<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 JUNE 30, 1999
------------------------------------------------
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 June 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 / /
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at June 30, 1999 and December 31, 1998 3
Statement of Operations
for the three and six months ended June 30, 1999 and 1998 4
Statement of Cash Flows
for the six months ended June 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 11-16
PART II. OTHER INFORMATION:
Items 1 - 6 17
</TABLE>
2
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AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
June 30, 1999 and December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,361,620 $ 3,540,736
Rents receivable 104,184 104,184
Equipment at cost, net of accumulated depreciation
of $6,879,416 and $5,857,207 at June 30, 1999
and December 31, 1998, respectively 13,238,895 14,261,104
------------ ------------
Total assets $ 16,704,699 $ 17,906,024
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 4,854,394 $ 6,279,100
Accrued interest 61,506 83,223
Accrued liabilities 236,877 288,500
Accrued liabilities - affiliate 52,796 20,698
Deferred rental income 170,088 158,882
------------ ------------
Total liabilities 5,375,661 6,830,403
------------ ------------
Partners' capital (deficit):
General Partner (1,132,544) (1,145,215)
Limited Partnership Interests
(3,040,000 Units; initial purchase price of $25 each) 12,461,582 12,220,836
------------ ------------
Total partners' capital 11,329,038 11,075,621
------------ ------------
Total liabilities and partners' capital $ 16,704,699 $ 17,906,024
------------ ------------
------------ ------------
</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 six months ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 835,093 $ 907,393 $ 1,671,368 $ 1,920,988
Interest income 38,170 40,020 76,117 74,976
Gain on sale of equipment -- 188,018 -- 188,018
----------- ----------- ----------- -----------
Total income 873,263 1,135,431 1,747,485 2,183,982
----------- ----------- ----------- -----------
Expenses:
Depreciation 511,105 511,104 1,022,209 1,130,591
Interest expense 107,712 173,634 236,152 361,687
Equipment management fees - affiliate 41,754 45,369 83,568 96,049
Operating expenses - affiliate 94,007 427,661 152,139 468,833
----------- ----------- ----------- -----------
Total expenses 754,578 1,157,768 1,494,068 2,057,160
----------- ----------- ----------- -----------
Net income (loss) $ 118,685 $ (22,337) $ 253,417 $ 126,822
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss)
per limited partnership unit $ 0.04 $ (0.01) $ 0.08 $ 0.04
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the six months ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 253,417 $ 126,822
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 1,022,209 1,130,591
Gain on sale of equipment -- (188,018)
Changes in assets and liabilities Increase in:
Rents receivable -- (82,712)
Increase (decrease) in:
Accrued interest (21,717) 14,469
Accrued liabilities (51,623) 312,278
Accrued liabilities - affiliate 32,098 (36,219)
Deferred rental income 11,206 (48,520)
------------ ------------
Net cash from operating activities 1,245,590 1,228,691
------------ ------------
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 (1,424,706) (1,128,734)
------------ ------------
Net cash used in financing activities (1,424,706) (1,128,734)
------------ ------------
Net increase (decrease) in cash and cash equivalents (179,116) 946,257
Cash and cash equivalents at beginning of period 3,540,736 2,671,041
------------ ------------
Cash and cash equivalents at end of period $ 3,361,620 $ 3,617,298
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 257,869 $ 347,218
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
June 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not include
all information and footnote disclosures required under generally accepted
accounting principles for complete financial statements and, accordingly, the
accompanying financial statements should be read in conjunction with the
footnotes presented in the 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 June 30, 1999 and December 31, 1998 and results of operations for
the three and six month periods ended June 30, 1999 and 1998 have been made and
are reflected.
NOTE 2 - CASH AND CASH EQUIVALENTS
At June 30, 1999, the Partnership had $3,333,588 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. Future minimum rents of
$3,100,313 are due as follows:
<TABLE>
<S> <C>
For the year ending June 30, 2000 $ 2,311,134
2001 789,179
--------------
Total $ 3,100,313
--------------
--------------
</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. In aggregate, these lease
extensions will provide additional lease revenue of approximately $2,899,000 to
the Partnership over the terms of the leases.
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at June
30, 1999. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 1999 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.
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
Remaining
Lease
Term Equipment
Equipment Type (Months) At Cost
- --------------------------------------- --------- ---------------
<S> <C> <C>
Two McDonnell-Douglas MD-82 (Finnair) 7-22 $ 13,762,438
Three Boeing 737-2H4 (Southwest) 6 6,355,873
--------------
Total equipment cost 20,118,311
Accumulated depreciation (6,879,416)
--------------
Equipment, net of accumulated depreciation $ 13,238,895
--------------
--------------
</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 three month
periods ended June 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 $ 83,568 $ 96,049
Administrative charges 45,619 26,502
Reimbursable operating expenses
due to third parties 106,520 442,331
----------- -----------
Total $ 235,707 $ 564,882
----------- -----------
----------- -----------
</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.
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 six months
ended June 30, 1999 include adjustments for 1998 actual costs of approximately
$13,000 and $9,000, respectively.
7
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 6 - NOTES PAYABLE
Notes payable at June 30, 1999 consisted of installment notes payable to
banks of $4,854,394. 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 June 30, 1999.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C>
For the year ending June 30, 2000 $ 3,689,927
2001 1,164,467
--------------
Total $ 4,854,394
--------------
--------------
</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").
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, divides the
Class Action Lawsuit into two separate sub-classes that can 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
8
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
Partnerships"), is expected to remain pending for a longer period 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
referenced above in connection with the proposed 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 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.
9
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
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
<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 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 substantially all of 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 SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 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 June 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 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 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 six months ended June 30, 1999, the Partnership
recognized lease revenue of $835,093 and $1,671,368, respectively, compared to
$907,393 and $1,920,988 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 now 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 June 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 the six month period ending June 30, 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 six month periods ending June 30, 1999
was $38,170 and $76,117, respectively, compared to $40,020 and $74,976 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 six months ended June 30, 1999, the Partnership incurred
interest expense of $107,712 and $236,152, respectively, compared to $173,634
and $361,687 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 six
month periods ended June 30, 1999 and 1998.
Operating expenses were $94,007 and $152,139 for the three and six months
ended June 30, 1999, respectively, compared to $427,661 and $468,833 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
$511,105 and $1,022,209 for the three and six months ended June 30, 1999,
respectively, compared to $511,104 and $1,130,591 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 $1,245,590 and
$1,228,691 for the six months ended June 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 six
months ended June 30, 1998, the Partnership realized net cash proceeds of
$846,300. Such proceeds related to the sale of the Partnership's interest in an
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 June 30, 1999, the Partnership was due aggregate future minimum lease
payments of $3,100,313 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 $4,854,394 (see Note 6 to the financial statements).
At the expiration of
13
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 and risk their disposal at a
depressed value at a time when a better economic return would be realized from
14
<PAGE>
FORM 10-Q
PART I. FINANCIAL INFORMATION
refurbishing the aircraft and re-leasing them to another user. 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.
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.
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. No distributions were declared for either of the six
months ended June 30, 1999 or 1998.
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. Such items consist of the cumulative difference
between income or loss for tax purposes and financial statement income or loss
and the difference between distributions (declared vs. paid) for income tax and
financial reporting purposes, if any. 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 June 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
15
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Lawsuit described in Note 7 to the accompanying financial statements will be the
principal factor in determining the future of the Partnership's operations.
16
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
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
17
<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: August 13, 1999
By: /s/ Gary Romano
--------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 13, 1999
18
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<NAME> AIRFUND I
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,361,620
<SECURITIES> 0
<RECEIVABLES> 104,184
<ALLOWANCES> 0
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<PP&E> 20,118,311
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0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 16,704,699
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