<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, 1997
---------------------------------------------
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, 1997 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.)
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 II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position at September 30,
1997 and December 31, 1996................................ 3
Statement of Operations for the three and nine
months ended September 30, 1997 and 1996.................. 4
Statement of Cash Flows for the nine months ended
September 30, 1997 and 1996............................... 5
Notes to the Financial Statements........................... 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9-13
PART II. OTHER INFORMATION:
Items 1 - 6..................................................... 14
2
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
September 30, 1997 and December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................. $2,137,216 $ 2,347,762
Rents receivable.......................................................................... 39,931 --
Accounts receivable--affiliate............................................................ 185,493 146,567
Equipment at cost, net of accumulated depreciation of $42,494,744
and $39,961,731 at September 30, 1997 and December 31, 1996,
respectively............................................................................ 8,136,470 10,669,483
----------- -----------
Total assets........................................................................ $10,499,110 $ 13,163,812
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable............................................................................. $2,895,070 $ 3,419,785
Accrued interest.......................................................................... 36,841 35,929
Accrued liabilities....................................................................... 335,500 541,534
Accrued liabilities--affiliate............................................................ 24,286 489,018
Deferred rental income.................................................................... 112,034 74,667
----------- -----------
Total liabilities................................................................... 3,403,731 4,560,933
----------- -----------
Partners' capital (deficit):
General Partner......................................................................... (2,640,687) (2,565,312)
Limited Partnership Interests
(2,714,647 Units; initial purchase price of $25 each)................................... 9,736,066 11,168,191
----------- -----------
Total partners' capital............................................................. 7,095,379 8,602,879
----------- -----------
Total liabilities and partners' capital.............................................$10,499,110 $ 13,163,812
----------- -----------
----------- -----------
</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 nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
----------- ------------ ----------- -------------
Income:
Lease revenue.......................... $803,499 $ 1,398,078 $ 2,262,996 $ 4,019,900
Interest income........................ 26,926 86,749 80,935 220,877
Gain on sale of equipment.............. -- 460,969 -- 460,969
----------- ------------ ------------ ------------
Total income....................... 830,425 1,945,796 2,343,931 4,701,746
----------- ------------ ------------ ------------
Expenses:
Depreciation........................... 844,338 831,696 2,533,013 2,826,205
Interest expense....................... 65,234 79,835 207,852 198,239
Equipment management fees
-affiliate ......................... 40,175 69,904 113,150 200,995
Operating expenses--affiliate......... 539,280 537,613 997,416 1,157,151
----------- ------------ ------------ ------------
Total expenses.................... 1,489,027 1,519,048 3,851,431 4,382,590
----------- ------------ ------------ ------------
Net income (loss)....................... $(658,602) $ 426,748 $ (1,507,500) $ 319,156
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Net income (loss)
per limited partnership unit.......... $ (0.23) $ 0.15 $ (0.53) $ 0.11
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Cash distributions declared
per limited partnership unit......... $ -- $ 2.00 $ -- $ 2.25
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</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 nine months ended September 30, 1997 and 1996
(Unaudited)
1997 1996
------------ ----------
Cash flows from (used in)
operating activities:
Net income (loss)......................... $(1,507,500) $ 319,156
Adjustments to reconcile net
income (loss) to net cash from
operating activities:
Depreciation.......................... 2,533,013 2,826,205
Gain on sale of equipment............. -- (460,969)
Changes in assets and liabilities
Decrease (increase) in:
rents receivable...................... (39,931) 169,906
accounts receivable--affiliate........ (38,926) 127,920
Increase (decrease) in:
accrued interest...................... 912 12,051
accrued liabilities................... (206,034) 404,070
accrued liabilities--affiliate........ (464,732) (11,788)
deferred rental income................ 37,367 (401,061)
------------ ----------
Net cash from operating activities.. 314,169 2,985,490
------------ ----------
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....... (524,715) (618,320)
Distributions paid...................... -- (1,428,760)
------------ ----------
Net cash used in financing
activities........................ (524,715) (2,047,080)
------------ ----------
Net increase (decrease) in cash
and cash equivalents.................... (210,546) 4,401,509
Cash and cash equivalents at
beginning of period..................... 2,347,762 3,557,968
------------ ----------
Cash and cash equivalents at end
of period............................... $2,137,216 $7,959,477
------------ ----------
------------ ----------
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest.............................. $206,940 $186,188
------------ ----------
------------ ----------
Supplemental disclosure of investing and financing activities:
At December 31, 1995, the Partnership held $1,317,392 in a special-purpose
escrow account pending the completion of an aircraft exchange (See Results
of Operations). The Partnership completed the exchange in March 1996
obtaining interests in aircraft at an aggregate cost of $4,157,280,
utilizing cash of $1,389,942 (including the escrowed funds) and
third-party financing of $2,767,338.
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, 1997
(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 1996 Annual Report. Except as
disclosed herein, there has been no material change to the information
presented in the footnotes to the 1996 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, 1997 and December 31, 1996 and results of operations
for the three and nine month periods ended September 30, 1997 and 1996 have been
made and are reflected.
NOTE 2--CASH
At September 30, 1997, the Partnership had $2,030,000 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 $3,958,097 are due as
follows:
For the year ending September 30,1998 $2,896,792
1999 935,449
2000 125,856
----------
Total $3,958,097
----------
----------
The Partnership entered into a new 1-year lease agreement with Aer Lease
Limited for its proportionate interest in a Lockheed L-1011-50 aircraft at a
base rent to the Partnership of $39,500 per month, beginning April 27, 1997.
NOTE 4--EQUIPMENT
The following is a summary of equipment owned by the Partnership at
September 30, 1997. In the opinion of Equis Financial Group Limited Partnership
("EFG"), the acquisition cost of the equipment did not exceed its fair market
value.
6
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Remaining
LEASE TERM EQUIPMENT
EQUIPMENT TYPE MONTHS AT COST
- -------------- ---------- ---------------
One Lockheed L-1011-100....................... 0 $ 15,879,518
One Boeing 727-208 ADV (ATA).................. 16 12,928,710
One Boeing 727-251 ADV (Transmeridian)........ 13 9,732,714
One Lockheed L-1011-50 (Aer Lease)............ 7 6,013,492
Two McDonnell-Douglas MD-82 (Finnair)......... 19 4,157,280
Three Boeing 737-2H4 (Southwest).............. 27 1,919,500
---------------
Total equipment cost 50,631,214
Accumulated depreciation (42,494,744)
---------------
Equipment, net of accumulated depreciation $ 8,136,470
---------------
---------------
The costs of the Lockheed L-1011-50 aircraft, the two McDonnell-Douglas
MD-82 aircraft, and the three Boeing 737-2H4 aircraft 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.
On September 30, 1996, the Lockheed L-1011-100 aircraft was returned by the
lessee. Currently, the aircraft is undergoing heavy maintenance which is
expected to cost the Partnership approximately $947,000, all of which was
incurred or accrued at September 30, 1997. The Partnership entered into a new
3-year lease agreement with Classic Airways Limited ("Classic") related to this
aircraft at a base rent to the Partnership of $80,000 per month, effective
November 1, 1997. In addition, Classic has been granted an option to purchase
the aircraft for $2,500,000 after two years of the lease has elapsed and
$2,000,000 upon the expiration of the lease.
NOTE 5--RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the nine month
periods ended September 30, 1997 and 1996, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
1997 1996
------------ ------------
Equipment management fees................. $ 113,150 $ 200,995
Administrative charges.................... 36,885 15,750
Reimbursable operating expenses due to
third parties........................... 960,531 1,141,401
------------ ------------
Total............. $ 1,110,566 $ 1,358,146
------------ ------------
------------ ------------
7
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
All rents and 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.
At September 30, 1997, the Partnership was owed $185,493 by EFG for such funds
and the interest thereon. These funds were remitted to the Partnership in
October 1997.
NOTE 6--NOTES PAYABLE
Notes payable at September 30, 1997 consisted of installment notes payable
to banks of $2,895,070. All of the installment notes are non-recourse, with
interest rates ranging between 8.65% and 8.89% and are collateralized by the
equipment and assignment of the related lease payments. All of the notes were
originated in connection with the like-kind exchange transaction involving the
Southwest Aircraft and the Finnair Aircraft (See Results of the Operations). 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 of
$1,411,035. The carrying amount of notes payable approximates fair value at
September 30, 1997.
The annual maturities of the installment notes payable are as follows:
For the year ending September 30, 1998 $ 789,921
1999 1,981,529
2000 123,620
---------
Total $2,895,070
---------
---------
NOTE 7--LEGAL PROCEEDINGS
On June 24, 1997, four plaintiffs (the "Plaintiffs") owning limited partner
units or beneficiary interests in eight investment programs sponsored by EFG
filed a lawsuit, as a derivative action, on behalf of the Partnership and 27
other investment programs (collectively, the "Nominal Defendants") in the
Superior Court of the Commonwealth of Massachusetts for the County of Suffolk
against EFG and certain of EFG's affiliates, including the General Partner of
the Partnership and four other wholly-owned subsidiaries of EFG which are the
general partner or managing trustee of one or more of the investment programs,
(collectively, the "Managing Defendants"), and certain other entities and
individuals that have control of the Managing Defendants and the Nominal
Defendants (the "Controlling Defendants"). The Plaintiffs assert claims of
breach of fiduciary duty, breach of contract, unjust enrichment, and equitable
relief and seek various remedies, including compensatory and punitive damages to
be determined at trial.
The General Partner and EFG are in the early stages of evaluating the nature
and extent of the claims asserted in this lawsuit and cannot predict its outcome
with any degree of certainty. However, based upon all of the facts presently
being considered by management, the General Partner and EFG do not believe that
any likely outcome will have a material adverse effect on the Partnership. The
General Partner, EFG and their affiliates intend to vigorously defend against
the lawsuit.
8
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMAITON
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements in this quarterly report 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 important 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
ability of EFG to collect all rents due under the attendant lease agreements and
successfully remarket the Partnership's aircraft upon the expiration of such
leases.
Three and nine months ended September 30, 1997 compared to the three and
nine months ended September 30, 1996:
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. Subsequently, all of the aircraft in the
Partnership's original portfolio have been re-leased, renewed, exchanged for
other aircraft or sold (see below). At September 30, 1997 the Partnership owned
three aircraft and proportionate interest in six additional aircraft. All of the
Partnership's aircraft are currently on lease with the exception of a Lockheed
L-1011-100 aircraft. The Partnership entered into a new 3-year lease agreement
with a new lessee for the Lockheed L-1011-100 aircraft effective November 1,
1997. Upon expiration of the current lease agreements, each aircraft will be
re-leased or sold depending on prevailing market conditions and the assessment
of such conditions by EFG to obtain the most advantageous economic benefit.
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, 1997, the Partnership
recognized lease revenue of $803,499 and $2,262,996, respectively, compared to
$1,398,078 and $4,019,900 for the same periods in 1996. The decrease in lease
revenue from 1996 to 1997 was due primarily to lease term expirations related to
the Partnership's Lockheed L-1011-100 aircraft and its proportionate interest in
a Lockheed L-1011-50 aircraft and the sale of a 727-200 Advanced aircraft
(discussed below). The decrease was partially offset by the effects of the
re-lease of the Partnership's Boeing 727-251 Advanced aircraft in September 1996
(discussed below) and the Partnership's aircraft exchange 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, 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). The
Southwest Aircraft were exchanged into the Partnership in 1995 while the Finnair
Aircraft were exchanged into the Partnership on March 25, 1996. Accordingly,
revenue for the Finnair Aircraft for the nine months ended September 30,
1996 did not fully reflect the rents ultimately earned from the leasing of these
aircraft. In aggregate, the replacement aircraft generated approximately
$254,000 and $761,000 of lease revenue during the three and nine months ended
September 30, 1997, respectively, compared to approximately $255,000 and
$554,000 for the same periods in 1996.
9
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMAITON
The Partnership's Boeing 727-251 Advanced 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 at a cost to the
Partnership of $984,000, all of which was incurred or accrued during the year
ended December 31, 1996. In September 1996, the Partnership entered into a new
28-month lease agreement with Transmeridian Airlines ("Transmeridian"), to
re-lease this aircraft for aggregate rents over the lease term of approximately
$1,941,000. This aircraft generated $240,000 and $720,000 of lease revenue
during the three and nine months ended September 30, 1997, respectively,
compared to approximately $53,000 during each of the same periods in 1996.
The Partnership sold a Boeing 727-200 ADV aircraft to Northwest during the
second half of 1996 and, in addition to the sales proceeds, received lease
termination rents. The Partnership recognized aggregate lease revenue of
approximately $563,000 and $1,422,000 for the three and nine months ended
September 30, 1996, respectively, from this aircraft.
The Partnership owns a whole and a partial interest in two Lockheed L-1011
aircraft formerly leased to Cathay Pacific Airways Limited ("Cathay"). The
Partnership's renewal lease agreements with Cathay 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. In aggregate, the
Partnership recognized lease revenue of approximately $336,000 and $1,419,000
related to the two Cathay aircraft during the three and nine months ended
September 30, 1996, respectively. Cathay subsequently returned both aircraft to
the Partnership upon the expiration of the extensions. The Lockheed L-1011-50
aircraft underwent heavy maintenance which cost the Partnership approximately
$400,000, all of which was incurred at September 30, 1997. The Partnership
entered into a new 1-year lease agreement with Aer Lease Limited ("Aer Lease"),
with respect to its interest in the L-1011-50 aircraft, at a base rent to the
Partnership of $39,550 per month, beginning April 27, 1997. The Partnership
recognized lease revenue of approximately $119,000 and $202,000 related to this
aircraft during the three and nine months ended September 30, 1997. The Lockheed
L-1011-100 is currently undergoing heavy maintenance expected to cost the
Partnership approximately $947,000 all of which was incurred or accrued at
September 30, 1997. The Partnership entered into a new 3-year lease agreement
with Classic Airways Limited ("Classic") related to this aircraft at a base rent
to the Partnership of $80,000 per month, effective November 1, 1997. In
addition, Classic has been granted an option to purchase the aircraft for
$2,500,000 and $2,000,000 after two years and the entire term of the lease have
elapsed, respectively. Currently, the demand for Lockheed 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 Lockheed
L-1011 aircraft. Such circumstances have inhibited the remarketing of the
Partnership's Lockheed L-1011 aircraft and have required the Partnership to
incur costs to meet the needs of Aer Lease and Classic. Accordingly, until the
Partnership's Lockheed L-1011 aircraft are sold, the General Partner will
continue to reserve a portion of the Partnership's cash for such purposes in the
future.
The Partnership's Boeing 727-208 aircraft is under a two year renewal
agreement with American Trans Air, Inc. The renewal agreement, scheduled to
expire in January 1999, provides revenue of $63,500 per month to the
Partnership. The Partnership recognized lease revenue of approximately $191,000
and $572,000 from this aircraft for each of the three and nine month periods
ended September 30, 1996 and 1997.
The Partnership holds a proportionate ownership interest in the Lockheed
L-1011-50 aircraft, the Southwest Aircraft and the Finnair Aircraft, discussed
above. 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.
10
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMAITON
During July 1996, the Partnership sold a Boeing 727-200 Advanced 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.
The ultimate realization of residual value for aircraft is dependent upon
many factors, including EFG's ability to sell and re-lease the aircraft.
Changing market conditions, industry trends, technological advances, and many
other events can converge to enhance or detract from asset values at any given
time. EFG attempts to monitor these changes 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 on a re-lease, renewal or month-to-month basis.
Consequently, the amount of any gain or loss reported in the financial
statements is not necessarily indicative of the total residual value the
Partnership achieved from leasing the aircraft.
Interest income for the three and nine months ended September 30, 1997 was
$26,926 and $80,935, respectively, compared to $86,749 and $220,877 for the same
periods in 1996. Interest income is typically generated from temporary
investments of rental receipts and equipment sale proceeds in short-term
instruments. Interest income in 1996 included interest of $39,346 earned on cash
held in a special-purpose escrow account in connection with the like-kind
exchange transaction, discussed above. In addition, the Partnership's cash
available for investment was significantly higher during 1996 than in 1997.
For the three and nine months ended September 30, 1997, the Partnership
incurred interest expense of $65,234 and $207,852, respectively, compared to
$79,835 and $198,239 for the same periods in 1996. Interest expense in 1997 and
1996 resulted from financing obtained from third-party lenders in connection
with the Southwest Aircraft and the Finnair Aircraft. The financing of the
Finnair Aircraft occurred on March 25, 1996. Therefore, interest expense related
to the Finnair debt during the nine months ended September 30, 1996 was only
incurred from that date through the end of the period. 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, 1997 and 1996, 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. During the nine months ended
September 30, 1997, significant heavy maintenance costs were incurred or accrued
in connection with the two Lockheed L-1011 aircraft to allow the Partnership to
remarket these aircraft (see above). During the nine months ended September 30,
1996, in addition to heavy maintenance costs incurred or accrued in connection
with the two Lockheed L-1011 aircraft, such costs were also incurred or accrued
to facilitate the re-lease of the Boeing 727-251 aircraft (see 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 expense was $844,338 and
$2,533,013 for the three and nine months ended September 30, 1997, respectively,
compared to $831,696 and $2,826,205 for the same periods in 1996.
11
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMAITON
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 generally 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 $314,169 and $2,985,490 during the nine
months ended September 30, 1997 and 1996, respectively. The expiration of the
Partnership's lease agreements related to its Lockheed L-1011-100 aircraft and
its proportionate interest in the Lockheed L-1011-50 aircraft and the sale of
its Boeing 727-200 Advanced aircraft have caused a decline in the Partnership's
lease revenue and corresponding sources of operating cash. This has been
partially offset by rents generated in connection with the Finnair Aircraft and
the re-lease of the aircraft to Transmeridian and Aer Lease (see Results of
Operations). In addition, the Partnership expended substantial funds in
connection with its remarketing efforts related to the two Lockheed L-1011
aircraft. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities decline as the
Partnership remarkets its aircraft. Conversely, the Partnership may incur
increased costs to insure the successful remarketing of these 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 from 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. During the nine months ended September
30, 1996, the Partnership realized $3,535,649 in proceeds from the sale of a
Boeing 727-200 Advanced aircraft. There were no equipment acquisitions or sales
during the same period in 1997. 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 and Finnair Aircraft. The repayment of principal related to such
indebtedness is reported as a component of financing activities. 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 related to the Southwest and
Finnair Aircraft are collected, all of the rental payment will be used to repay
principal and interest. The Partnership also has a balloon payment obligation at
the expiration of the primary lease term related to the Finnair Aircraft of
$1,411,035.
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 EFG to manage and remarket the aircraft, and many other events
12
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMAITON
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.
The Partnership has incurred and accrued significant heavy maintenance costs
in connection with its remarketing efforts related to the two Lockheed L-1011
aircraft and the Transmeridian Aircraft. The Partnership also expects to incur
additional costs in future years as the Partnership's remaining aircraft are
remarketed. The amount of such costs will depend upon the extent of upgrades or
refurbishments necessary to prepare these aircraft for sale or re-lease. These
costs have presented, and will continue to present, demands on the Partnership's
cash position. Accordingly, the General Partner will continue to reserve a
significant portion of the Partnership's cash for such purposes. The General
Partner anticipates that future cash distributions will be contingent primarily
upon the realization of sale proceeds generated from remarketing the
Partnership's remaining aircraft and the extent of the Partnership's cash
reserve requirements. Accordingly, the General Partner did not declare a cash
distribution during the first three quarters of 1997 and expects to continue to
suspend the declaration of quarterly cash distributions between the periods
corresponding to major remarketing events.
13
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 7 to the financial statements herein.
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
14
<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, 1997
------------------------------------------
By: /s/ Gary M. Romano
------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management
Corporation (Duly Authorized Officer
and Principal Financial Officer)
Date: November 14, 1997
------------------------------------------
15
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,137,216
<SECURITIES> 0
<RECEIVABLES> 225,424
<ALLOWANCES> 0
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<CURRENT-ASSETS> 2,362,640
<PP&E> 50,631,214
<DEPRECIATION> 42,494,744
<TOTAL-ASSETS> 10,499,110
<CURRENT-LIABILITIES> 508,661
<BONDS> 2,895,070
0
0
<COMMON> 0
<OTHER-SE> 7,095,379
<TOTAL-LIABILITY-AND-EQUITY> 10,499,110
<SALES> 0
<TOTAL-REVENUES> 2,343,931
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,643,579
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207,852
<INCOME-PRETAX> 1,507,500
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,507,500
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<EXTRAORDINARY> 0
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