<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 March 31, 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 March 31, 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.)
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 March 31, 1997 and December 31, 1996 3
Statement of Operations
for the three months ended March 31, 1997 and 1996 4
Statement of Cash Flows
for the three months ended March 31, 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 9-12
PART II. OTHER INFORMATION:
Items 1 - 6 13
2
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 1997 and December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,717,996 $ 2,347,762
Accounts receivable - affiliate 151,105 146,567
Equipment at cost, net of accumulated depreciation of
$40,806,069 and $39,961,731 at March 31, 1997
and December 31, 1996, respectively 9,825,145 10,669,483
----------- -----------
Total assets $11,694,246 $13,163,812
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 3,288,050 $ 3,419,785
Accrued interest 49,524 35,929
Accrued liabilities 60,470 541,534
Accrued liabilities - affiliate 22,781 489,018
Deferred rental income -- 74,667
----------- -----------
Total liabilities 3,420,825 4,560,933
----------- -----------
Partners' capital (deficit):
General Partner (2,581,785) (2,565,312)
Limited Partnership Interests
(2,714,647 Units; initial purchase price of $25 each) 10,855,206 11,168,191
----------- -----------
Total partners' capital 8,273,421 8,602,879
----------- -----------
Total liabilities and partners' capital $11,694,246 $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 months ended March 31, 1997 and 1996
(Unaudited)
1997 1996
---------- ----------
Income:
Lease revenue $ 683,102 $1,483,096
Interest income 30,021 83,727
---------- ----------
Total income 713,123 1,566,823
---------- ----------
Expenses:
Depreciation 844,338 978,519
Interest expense 73,305 30,234
Equipment management fees - affiliate 34,155 74,155
Operating expenses - affiliate 90,783 209,052
---------- ----------
Total expenses 1,042,581 1,291,960
---------- ----------
Net income (loss) $(329,458) $ 274,863
---------- ----------
---------- ----------
Net income (loss)
per limited partnership unit $ (0.12) $ 0.10
---------- ----------
---------- ----------
Cash distribution declared
per limited partnership unit $ -- $ 0.13
---------- ----------
---------- ----------
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1997 and 1996
(Unaudited)
1997 1996
---------- ----------
Cash flows from (used in) operating activities:
Net income (loss) $ (329,458) $ 274,863
Adjustments to reconcile net income (loss) to
net cash from (used in) operating activities:
Depreciation 844,338 978,519
Changes in assets and liabilities
Decrease (increase) in:
rents receivable -- 137,700
accounts receivable - affiliate (4,538) 137,690
Increase (decrease) in:
accrued interest 13,595 2,036
accrued liabilities (481,064) 139,954
accrued liabilities - affiliate (466,237) 15,837
deferred rental income (74,667) (343,930)
---------- ----------
Net cash from (used in) operating activities (498,031) 1,342,669
---------- ----------
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 (131,735) (204,636)
Distributions paid -- (714,381)
---------- ----------
Net cash used in financing activities (131,735) (919,017)
---------- ----------
Net increase (decrease) in cash and cash equivalents (629,766) 351,102
Cash and cash equivalents at beginning of period 2,347,762 3,557,968
---------- ----------
Cash and cash equivalents at end of period $1,717,996 $3,909,070
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 59,710 $ 28,198
---------- ----------
---------- ----------
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
March 31, 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 March 31, 1997 and December 31, 1996 and results of operations
for the three month periods ended March 31, 1997 and 1996 have been made and
are reflected.
NOTE 2 - CASH
At March 31, 1997, the Partnership had $1,600,000 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 $5,154,043 are due as follows:
For the year ending March 31, 1998 $ 2,719,492
1999 2,119,911
2000 314,640
--------------
Total $ 5,154,043
--------------
--------------
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at March
31, 1997. In the opinion of Equis Financial Group Limited Partnership
("EFG"), (formerly American Finance Group), 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)
Lease
Term Equipment
Equipment Type (Months) at Cost
- -------------------------------------- -------- ------------
One Lockheed L-1011-100 -- 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 -- 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 (40,806,069)
-------------
Equipment, net of accumulated depreciation $ 9,825,145
-------------
-------------
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 June 30 and September 30, 1996, the Lockheed L-1011-50 and L-1011-100
aircraft were returned by the lessee. Currently, both aircraft are
undergoing heavy maintenance. The heavy maintenance on the Lockheed
L-1011-50 is expected to cost the Partnership approximately $362,000, all of
which was accrued or incurred at March 31, 1997. The Partnership entered
into a new 12-month lease agreement with Aer Lease Limited for the Lockheed
L-1011-50 aircraft at a base rent to the Partnership of $39,500 per month,
effective upon completion of the heavy maintenance. The heavy maintenance on
the Lockheed L-1011-100 aircraft is expected to cost the Partnership
approximately $400,000 all of which was accrued or incurred at March 31,
1997. The General Partner is actively seeking the re-lease of this aircraft.
NOTE 5 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three month
periods ended March 31, 1997 and 1996, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
1997 1996
-------- --------
Equipment management fees $ 34,155 $ 74,155
Administrative charges 7,173 5,250
Reimbursable operating expenses
due to third parties 83,610 203,802
-------- --------
Total $124,938 $283,207
-------- --------
-------- --------
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 EFG.
EFG temporarily deposits collected funds in a separate interest-bearing
escrow account prior to remittance to the Partnership. At March 31, 1997,
the Partnership was owed $151,105 by EFG for such funds and the interest
thereon. These funds were remitted to the Partnership in April 1997.
NOTE 6 - NOTES PAYABLE
Notes payable at March 31, 1997 consisted of installment notes payable to
banks of $3,288,050. 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 like-kind exchange transaction
involving the Southwest Aircraft and the Finnair Aircraft (See Results of
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 March 31, 1997.
The annual maturities of the installment notes payable are as follows:
For the year ending March 31, 1998 $ 779,330
1999 825,132
2000 1,683,588
----------
Total $3,288,050
----------
----------
8
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART 1. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
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. In 1995, the Partnership transferred its
proportionate ownership interest in one aircraft to the existing lessee,
United Airlines, Inc. ("United"), 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 and in September
1996, upon completion of refurbishments, was re-leased to Transmeridian
Airlines (see below). The Partnership continues to own a proportionate
interest in an aircraft which was returned by the lessee on June 30, 1996 and
is currently undergoing heavy maintenance. The Partnership entered into a
new 12-month lease agreement with Aer Lease Limited with respect to its
interest in this aircraft, effective upon completion of the heavy
maintenance. In 1996, the Partnership sold one of its original aircraft to
the lessee, Northwest Airlines, Inc. ("Northwest"). At March 31, 1997, 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
January 1999 (see below), and the second which is currently undergoing heavy
maintenance. The second aircraft was returned by the lessee, upon completion
of its renewal lease term, in September 1996. The General Partner is
actively seeking the re-lease of this aircraft. 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 months ended March 31, 1997, the Partnership recognized lease
revenue of $683,102 compared to $1,483,096 for the same period 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 ADV aircraft (discussed below). The decrease was partially offset by
the effects of 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 period ended March 31, 1996 did not fully
reflect the rents ultimately earned from the like-kind exchange. In
aggregate, the replacement aircraft generated approximately $253,000 of lease
revenue during the first quarter of 1997 compared to approximately $96,000
for the same period in 1996.
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 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, to re-lease this aircraft
9
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART 1. FINANCIAL INFORMATION
for aggregate rents over the lease term of approximately $1,941,000. This
aircraft generated $240,000 of lease revenue during the first quarter of 1997
and was off lease for all of the first quarter of 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 $429,000 from this aircraft during the first quarter of 1996.
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 $768,000 related to
the two Cathay aircraft during the first quarter of 1996. Cathay
subsequently returned both aircraft to the Partnership upon the expiration of
the extensions and both aircraft are currently undergoing heavy maintenance.
The heavy maintenance on the Lockheed L-1011-50 is expected to cost the
Partnership approximately $362,000, all of which was accrued or incurred at
March 31, 1997. The Partnership entered into a new 12-month lease agreement
with Aer Lease Limited, with respect to its interest in the L-1011-50
aircraft, at a base rent to the Partnership of $39,550 per month, effective
upon completion of the heavy maintenance. The heavy maintenance on the
Lockheed L-1011-100 is expected to cost the Partnership approximately
$400,000 all of which was accrued or incurred at March 31, 1997. The General
Partner is actively seeking the re-lease of this aircraft. 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. Such circumstances have inhibited the
remarketing of the Partnership's L-1011 aircraft and have required the
Partnership to incur costs to meet the needs of Aer Lease Limited and other
potential successor lessees. Accordingly, until the Partnership's L-1011
aircraft are sold, the General Partner will continue to reserve a portion of
the Partnership's cash for such purposes.
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 from this aircraft for each of the periods ended March 31, 1996 and
1997.
The Partnership holds a proportionate ownership interest in the L-1011-50
aircraft and the Southwest and 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.
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 future gain or loss reported in the
financial statements will not necessarily be indicative of the total residual
value the Partnership achieved from leasing the aircraft.
10
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART 1. FINANCIAL INFORMATION
Interest income for the three months ended March 31, 1997 was $30,021
compared to $83,727 for the same period 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.
For the three months ending March 31, 1997 and 1996 the Partnership
incurred interest expense of $73,305 and $30,234, respectively. 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 first quarter of 1996
was only incurred from that date through the end of the quarter. Interest
expense in future periods will decline as the principal balance of notes
payable is reduced through the application of rent receipts to outstanding
debt.
Management fees were 5% of lease revenue during each of the periods ended
March 31, 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. Operating
expenses were high in 1996 due to heavy maintenance costs incurred or accrued
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 expense was $844,338 for the three months ended March 31, 1997
compared to $978,519 for the same period in 1996.
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 a net
cash outflow of $498,031 for the three months ended March 31, 1997 compared
to a net cash inflow of $1,342,669 for the same period in 1996. 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 Southwest, Finnair and Transmeridian aircraft. In
addition, the Partnership expended substantial funds in connection with its
remarketing efforts related to the two 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 is reported under investing
activities on the accompanying Statement of Cash Flows. For the three months
ended March 31, 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 1997.
11
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART 1. FINANCIAL INFORMATION
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 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 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 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 for the first quarter of
1997 and expects to continue to suspend the declaration of quarterly cash
distributions between the periods corresponding to major remarketing events.
12
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART 1. FINANCIAL 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
13
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AIRFUND 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: May 15, 1997
-------------------------------------------------
By: /s/ Gary Romano
--------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 1997
-------------------------------------------------
14
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,717,996
<SECURITIES> 0
<RECEIVABLES> 151,105
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,869,101
<PP&E> 50,631,214
<DEPRECIATION> 40,806,069
<TOTAL-ASSETS> 11,694,246
<CURRENT-LIABILITIES> 192,775
<BONDS> 3,288,050
0
0
<COMMON> 0
<OTHER-SE> 8,273,421
<TOTAL-LIABILITY-AND-EQUITY> 11,694,246
<SALES> 683,102
<TOTAL-REVENUES> 713,123
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 969,276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,305
<INCOME-PRETAX> (329,458)
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