<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-----------------------------------------------
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, 1997 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.)
88 Broad Street, Boston, MA 02110
- ----------------------------------- -------------------------
(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, 1997 and December 31, 1996 3
Statement of Operations
for the three and nine months ended September 30, 1997 and 1996 4
Statement of Cash Flows
for the nine months ended September 30, 1997 and 1996 5
Notes to the Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II. OTHER INFORMATION:
Items 1 - 6 13
2
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
September 30, 1997 and December 31, 1996
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
ASSETS
- ------
Cash and cash equivalents $2,658,253 $4,126,851
Rents receivable 104,184 --
Accounts receivable - affiliate 61,358 --
Equipment at cost,net of accumulated
depreciation of $10,298,292 and
$8,421,801 at September 30, 1997
and December 31, 1996, respectively 17,697,243 19,573,734
--------------- ---------------
Total assets $20,521,038 $23,700,585
--------------- ---------------
--------------- ---------------
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $9,584,576 $11,321,769
Accrued interest 121,965 118,940
Accrued liabilities 22,500 442,400
Accrued liabilities - affiliate 28,948 63,930
Deferred rental income 219,172 158,904
Cash distributions payable to partners -- 1,000,000
--------------- ---------------
Total liabilities 9,977,161 13,105,943
--------------- ---------------
Partners' capital (deficit):
General Partner (1,171,802) (1,169,264)
Limited Partnership Interests
(3,040,000 Units; initial purchase
price of $25 each) 11,715,679 11,763,906
--------------- ---------------
Total partners' capital 10,543,877 10,594,642
--------------- ---------------
Total liabilities and partners' capital $20,521,038 $23,700,585
--------------- ---------------
--------------- ---------------
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, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 1,023,474 $ 1,295,140 $ 2,828,876 $ 3,436,490
Interest income 31,655 50,213 95,839 212,786
Gain on sale of equipment -- 2,783,440 -- 2,783,440
----------- ----------- ----------- -----------
Total income 1,055,129 4,128,793 2,924,715 6,432,716
----------- ----------- ----------- -----------
Expenses:
Depreciation 625,497 792,581 1,876,491 2,448,104
Interest expense 215,966 264,302 688,127 656,316
Equipment management fees
- affiliate 51,174 64,757 141,444 171,825
Operating expenses - affiliate 94,284 198,015 269,418 450,153
----------- ----------- ----------- -----------
Total expenses 986,921 1,319,655 2,975,480 3,726,398
----------- ----------- ----------- -----------
Net income (loss) $68,208 $ 2,809,138 $ (50,765) $ 2,706,318
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss)
per limited partnership unit $ 0.02 $ 0.88 $ (0.02) $ 0.85
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Cash distributions declare
per limited partnership unit $ -- $ 1.25 $ -- $ 1.25
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from (used in)
operating activities:
Net income (loss) $ (50,765) $ 2,706,318
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation 1,876,491 2,448,104
Gain on sale of equipment -- (2,783,440)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable (104,184) 562,594
accounts receivable - affiliate (61,358) 315,942
Increase (decrease) in:
accrued interest 3,025 39,874
accrued liabilities (419,900) 139,396
accrued liabilities-affiliate (34,982) (48,224)
deferred rental income 60,268 28,650
------------- -------------
Net cash from operating activities 1,268,595 3,409,214
------------- -------------
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 (1,737,193) (2,047,206)
Distributions paid (1,000,000) (600,000)
------------- -------------
Net cash used in financing activities (2,737,193) (2,647,206)
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,468,598) 3,731,282
Cash and cash equivalents at beginning of period 4,126,851 1,079,341
------------- -------------
Cash and cash equivalents at end of period $ 2,658,253 $ 4,810,623
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 685,102 $ 616,442
------------- -------------
------------- -------------
</TABLE>
Supplemental disclosure of investing and financing activities:
At December 31, 1995, the Partnership held $4,360,599 in a special-purpose
escrow account pending the completion of an aircraft exchange (See Results
of Operations). The Partnership completed the exchange in March 1996
obtaining interests in aircraft at an aggregate cost of $13,762,438,
utilizing cash of $4,601,325 (including the escrowed funds) and third-party
financing of $9,161,113.
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
September 30, 1997
(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 1996 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1996 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, 1997 and December 31, 1996 and results of operations
for the three and nine month periods ended September 30, 1997 and 1996 have been
made and are reflected.
NOTE 2-CASH
- -----------
At September 30, 1997, the Partnership had $2,555,000 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
$6,457,498 are due as follows:
For the year ending September 30, 1998 $3,731,338
1999 2,309,424
2000 416,736
----------
Total $6,457,498
----------
----------
The Partnership entered into a new 1-year lease agreement with Aer Lease
Limited for its proportionate interest in a Lockheed L-1011-50 aircraft at a
base rent to the Partnership of $60,450 per month, beginning April 27, 1997.
NOTE 4-EQUIPMENT
- ----------------
The following is a summary of equipment owned by the Partnership at
September 30, 1997. In the opinion of Equis Financial Group Limited Partnership
("EFG"), the acquisition cost of the equipment did not exceed its fair market
value.
6
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
REMAINING
LEASE
TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST
- ------------------------------------------ ------------- -------------
Two McDonnell-Douglas MD-82 (Finnair) 19 $ 13,762,438
One Lockheed L-1011-50 (Aer Lease) 7 7,877,224
Three Boeing 737-2H4 (Southwest) 27 6,355,873
-------------
Total equipment cost 27,995,535
Accumulated depreciation (10,298,292)
-------------
Equipment, net of accumulated depreciation $ 17,697,243
-------------
-------------
The cost of each of the Partnership's aircraft represent proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All Partnerships individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.
NOTE 5-RELATED PARTY TRANSACTIONS
- ---------------------------------
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the nine month
periods ended September 30, 1997 and 1996, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
1997 1996
---------- ----------
Equipment management fees $ 141,444 $ 171,825
Administrative charges 36,537 15,750
Reimbursable operating expenses
due to third parties 232,881 434,403
---------- ----------
Total $ 410,862 $ 621,978
---------- ----------
---------- ----------
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 September 30, 1997, the Partnership was owed $61,358 by EFG
for such funds and the interest thereon. These funds were remitted to the
Partnership in October 1997.
7
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6-NOTES PAYABLE
- --------------------
Notes payable at September 30, 1997 consisted of installment notes
payable to banks of $9,584,576. All of the installment notes are
non-recourse, with interest rates ranging between 8.65% and 8.89% and are
collateralized by the equipment and assignment of the related lease payments.
All of the notes were originated in connection with the like-kind exchange
transaction involving the Southwest Aircraft and the Finnair Aircraft (See
Results of Operations). 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 of $4,671,150. The carrying amount of notes
payable approximates fair value at September 30, 1997.
The annual maturities of the installment notes payable are as follows:
For the year ending September 30, 1998 $2,615,240
1999 6,560,009
2000 409,327
----------
Total $9,584,576
----------
----------
NOTE 7-LEGAL PROCEEDINGS
- ------------------------
On June 24, 1997, four plaintiffs (the "Plaintiffs") owning limited
partner units or beneficiary interests in eight investment programs sponsored
by EFG filed a lawsuit, as a derivative action, on behalf of the Partnership
and 27 other investment programs (collectively, the "Nominal Defendants") in
the Superior Court of the Commonwealth of Massachusetts for the County of
Suffolk against EFG and certain of EFG's affiliates, including the General
Partner of the Partnership and four other wholly-owned subsidiaries of EFG
which are the general partner or managing trustee of one or more of the
investment programs, (collectively, the "Managing Defendants"), and certain
other entities and individuals that have control of the Managing Defendants
and the Nominal Defendants (the "Controlling Defendants"). The Plaintiffs
assert claims of breach of fiduciary duty, breach of contract, unjust
enrichment, and equitable relief and seek various remedies, including
compensatory and punitive damages to be determined at trial.
The General Partner and EFG are in the early stages of evaluating the
nature and extent of the claims asserted in this lawsuit and cannot predict
its outcome with any degree of certainty. However, based upon all of the
facts presently being considered by management, the General Partner and EFG
do not believe that any likely outcome will have a material adverse effect on
the Partnership. The General Partner, EFG and their affiliates intend to
vigorously defend against the lawsuit.
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.
----------------------
Certain statements in this quarterly report 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 important 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
ability of EFG to collect all rents due under the attendant lease agreements and
successfully remarket the Partnership's aircraft upon the expiration of such
leases.
Three and nine months ended September 30, 1997 compared to the three and
- ------------------------------------------------------------------------
nine months ended September 30, 1996:
- -------------------------------------
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 used 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. Subsequently, all
of the aircraft in the Partnership's original portfolio have been re-leased,
renewed, exchanged for other aircraft or sold (see below). At September 30,
1997, the Partnership owned a proportionate interest in six aircraft. All of
the Partnership's aircraft are currently on lease. 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 EFG 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, 1997, the Partnership
recognized lease revenue of $1,023,474 and $2,828,876, respectively, compared
to $1,295,140 and $3,436,490 for the same periods in 1996. The decrease in
lease revenue from 1996 to 1997 resulted from the expiration of the leases
related to the Partnership's interest in a Lockheed L-1011-50 aircraft and
the sale of two 727-251 Advanced aircraft (discussed below). These decreases
were partially offset by the Partnership's aircraft exchange, which was
concluded in the first quarter of 1996. As a result of the aircraft exchange,
the Partnership replaced its ownership interest in a Boeing 747-SP aircraft,
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). The Southwest Aircraft were exchanged into the Partnership in
1995 while the Finnair Aircraft were exchanged into the Partnership on March
25, 1996. Accordingly, revenue for the Finnair Aircraft for the nine months
ended September 30, 1996 reflected only a portion of the rents ultimately
earned from the leasing of these aircraft. In aggregate, the replacement
aircraft generated approximately $842,000 and $2,521,000 of lease revenue
during the three and nine months ended September 30, 1997, respectively,
compared to approximately $846,000 and $1,836,000 for the same periods in
1996. In the near-term lease revenue will be consistent with the three months
ended September 30, 1997, thereafter, lease revenue will decline due to the
expiration of the lease terms, described herein.
9
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
The Partnership's two lease agreements with Northwest Airlines, Inc.
("Northwest") expired on October 31, 1996. The Partnership sold both of the
Boeing 727-251 Advanced aircraft to Northwest during the second half of 1996
and, in addition to the sales proceeds, received lease termination rents with
respect to one of the aircraft. The Partnership recognized aggregate lease
revenue of $420,000 and $1,140,000 from these aircraft during the three and
nine months ended September 30, 1996, respectively.
The Partnership's renewal lease agreement with Cathay Pacific Airways,
Ltd ("Cathay") related to its interest in the Lockheed L-1011-50 aircraft
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 aircraft subsequently underwent heavy maintenance which cost
the Partnership approximately $570,000, all of which was incurred at
September 30, 1997. The Partnership entered into a new 1-year lease agreement
with Aer Lease Limited ("Aer Lease") at a base rent to the Partnership of
$60,450 per month, beginning April 27, 1997. In aggregate, the Partnership
recognized lease revenue of approximately $181,000 and $308,000 related to
this aircraft during the three and nine months ended September 30, 1997,
respectively, compared to approximately $30,000 and $461,000 for the same
periods in 1996. Currently, the demand for Lockheed 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
Lockheed L-1011 aircraft. Such circumstances inhibited the remarketing of the
Partnership's Lockheed L-1011-50 aircraft and required the Partnership to
refurbish the aircraft to meet the needs of Aer Lease.
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.
The Partnership holds a proportionate ownership interest in the Lockheed
L-1011-50 aircraft and the Southwest and Finnair Aircraft, discussed above.
The remaining interests are owned by other affiliated partnerships sponsored
by EFG. All partnerships individually report, in proportion to their
respective ownership interests, their respective shares of assets,
liabilities, revenues and expenses associated with the aircraft.
The ultimate realization of residual value for aircraft is dependent upon
many factors, including EFG's ability to sell and re-lease the aircraft.
Changing market conditions, industry trends, technological advances, and many
other events can converge to enhance or detract from asset values at any
given time. EFG attempts to monitor these 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 revenue generated from that aircraft,
together with its residual value. The latter consists of cash proceeds
realized upon the aircraft's sale in addition to all other cash receipts
obtained from renting the aircraft on a re-lease, renewal or month-to-month
basis. Consequently, the amount of any gain or loss reported in the financial
statements is not necessarily indicative of the total residual value the
Partnership achieved from leasing the aircraft.
Interest income for the three and nine months ended September 30, 1997
was $31,655 and $95,839, respectively, compared to $50,213 and $212,786 for
the same periods in 1996. Interest income is typically generated from
temporary investments of rental receipts and equipment sale proceeds in
short-term instruments.
10
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
FORM I. FINANCIAL INFORMATION
Interest income in 1996 included interest of $130,268 earned on cash held in
a special-purpose escrow account in connection with the like-kind exchange
transaction, discussed above.
For the three and nine months ended September 30, 1997, the Partnership
incurred interest expense of $215,966 and $688,127, respectively, compared to
$264,302 and $656,316 for the same periods in 1996. Interest expense in 1997
and 1996 resulted from financing obtained from third-party lenders in
connection with the Southwest Aircraft and the Finnair Aircraft. The
financing of the Finnair Aircraft occurred on March 25, 1996. Therefore,
interest expense related to the Finnair debt during the nine months ended
September 30, 1996 was only incurred from that date through the end of the
period. 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, 1997 and 1996, 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 9.2% and 9.5% of lease revenue during the
three and nine months ended September 30, 1997, respectively, compared to
15.3% and 13.1% for the same periods in 1996. During the nine months ended
September 30, 1997, significant heavy maintenance costs were incurred in
connection with the Lockheed L-1011-50 aircraft to allow the Partnership to
remarket this aircraft (see above). During the nine months ended September
30, 1996, operating expenses included legal expenses and broker fees incurred
in connection with the like-kind exchange transaction, 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 $625,497 and $1,876,491 for the three and nine
months ended September 30, 1997, respectively, compared to $792,581 and
$2,448,104 for the same periods in 1996.
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 generally derive from aircraft rental transactions. Accordingly,
the Partnership's principal source of cash from operations is generally
provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated net cash
inflows of $1,268,595 and $3,409,214 for the nine months ended September 30,
1997 and 1996, respectively. The expiration of the Partnership's lease
agreement related to its interest in the Lockheed L-1011-50 aircraft and the
sale of the two Boeing 727-251 Advanced aircraft have caused a decline in the
Partnership's lease revenue and corresponding sources of operating cash. This
has been partially offset by an increase in rents generated in connection
with the Finnair Aircraft and the re-lease of the aircraft to Aer Lease (see
Results of Operations). In addition, the Partnership has expended substantial
funds in connection with the remarketing of the Lockheed L-1011-50 aircraft.
Overall, expenses associated with rental activities, such as management fees,
and net cash flow from operating activities decline as the Partnership
remarkets its aircraft. Conversely, the Partnership may incur increased costs
to insure the successful remarketing of these aircraft. Ultimately, the
Partnership will dispose of all aircraft under lease. This will occur
principallythrough sale transactions whereby each aircraft will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each aircraft's primary or renewal/re-lease term.
11
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Cash expended for equipment acquisitions and cash realized from 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. 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
acquisitions or sales during the same period in 1997. 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 and Finnair Aircraft. The repayments of principal related to
such indebtedness are reported as a component of financing activities. 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, all of the
rental payment will be used to repay principal and interest. The Partnership
also has balloon payment obligations at the expiration of the primary lease
term related to the Finnair Aircraft of $4,671,150.
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 conditions,
technological changes, the ability of EFG 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 and current cash reserves 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. Accordingly, the General Partner did not declare a cash
distribution during the first three quarters of 1997 and expects to suspend
the declaration of quarterly cash distributions between the periods
corresponding to major remarketing events.
12
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Response:
Refer to Note 7 to the financial statement herein.
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
13
<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 14, 1997
-------------------------------------------------
By: /s/ Gary M. Romano
-------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 14, 1997
-------------------------------------------------
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,658,253
<SECURITIES> 0
<RECEIVABLES> 165,542
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,823,795
<PP&E> 27,995,535
<DEPRECIATION> 10,298,292
<TOTAL-ASSETS> 20,521,038
<CURRENT-LIABILITIES> 392,585
<BONDS> 9,584,576
0
0
<COMMON> 0
<OTHER-SE> 10,543,877
<TOTAL-LIABILITY-AND-EQUITY> 20,521,038
<SALES> 0
<TOTAL-REVENUES> 2,924,715
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,287,353
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 688,127
<INCOME-PRETAX> 50,765
<INCOME-TAX> 0
<INCOME-CONTINUING> 50,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,765
<EPS-PRIMARY> 0
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</TABLE>
