<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
------------------------------------------------
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 March 31, 2000 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
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 2000 and December 31, 1999 ....................... 3
Statement of Operations
for the three months ended March 31, 2000 and 1999 ............ 4
Statement of Cash Flows
for the three months ended March 31, 2000 and 1999 ............ 5
Notes to the Financial Statements .................................. 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 9-12
PART II. OTHER INFORMATION:
Items 1 - 6 ............................................................ 13
</TABLE>
2
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................... $ 1,212,344 $ 3,180,907
Accounts receivable ..................................... 16,800 --
Accounts receivable - affiliate ......................... 24 4,888
Note receivable ......................................... 1,800,000 --
Equipment at cost, net of accumulated depreciation
of $8,255,398 and $7,912,079 at March 31, 2000
and December 31, 1999, respectively ................. 11,862,913 12,206,232
------------ ------------
Total assets .................................. $ 14,892,081 $ 15,392,027
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable ........................................... $ 3,719,591 $ 3,250,113
Accrued interest ........................................ 30,647 44,209
Accrued liabilities ..................................... 232,264 922,069
Accrued liabilities - affiliate ......................... 6,775 18,602
Deferred rental income .................................. 81,840 170,088
------------ ------------
Total liabilities ............................. 4,071,117 4,405,081
------------ ------------
Partners' capital (deficit):
General Partner ..................................... (1,157,948) (1,149,649)
Limited Partnership Interests
(3,040,000 Units; initial purchase price
of $25 each) ........................................ 11,978,912 12,136,595
------------ ------------
Total partners' capital ...................... 10,820,964 10,986,946
------------ ------------
Total liabilities and partners' capital ...... $ 14,892,081 $ 15,392,027
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the three months ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Income:
Lease revenue .......................... $ 362,298 $ 836,275
Interest income ........................ 53,965 37,947
--------- ---------
Total income ....................... 416,263 874,222
--------- ---------
Expenses:
Depreciation ........................... 343,319 511,104
Interest expense ....................... 101,581 128,440
Equipment management fees - affiliate... 18,115 41,814
Operating expenses - affiliate ......... 119,230 58,132
--------- ---------
Total expenses ..................... 582,245 739,490
--------- ---------
Net income (loss) ........................... $(165,982) $ 134,732
========= =========
Net income (loss)
per limited partnership unit ........... $ (0.05) $ 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 three months ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) ......................................... $ (165,982) $ 134,732
Adjustments to reconcile net income (loss) to net cash from
(used in) operating activities:
Depreciation ....................................... 343,319 511,104
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable ................................... -- 104,184
Accounts receivable ................................ (16,800) --
Accounts receivable - affiliate .................... 4,864 --
Increase (decrease) in:
Accrued interest ................................... (13,562) (15,492)
Accrued liabilities ................................ (689,805) (36,700)
Accrued liabilities - affiliate .................... (11,827) 6,763
Deferred rental income ............................. (88,248) 5,885
----------- -----------
Net cash from (used in) operating activities... (638,041) 710,476
----------- -----------
Cash flows used in investing activities:
Note receivable .................................... (1,800,000) --
----------- -----------
Net cash used in investing activities ......... (1,800,000) --
----------- -----------
Cash flows from (used in) financing activities:
Proceeds from notes payable ........................ 666,217 --
Principal payments - notes payable ................. (196,739) (802,412)
----------- -----------
Net cash from (used in) financing activities .. 469,478 (802,412)
----------- -----------
Net decrease in cash and cash equivalents ................. (1,968,563) (91,936)
Cash and cash equivalents at beginning of period .......... 3,180,907 3,540,736
----------- -----------
Cash and cash equivalents at end of period ................ $ 1,212,344 $ 3,448,800
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ............... $ 115,143 $ 143,932
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
March 31, 2000
(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 1999 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1999 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 2000 and December 31, 1999 and results of operations for
the three month periods ended March 31, 2000 and 1999 have been made and are
reflected.
NOTE 2 - CASH
At March 31, 2000, AIRFUND International Limited Partnership (the
"Partnership") had $1,099,732 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 to the
financial statements presented in the Partnership's 1999 Annual Report regarding
the Class Action Lawsuit. Future minimum rents of $1,052,238 are due for the
year ending March 31, 2001.
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at March
31, 2000. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2000 under contracted lease terms. In the
opinion of EFG, the acquisition cost of the equipment did not exceed its fair
market value.
6
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
Remaining
Lease
Term Equipment
Equipment Type (Months) At Cost
-------------- --------- ---------
<S> <C> <C>
One McDonnell-Douglas MD-82 (Finnair) 13 $ 6,881,219
One McDonnell-Douglas MD-82 0 6,881,219
Three Boeing 737-2H4 0 6,355,873
-----------
Total equipment cost 20,118,311
Accumulated depreciation (8,255,398)
-----------
Equipment, net of accumulated depreciation $11,862,913
===========
</TABLE>
The cost of each of the Partnership's aircraft represents a proportionate
ownership interest. 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.
Certain of the Partnership's aircraft and the related lease payment streams
were used to secure the Partnership's term loans with third-party lenders (see
Note 7). The preceding summary includes leveraged equipment having an aggregate
original cost of approximately $13,762,000 and a net book value of approximately
$9,680,000 at March 31, 2000.
At March 31, 2000, the three Boeing 737-2H4 jet aircraft and one of the
McDonnell-Douglas MD-82 aircraft were held for sale or re-lease. These aircraft
had a total cost of approximately $13,237,000 and a net book value of
approximately $2,183,000 at March 31, 2000. The General Partner is attempting to
remarket these aircraft.
NOTE 5 - NOTE RECEIVABLE
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
"Exchange Partnerships") (see Note 7 to the financial statements presented in
the Partnership's 1999 Annual Report) collectively loaned $32 million to Echelon
Residential Holdings LLC, a newly-formed real estate development company that
will be owned by several investors, including James A. Coyne, Executive Vice
President of EFG. Mr. Coyne, in his individual capacity, is the only investor in
Echelon Residential Holdings LLC who is related to EFG.
The Partnership's participation in the loan is $1,800,000. Echelon
Residential Holdings LLC, through a subsidiary (Echelon Residential LLC), used
the loan proceeds to acquire various real estate assets from Echelon
International Corporation, a Florida based real estate company. The loan has a
term of 30 months maturing on September 7, 2002 and bears interest at the annual
rate of 14% for the first 24 months and 18% for the final six months of the
term. Interest accrues and compounds monthly but is not payable until maturity.
The Partnership accrued interest income of $16,800 related to this loan during
the three months ended March 31, 2000. In connection with the transaction,
Echelon Residential Holdings LLC has pledged a security interest in all of its
right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral.
7
<PAGE>
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 6 - 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 March 31, 2000 and 1999, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Equipment management fees ..................... $ 18,115 $41,814
Administrative charges ........................ 8,116 13,251
Reimbursable operating expenses
due to third parties ...................... 111,114 44,881
------- -------
Total ......... $137,345 $99,946
======== =======
</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.
NOTE 7 - NOTES PAYABLE
Notes payable at March 31, 2000 consisted of installment notes payable to
banks of $3,719,591. The installment notes bear an interest rate of either
8.225% or a fluctuating interest rate based on LIBOR (approximately 6% at March
31, 2000) plus a margin. The Partnership has a balloon payment obligation at the
expiration of the renewal lease term related to the aircraft on lease to Finnair
OY of $432,267, which matures in April 2001. In addition, the Partnership has a
balloon payment obligation of $2,320,824 which matures in August 2000. This
obligation is related to the Partnership's interest in a McDonnell-Douglas MD-82
aircraft that was returned in January 2000 upon its lease term expiration. This
aircraft is being stored in a warehouse pending its remarketing. The carrying
amount of notes payable approximates fair value at March 31, 2000.
The annual maturities of the installment notes payable are as follows:
For the year ending March 31, 2001 ................. $3,287,324
2002 ................. 432,267
----------
Total ................ $3,719,591
==========
NOTE 8 - LEGAL PROCEEDINGS
As described more fully in the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1999, 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.
8
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements in this quarterly report 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 financial statements presented in the
Partnership's 1999 Annual Report, the remarketing of the Partnership's aircraft,
and the performance of the Partnership's non-aircraft assets.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999:
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 March 31, 2000, the
Partnership owned a proportionate interest in five aircraft, only one of which
is currently on lease. The four aircraft off lease and the remaining aircraft,
upon expiration of its lease agreement, will be re-leased or sold depending on
prevailing market conditions and Equis Financial Group Limited Partnership's
("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 8 to the
financial statements presented in the Partnership's 1999 Annual Report. Pursuant
to the Amended and Restated Agreement and Certificate of Limited Partnership
(the "Restated Agreement, as amended"), the Partnership is scheduled to be
dissolved by December 31, 2004.
RESULTS OF OPERATIONS
For the three months ended March 31, 2000, the Partnership recognized lease
revenue of $362,298 compared to $836,275 for the same period in 1999. The
decrease in lease revenue from 1999 to 2000 resulted from the expiration of
lease terms related to the Partnership's interest in three Boeing 737-2H4
aircraft and a McDonnell-Douglas MD-82 aircraft (see further discussion below).
The amount of future lease revenues in the near term will be dependent upon the
results of ongoing remarketing efforts related to aircraft currently off lease.
Subsequently, the Partnership's lease revenue is expected to decline due to
aircraft sales and lease term expirations.
The lease terms related to the three Boeing 737-2H4 aircraft, in which the
Partnership holds a proportionate interest, expired on December 31, 1999. These
aircraft are currently being stored in a warehouse while the General Partner
pursues remarketing alternatives. The Partnership recognized lease revenue of
$312,552 related to these aircraft during the three months ended March 31, 1999.
One of the McDonnell-Douglas MD-82 aircraft, in which the Partnership holds
a proportionate interest, is currently on lease to Finnair OY. This lease, which
was renewed upon the expiration of the primary lease term in April 1999, will
expire in April 2001. The Partnership recognized lease revenue of $265,982 and
$261,862 related to this aircraft during the three months ended March 31, 2000
and 1999, respectively. The lease term associated with the second
McDonnell-Douglas MD-82 aircraft, in which the Partnership holds an ownership
interest, expired in January 2000. That aircraft, which is being stored in a
warehouse pending its remarketing, generated lease
9
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
revenue to the Partnership of $96,316 and $261,826 during the three months ended
March 31, 2000 and 1999, respectively.
The Partnership's aircraft interests represent proportionate ownership
interests. The remaining interests are owned by other affiliated partnerships
sponsored by EFG. All partnerships individually report, in proportion to their
respective ownership interests, their respective shares of assets, liabilities,
revenues and expenses associated with the aircraft.
The ultimate realization of residual value for the Partnership's aircraft
will be 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 general in order to identify opportunities which may be
advantageous to the Partnership and which will maximize total cash returns for
each aircraft.
The total economic value realized upon final disposition of each aircraft
is comprised of all primary lease term revenue generated from that aircraft,
together with its residual value. The latter consists of cash proceeds realized
upon the aircraft's sale in addition to all other cash receipts obtained from
renting the aircraft on a re-lease, renewal or month-to-month basis.
Consequently, the amount of any future gain or loss reported in the financial
statements will not necessarily be indicative of the total residual value the
Partnership achieved from leasing the aircraft.
Interest income for the three months ended March 31, 2000 was $53,965
compared to $37,947 for the same period in 1999. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. During the three months ended March 31,
2000, interest income included interest earned on a note receivable from Echelon
Residential Holdings LLC in the amount of $16,800 (see below). The amount of
future interest income is expected to fluctuate as a result of changing interest
rates and the amount of cash available for investment, among other factors.
For the three months ended March 31, 2000 and 1999, the Partnership
incurred interest expense of $101,581 and $128,440, respectively. Interest
expense in future periods will decline as the principal balance of notes payable
is reduced through the application of rent receipts to outstanding debt.
Management fees were 5% of lease revenue during each of the periods ended
March 31, 2000 and 1999. Operating expenses were $119,230 and $58,132 for the
three months ended March 31, 2000 and 1999, respectively. The principle reason
for the increase in operating expenses from 1999 to 2000 was storage costs
associated with the Partnership's aircraft off lease. Other operating expenses
include administrative charges and professional service costs, such as audit and
legal fees, as well as printing, distribution and remarketing expenses. In
certain cases, repairs and maintenance costs may be incurred in connection with
aircraft being remarketed. Depreciation expense was $343,319 for the three
months ended March 31, 2000, compared to $511,104 for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. As an aircraft
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 a net cash outflow of $638,041 and a net cash inflow of $710,476 for
the three months ended March 31, 2000 and 1999, 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, will continue to incur costs to facilitate
the remarketing of its aircraft in the future.
10
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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.
At March 31, 2000, the Partnership was due aggregate future minimum lease
payments of $1,052,238 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 $3,719,591 (see Note 7 to the financial statements).
At the expiration of the individual lease term underlying the Partnership's
future minimum lease payments, the Partnership will sell the aircraft or enter
into a re-lease or renewal agreement. In addition, the General Partner and EFG
currently are attempting to remarket the four aircraft that are currently off
lease. Such 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.
The Partnership obtained long-term financing in connection with the
McDonnell Douglas MD-82 and the Boeing 737-2H4 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
periods. As rental payments are collected, they are used to repay associated
indebtedness. The Partnership has a balloon payment obligation of $432,267
related to the indebtedness associated with the McDonnell Douglas MD-82 aircraft
leased to Finnair OY. The debt associated with the Boeing 737-2H4 aircraft was
fully amortized at December 31, 1999.
In addition, in February 2000, the Partnership and certain affiliated
investment programs (collectively, the "Programs") refinanced the indebtedness
which matured in January 2000 associated with a McDonnell-Douglas MD-82 aircraft
formerly leased to Finnair OY. In addition to refinancing the existing
indebtedness of $3,370,000, the Programs received additional debt proceeds of
$1,350,000 required to perform a D-Check on the aircraft. The Partnership
received $666,217 from such proceeds. The note bears a fluctuating interest rate
based on LIBOR plus a margin with interest payments due monthly. The
Partnership's aggregate share of the refinanced and new indebtedness was
$2,320,824 which is due at maturity on August 9, 2000. The aircraft was returned
in January 2000 upon its lease term expiration and is currently being stored in
a warehouse pending its remarketing.
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 7 to the financial statements presented in the
Partnership's 1999 Annual Report, the Partnership is permitted to invest in new
equipment or other business activities, subject to certain limitations. On March
8, 2000, the Partnership and 10 affiliated partnerships (the "Exchange
Partnerships") (see Note 7 to the financial statements presented in the
Partnership's 1999 Annual Report) collectively loaned $32 million to Echelon
Residential Holdings LLC, a newly-formed real estate development company that
will be owned by several investors, including James A. Coyne, Executive Vice
President of EFG. Mr. Coyne, in his individual capacity, is the only investor in
Echelon Residential Holdings LLC who is related to EFG.
The Partnership's participation in the loan is $1,800,000. Echelon
Residential Holdings LLC, through a subsidiary (Echelon Residential LLC), used
the loan proceeds to acquire various real estate assets from Echelon
International Corporation, a Florida based real estate company. The loan has a
term of 30 months maturing on September 7, 2002 and bears interest at the annual
rate of 14% for the first 24 months and 18% for the final six months of the
term. Interest accrues and compounds monthly but is not payable until maturity.
In connection with the transaction, Echelon Residential Holdings LLC has pledged
a security interest in all of its right, title and interest in and to its
membership interests in Echelon Residential LLC to the Exchange Partnerships as
collateral.
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 aircraft upon lease
11
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
expiration. Liquidity is especially important as the Partnership matures and
sells aircraft, because the remaining aircraft portfolio 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 airworthiness 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. At March 31, 2000, the
Partnership had ownership interests in five commercial jet aircraft. Three of
the aircraft are Boeing 737 aircraft formerly leased to Southwest Airlines, Inc.
("Southwest"). The lease agreements for each of these aircraft expired on
December 31, 1999 and Southwest elected to return the aircraft. The aircraft are
Stage 2 aircraft, meaning that they 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. At this time, the General Partner is
attempting to remarket these assets without further capital investment by either
re-leasing the aircraft to a user outside of the United States or selling the
aircraft as they are without retro-fitting the aircraft to conform to Stage 3
standards. The remaining two aircraft in the Partnership's portfolio already are
Stage 3 compliant. One of these aircraft had a lease term that expired in
January 2000 and is being held in storage pending the outcome of ongoing
remarketing efforts. The other aircraft has a lease term expiring in April 2001.
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 1999
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 March 31, 2000. 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, 1999, the General Partner had a positive tax capital account
balance.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 7 to the financial statements presented in the Partnership's 1999 Annual
Report. The proposed settlement to that lawsuit, if effected, will materially
change the future organizational structure and business interests of the
Partnership, as well as its cash distribution policies. In addition, the General
Partner will continue to suspend the payment of quarterly cash distributions
pending final resolution of the Class Action Lawsuit. Accordingly, future cash
distributions are not expected to be paid until the Class Action Lawsuit is
adjudicated.
12
<PAGE>
AIRFUND International Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 8 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
13
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AIRFUND International Limited Partnership
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the General
Partner of the Registrant.
By: /s/ Michael J. Butterfield
------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: May 15, 2000
------------------------------------------------
By: /s/ Gary M. Romano
------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 2000
------------------------------------------------
14
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<SECURITIES> 0
<RECEIVABLES> 1,816,824
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0
0
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<SALES> 0
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<INCOME-PRETAX> (165,982)
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