<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 September 30, 1996
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, 1996 Commission File No. 0-19137
AIRFUND II International Limited Partnership
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3057290
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 NORTH WASHINGTON STREET, BOSTON, MA 02114
(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 II International Limited Partnership
FORM 10-Q
INDEX
PAGE
-----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at September 30, 1996 and December 31, 1995 3
Statement of Operations
for the three and nine months ended September 30,
1996 and 1995 4
Statement of Cash Flows
for the nine months ended September 30, 1996 and 1995 5
Notes to the Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
PART II. OTHER INFORMATION:
Items 1 - 6 15
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<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
September 30, 1996 and December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents
$ 7,959,477 $ 3,557,968
Contractual right for equipment
-- 1,317,392
Rents receivable
-- 169,906
Accounts receivable - affiliate
188,519 316,439
Equipment at cost, net of accumulated depreciation of
$36,304,391 and $41,568,185 at September 30, 1996
and December 31, 1995, respectively 14,326,823 16,070,428
----------- -----------
Total assets $22,474,819 $21,432,133
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 3,581,414 $ 1,432,396
Accrued interest 31,248 19,197
Accrued liabilities 497,210 93,140
Accrued liabilities - affiliate 46,364 58,152
Deferred rental income 76,445 477,506
Cash distributions payable to partners 5,670,163 714,381
----------- -----------
Total liabilities 9,902,844 2,794,772
----------- -----------
Partners' capital (deficit):
General Partner (2,366,857) (2,106,228)
Limited Partnership Interests
(2,714,647 Units; initial purchase price of $25 each) 14,938,832 20,743,589
----------- -----------
Total partners' capital 12,571,975 18,637,361
----------- -----------
Total liabilities and partners' capital $22,474,819 $21,432,133
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF OPERATIONS
for the three and nine months ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 1,398,078 $ 1,678,986 $ 4,019,900 $ 4,982,689
Interest income 86,749 41,113 220,877 126,331
Gain on sale of equipment 460,969 -- 460,969 --
Loss on exchange of equipment -- (497,014) -- (497,014)
----------- ----------- ---------- ----------
Total income 1,945,796 1,223,085 4,701,746 4,612,006
----------- ----------- ---------- ----------
Expenses:
Depreciation and amortization 831,696 1,222,154 2,826,205 3,710,096
Interest expense 79,835 -- 198,239 --
Equipment management fees - affiliate 69,904 83,949 200,995 249,134
Operating expenses - affiliate 537,613 24,611 1,157,151 117,850
----------- ----------- ---------- ----------
Total expenses 1,519,048 1,330,714 4,382,590 4,077,080
----------- ----------- ---------- ----------
Net income (loss) $ 426,748 $ (107,629) $ 319,156 $ 534,926
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Net income (loss) per limited partnership unit $ 0.15 $ (0.04) $ 0.11 $ 0.19
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Cash distributions declared per limited partnership unit $ 2.00 $ 0.25 $ 2.25 $ 1.50
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 319,156 $ 534,926
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 2,826,205 3,710,096
Gain on sale of equipment (460,969) --
Loss on exchange of equipment -- 497,014
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 169,906 (2,474)
accounts receivable - affiliate 127,920 58,932
Increase (decrease) in:
accrued interest 12,051 --
accrued liabilities 404,070 (159,978)
accrued liabilities - affiliate (11,788) (12,177)
deferred rental income (401,061) 661,125
----------- ----------
Net cash from operating activities 2,985,490 5,287,464
----------- ----------
Cash flows from (used in) investing activities:
Purchase of equipment (72,550) --
Proceeds from equipment sales 3,535,649 --
----------- ----------
Net cash from investing activities 3,463,099 --
----------- ----------
Cash flows used in financing activities:
Principal payments - notes payable (618,320) --
Distributions paid (1,428,760) (5,357,856)
----------- ----------
Net cash used in financing activities (2,047,080) (5,357,856)
----------- ----------
Net increase (decrease) in cash and cash equivalents 4,401,509 (70,392)
Cash and cash equivalents at beginning of period 3,557,968 3,620,148
----------- ----------
Cash and cash equivalents at end of period $7,959,477 $3,549,756
----------- ----------
----------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 186,188 $ --
----------- ----------
----------- ----------
Supplemental disclosure of non-cash investing activities:
See Note 5 to the Financial Statements.
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-5-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
September 30, 1996
(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 1995 Annual Report. Except
as disclosed herein, there has been no material change to the information
presented in the footnotes to the 1995 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, 1996 and December 31, 1995 and results of
operations for the three and nine month periods ended September 30, 1996 and
1995 have been made and are reflected.
NOTE 2 - CASH
At September 30, 1996, the Partnership had $7,855,000 invested in reverse
repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Partnership monthly or quarterly and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. Future minimum rents
of $5,173,403 are due as follows:
For the year ending September 30, 1997 $2,239,534
1998 1,907,534
1999 900,479
2000 125,856
----------
Total $5,173,403
==========
In September 1995, the Partnership transferred its ownership interest in a
Boeing 747-SP-21 commercial jet aircraft (the "United Aircraft") to the
existing lessee, United Air Lines, Inc., pursuant to the rules for a
like-kind exchange transaction for income tax reporting purposes (See Note 5
herein). In November 1995, the Partnership partially replaced the United
Aircraft with a 13.11% interest in three Boeing 737-2H4 aircraft leased to
Southwest Airlines, Inc. (the "Southwest Aircraft"). The Partnership will
receive approximately $378,000 of rental revenue in each of the years in the
period ending September 30, 1999, and approximately $126,000 in the year
ending September 30, 2000, pursuant to the Southwest Aircraft lease agreement.
-6-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.58% interest in two McDonnell-Douglas MD-82
Aircraft leased by Finnair OY (the "Finnair Aircraft"). The Partnership will
receive approximately $640,000 of rental revenue in each of the years in the
period ending September 30, 1998, and approximately $313,000 in the year
ending September 30, 1999, pursuant to the Finnair Aircraft lease agreement.
Effective September 1996, the Partnership re-leased a Boeing 727-251 ADV
aircraft, formerly on a renewal rental agreement with Northwest Airlines,
Inc., to Transmeridian Airlines. The Partnership will receive approximately
$968,000 of rental revenue in the year ended September 30, 1997, $890,000 in
the year ended September 30, 1998, and $210,000 in the year ended September
30, 1999.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by American
Finance Group ("AFG") on behalf of the Partnership and AFG is reimbursed at
its actual cost for such expenditures. Fees and other costs incurred during
each of the nine month periods ended September 30, 1996 and 1995, which were
paid or accrued by the Partnership to AFG or its Affiliates, are as follows:
1996 1995
-------- ---------
Equipment management fees $ 200,995 $249,134
Administrative charges 15,750 15,750
Reimbursable operating expenses
due to third parties 1,141,401 102,100
---------- --------
Total $1,358,146 $366,984
========== ========
All rents are paid by the lessees directly to AFG. AFG temporarily
deposits collected funds in a separate interest-bearing escrow account prior
to remittance to the Partnership. At September 30, 1996, the Partnership was
owed $188,519 by AFG for such funds and the interest thereon. These funds
were remitted to the Partnership in October 1996.
NOTE 5 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
September 30, 1996. In the opinion of AFG, the acquisition cost of the
equipment did not exceed its fair market value.
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<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
Lease Term Equipment
Equipment Type (Months) at Cost
- ------------------------------- ---------- -------------
<S> <C> <C>
One Lockheed L-1011-100 (Cathay) -- $ 15,879,518
One Boeing 727-208 ADV (ATA) 36 12,928,710
One Boeing 727-251 ADV (Transmeridian) 28 9,732,714
One Lockheed L-1011-50 (Cathay) -- 6,013,492
Two McDonnell-Douglas MD-82 (Finnair) 36 4,157,280
Three Boeing 737-2H4 (Southwest) 49 1,919,500
------------
Total equipment cost 50,631,214
Accumulated depreciation (36,304,391)
------------
Equipment, net of accumulated depreciation $ 14,326,823
============
</TABLE>
The costs of the Lockheed L-1011-50 aircraft, the three Boeing 737-2H4
aircraft and the two McDonnell-Douglas MD-82 aircraft represent proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by AFG. 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 Partnership's portfolio includes a Boeing 727-251 ADV aircraft formerly
on a renewal rental agreement with Northwest Airlines, Inc. This aircraft
was returned upon expiration of its lease term on November 30, 1995 and has
undergone heavy maintenance, approximately $480,000 of which was incurred or
accrued during the nine months ended September 30, 1996. During the three
months ended September 30, 1996, the Partnership received $468,133 from the
former lessee of this aircraft, representing a reimbursement of additional
maintenance costs previously incurred. The Partnership entered into a new
28-month lease agreement with Transmeridian Airlines, to re-lease the
aircraft effective September 1996.
In September 1995, the Partnership transferred its 23.19% ownership
interest in the United Aircraft, pursuant to the rules for a like-kind
exchange for income tax reporting purposes (See Note 3 herein). In November
1995, the Partnership partially replaced the United Aircraft with a 13.11%
ownership interest in the Southwest Aircraft, at an aggregate cost to the
Partnership of $1,919,500. To acquire the interest in the Southwest
Aircraft, the Partnership obtained financing of $1,432,396 from a third-party
lender and utilized $487,104 of the cash consideration received from the
transfer of the United Aircraft. The remaining ownership interest of 86.89%
in the Southwest Aircraft is held by affiliated equipment leasing programs
sponsored by AFG.
Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% ownership interest in the Finnair Aircraft
at a total cost to the Partnership of $4,157,280. To acquire the ownership
interest in the Finnair Aircraft, the Partnership paid $1,389,942 in cash and
obtained financing of $2,767,338 from a third-party lender. The remaining
ownership interest of 85.15% in the Finnair Aircraft is held by affiliated
equipment leasing programs sponsored by AFG.
On June 30, 1996, the Lockheed L-1011-50 aircraft, in which the Partnership
has a proportionate ownership interest, was returned by the lessee. The General
Partner is actively seeking the re-lease of this aircraft. The Partnership's
Lockheed L-1011-100 was returned to the Partnership upon the expiration of its
renewal lease term, in September 1996 and is currently undergoing heavy
maintenance expected to cost the Partnership
-8-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
approximately $430,000, all of which was incurred or accrued during the nine
months ended September 30, 1996. The General Partner is negotiating the
re-lease of this aircraft.
NOTE 6 - NOTES PAYABLE
Notes payable at September 30, 1996 consisted of installment notes payable
to banks of $3,581,414. The installment notes are non-recourse, with
interest rates ranging between 8.65% and 8.76% and are collateralized by the
equipment and assignment of the related lease payments. All of the notes
were originated in connection with the Southwest Aircraft and the Finnair
Aircraft. The installment notes related to the Southwest Aircraft will be
fully amortized by noncancellable rents. The Partnership has a balloon
payment obligation at the expiration of the primary lease term related to the
Finnair Aircraft. The carrying amount of notes payable approximates fair
value at September 30, 1996.
The annual maturities of the installment notes payable are as follows:
For the year ending September 30, 1997 $ 707,598
1998 795,950
1999 1,984,730
2000 93,136
----------
Total $3,581,414
==========
NOTE 7 - REMARKETING ACTIVITIES
During July 1996, the Partnership sold a Boeing 727-200 ADV aircraft having
a net book value of $3,074,680 to the lessee, Northwest Airlines, Inc. The
Partnership received sale proceeds of $3,535,649 and recognized a net gain of
$460,969 from this transaction. In addition, the Partnership received lease
termination rents of $429,351 as the aircraft was sold prior to the
expiration of the related lease term. The aircraft represented approximately
18% of the Partnership's aircraft portfolio and was acquired by the
Partnership in May 1990 at an aggregate cost of $11,164,679.
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<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1995:
OVERVIEW
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. During 1990 and 1991, the Partnership
purchased four commercial jet aircraft and a proportionate interest in two
additional aircraft which were leased by major carriers engaged in passenger
transportation. Initially, each aircraft generated rental revenue pursuant to
primary-term lease agreements. In 1995, the Partnership transferred its
proportionate ownership interest in one aircraft to the existing lessee,
United Airlines, Inc., in exchange for proportionate interests in three
aircraft leased to Southwest Airlines, Inc., pursuant to lease agreements
which expire in 1999. During the first quarter of 1996, the Partnership
completed the replacement of the United Aircraft with proportionate interests
in two aircraft leased to Finnair OY, pursuant to lease agreements which also
expire in 1999. One of the four commercial aircraft held in the
Partnership's original portfolio was returned to the Partnership in 1995,
upon the expiration of its lease term, (see "Results in Operations") and in
September 1996, upon completion of refurbishments, was re-leased to
Transmeridian Airlines. The Partnership is actively seeking to re-lease the
other original aircraft in which it holds a proportionate interest and which
was returned by the lessee, upon completion of its renewal lease term, in
June 1996. In July 1996, the Partnership sold one of its original aircraft
to the lessee, Northwest Airline, Inc. At September 30, 1996, the
Partnership also owned a complete interest in two other aircraft, one of
which is being leased pursuant to a re-lease agreement which will expire in
1997, and the second for which a re-lease is being negotiated. The second
aircraft was returned by the lessee, upon completion of its renewal lease
term, in September 1996. Upon expiration of the primary and renewal lease
agreements, each aircraft will be re-leased or sold depending on prevailing
market conditions and the assessment of such conditions by AFG to obtain the
most advantageous economic benefit. Ultimately, all aircraft will be sold and
the net proceeds will be distributed to the Partners, after all liabilities
and obligations of the Partnership have been satisfied.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 1996, the Partnership
recognized lease revenue of $1,398,078 and $4,019,900, respectively, compared
to $1,678,986 and $4,982,689 for the same periods in 1995. The decrease in
lease revenue from 1995 to 1996 was due primarily to lease term expirations
related to the Partnership's Lockheed L-1011-100 and Boeing 727-251 ADV
aircraft, and its proportionate interest in a Lockheed L-1011-50. The
decrease was partially offset by the effects of the Partnership's aircraft
exchange (discussed below) which was concluded late in the first quarter of
1996. As a result of the exchange, the Partnership replaced its ownership
interest in a Boeing 747-SP aircraft, having aggregate quarterly lease
revenues of $149,640, with interests in five other aircraft (three Boeing 737
aircraft leased by Southwest Airlines, Inc. and two McDonnell Douglas MD-82
aircraft leased by Finnair OY) having aggregate quarterly lease revenues of
$254,384. The Finnair Aircraft was exchanged into the Partnership on March
25, 1996. Accordingly, revenue for the nine months ended September 30, 1996
did not fully reflect the rents ultimately anticipated from the like-kind
exchange.
The Partnership's Boeing 727-251 ADV aircraft, formerly on a renewal rental
agreement with Northwest Airlines, Inc. ("Northwest") was returned upon
expiration of its lease term on November 30, 1995. This aircraft has
undergone heavy maintenance, approximately $480,000 of which was incurred or
accrued during the nine months ended September 30, 1996. During the three
months ended September 30, 1996, the Partnership received
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<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
$468,133 from the former lessee of this aircraft, representing a
reimbursement of additional heavy maintenance costs previously incurred. In
September, 1996, the Partnership entered into a new 28-month lease agreement
with Transmeridian Airlines, to re-lease this aircraft for aggregate rents
over the lease term of approximately $2,068,000.
The Partnership owns a whole and a partial interest in two Lockheed L-1011
aircraft with former leases to Cathay Pacific Airways Limited ("Cathay").
The Partnership's original lease agreements with Cathay provided for
semi-annual rent adjustments based on the six month London Inter-Bank Offered
Rate ("LIBOR"). Accordingly, rents generated from these leases fluctuated in
relation to the prevailing LIBOR rate on a semi-annual basis. The
Partnership's renewal lease agreements with Cathay (having adjusted
semi-annual rents aggregating $1,353,599) expired on February 14, 1996 and
were extended until April 11, 1996. Subsequent to this extension, Cathay
again extended the lease on one of the aircraft until June 30, 1996 and on
the other until September 30, 1996, both at fixed rates. Cathay subsequently
returned both aircraft to the Partnership upon the expiration of the
extensions. Currently, the demand for L-1011 aircraft is weak, limited
principally to air cargo carriers and operators of passenger charters.
Several major airlines have reduced their commitment to the L-1011 and,
currently, a large domestic air carrier is expected to retire eleven L-1011
aircraft from its fleet. Such circumstances have inhibited the remarketing
of the Partnership's L-1011 aircraft and requires the Partnership to upgrade
or refurbish the aircraft to meet the needs of a potential successor lessee.
The Partnership's Lockheed L-1011-100 is currently undergoing heavy
maintenance expected to cost the Partnership approximately $430,000, all of
which was incurred or accrued during the nine months ended September 30,
1996. Accordingly, until the Partnership's L-1011 aircraft are remarketed,
the General Partner will continue to reserve a portion of the Partnership's
cash for such purposes.
The Partnership's Boeing 727-208 ADV aircraft is under a three year
re-lease agreement with American Trans Air, Inc. The re-lease agreement,
scheduled to expire in January 1997, provides revenue of $63,500 per month to
the Partnership.
The Partnership holds a proportionate ownership interest in the Cathay,
Southwest and Finnair Aircraft discussed above. The remaining interests are
owned by other affiliated partnerships sponsored by AFG. All partnerships
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues and expenses
associated with the aircraft. (See Notes 3 and 5 to the financial
statements.)
The Partnership typically earns interest income from temporary investments
of rental receipts in short-term instruments. For the three and nine months
ended September 30, 1996 the Partnership earned interest income of $86,749
and $220,877, respectively, compared to $41,113 and $126,331 for the same
periods in 1995. The increase in interest income in 1996 compared to 1995 is
a result of interest of $39,346 earned on cash held in a special-purpose
escrow account in connection with the like-kind exchange transactions
discussed below and interest earned on sale proceeds associated with the
Boeing 727-200 ADV aircraft prior to the time such sale proceeds were
distributed to the Recognized Owners.
During July 1996, the Partnership sold a Boeing 727-200 ADV jet aircraft
with an original cost and net book value of $11,164,679 and $3,074,680,
respectively, to the existing lessee. In connection with this sale, the
Partnership realized sale proceeds of $3,535,649, which resulted in a net
gain, for financial statement purposes, of $460,969. The Partnership also
realized lease termination rents of $429,351 in connection with this sale as
the aircraft was sold prior to the expiration of the related lease term.
-11-
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
In September 1995, the Partnership transferred its entire ownership
interest (23.19%) in a Boeing 747-SP aircraft (the "United Aircraft") to its
lessee, United Air Lines, Inc. The transaction was structured as a like-kind
exchange for income tax reporting purposes. The Partnership received
aggregate cash consideration of $1,910,907, including $106,411 for rent
accrued through the transfer date. The net cash consideration of $1,804,496
was deposited into a special-purpose escrow account through a third-party
exchange agent pending the completion of the aircraft exchange. The
Partnership's interest in the United Aircraft had a net book value of
$2,301,510 at the date of transfer and resulted in a net loss for financial
reporting purposes of $497,014.
In November 1995, the Partnership partially replaced the United Aircraft
with a 13.11% ownership interest in the Southwest Aircraft, at an aggregate
cost of $1,919,500. To acquire the interest in the Southwest Aircraft, the
Partnership obtained financing of $1,432,396 from a third-party lender and
utilized $487,104 of the cash consideration received from the transfer of the
United Aircraft. The remaining ownership interest of 86.89% in the Southwest
Aircraft is held by affiliated equipment leasing programs sponsored by AFG.
Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% ownership interest in two Finnair Aircraft
at a total cost to the Partnership of $4,157,280. To acquire the ownership
interest in the Finnair Aircraft, the Partnership paid $1,389,942 in cash and
obtained financing of $2,767,338 from a third-party lender. The remaining
ownership interest of 85.15% of the Finnair Aircraft is held by affiliated
equipment leasing programs sponsored by AFG. The like-kind exchange,
involving the United, Southwest and Finnair Aircraft, was undertaken, in
part, to mitigate the Partnership's economic risk resulting from the United
Aircraft being returned to the Partnership upon its lease expiration in April
1996 and remaining off-lease for an extended period. The exchange enabled
the Partnership to replace a specialized aircraft with other aircraft which
are used more widely in the industry and also to significantly extend its
rental stream with two creditworthy lessees.
During the three and nine months ended September 30, 1996, the Partnership
incurred interest expense of $79,835 and $198,239, respectively. Interest
expense resulted from financing obtained from third-party lenders in
connection with the Southwest Aircraft and the Finnair Aircraft, described
above. 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
September 30, 1996 and 1995 and will not change as a percentage of lease
revenue in future periods.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as
insurance, printing, distribution and remarketing expenses The increase in
operating expenses during 1996 compared to 1995 is due primarily to heavy
maintenance costs incurred in connection with the Boeing 727-251 ADV aircraft
and the Lockheed L-1011-100 aircraft, discussed above. During the three
months ended September 30, 1996, the Partnership received $468,133 from the
former lessee of the Boeing 727-251 ADV aircraft, representing a
reimbursement of additional heavy maintenance costs previously incurred. The
amount of future operating expenses cannot be predicted with certainty;
however, such expenses are usually higher during the acquisition and
liquidation phases of a partnership. Other fluctuations will occur in
relation to the volume and timing of aircraft remarketing activities.
Depreciation and amortization expense was $831,696 and $2,826,205 for the
three and nine months ended September 30, 1996, respectively, compared to
$1,222,154 and $3,710,096 for the same periods in 1995.
The ultimate realization of residual value for any aircraft will be
dependent upon many factors, including AFG's ability to sell and re-lease the
aircraft. Changes in market conditions, industry trends, technological
advances, and
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<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
other events could converge to enhance or detract from asset values at any
given time. Accordingly, AFG will attempt to monitor changes in the airline
industry in order to identify opportunities which may be advantageous to the
Partnership and which will maximize total cash returns for each aircraft.
The total economic value realized upon final disposition of each aircraft
is comprised of all primary lease term revenue generated from that aircraft,
together with its residual value. The latter consists of cash proceeds
realized upon the aircraft's sale in addition to all other cash receipts
obtained from renting the aircraft under re-lease or renewal lease
agreements. Consequently, the amount of any future gain or loss reported in
the financial statements may not necessarily be indicative of the total
residual value the Partnership achieved from leasing the aircraft.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity which was
established for specific purposes described in the preceding "Overview". As
an equipment leasing program, the Partnership's principal operating
activities derive from aircraft rental transactions. Accordingly, the
Partnership's principal source of cash from operations is provided by the
collection of periodic rents. These cash inflows are used to satisfy debt
service obligations associated with leveraged leases, and to pay management
fees and operating costs. Operating activities generated net cash inflows of
$2,985,490 and $5,287,464 during the nine months ended September 30, 1996
and 1995, respectively. The expiration of the Partnership's lease agreements
related to both its Lockheed L-1011-100 and its proportionate interest in the
Lockheed L-1011-50 and the sale of a Boeing 727-200 Advanced aircraft will
cause a decline in the Partnership's future lease revenue and corresponding
sources of operating cash. This will be partially offset by rents generated
in connection with the Southwest Aircraft and the Finnair Aircraft. 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. Ultimately, the Partnership will dispose of all aircraft under
lease. This will occur principally through sale transactions whereby each
aircraft will be sold to the existing lessee or to a third party. Generally,
this will occur upon expiration of each aircraft's primary or
renewal/re-lease term.
Cash expended for equipment acquisitions and cash realized form asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During the nine months ended September
30, 1996, the Partnership expended $72,550 in cash in connection with the
like-kind exchange transactions referred to above. There were no equipment
acquisitions during the same period in 1995. During the nine months ended
September 30, 1996, the Partnership realized $3,535,649 in proceeds from the
sale of a Boeing 727-200 ADV aircraft. There were no equipment sales during
the same period in 1995. Future inflows of cash from asset disposals will
vary in timing and amount and will be influenced by many factors including,
but not limited to, the frequency and timing of lease expirations, the
equipment's condition and age, and future market conditions.
As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving
the Southwest Aircraft and the Finnair Aircraft. The corresponding note
agreements are recourse only to the specific equipment financed and to the
minimum rental payments contracted to be received during the debt
amortization period. As rental payments are collected, a portion or all of
the rental payment will be used to repay principal and interest. The
Partnership has a balloon payment obligation at the expiration of the primary
lease term related to the Finnair Aircraft.
Cash distributions to the General Partner and Recognized Owners are
declared and generally paid within fifteen days following the end of each
calendar quarter. The payment of such distributions is presented as a
-13-
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
component of financing activities. For the nine months ended September 30,
1996, the Partnership declared total cash distributions of Distributable Cash
From Operations and Distributable Cash From Sales and Refinancings of
$6,384,542. Of the total distributions, $6,107,955 was allocated to the
Recognized Owners and $276,587 was allocated to the General Partner. The
third quarter 1996 cash distribution was paid on October 15, 1996.
Cash distributions paid to the Recognized Owners consist of both a return
of and a return on capital. To the extent that cash distributions consist of
Cash From Sales or Refinancings, substantially all of such cash distributions
should be viewed as a return of capital. Cash distributions do not represent
and are not indicative of yield on investment. Actual yield on investment
cannot be determined with any certainty until conclusion of the Partnership
and will be dependent upon the collection of all future contracted rents, the
generation of renewal and/or re-lease rents, and the residual value realized
for each aircraft at its disposal date. Future market conditions,
technological changes, the ability of AFG to manage and remarket the
aircraft, and many other events and circumstances, could enhance or detract
from individual asset yields and the collective performance of the
Partnership's aircraft portfolio.
Overall, the future liquidity of the Partnership will be greatly dependent
upon the collection of contractual rents and the outcome of residual
activities. The General Partner anticipates that cash proceeds resulting
from these sources will satisfy the Partnership's future expense obligations.
However, the amount of cash available for distribution in future periods is
expected to fluctuate widely as the General Partner attempts to remarket the
Partnership's aircraft and possibly upgrade certain aircraft to meet the
standards of potential successor lessees.
In June and September 1996, Cathay returned two aircraft, one in which the
Partnership holds a proportionate interest and a second aircraft owned
entirely by the Partnership. These events are expected to present demands on
the Partnership's cash position, depending upon the extent of upgrades or
refurbishments necessary to remarket these aircraft. Accordingly, until
these aircraft are remarketed, the General Partner will continue to reserve a
portion of the Partnership's cash for such purposes. The cash distribution
for the third quarter of 1996 resulted from proceeds realized from the sale
of the Partnership's Boeing 727-200 ADV aircraft and a reduction in the
Partnership's estimated cash reserve requirements. The General Partner
anticipates that future cash distributions will be contingent primarily upon
the realization of sale proceeds from remarketing the Partnership's remaining
aircraft and the extent of the Partnership's cash reserve requirements.
Accordingly, the General Partner expects to suspend the declaration of
quarterly cash distributions between the periods corresponding to major
remarketing events.
-14-
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
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
-15-
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity
and on the date indicated.
AIRFUND II International Limited Partnership
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the General
Partner of the Registrant.
By: /s/ Michael J. Butterfield
---------------------------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: November 14, 1996
---------------------------------------------
By: /s/ Gary M. Romano
---------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 14, 1996
---------------------------------------------
-16-
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,959,477
<SECURITIES> 0
<RECEIVABLES> 188,519
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,147,996
<PP&E> 50,631,214
<DEPRECIATION> 36,304,391
<TOTAL-ASSETS> 22,474,819
<CURRENT-LIABILITIES> 6,321,430
<BONDS> 3,581,414
0
0
<COMMON> 0
<OTHER-SE> 12,571,975
<TOTAL-LIABILITY-AND-EQUITY> 22,474,819
<SALES> 4,019,900
<TOTAL-REVENUES> 4,701,746
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,184,351
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198,239
<INCOME-PRETAX> 319,156
<INCOME-TAX> 0
<INCOME-CONTINUING> 319,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 319,156
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
