<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, 1999
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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, 1999 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
----- ----
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AIRFUND International Limited Partnership
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION:
<S> <C>
Item 1. Financial Statements
Statement of Financial Position
at September 30, 1999 and December 31, 1998 3
Statement of Operations
for the three and nine months ended September 30, 1999 and 1998 4
Statement of Cash Flows
for the nine months ended September 30, 1999 and 1998 5
Notes to the Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
PART II. OTHER INFORMATION:
Items 1 - 6 16
</TABLE>
2
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AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
September 30, 1999 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,251,466 $ 3,540,736
Rents receivable 208,368 104,184
Equipment at cost, net of accumulated depreciation
of $7,394,702 and $5,857,207 at September 30, 1999
and December 31, 1998, respectively 12,723,609 14,261,104
------------ ------------
Total assets $ 16,183,443 $ 17,906,024
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 4,215,937 $ 6,279,100
Accrued interest 53,318 83,223
Accrued liabilities 203,323 288,500
Accrued liabilities - affiliate 25,510 20,698
Deferred rental income 170,089 158,882
------------ ------------
Total liabilities 4,668,177 6,830,403
------------ ------------
Partners' capital (deficit):
General Partner (1,123,233) (1,145,215)
Limited Partnership Interests
(3,040,000 Units; initial purchase price of $25 each) 12,638,499 12,220,836
------------ ------------
Total partners' capital 11,515,266 11,075,621
------------ ------------
Total liabilities and partners' capital $ 16,183,443 $ 17,906,024
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
3
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AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the three and nine months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 840,415 $ 846,189 $2,511,783 $2,767,177
Interest income 41,056 49,358 117,173 124,334
Gain on sale of equipment -- -- -- 188,018
---------- ---------- ---------- ----------
Total income 881,471 895,547 2,628,956 3,079,529
---------- ---------- ---------- ----------
Expenses:
Depreciation 515,286 510,666 1,537,495 1,641,257
Interest expense 89,587 158,897 325,739 520,584
Equipment management fees - affiliate 42,021 42,310 125,589 138,359
Operating expenses - affiliate 48,349 56,244 200,488 525,077
---------- ---------- ---------- ----------
Total expenses 695,243 768,117 2,189,311 2,825,277
---------- ---------- ---------- ----------
Net income $ 186,228 $ 127,430 $ 439,645 $ 254,252
========== ========== ========== ==========
Net income
per limited partnership unit $ 0.06 $ 0.04 $ 0.14 $ 0.08
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
4
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AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 439,645 $ 254,252
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 1,537,495 1,641,257
Gain on sale of equipment -- (188,018)
Changes in assets and liabilities Decrease (increase) in:
Rents receivable (104,184) 17,442
Increase (decrease) in:
Accrued interest (29,905) (6,738)
Accrued liabilities (85,177) 320,750
Accrued liabilities - affiliate 4,812 (7,965)
Deferred rental income 11,207 (48,520)
----------- -----------
Net cash from operating activities 1,773,893 1,982,460
----------- -----------
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 (2,063,163) (1,894,972)
----------- -----------
Net cash used in financing activities (2,063,163) (1,894,972)
----------- -----------
Net increase (decrease) in cash and cash equivalents (289,270) 933,788
Cash and cash equivalents at beginning of period 3,540,736 2,671,041
----------- -----------
Cash and cash equivalents at end of period $ 3,251,466 $ 3,604,829
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 355,644 $ 527,322
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
5
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
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 1998 Annual Report. Except as
disclosed herein, there has been no material change to the information
presented in the footnotes to the 1998 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, 1999 and December 31, 1998 and results of
operations for the three and nine month periods ended September 30, 1999 and
1998 have been made and are reflected.
NOTE 2 - CASH AND CASH EQUIVALENTS
At September 30, 1999, AIRFUND International Limited Partnership (the
"Partnership") had $3,138,221 invested in federal agency discount notes,
repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities, or other highly liquid overnight investments.
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. In certain instances,
the Partnership may enter renewal or re-lease agreements which expire beyond
the Partnership's anticipated dissolution date. This circumstance is not
expected to prevent the orderly wind-up of the Partnership's business
activities as the General Partner and Equis Financial Group Limited
Partnership ("EFG") would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the
amount of future noncancellable rental payments associated with the attendant
lease agreements. See also Note 7 regarding the Class Action Lawsuit. Future
minimum rents of $2,259,897 are due as follows:
<TABLE>
<S> <C> <C>
For the year ending September 30, 2000 $ 1,733,778
2001 526,119
--------------
Total $ 2,259,897
==============
</TABLE>
In December 1998, the Partnership and certain affiliated leasing
programs owning interests in two McDonnell Douglas MD-82 aircraft entered
into lease extension agreements with Finnair OY. The lease extensions,
effective upon the expiration of the existing primary lease terms on April
28, 1999, extended the leases for nine months and two years, respectively.
6
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AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
September 30, 1999. Remaining Lease Term (Months), as used below, represents
the number of months remaining from September 30, 1999 under contracted lease
terms. In the opinion of 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) 4-19 $ 13,762,438
Three Boeing 737-2H4 (Southwest) 3 6,355,873
--------------
Total equipment cost 20,118,311
Accumulated depreciation (7,394,702)
--------------
Equipment, net of accumulated depreciation $ 12,723,609
==============
</TABLE>
The cost of each of the Partnership's aircraft represents 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.
All of the remaining aircraft summarized above and related lease payment
streams were used to secure term loans with third-party lenders (see Note 6).
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, 1999 and 1998, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Equipment management fees $ 125,589 $ 138,359
Administrative charges 57,850 39,753
Reimbursable operating expenses
due to third parties 142,638 485,324
----------- -----------
Total $ 326,077 $ 663,436
=========== ===========
</TABLE>
All rents and the 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.
7
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
Administrative charges represent amounts owed to EFG, pursuant to
Section 10.4 of the Amended and Restated Agreement and Certificate of Limited
Partnership (the "Restated Agreement, as amended"), for persons employed by
EFG who are engaged in providing administrative services to the Partnership.
Administrative charges and reimbursable operating expenses for the nine
months ended September 30, 1999 include adjustments for 1998 actual costs of
approximately $13,000 and $9,000, respectively.
NOTE 6 - NOTES PAYABLE
Notes payable at September 30, 1999 consisted of installment notes
payable to banks of $4,215,937. All of the installment notes are
non-recourse, with interest rates ranging between 8.09% and 8.65% 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
balloon payment obligations at the expiration of the renewal lease terms
related to the aircraft on lease to Finnair OY of $1,654,607 and $441,154.
This indebtedness matures in January 2000 and April 2001, respectively. The
carrying amount of notes payable approximates fair value at September 30,
1999.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C> <C>
For the year ending September 30,2000 $ 3,290,586
2001 925,351
----------------
Total $ 4,215,937
================
</TABLE>
NOTE 7 - LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL
GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court for
the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a
number of its affiliates, including the General Partner, as defendants
(collectively, the "Defendants"). Certain of the Plaintiffs, on or about June
24, 1997, had filed an earlier derivative action, captioned LEONARD
ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in
the Superior Court of the Commonwealth of Massachusetts on behalf of the
Nominal Defendants against the Defendants. Both actions are referred to
herein collectively as the "Class Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the
Securities Exchange Act of 1934, common law fraud, breach of contract, breach
of fiduciary duty, and violations of the partnership or trust agreements that
govern each of the Nominal Defendants. The Defendants have denied, and
continue to deny, that any of them have committed or threatened to commit any
violations of law or breached any fiduciary duties to the Plaintiffs or the
Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed
a Stipulation of Settlement setting forth 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 preliminarily
approved by the Court on August 20, 1998 when 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").
8
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AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
On March 12, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which
was filed with the Court on March 12, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divided
the Class Action Lawsuit into two separate sub-classes that could be settled
individually. On May 26, 1999, the Court issued an Order and Final Judgment
approving settlement of one of the sub-classes. Settlement of the second
sub-class, involving the Partnership and 10 affiliated partnerships
(collectively referred to as the "Exchange Partnerships"), remains pending
due, in part, to the complexity of the proposed settlement pertaining to this
class. Prior to issuing a final order approving the settlement of the second
sub-class involving the Partnership, the Court will hold a fairness hearing
that will be open to all interested parties and permit any party to object to
the settlement. The investors of the Partnership and all other plaintiff
sub-class members will receive a Notice of Settlement and other information
pertinent to the settlement of their claims that will be mailed to them in
advance of the fairness hearing.
The settlement of the second sub-class is premised on the consolidation
of the Exchange Partnerships' net assets (the "Consolidation"), subject to
certain conditions, into a single successor company ("Newco"). Under the
proposed Consolidation, the partners of the Exchange Partnerships would
receive both common stock in Newco and a cash distribution; and thereupon the
Exchange Partnerships would be dissolved. In addition, EFG would contribute
certain management contracts, operations personnel, and business
opportunities to Newco and cancel its current management contracts with all
of the Exchange Partnerships. Newco would operate as a finance company
specializing in the acquisition, financing and servicing of equipment leases
for its own account and for the account of others on a contract basis. Newco
also would use its best efforts to list its shares on the NASDAQ National
Market or another national exchange or market as soon after the Consolidation
as Newco deems that market conditions and its business operations are
suitable for listing its shares and Newco has satisfied all necessary
regulatory and listing requirements. The potential benefits and risks of the
Consolidation will be presented in a Solicitation Statement that will be
mailed to all of the partners of the Exchange Partnerships as soon as the
associated regulatory review process is completed and at least 60 days prior
to the fairness hearing. A preliminary Solicitation Statement was filed with
the Securities and Exchange Commission on August 24, 1998 and remains
pending. Class members will be notified of the actual fairness hearing date
when it is confirmed.
One of the principal objectives of the Consolidation is to create a
company that would have the potential to generate more value for the benefit
of existing limited partners than other alternatives, including continuing
the Partnership's customary business operations until all of its assets are
disposed in the ordinary course of business. To facilitate the realization of
this objective, the Amended Stipulation provides, among other things, that
commencing March 22, 1999, the Exchange Partnerships may collectively invest
up to 40% of the total aggregate net asset values of all of the Exchange
Partnerships in any investment, including additional equipment and other
business activities that the general partners of the Exchange Partnerships
and EFG reasonably believe to be consistent with the anticipated business
interests and objectives of Newco, subject to certain limitations, including
that the Exchange Partnerships retain sufficient cash balances to pay their
respective shares of the cash distribution that is part of the proposed
settlement and Consolidation.
In the absence of the Court's authorization to enter into such
activities, the Partnership's Restated Agreement, as amended, would not
permit new investment activities without the approval of limited partners
owning a majority of the Partnership's outstanding Units. Accordingly, to the
extent that the Partnership invests in new equipment, the Manager (being EFG)
will (i) defer, until the earlier of the effective date of the Consolidation
or December 31, 1999, any acquisition fees resulting therefrom and (ii) limit
its management fees on all such assets to 2% of rental income. In the event
that the Consolidation is consummated, all such acquisition and management
fees will be paid to Newco. To the extent that the Partnership invests in
other business activities not consisting of equipment acquisitions, the
Manager will forego any acquisition fees and management fees related to such
investments. In the event that the Partnership has acquired new investments,
but the Partnership does
9
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AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
not participate in the Consolidation, Newco will acquire such new investments
for an amount equal to the Partnership's net equity investment plus an
annualized return thereon of 7.5%. Finally, in the event that the Partnership
has acquired new investments and the Consolidation is not effected, the
General Partner will use its best efforts to divest all such new investments
in an orderly and timely fashion and the Manager will cancel or return to the
Partnership any acquisition or management fees resulting from such new
investments. To date, the General Partner has not authorized new investment
activities involving the Partnership.
The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting a final settlement, including
providing the partners of the Exchange Partnerships with the opportunity to
object to the participation of their partnership in the Consolidation.
Assuming the proposed settlement is effected according to present terms, the
Partnership's share of legal fees and expenses related to the Class Action
Lawsuit is estimated to be approximately $81,000 all of which was accrued and
expensed by the Partnership in 1998. In addition, the Partnership's share of
fees and expenses related to the proposed Consolidation is estimated to be
approximately $255,000, all of which also was accrued and expensed by the
Partnership in 1998.
While the Court's August 20 Order enjoined certain class members,
including all of the partners of the Partnership, from transferring, selling,
assigning, giving, pledging, hypothecating, or otherwise disposing of any
Units pending the Court's final determination of whether the settlement
should be approved, the March 22 Order permits the partners to transfer Units
to family members or as a result of the divorce, disability or death of the
partner. No other transfers are permitted pending the Court's final
determination of whether the settlement should be approved. The provision of
the August 20 Order which enjoined the General Partners of the Exchange
Partnerships from, among other things, recording any transfers not in
accordance with the Court's order remains effective.
There can be no assurance that settlement of the sub-class involving the
Exchange Partnerships will receive final Court approval and be effected.
There also can be no assurance that all or any of the Exchange Partnerships
will participate in the Consolidation because if limited partners owning more
than one-third of the outstanding Units of a partnership object to the
Consolidation, then that partnership will be excluded from the Consolidation.
The General Partner and its affiliates, in consultation with counsel, concur
that there is a reasonable basis to believe that a final settlement of the
sub-class involving the Exchange Partnerships will be achieved. However, in
the absence of a final settlement approved by the Court, the Defendants
intend to defend vigorously against the claims asserted in the Class Action
Lawsuit. Neither the General Partner nor its affiliates can predict with any
degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome.
10
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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 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 remarketing of the
Partnership's equipment.
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
Equis Financial Group Limited Partnership (formerly American Finance Group)
("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. EFG has completed its
Year 2000 project at an aggregate cost of less than $50,000 and at a di
minimus cost to the Partnership. All costs incurred in connection with EFG's
Year 2000 project have been expensed as incurred.
EFG's primary information software was coded by a third party 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 have required only minor
modifications to function properly with respect to dates in the year 2000 and
thereafter. 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 indicated that their systems would 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. The Partnership's equipment
leases were structured as triple net leases, meaning that the lessees are
responsible for, among other things, (i) maintaining and servicing all
equipment during the lease term, (ii) ensuring that all equipment functions
properly and is returned in good condition, normal wear and tear excepted,
and (iii) insuring the assets against casualty and other events of loss.
Non-compliance with lease terms on the part of a lessee, including failure to
address Year 2000 Issues could result in lost revenues and impairment of
residual values of the Partnership's equipment assets under a worst-case
scenario.
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.
11
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998:
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, 1999, the
Partnership owned a proportionate interest in five 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 EFG's assessment of such conditions to obtain the most
advantageous economic benefit. Presently, the Partnership is a Nominal
Defendant in a Class Action Lawsuit, the outcome of which could significantly
alter the nature of the Partnership's organization and its future business
operations. See Note 7 to the accompanying financial statements. Pursuant to
the Restated Agreement, as amended, the Partnership is scheduled to be
dissolved by December 31, 2004.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 1999, the Partnership
recognized lease revenue of $840,415 and $2,511,783, respectively, compared
to $846,189 and $2,767,177 for the same periods in 1998. The decrease in
lease revenue from 1998 to 1999 is primarily the result of the sale in April
1998 of the Partnership's interest in a Lockheed L-1011-50 aircraft. In the
future, the Partnership's aggregate lease revenue is expected to decline due
to aircraft sales and the expiration of the lease terms related to the
Partnership's remaining aircraft.
The three Boeing 737-2H4 aircraft in which the Partnership holds a
proportionate interest are currently on lease to Southwest Airlines, Inc.
(the "Southwest Aircraft"). These leases are scheduled to expire in December
1999 and collectively provide lease revenue of $312,552 per quarter to the
Partnership. Additionally, the two McDonnell-Douglas MD-82 aircraft in which
the Partnership holds a proportionate interest are currently on lease to
Finnair OY (the "Finnair Aircraft"). These leases, which were renewed upon
the expiration of the primary lease terms in April 1999, are scheduled to
expire in January 2000 and April 2001 and generate lease revenue of $264,804
and $263,060 per quarter to the Partnership, respectively (see further
discussion below).
At September 30, 1999, the Partnership held a proportionate ownership
interest in the Southwest Aircraft and the 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.
On April 29, 1998, at the expiration of the aircraft's lease term, the
Partnership sold its proportional interest in a Lockheed L-1011-50 aircraft,
formerly leased to Aer Lease Limited ("Aer Lease"), to the lessee for net
proceeds of $846,300. 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. There were
no equipment sales during 1999.
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 and 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.
12
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
The total economic value realized for 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, 1999 was $41,056 and $117,173, respectively, compared to $49,358 and
$124,334 for the same periods in 1998. 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 ended September 30, 1999, the Partnership
incurred interest expense of $89,587 and $325,739, respectively, compared to
$158,897 and $520,584 for the same periods in 1998. 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, 1999 and 1998.
Operating expenses were $48,349 and $200,488 for the three and nine
months ended September 30, 1999, respectively, compared to $56,244 and
$525,077 for the same periods in 1998. Operating expenses in 1999 include an
adjustment for 1998 actual administrative charges and third party costs of
approximately $22,000. During 1998, the Partnership incurred or accrued
$334,000 for certain legal and Consolidation expenses related to the Class
Action Lawsuit described in Note 7 to the financial statements. Other
operating expenses consist principally of professional service costs, such as
audit and legal fees, as well as insurance, printing, distribution and
remarketing expenses. Depreciation expense was $515,286 and $1,537,495 for
the three and nine months ended September 30, 1999, respectively, compared to
$510,666 and $1,641,257 for the same periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. As an aircraft
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
$1,773,893 and $1,982,460 for the nine months ended September 30, 1999 and
1998, respectively. 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. The Partnership, however, may
incur increased costs to facilitate the successful remarketing of its
aircraft in the future. Ultimately, the Partnership will dispose of all
aircraft under lease. This will occur 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. Such proceeds related to the sale of the Partnership's
interest in a Lockheed L-1011-50 aircraft. No aircraft sales occurred during
the corresponding period in 1999. 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.
At September 30, 1999, the Partnership was due aggregate future minimum
lease payments of $2,259,897 from contractual lease agreements (see Note 3 to
the financial statements), a portion of which will be used to
13
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
amortize the principal balance of notes payable of $4,215,937 (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 its 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 often is dependent upon
the needs and interests of the existing lessees. Some lessees may choose to
renew their lease contracts, while others may elect to return the 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 need cash outflows
to satisfy interest on indebtedness and to pay management fees and operating
expenses.
The Partnership obtained long-term financing in connection with 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, they are used to repay
principal and interest.
In December 1998, the Partnership and certain affiliated investment
programs owning interests in two McDonnell Douglas MD-82 aircraft
(collectively, the "Programs") entered into lease extension agreements with
Finnair OY. The lease extensions, effective upon the expiration of the
existing primary lease terms on April 28, 1999, extended the leases for nine
months and two years, respectively. In aggregate, these lease extensions will
provide additional lease revenue of approximately $2,899,000 to the
Partnership over the terms of the leases.
On April 29, 1999, the Programs entered into agreements with a
third-party lender to extend the maturity dates of the Programs' indebtedness
related to the Finnair Aircraft. Consistent with the extension terms of the
lease agreements related to the Finnair Aircraft discussed above, the
maturity dates of the indebtedness were extended to January 2000 and April
2001, respectively. The Partnership has balloon payment obligations of
$1,654,607 and $441,154 related to this indebtedness that is due on the
respective maturity dates.
There are no formal restrictions under the Restated Agreement, as
amended, that materially limit the Partnership's ability to pay cash
distributions, except that the General Partner may suspend or limit cash
distributions to ensure that the Partnership maintains sufficient working
capital reserves to cover, among other things, operating costs and potential
expenditures, such as refurbishment costs to remarket equipment upon lease
expiration. Liquidity is especially important as the Partnership matures and
sells equipment, because the remaining equipment base consists of fewer
revenue-producing assets that are available to cover prospective cash
disbursements. Insufficient liquidity could inhibit the Partnership's ability
to sustain its operations or maximize the realization of proceeds from
remarketing its remaining aircraft. The management and remarketing of
aircraft can involve, among other things, significant costs and lengthy
remarketing initiatives.
Although the Partnership's lessees are required to maintain the aircraft
during the period of lease contract, repair, maintenance, and/or
refurbishment costs at lease expiration can be substantial. For example, an
aircraft that is returned to the Partnership meeting minimum air worthiness
standards, such as flight hours or engine cycles, nonetheless may require
heavy maintenance in order to bring its engines, airframe and other hardware
up to standards that will permit its prospective use in commercial air
transportation. Individually, these repairs can cost in excess of $1 million
and, collectively; they could require the disbursement of several million
dollars, depending upon the extent of refurbishment. In addition, the
Partnership's equipment portfolio includes an interest in three Stage 2
aircraft having scheduled lease expiration dates of December 31, 1999. These
aircraft are prohibited from operating in the United States after December
31, 1999 unless they are retro-fitted with hush-kits to meet Stage 3 noise
regulations promulgated by the Federal Aviation Administration. The cost to
hush-kit an aircraft, such as the Partnership's Boeing 737s, can approach $2
million. Although the Partnership is not required to retro-fit its aircraft
with hush-kits, insufficient liquidity could jeopardize the remarketing of
these aircraft.
14
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Collectively, the aggregation of the Partnership's potential liquidity needs
related to aircraft and other working capital requirements could be
significant. Accordingly, the General Partner has maintained significant cash
reserves within the Partnership in order to minimize the risk of a liquidity
shortage.
Finally, the Partnership is a Nominal Defendant in a Class Action
Lawsuit described in Note 7 to the accompanying financial statements. A
preliminary court order has allowed the Partnership to invest in new
equipment or other activities, subject to certain limitations, effective
March 22, 1999. To the extent that the Partnership continues to own aircraft
investments that could require capital reserves, the General Partner does not
anticipate that the Partnership will invest in new assets, regardless of its
authority to do so. No distributions were declared for either of the nine
months ended September 30, 1999 or 1998. Until the Class Action Lawsuit is
adjudicated, the General Partner does not expect to reinstate distributions
to the Partners. In addition, the proposed settlement, if effected, will
materially change the future organizational structure and business interests
of the Partnership, as well as its cash distribution policies. See Note 7 to
the accompanying financial statements.
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 1998 Annual Report). For instance, selling commissions and
organization and offering costs pertaining to syndication of the
Partnership's limited partnership units are not deductible for federal income
tax purposes, but are recorded as a reduction of partners' capital for
financial reporting purposes. Therefore, such differences are permanent
differences between capital accounts for financial reporting and federal
income tax purposes. Other differences between the bases of capital accounts
for federal income tax and financial reporting purposes occur due to timing
differences consisting of the cumulative difference between income or loss
for tax purposes and financial statement income or loss. The principal
component of the cumulative difference between financial statement income or
loss and tax income or loss results from different depreciation policies for
book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at September 30, 1999. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital
contribution of $1,000 and its allocation of financial statement net income
or loss. Ultimately, the existence of a capital deficit for the General
Partner for financial reporting purposes is not indicative of any further
capital obligations to the Partnership by the General Partner. The Restated
Agreement, as amended, requires that upon the dissolution of the Partnership,
the General Partner will be required to contribute to the Partnership an
amount equal to any negative balance which may exist in the General Partner's
tax capital account. At December 31, 1998, the General Partner had a positive
tax capital account balance.
The future liquidity of the Partnership will be influenced by, among
other factors, prospective market conditions, aircraft refurbishment
requirements, the ability of EFG to manage and remarket the Partnership's
aircraft, and many other events and circumstances, that could enhance or
detract from individual aircraft yields and the collective performance of the
Partnership's aircraft portfolio. However, the outcome of the Class Action
Lawsuit described in Note 7 to the accompanying financial statements will be
the principal factor in determining the future of the Partnership's
operations.
15
<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>
16
<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 12, 1999
------------------------------------------------
By: /s/ Gary M. Romano
------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 12, 1999
------------------------------------------------
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,251,466
<SECURITIES> 0
<RECEIVABLES> 208,368
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,459,834
<PP&E> 20,118,311
<DEPRECIATION> (7,394,702)
<TOTAL-ASSETS> 16,183,443
<CURRENT-LIABILITIES> 452,240
<BONDS> 4,215,937
0
0
<COMMON> 0
<OTHER-SE> 11,515,266
<TOTAL-LIABILITY-AND-EQUITY> 16,183,443
<SALES> 0
<TOTAL-REVENUES> 2,628,956
<CGS> 0
<TOTAL-COSTS> 1,863,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 325,739
<INCOME-PRETAX> 439,645
<INCOME-TAX> 0
<INCOME-CONTINUING> 439,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439,645
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
