------
Total $11,856,875
===========
</TABLE>
NOTE 7 - REMARKETING ACTIVITIES
- -------------------------------
During July 1996, the Partnership sold a Boeing 727-251 Advanced aircraft to
the lessee, Northwest Airlines, Inc. The Partnership received sale proceeds of
$3,210,000 and recognized a net gain of $2,783,440 from this transaction. In
addition, the Partnership received lease termination rents of $180,000. The
aircraft represented approximately 20% of the Partnership's aircraft portfolio
and was acquired by the Partnership in July 1989 at an aggregate cost of
$9,520,359.
NOTE 8 - SUBSEQUENT EVENT
- -------------------------
During November 1996, the Partnership executed a purchase and sale agreement
to sell a Boeing 727-251 Advanced aircraft to the lessee, Northwest Airlines,
Inc. The Partnership expects to receive net sale proceeds of $3,363,750, subject
to the completion of a succesful inspection of the aircraft. At September 30,
1996, the net carrying value of the aircraft was $934,374.
8
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
-------------
Three and nine months ended September 30, 1996 compared to the three and nine
- -----------------------------------------------------------------------------
months ended September 30, 1995:
- -------------------------------
Results of Operations
- ---------------------
Overview
- --------
As an equipment leasing partnership, the Partnership was organized to acquire
and lease a portfolio of commercial jet aircraft subject to lease agreements
with third parties. Upon its inception in 1989, the Partnership purchased three
commercial jet aircraft and a proportionate interest in a fourth aircraft which
were leased by major carriers engaged in passenger transportation. Initially,
each aircraft generated rental revenues pursuant to primary-term lease
agreements. In 1991, one of the Partnership's original aircraft was sold to a
third party and a portion of the sale proceeds was reinvested in a proportionate
interest in another aircraft. In 1995, the Partnership transferred its
ownership interest in the fourth aircraft to the existing lessee, United Air
Lines, Inc., in exchange for proportionate interests in three aircraft leased to
Southwest Airlines, Inc., pursuant to lease agreements which expire in 1999.
During the first quarter of 1996, the Partnership completed the replacement of
the United Aircraft with proportionate interests in two aircraft leased to
Finnair OY, pursuant to lease agreements which also expire in 1999. The
Partnership continues to own a proportionate interest in an aircraft which was
returned by the lessee on June 30, 1996 and for which the General Partner is
actively seeking to re-lease. In July 1996, the Partnership sold one of its
original aircraft to the lessee, Northwest Airlines, Inc. (See Note 7 -
Remarketing Activities). At September 30, 1996, the Partnership owned a
complete interest in one aircraft, which was sold in November 1996 (See Note 8 -
Subsequent Events). Upon expiration of the lease agreements, each aircraft will
be re-leased or sold depending on prevailing market conditions and the
assessment of such conditions by AFG to obtain the most advantageous economic
benefit. Ultimately, all aircraft will be sold and the net proceeds will be
distributed to the Partners, after all liabilities and obligations of the
Partnership have been satisfied.
Results of Operations
- ---------------------
For the three and nine months ended September 30, 1996, the Partnership
recognized lease revenue of $1,295,140 and $3,436,490, respectively, compared to
$1,144,148 and $3,391,548 for the same periods in 1995. The increase in lease
revenue from 1995 to 1996 resulted from the Partnership's aircraft exchange
(discussed below), which was concluded in the first quarter of 1996 and the
receipt of lease termination rents received in connection with the sale of the
Boeing 727-251 Advanced aircraft in July 1996. These increases were largely
offset by the effect of the expiration of the lease related to the Partnership's
interest in a Lockheed L-1011-50 aircraft. As a result of the aircraft
exchange, the Partnership replaced its ownership interest in a Boeing 747-SP,
having aggregate quarterly lease revenues of $495,360, with interests in five
other aircraft (three Boeing 737 aircraft leased by Southwest Airlines, Inc. and
two McDonnell Douglas MD-82 aircraft leased by Finnair OY) having aggregate
quarterly lease revenues of $845,665. Due to the conclusion of this transaction
late in the first quarter of 1996, revenue for the nine months ended September
30, 1996 does not fully reflect the rents ultimately anticipated from the like-
kind exchange.
The Partnership's two lease agreements with Northwest Airlines, Inc.
("Northwest") were renewed for a period of twelve months commencing May 1, 1994.
Subsequently, Northwest extended the renewal period for an additional twelve
months through April 30, 1996. Rents due under the initial twelve month
renewals generated aggregate monthly revenue of $124,000 per month compared to
$120,000 per month for the second twelve month
9
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
renewals. Northwest opted to extend these leases for an additional six months
until October 31, 1996 at an aggregate of $120,000 per month. During July 1996,
the Partnership sold one of the aircraft to Northwest and, in addition to the
sales proceeds, received lease termination rents (see below). In November 1996,
the Partnership sold the second aircraft to Northwest (See Note 8 - Subsequent
Event).
The Partnership's original lease agreement with Cathay Pacific Airways, Ltd
("Cathay") provided for semi-annual rent adjustments based on the six month
London Inter-bank Offered Rate ("LIBOR"). Accordingly, rents generated from
this lease fluctuated in relation to the prevailing LIBOR rate on a semi-annual
basis. The Partnership's renewal lease agreement with Cathay (having an
adjusted semi-annual rent of $535,802) expired on February 14, 1996 and was
extended until April 11, 1996. Subsequent to this extension, Cathay leased the
aircraft at a fixed rate until June 30, 1996 at which date the aircraft was
returned to the Partnership. The fixed extension agreement generated
approximately $127,000 in renewal revenue for the Partnership. Currently, the
demand for L-1011 aircraft is weak, limited principally to air cargo carriers
and operators of passenger charters. Several major airlines have reduced their
commitment to the L-1011 and, currently, a large domestic air carrier is
expected to retire eleven L-1011 aircraft from its fleet. Such circumstances
may inhibit the remarketing of the Partnership's L-1011 aircraft and may
require the Partnership to upgrade or refurbish the aircraft to meet the needs
of a potential successor lessee. Accordingly, until the Partnership's L-1011
aircraft is remarketed, the General Partner expects to reserve a portion of the
Partnership's cash for such purposes.
The Partnership holds a proportionate ownership interest in the Cathay,
Southwest and Finnair Aircraft, discussed above. The remaining interests are
owned by other affiliated partnerships sponsored by AFG. All partnerships
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues and expenses associated
with the aircraft. (See Note 5 to the financial statements.)
The Partnership typically earns interest income from temporary investments of
rental receipts in short-term instruments. For the three and nine months ended
September 30, 1996, the Partnership earned interest income of $50,213 and
$212,786, respectively, compared to $14,394 and $43,393 for the same periods in
1995. The increase in interest income in 1996 compared to 1995 is a result of
interest of $130,268 earned on cash held in a special-purpose escrow account in
connection with the like-kind exchange transactions discussed below and interest
earned on sale proceeds associated with the Northwest transaction prior to the
time such sale proceeds were distributed to the Recognized Owners.
During July 1996, the Partnership sold a Boeing 727-Advanced jet aircraft with
an original cost and net book value of $9,520,359 and $426,560, respectively, to
the existing lessee. In connection with this sale, the Partnership realized
sale proceeds of $3,210,000, which resulted in a net gain, for financial
statement purposes, of $2,783,440. The Partnership also realized lease
termination rents of $180,000 relating to this sale as the aircraft was sold
prior to the expiration of the related lease term.
In September 1995, the Partnership transferred its entire ownership interest
(76.8%) in a Boeing 747-SP aircraft (the "United Aircraft") to its lessee,
United Air Lines, Inc. The transaction was structured as a like-kind exchange
for income tax reporting purposes. The Partnership received aggregate cash
consideration of $6,325,760, including $352,256 for rent accrued through the
transfer date. The net cash consideration of $5,973,504 was deposited into a
special-purpose escrow account through a third-party exchange agent pending the
completion of the aircraft exchange. The Partnership's interest in the United
Aircraft had a net book value of $7,914,422 at the date of transfer and resulted
in a net loss for financial reporting purposes of $1,940,918.
In November 1995, the Partnership partially replaced the United Aircraft with
a 43.41% ownership interest in the Southwest Aircraft, at an aggregate cost of
$6,355,873. To acquire the interest in the Southwest Aircraft, the
10
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Partnership obtained financing of $4,742,968 from a third-party lender and
utilized $1,612,905 of the cash consideration received from the transfer of the
United Aircraft. The remaining ownership interest of 56.59% in the Southwest
Aircraft is held by affiliated equipment leasing programs sponsored by AFG.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with a 49.17% ownership interest in the Finnair Aircraft at a
total cost to the Partnership of $13,762,438. To acquire the ownership interest
in the Finnair Aircraft, the Partnership paid $4,601,325 in cash and obtained
financing of $9,161,113 from a third-party lender. The remaining ownership
interest of 50.83% in the Finnair Aircraft is held by affiliated equipment
leasing programs sponsored by AFG. The like-kind exchange, involving the
United, Southwest and Finnair Aircraft, was undertaken, in part, to mitigate the
Partnership's economic risk resulting from the United Aircraft being returned to
the Partnership upon its lease expiration in April 1996 and remaining off-lease
for an extended period. The exchange enabled the Partnership to replace a
specialized aircraft with other aircraft which are used more widely in the
industry and also to significantly extend its rental stream with two
creditworthy lessees.
During the three and nine months ended September 30, 1996, the Partnership
incurred interest expense of $264,302 and $656,316, respectively. Interest
expense resulted from financing obtained from third-party lenders in connection
with the Southwest Aircraft and the Finnair Aircraft, described above. Interest
expense in future periods is expected to decline as the principal balance of
notes payable is reduced through the application of rent receipts to outstanding
debt.
Management fees were 5% of lease revenue during each of the periods ended
September 30, 1996 and 1995 and will not change as a percentage of lease revenue
in future periods.
Operating expenses consist principally of administrative charges, professional
service costs, such as audit and legal fees, as well as insurance, printing,
distribution and remarketing expenses. Collectively, operating expenses
represented 15.3% and 13.1% of lease revenue during the three and nine months
ended September 30, 1996, compared to 2.2% and 4.9% of lease revenue for the
same periods in 1995. The increase in operating expenses from 1995 to 1996 was
due primarily to legal expenses and broker fees incurred in connection with the
like-kind exchange transactions, discussed above. The amount of future
operating expenses cannot be predicted with certainty; however, such expenses
are usually higher during the acquisition and liquidation phases of a
partnership. Other fluctuations will occur in relation to the volume and timing
of aircraft remarketing activities. Depreciation expense was $792,581 and
$2,448,104 for the three and nine months ended September 30, 1996, respectively,
compared to $648,192 and $2,094,994 for the same periods in 1995.
The ultimate realization of residual value for any aircraft will be dependent
upon many factors, including AFG's ability to sell and re-lease the aircraft.
Changes in market conditions, industry trends, technological advances, and other
events could converge to enhance or detract from asset values at any given time.
Accordingly, AFG will attempt to monitor changes in the airline industry in
order to identify opportunities which may be advantageous to the Partnership and
which will maximize total cash returns for each aircraft.
The total economic value realized upon final disposition of each aircraft is
comprised of all primary lease term revenues generated from that aircraft,
together with its residual value. The latter consists of cash proceeds realized
upon the aircraft's sale in addition to all other cash receipts obtained from
renting the aircraft under re-lease or renewal lease agreements. Consequently,
the amount of any future gain or loss reported in the financial statements may
not necessarily be indicative of the total residual value the Partnership
achieved from leasing the aircraft.
11
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
aircraft rental transactions. Accordingly, the Partnership's principal source of
cash from operations is provided by the collection of periodic rents. These cash
inflows are used to satisfy debt service obligations associated with leveraged
leases, and to pay management fees and operating costs. Operating activities
generated net cash inflows of $3,409,214 and $3,285,350 for the nine months
ended September 30, 1996 and 1995, respectively. The expiration of the
Partnership's lease agreement related to its interest in the Lockheed L-1011-50
and the sale of the two Boeing 727-251 Advanced aircraft will cause a decline in
the Partnership's future lease revenue and corresponding sources of operating
cash. This will be partially offset by rents generated in connection with the
Southwest Aircraft and the Finnair Aircraft. Overall, expenses associated with
rental activities, such as management fees, and net cash flow from operating
activities will decline as the Partnership remarkets its aircraft. Ultimately,
the Partnership will dispose of all aircraft under lease. This will occur
principally through sale transactions whereby each aircraft will be sold to the
existing lessee or to a third party. Generally, this will occur upon expiration
of each aircraft's primary of renewal/re-lease term.
Cash expended for equipment acquisitions and cash realized form asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. During the nine months ended September 30, 1996, the
Partnership expended $240,726 in cash in connection with the like-kind exchange
transactions referred to above. There were no equipment acquisitions during the
same period in 1995. During the nine months ended September 30, 1996, the
Partnership realized $3,210,000 in proceeds from the sale of a Boeing 727-251
Advanced aircraft. There were no equipment sales during the same period in
1995. 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 equipment's condition and age,
and future market conditions.
As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, a portion or all of the rental payment will be
used to repay principal and interest. The Partnership has balloon payment
obligations at the expiration of the primary lease term related to the Finnair
Aircraft.
Cash distributions to the General Partner and Recognized Owners are 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. For the nine months ended September 30, 1996, the
Partnership declared total cash distributions of Distributable Cash From
Operations and Distributable Cash From Sales and Refinancings of $4,000,000. In
accordance with the Amended and Restated Agreement and Certificate of Limited
Partnership, the Recognized Owners were allocated 95% of these distributions, or
$3,800,000, and the General Partner was allocated 5%, or $200,000. The third
quarter 1996 cash distribution was paid on October 15, 1996.
Cash distributions paid to the Recognized Owners consist of both a return of
and a return on capital. To the extent that cash distributions consist of Cash
From Sales or Refinancings, substantially all of such cash distributions should
be viewed as a return of 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, and the residual value realized for each aircraft
at its disposal date. Future market
12
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
conditions, technological changes, the ability of AFG to manage and remarket the
aircraft, and many other events and circumstances, could enhance or detract from
individual asset yields and the collective performance of the Partnership's
aircraft portfolio.
Overall, the future liquidity of the Partnership will be greatly dependent
upon the collection of contractual rents and the outcome of residual activities.
The General Partner anticipates that cash proceeds resulting from these sources
will satisfy the Partnership's future expense obligations. However, the amount
of cash available for distribution in future periods is expected to fluctuate
widely as the General Partner attempts to remarket the Partnership's aircraft
and possibly upgrade certain aircraft to meet the standards of potential
successor lessees.
In June 1996, Cathay returned an aircraft in which the Partnership holds a
proportionate interest. This event is expected to present demands on the
Partnership's cash position, depending upon the extent of upgrades or
refurbishments necessary to remarket this aircraft. Accordingly, until this
aircraft is remarketed, the General Partner will continue to reserve a portion
of the Partnership's cash for such purposes. The cash distribution for the third
quarter of 1996 resulted principally from proceeds realized from the sale of the
Partnership's Boeing 727-251 ADV aircraft. The General Partner anticipates that
future cash distributions will be contingent primarily upon the realization of
sale proceeds from remarketing the Partnership's remaining aircraft and the
extent of the Partnership's cash reserve requirements. Accordingly, the General
Partner expects to suspend the declaration of quarterly cash distributions
between the periods corresponding to major remarketing events.
13
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
14
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AIRFUND International Limited Partnership
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the General
Partner of the Registrant.
By: /s/ Michael J. Butterfield
------------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: November 13, 1996
-------------------------------------------------------
By: /s/ Gary M. Romano
-------------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 13, 1996
-------------------------------------------------------
15
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,810,623
<SECURITIES> 0
<RECEIVABLES> 37,861
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,848,484
<PP&E> 37,515,895
<DEPRECIATION> 16,095,852
<TOTAL-ASSETS> 26,268,527
<CURRENT-LIABILITIES> 4,471,591
<BONDS> 11,856,875
0
0
<COMMON> 0
<OTHER-SE> 9,940,061
<TOTAL-LIABILITY-AND-EQUITY> 26,268,527
<SALES> 3,436,490
<TOTAL-REVENUES> 6,432,716
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,070,082
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 656,316
<INCOME-PRETAX> 2,706,318
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,706,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,706,318
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
