<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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, 1998 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
incorporation or organization) organization)
88 BROAD STREET, BOSTON, MA 02110
(Address of principal executive offices) (Zip Code)
(617) 854-5800
Registrant's telephone number, including area code
(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 / /
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<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position at September 30, 1998 and December 31, 1997........................... 3
Statement of Operations for the three and nine months ended September 30, 1998 and 1997............... 4
Statement of Cash Flows for the nine months ended September 30, 1998 and 1997......................... 5
Notes to the Financial Statements..................................................................... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 10-14
PART II. OTHER INFORMATION:
Items 1 - 6............................................................................................. 15
</TABLE>
2
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 3,604,829 $ 2,671,041
Rents receivable...................................... 104,184 121,626
Equipment at cost, net of accumulated depreciation of
$5,346,104 and $10,923,789 at September 30, 1998 and
December 31, 1997, respectively...................... 14,772,207 17,071,746
------------- ------------
Total assets...................................... $ 18,481,220 $ 19,864,413
------------- ------------
------------- ------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable......................................... $ 6,969,335 $ 8,864,307
Accrued interest...................................... 91,314 98,052
Accrued liabilities................................... 329,000 8,250
Accrued liabilities -- affiliate...................... 28,254 36,219
Deferred rental income................................ 164,767 213,287
------------- ------------
Total liabilities................................. 7,582,670 9,220,115
------------- ------------
Partners' capital (deficit):
General Partner..................................... (1,154,068) (1,166,781)
Limited Partnership Interests
(3,040,000 Units; initial purchase price of $25
each)............................................. 12,052,618 11,811,079
------------- ------------
Total partners' capital........................... 10,898,550 10,644,298
------------- ------------
Total liabilities and partners' capital........... $ 18,481,220 $ 19,864,413
------------- ------------
------------- ------------
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income:
Lease revenue..................... $ 846,189 $ 1,023,474 $ 2,767,177 $ 2,828,876
Interest income................... 49,358 31,655 124,334 95,839
Gain on sale of equipment......... -- -- 188,018 --
--------- ----------- ----------- -----------
Total income.................... 895,547 1,055,129 3,079,529 2,924,715
--------- ----------- ----------- -----------
Expenses:
Depreciation...................... 510,666 625,497 1,641,257 1,876,491
Interest expense.................. 158,897 215,966 520,584 688,127
Equipment management fees --
affiliate....................... 42,310 51,174 138,359 141,444
Operating expenses -- affiliate... 56,244 94,284 525,077 269,418
--------- ----------- ----------- -----------
Total expenses.................. 768,117 986,921 2,825,277 2,975,480
--------- ----------- ----------- -----------
Net income (loss)................... $ 127,430 $ 68,208 $ 254,252 $ (50,765)
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Net income (loss) per limited
partnership unit................... $ 0.04 $ 0.02 $ 0.08 $ (0.02)
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss)..................................... $ 254,252 $ (50,765)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation...................................... 1,641,257 1,876,491
Gain on sale of equipment......................... (188,018) --
Changes in assets and liabilities
(Increase) decrease in:
rents receivable.................................. 17,442 (104,184)
accounts receivable -- affiliate.................. -- (61,358)
Increase (decrease) in:
accrued interest.................................. (6,738) 3,025
accrued liabilities............................... 320,750 (419,900)
accrued liabilities -- affiliate.................. (7,965) (34,982)
deferred rental income............................ (48,520) 60,268
------------ ------------
Net cash from operating activities.............. 1,982,460 1,268,595
------------ ------------
Cash flows from investing activities:
Proceeds from equipment sale........................ 846,300 --
------------ ------------
Net cash from investing activities.............. 846,300 --
------------ ------------
Cash flows used in financing activities:
Principal payments -- notes payable................. (1,894,972) (1,737,193)
Distributions paid.................................. -- (1,000,000)
------------ ------------
Net cash used in financing activities........... (1,894,972) (2,737,193)
------------ ------------
Net increase (decrease) in cash and cash
equivalents.......................................... 933,788 (1,468,598)
Cash and cash equivalents at beginning of period...... 2,671,041 4,126,851
------------ ------------
Cash and cash equivalents at end of period............ $ 3,604,829 $ 2,658,253
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $ 527,322 $ 685,102
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
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 1997 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1997 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, 1998 and December 31, 1997 and results of operations
for the three and nine months ended September 30, 1998 and 1997 have been made
and are reflected.
NOTE 2 -- CASH
At September 30, 1998, the Partnership had $3,496,575 invested in federal
agency discount notes and 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
$2,726,160 are due as follows:
<TABLE>
<S> <C>
For the year ending September 30, 1999 $2,309,424
2000 416,736
----------
Total $2,726,160
----------
----------
</TABLE>
NOTE 4 -- EQUIPMENT
The following is a summary of equipment owned by the Partnership at
September 30, 1998. Remaining Lease Term (Months), as used below, represents the
number of months remaining from September 30, 1998 under contracted lease terms.
In the opinion of Equis Financial Group Limited Partnership ("EFG") the
acquisition cost of the equipment did not exceed its fair market value.
<TABLE>
<CAPTION>
REMAINING
LEASE TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST
------------------------------------------------------ ---------- ------------
<S> <C> <C>
Two McDonnell-Douglas MD-82 (Finnair)................. 7 $ 13,762,438
Three Boeing 737-2H4 (Southwest)...................... 15 6,355,873
------------
Total equipment cost 20,118,311
Accumulated depreciation (5,346,104)
------------
Equipment, net of accumulated depreciation $ 14,772,207
------------
------------
</TABLE>
6
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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, 1998 and 1997, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Equipment management fees................................... $138,359 $141,444
Administrative charges...................................... 39,753 36,537
Reimbursable operating expenses due to third parties........ 485,324 232,881
-------- --------
Total................................................... $663,436 $410,862
-------- --------
-------- --------
</TABLE>
NOTE 6 -- NOTES PAYABLE
Notes payable at September 30, 1998 consisted of installment notes payable
to banks of $6,969,335. 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. The installment notes
related to the aircraft on lease to Southwest Airlines, Inc. 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 aircraft
on lease to Finnair OY of $4,671,150. The carrying amount of notes payable
approximates fair value at September 30, 1998.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C>
For the year ending September 30, 1999 $6,560,003
2000 409,332
----------
Total $6,969,335
----------
----------
</TABLE>
NOTE 7 -- LEGAL PROCEEDINGS
On or about January 15, 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."
7
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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 July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth the terms pursuant to which a settlement
of the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and supersedes a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998. On August 20, 1998, the Court issued its
"Order Preliminarily Approving Settlement, Conditionally Certifying Settlement
Class and Providing for Notice of, and Hearing on, the Proposed Settlement" (the
"August 20 Order"). The Court's August 20 Order enjoined certain class members,
including all of the partners of the Partnership, from transferring, selling,
assigning, giving, pledging, hypothesizing, or otherwise disposing of any Units
pending the Court's final determination of whether the settlement should be
approved. Similarly, the August 20 Order enjoined the General Partner of the
Partnership (and the general partners of certain affiliated partnerships) from,
among other things, recording any such transfers.
The Stipulation of Settlement, as preliminarily approved by the Court,
contemplates various changes that, if effected, would alter the future
operations of the Nominal Defendants. With respect to the Partnership and 10
affiliated partnerships (hereafter referred to as the "Exchange Partnerships"),
the Stipulation of Settlement provides for the restructuring of their respective
business operations into a single successor company whose securities would be
listed and traded on a national securities exchange. The partners of the
Exchange Partnerships would receive both common stock in the new company and a
cash distribution in exchange for their existing partnership interests. Such a
transaction would, among other things, allow for the consolidation of the
Partnership's operating expenses with other similarly organized equipment
leasing programs. The Stipulation of Settlement prescribes certain conditions
necessary to effecting the settlement, including providing the partners of the
Exchange Partnerships with the opportunity to object to the participation of
their partnership in the restructuring.
A preliminary Solicitation Statement, describing, among other things, the
various terms of settlement, was filed with the Securities and Exchange
Commission on August 25, 1998. Upon completion of the review process, a
definitive Solicitation Statement will be distributed to all of the partners of
the Exchange Partnerships to enable them to vote on the restructuring. Prior to
the settlement becoming final, the Court will hold a hearing on the settlement
that will be open to all interested parties. The Court has scheduled a hearing
date for December 11, 1998. Currently, it is anticipated that a request for
extension will be filed with the Court to permit sufficient time to complete the
regulatory review process and print and mail the definitive Solicitation
Statement. Class members will be notified of the final hearing date in advance.
There can be no assurance that the outcome of the voting by the partners of
the Exchange Partnerships, including the Partnership, will result in all or any
of the Exchange Partnerships, including the Partnership, being included in the
proposed restructuring. There also can be no assurance that a settlement,
including the restructuring, will be approved by the Court and effected. The
General Partner and its affiliates, in consultation with counsel, concur that
there is a reasonable basis to believe that a final settlement will be achieved.
However, in the absence of a final settlement approved by the Court, the
8
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. The General Partner and its affiliates cannot predict with any
degree of certainty the ultimate outcome of such litigation.
9
<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 of AIRFUND International Limited
Partnership (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 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
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, and the ability of Equis Financial Group Limited
Partnership, (formerly American Finance Group) ("EFG"), to collect all rents due
under the attendant lease agreements and successfully remarket the Partnership's
equipment upon the expiration of such leases.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer programming
logic to correctly identify the calendar year. Many companies utilize computer
programs or hardware with date sensitive software or embedded chips that could
interpret dates ending in "00" as the year 1900 rather than the year 2000. In
certain cases, such errors could result in system failures or miscalculations
that disrupt the operations of the affected businesses. The Partnership uses
information systems provided by EFG and has no information systems of its own.
EFG has adopted a plan to address the Year 2000 Issue that consists of four
phases: assessment, remediation, testing, and implementation and has elected to
utilize principally internal resources to perform all phases. Presently, EFG
anticipates completing its Year 2000 project by December 31, 1998 at a di
minimus cost to the Partnership. Aggregate costs for the entire project are
anticipated to be less than $50,000, all of which will have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of original
design to use a four-digit field to identify calendar year. All of the
Partnership's lease billings, cash receipts and equipment remarketing processes
are performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and are expected to require only minor modifications to function properly with
respect to dates in the year 2000 and thereafter. Moreover, EFG understands that
each of its and the Partnership's significant vendors and third-party servicers
are in the process, or have completed the process, of making their systems Year
2000 compliant. Substantially all parties queried have indicated that their
systems will be Year 2000 compliant by the end of 1998. Presently, EFG is not
aware of any outside customer with a Year 2000 Issue that would have a material
effect on the Partnership's results of operations, liquidity, or financial
position. However, non-compliance on the part of a lessee could, under a worse
case scenario, result in lost revenues to the Partnership.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Partnership's business operations. However, EFG has no means of ensuring that
all customers, vendors and third-party servicers will conform ultimately to Year
2000 standards. The effect of this risk to the Partnership is not determinable.
10
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997:
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. At September 30, 1998, the
Partnership owned a proportionate interest in five aircraft, all of which were
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.
Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit. The
outcome of the Class Action Lawsuit could alter the nature of the Partnership's
organization and its future business operations. See Note 7 to the accompanying
financial statements.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 1998, the Partnership
recognized lease revenue of $846,189 and $2,767,177, respectively, compared to
$1,023,474 and $2,828,876 for the same periods in 1997. The decrease in lease
revenue for the nine months ended September 30, 1998 compared to the same period
in 1997 resulted from the sale, at the expiration of the aircraft's lease term,
on April 29,1998, of the Partnership's proportional interest in a Lockheed
L-1011-50 aircraft to Aer Lease Limited ("Aer Lease"). The Partnership
recognized lease revenue of $246,582 and $308,259 related to this aircraft for
the nine months ended September 30, 1998 and 1997, respectively. The Partnership
realized net proceeds of $846,300 from the sale of this aircraft. The
Partnership's interest in the aircraft had a net book value of $658,282 at the
time of sale, resulting in the recognition of a net gain on sale, for financial
statement purposes, of $188,018 during the nine months ending September 30,
1998.
The three Boeing 737-2H4 aircraft (the "Southwest Aircraft") in which the
Partnership holds a proportionate interest are currently on lease to Southwest
Airlines, Inc. These leases are scheduled to expire on December 31, 1999 and
provide lease revenue of $104,184 per month to the Partnership. Additionally,
the two McDonnell-Douglas MD-82 aircraft (the "Finnair Aircraft"), in which the
Partnership holds a proportionate interest, are currently on lease to Finnair
OY. These leases are scheduled to expire on April 28, 1999 and provide lease
revenue of $529,608 per quarter to the Partnership. In the future, lease revenue
is scheduled to decline due to the the expiration of the lease terms related to
the Partnership's remaining aircraft.
At September 30, 1998, the Partnership held a proportionate ownership
interest in the Southwest and Finnair Aircraft (see Note 4 to the financial
statements). 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.
11
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 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 month periods ending September 30,
1998 was $49,358 and $124,334 compared to $31,655 and $95,839 for the same
period in 1997. Interest income is typically generated from temporary
investments of rental receipts and equipment sale proceeds in short-term
instruments.
For the three and nine months ending September 30, 1998, the Partnership
incurred interest expense of $158,897 and $520,584, respectively, compared to
$215,966 and $688,127 for the same periods in 1997. Interest expense in future
periods is expected to continue 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 three and nine
month periods ended September 30, 1998 and 1997, 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. Operating expenses were $56,244
and $525,077 for the three and nine months ended September 30, 1998,
respectively, compared to $94,284 and $269,418 for the same periods in 1997.
During the nine months ended September 30, 1998, the Partnership incurred or
accrued approximately $334,000 for certain legal and administrative expenses
related to the Class Action Lawsuit described in Note 7 to the accompanying
financial statements. In 1997, operating expenses included refurbishment costs
incurred in connection with the Partnership's interest in the L-1011-50 aircraft
to meet the needs of Aer Lease. 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 $510,666 and $1,641,257 for the three and nine months
ended September 30, 1998, compared to $625,497 and $1,876,491 for the same
periods in 1997.
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 $1,982,460 and $1,268,595 for the nine months
ended September 30, 1998 and 1997, respectively. Overall, expenses associated
with rental activities, such as management fees, and net cash flow from
operating activities decline as the Partnership remarkets its
12
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 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 or renewal/re-lease term.
Cash realized from aircraft disposal transactions is reported under
investing activities on the accompanying Statement of Cash Flows. For the nine
months ended September 30,1998, the Partnership realized net cash proceeds of
$846,300. No aircraft sales occurred during the corresponding period in 1997.
Such proceeds related to the sale, to Aer Lease, of the Partnership's interest
in the L-1011-50 aircraft. Future inflows of cash from aircraft 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
aircraft being sold, their condition and age, and future market conditions.
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 (generally referred to as permanent or timing differences;
see Note 6 to the financial statements presented in the Partnership's 1997
Annual Report). For instance, selling commissions, organization and offering
costs pertaining to syndication of the Partnership's limited partnership units
are not deductible for federal income tax purposes but are recorded as a
reduction of partners' capital for financial reporting purposes. Therefore, such
differences are permanent differences between capital accounts for financial
reporting and federal income tax purposes. Other differences between the bases
of capital accounts for federal income tax and financial reporting purposes
occur due to timing differences. Such items consist of the cumulative difference
between income or loss for tax purposes and financial statement income or loss,
the difference between distributions (declared vs. paid) for income tax and
financial reporting purposes, and the treatment of unrealized gains or losses on
investment securities, if any, 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 September 30, 1998. 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 Amended and Restated
Agreement and Certificate of Limited Partnership, 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, 1997, the
General Partner had a positive tax capital account balance.
At September 30, 1998, the Partnership had aggregate future minimum lease
payments of $2,726,160 from contractual lease agreements (see Note 3 to the
financial statements), a portion of which will be used to amortize the principal
balance of notes payable of $6,969,335 (see Note 6 to the financial statements).
At the expiration of the individual primary lease terms underlying the
Partnership's future minimum lease payments, the Partnership will sell the
aircraft 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 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 is
often dependent upon the needs and interests of the existing lessees. Some
lessees
13
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
may choose to renew their lease contracts, while others may elect to return the
aircraft. In the latter instances, the aircraft could be re-leased to another
lessee or sold to a third party. Accordingly, as the terms of the currently
existing contractual lease agreements expire, the cash flows of the Partnership
will become less predictable. In addition, the Partnership will have cash
outflows to satisfy interest on indebtedness and to pay management fees and
operating expenses. The Partnership may also be required to expend funds to
refurbish or otherwise improve the aircraft being remarketed in order to make
them more desirable to a potential lessee or purchaser. Ultimately, the
Partnership is expected to meet its future disbursement obligations and to
distribute any excess of cash inflows over cash outflows to the Partners in
accordance with the Amended and Restated Agreement and Certificate of Limited
Partnership. However, several factors, including month-to-month lease
extensions, lessee defaults, equipment casualty events, and early lease
terminations could alter the timing and amount of the Partnership's anticipated
cash flows as described herein and in the accompanying financial statements and
result in fluctuations to the Partnership's future periodic cash distribution
payments. Further, the outcome of the Class Action Lawsuit described above could
effect the ability of the Partnership to collect all of its contracted future
minimum lease payments and remarketing proceeds, as well as the amount and
timing of future cash distributions to the Partners.
The Partnership obtained long-term financing in connection with like-kind
exchange transactions involving the acquisition of 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 also has a balloon payment obligation 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,
as well as the outcome of the Class Action Lawsuit described in Note 7 to the
accompanying financial statements. The General Partner anticipates that cash
proceeds resulting from the collection of contractual rents and the outcome of
residual activities will satisfy the Partnership's future expense obligations.
However, it is important to note that all of the Partnership's lease agreements
are scheduled to expire by the end of 1999 and that the Partnership will be
required to maintain sufficient liquidity to address future remarketing costs,
including potential modifications to the Partnership's aircraft in order to sell
or re-lease the aircraft at an attractive price. Accordingly, the General
Partner expects to continue to suspend the declaration of future cash
distributions pending further developments in the remarketing requirements for
the Partnership's remaining aircraft.
14
<PAGE>
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings
Response:
Refer to Note 7 to the financial statements 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
</TABLE>
15
<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
<TABLE>
<S> <C>
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, 1998
----------------------------------------------
By: /s/ GARY M. ROMANO
----------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 13, 1998
----------------------------------------------
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,604,829
<SECURITIES> 0
<RECEIVABLES> 104,184
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,709,013
<PP&E> 20,118,311
<DEPRECIATION> 14,772,207
<TOTAL-ASSETS> 18,481,220
<CURRENT-LIABILITIES> 613,335
<BONDS> 6,969,335
0
0
<COMMON> 0
<OTHER-SE> 10,898,550
<TOTAL-LIABILITY-AND-EQUITY> 18,481,220
<SALES> 0
<TOTAL-REVENUES> 3,079,529
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,304,693
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 520,584
<INCOME-PRETAX> 254,252
<INCOME-TAX> 0
<INCOME-CONTINUING> 254,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 254,252
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
