<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, 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 June 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position at June 30, 1996
and December 31, 1995 3
Statement of Operations for the three and six
months ended June 30, 1996 and 1995 4
Statement of Cash Flows for the six months ended
June 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
</TABLE>
2
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
June 30, 1996 and December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 3,808,582 $ 3,557,968
Contractual right for equipment -- 1,317,392
Rents receivable 9,244 169,906
Accounts receivable - affiliate 133,696 316,439
Equipment at cost, net of accumulated
depreciation of $43,562,694 and
$41,568,185 at June 30, 1996 and
December 31, 1995, respectively 18,233,199 16,070,428
----------- -----------
Total assets $22,184,721 $21,432,133
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 3,778,984 $ 1,432,396
Accrued interest 39,680 19,197
Accrued liabilities 119,918 93,140
Accrued liabilities - affiliate 23,782 58,152
Deferred rental income 49,778 477,506
Cash distributions payable to partners 357,190 714,381
----------- -----------
Total liabilities 4,369,332 2,794,772
----------- -----------
Partners' capital (deficit):
General Partner (2,147,327) (2,106,228)
Limited Partnership Interests
(2,714,647 Units; initial purchase
price of $25 each) 19,962,716 20,743,589
----------- -----------
Total partners' capital 17,815,389 18,637,361
----------- -----------
Total liabilities and partners'
capital $22,184,721 $21,432,133
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF OPERATIONS
for the three and six months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Income:
Lease revenue $1,138,726 $1,590,128 $2,621,822 $3,303,703
Interest income 50,401 40,145 134,128 85,218
---------- ---------- ---------- ----------
Total income 1,189,127 1,630,273 2,755,950 3,388,921
---------- ---------- ---------- ----------
Expenses:
Depreciation and amortization 1,015,990 1,243,887 1,994,509 2,487,942
Interest expense 88,170 -- 118,404 --
Equipment management fees
- affiliate 56,936 79,506 131,091 165,185
Operating expenses - affiliate 410,486 34,874 619,538 93,239
---------- ---------- ---------- ----------
Total expenses 1,571,582 1,358,267 2,863,542 2,746,366
---------- ---------- ---------- ----------
Net income (loss) $ (382,455) $ 272,006 $ (107,592) $ 642,555
========== ========== ========== ==========
Net income (loss)
per limited partnership unit $ (0.13) $ 0.10 $ (0.04) $ 0.22
========== ========== ========== ==========
Cash distributions declared
per limited partnership unit $ 0.13 $ 0.63 $ 0.25 $ 1.25
========== ========== ========== ==========
</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 six months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from (used in) operating
activities:
Net income (loss) $ (107,592) $ 642,555
Adjustments to reconcile net income
(loss) to net cash from operating
activities:
Depreciation and amortization 1,994,509 2,487,942
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 160,662 (2,483)
accounts receivable - affiliate 182,743 233,871
Increase (decrease) in:
accrued interest 20,483 --
accrued liabilities 26,778 (88,182)
accrued liabilities - affiliate (34,370) (24,911)
deferred rental income (427,728) (93,248)
----------- -----------
Net cash from operating
activities 1,815,485 3,155,544
----------- -----------
Cash flows used in investing activities:
Purchase of equipment (72,550) --
----------- -----------
Net cash used in investing
activities (72,550) --
----------- -----------
Cash flows used in financing activities:
Principal payments - notes payable (420,750) --
Distributions paid (1,071,571) (3,571,904)
----------- -----------
Net cash used in financing
activities (1,492,321) (3,571,904)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 250,614 (416,360)
Cash and cash equivalents at beginning
of period 3,557,968 3,620,148
----------- -----------
Cash and cash equivalents at end of
period $ 3,808,582 $ 3,203,788
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest $ 97,921 $ --
=========== ===========
</TABLE>
Supplemental disclosure of non-cash investing activities:
See Note 5 to the Financial Statements.
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
AIRFUND II International Limited Partnership
Notes to Financial Statements
June 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 June 30, 1996 and December 31, 1995 and results of operations for
the three and six month periods ended June 30, 1996 and 1995 have been made and
are reflected.
NOTE 2 - CASH
- -------------
At June 30, 1996, the Partnership had $3,800,000 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 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 $6,361,971 are
due as follows:
<TABLE>
<S> <C>
For the year ending June 30, 1997 $3,093,718
1998 1,917,534
1999 1,130,471
2000 220,248
----------
Total $6,361,971
==========
</TABLE>
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 June 30, 1999, and
approximately $220,000 in the year ending June 30, 2000, pursuant to the
Southwest Aircraft lease agreement.
6
<PAGE>
AIRFUND II International Limited Partnership
Notes to 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 June 30, 1998, and approximately $473,000 in the year ending June 30,
1999, pursuant to the Finnair Aircraft lease agreement.
Effective June 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 $941,000 of
rental revenue in the year ended June 30, 1997, $900,000 of rental revenue in
the year ended June 30, 1998, and $280,000 of rental revenue in the year ended
June 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 six month periods ended June 30, 1996 and 1995, which were paid or accrued
by the Partnership to AFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Equipment management fees $131,091 $165,185
Administrative charges 10,500 10,500
Reimbursable operating expenses
due to third parties 609,038 82,739
-------- --------
Total $750,629 $258,424
======== ========
</TABLE>
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 June 30, 1996, the Partnership was owed
$133,696 by AFG for such funds and the interest thereon. These funds were
remitted to the Partnership in July 1996.
NOTE 5 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at June 30,
1996. In the opinion of AFG, the acquisition cost of the equipment did not
exceed its fair market value.
7
<PAGE>
AIRFUND II International Limited Partnership
Notes to Financial Statements
(Continued)
<TABLE>
<CAPTION>
Lease Term Equipment
Equipment Type (Months) at Cost
- ------------------------- ----------- -------------
<S> <C> <C>
One Lockheed L-1011-100 (Cathay) 6 $ 15,879,518
One Boeing 727-208 ADV (ATA) 36 12,928,710
One Boeing 727-200 ADV (Northwest) -- 11,164,679
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
------------
</TABLE>
<TABLE>
<S> <C>
Total equipment cost 61,795,893
Accumulated depreciation (43,562,694)
------------
Equipment, net of accumulated depreciation $ 18,233,199
============
</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 incurred
heavy maintenance costs of approximately $500,000 during the six months ended
June 30, 1996. The Partnership entered into a new 28-month lease agreement with
Transmeridian Airlines, to re-lease the aircraft effective June 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
Partnership's complete interest in the Lockheed
8
<PAGE>
AIRFUND II International Limited Partnership
Notes to Financial Statements
(Continued)
L-1011-100 is anticipated to be returned to the Partnership upon the expiration
of its renewal lease term, in September 1996.
The Partnership's Boeing 727-200 ADV aircraft was sold to the lessee in July
1996 (see Note 7 - Subsequent Events).
NOTE 6 - NOTES PAYABLE
- ----------------------
Notes payable at June 30, 1996 consisted of installment notes payable to banks
of $3,778,984. All of 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 June 30, 1996.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C>
For the year ending June 30, 1997 $ 714,955
1998 780,423
1999 2,099,193
2000 184,413
----------
Total $3,778,984
==========
</TABLE>
NOTE 7 - SUBSEQUENT EVENT
- -------------------------
During July 1996, the Partnership sold its Boeing 727-200 Advanced aircraft
to the lessee, Northwest Airlines, Inc. The Partnership received lease
termination rents of $429,351 and sale proceeds of $3,535,649. At June 30, 1996,
the net carrying value of this aircraft was $3,074,680.
9
<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 six months ended June 30, 1996 compared to the three and six months
- -----------------------------------------------------------------------------
ended June 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 June 1996, upon completion of refurbishments, was re-leased
to Transmeridian Airlines. The Partnership is negotiating to re-lease the other
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. At June
30, 1996, the Partnership also owned a complete interest in three other
aircraft, one of which was sold in July 1996 (see Note 7 to the Financial
Statements, herein), and two of which are being leased pursuant to renewal and
re-lease agreements which will expire in 1996 and 1997, respectively. 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 six months ended June 30, 1996, the Partnership recognized
lease revenue of $1,138,726 and $2,621,822, respectively, compared to $1,590,128
and $3,303,703 for the same periods in 1995. The decrease in lease revenue from
1995 to 1996 was due primarily to the expiration of the lease to Northwest
Airlines, Inc. ("Northwest") of a Boeing 727-251 ADV aircraft, in December 1995.
This aircraft was re-leased to Transmeridian Airlines, effective June 1996 (see
discussion below). The decrease also reflects the effects of a temporary
decline in lease revenues associated with 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 $255,401. The Finnair
Aircraft was exchanged into the Partnership on March 25 1996. Accordingly,
revenue for the six months ended June 30, 1996 reflected only a portion of 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, was returned upon expiration of its lease term on
November 30, 1995. This aircraft underwent heavy maintenance costing the
Partnership approximately $500,000 during the six
10
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AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
months ended June 30, 1996. In June, 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 $2,121,000. The
Partnership's portfolio also includes a Boeing 727-200 ADV aircraft which was
sold in July 1996 (see Note 7 - Subsequent Events).
The Partnership owns a whole and a partial interest in two Lockheed L-1011
aircraft with 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 the other until September 30,
1996, both at fixed rates. Currently, the demand for L-1011 aircraft is weak,
limited princiaplly 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 may inhibit the remarketing of the
Partnership's L-1011 aircraft and may require the Partnership to upgrade or
refurbish the aircraft to meet the needs of a potential successor lessee.
Accordingly, until the Partnership's L-1011 aircraft are remarketed, the General
Partner expects to reserve a portion of the Partnership's cash for such
purposes. In addition, the General Partner will engage the services of a third
party to provide a new appraisal of the Partnership's L-1011 aircraft in light
of current market conditions.
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, herein.)
The Partnership typically earns interest income from temporary investments of
rental receipts in short-term instruments. For the three and six months ended
June 30, 1996, the Partnership earned interest income of $50,401 and $134,128,
respectively, compared to $40,145 and $85,218 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 above.
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 Notes 3 and 5 to the financial statements).
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
11
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AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 six months ended June 30, 1996, the Partnership incurred
interest expense of $88,170 and $118,404, 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 June
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, discussed above. 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
$1,015,990 and $1,994,509 for the three and six months ended June 30, 1996,
respectively, compared to $1,243,887 and $2,487,942 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 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 $1,815,485 and $3,155,544 during the
six months ended June 30, 1996 and 1995, respectively. The expiration of the
Partnership's current lease agreements 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
12
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AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 is reported under investing
activities on the accompanying Statement of Cash Flows. 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.
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 balloon payment
obligations 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 component of
financing activities. For the six months ended June 30, 1996, the Partnership
declared total cash distributions of Distributable Cash From Operations of
$714,380. In accordance with the Amended and Restated Agreement and Certificate
of Limited Partnership, the Recognized Owners were allocated 95% of these
distributions, or $678,661, and the General Partner was allocated 5%, or
$35,719. The second quarter 1996 cash distribution was paid on July 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 1996, Cathay returned one aircraft, in which the Partnership holds a
proportionate interest and a second aircraft, owned entirely by the
Partnership, is anticipated to be returned to the Partnership in September 1996.
Such events will present demands on the Partnership's cash position, depending
upon upgrades or refurbishments which will be necessary to remarket these
aircraft. Accordingly, the General Partner will reserve a portion of the
Partnership's cash for these purposes. In July 1996, the Partnership will
collect cash of $3,965,000, consisting of lease termination rents equal to
$429,351 and sale proceeds equal
13
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
to $3,535,649 from the sale of one of its Boeing 727 Advanced jet aircraft to
the lessee, Northwest. Over time, aircraft disposals and other remarketing
events will cause the Partnership's net cash from operating activities to
diminish. Accordingly, fluctuations in the level of quarterly cash distributions
have and will continue to occur. It is possible that the General Partner will
elect not to declare a cash distribution in a given quarter, depending upon the
overall cash requirements of the Partnership.
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: August 14, 1996
-------------------------------------
By: /s/ Gary M. Romano
---------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1996
-------------------------------------
16
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,808,582
<SECURITIES> 0
<RECEIVABLES> 142,940
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,951,522
<PP&E> 61,795,893
<DEPRECIATION> 43,562,694
<TOTAL-ASSETS> 22,184,721
<CURRENT-LIABILITIES> 590,348
<BONDS> 3,778,984
0
0
<COMMON> 0
<OTHER-SE> 17,815,389
<TOTAL-LIABILITY-AND-EQUITY> 22,184,721
<SALES> 0
<TOTAL-REVENUES> 2,755,950
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,863,542
<INTEREST-EXPENSE> 118,404
<INCOME-PRETAX> (107,592)
<INCOME-TAX> 0
<INCOME-CONTINUING> (107,592)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (107,592)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
