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, 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 June 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
98 North Washington Street, Boston, MA 02114
- --------------------------------------------------------------------------------
(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 June 30, 1997 and December 31, 1996 3
Statement of Operations
for the three and six months ended June 30, 1997 and 1996 4
Statement of Cash Flows
for the six months ended June 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
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
June 30, 1997 and December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,954,108 $ 2,347,762
Rents receivable 59,723 --
Accounts receivable - affiliate 205,433 146,567
Equipment at cost, net of accumulated depreciation of
$41,650,406 and $39,961,731 at June 30, 1997
and December 31, 1996, respectively 8,980,808 10,669,483
------------ ------------
Total assets $ 11,200,072 $ 13,163,812
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 3,082,018 $ 3,419,785
Accrued interest 39,032 35,929
Accrued liabilities 165,000 541,534
Accrued liabilities - affiliate 48,007 489,018
Deferred rental income 112,034 74,667
------------ ------------
Total liabilities 3,446,091 4,560,933
------------ ------------
Partners' capital (deficit):
General Partner (2,607,757) (2,565,312)
Limited Partnership Interests
(2,714,647 Units; initial purchase price of $25 each) 10,361,738 11,168,191
------------ ------------
Total partners' capital 7,753,981 8,602,879
------------ ------------
Total liabilities and partners' capital $ 11,200,072 $ 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 six months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 776,395 $ 1,138,726 $ 1,459,497 $ 2,621,822
Interest income 23,988 50,401 54,009 134,128
----------- ----------- ----------- -----------
Total income 800,383 1,189,127 1,513,506 2,755,950
----------- ----------- ----------- -----------
Expenses:
Depreciation 844,337 1,015,990 1,688,675 1,994,509
Interest expense 69,313 88,170 142,618 118,404
Equipment management fees
- affiliate 38,820 56,936 72,975 131,091
Operating expenses - affiliate 367,353 410,486 458,136 619,538
----------- ----------- ----------- -----------
Total expenses 1,319,823 1,571,582 2,362,404 2,863,542
----------- ----------- ----------- -----------
Net loss $ (519,440) $ (382,455) $ (848,898) $ (107,592)
=========== =========== =========== ===========
Net loss
per limited partnership unit $ (0.18) $ (0.13) $ (0.30) $ (0.04)
=========== =========== =========== ===========
Cash distributions declared
per limited partnership unit $ -- $ 0.13 $ -- $ 0.25
=========== =========== =========== ===========
</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, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net loss $ (848,898) $ (107,592)
Adjustments to reconcile net loss to
net cash from (used in) operating activities:
Depreciation 1,688,675 1,994,509
Changes in assets and liabilities Decrease (increase) in:
rents receivable (59,723) 160,662
accounts receivable - affiliate (58,866) 182,743
Increase (decrease) in:
accrued interest 3,103 20,483
accrued liabilities (376,534) 26,778
accrued liabilities - affiliate (441,011) (34,370)
deferred rental income 37,367 (427,728)
----------- -----------
Net cash from (used in) from operating activities (55,887) 1,815,485
----------- -----------
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 (337,767) (420,750)
Distributions paid -- (1,071,571)
----------- -----------
Net cash used in financing activities (337,767) (1,492,321)
----------- -----------
Net increase (decrease) in cash and cash equivalents (393,654) 250,614
Cash and cash equivalents at beginning of period 2,347,762 3,557,968
----------- -----------
Cash and cash equivalents at end of period $ 1,954,108 $ 3,808,582
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 139,515 $ 97,921
=========== ===========
</TABLE>
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
June 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 June 30, 1997 and December 31, 1996 and results of operations for
the three and six month periods ended June 30, 1997 and 1996 have been made and
are reflected.
NOTE 2 - CASH
At June 30, 1997, the Partnership had $1,850,000 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
$4,761,619 are due as follows:
For the year ending June 30, 1998 $ 3,045,442
1999 1,495,929
2000 220,248
-----------
Total $ 4,761,619
===========
The Partnership entered into a new 1-year lease agreement with Aer Lease
Limited for the Lockheed L-1011-50 aircraft in which it holds a proportionate
ownership interest 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 June
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)
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 (Aer Lease) 12 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 (41,650,406)
------------
Equipment, net of accumulated depreciation $ 8,980,808
============
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 $610,000, all of which was
accrued or incurred at June 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
August 18, 1997. In addition, Classic has been granted the 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 six month periods
ended June 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 $ 72,975 $131,091
Administrative charges 23,460 10,500
Reimbursable operating expenses
due to third parties 434,676 609,038
-------- --------
Total $531,111 $750,629
======== ========
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 June 30, 1997, the
Partnership was owed $205,433 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in July 1997.
NOTE 6 - NOTES PAYABLE
Notes payable at June 30, 1997 consisted of installment notes payable to
banks of $3,082,018. 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 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 June
30, 1997.
The annual maturities of the installment notes payable are as follows:
For the year ending June 30, 1998 $ 772,883
1999 2,095,104
2000 214,031
-----------
Total $ 3,082,018
===========
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 INFORMATION
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 six months ended June 30, 1997 compared to the three and six months
ended June 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 June 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 new 3-year lease agreement
with a new lessee for the Lockheed L-1011-100 aircraft effective August 18,
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 six months ended June 30, 1997, the Partnership
recognized lease revenue of $776,395 and $1,459,497, respectively, compared to
$1,138,726 and $2,621,822 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 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 six months ended
June 30, 1996 did not fully reflect the rents ultimately earned from the
like-kind exchange. In aggregate, the replacement aircraft generated
approximately $254,000 and $507,000 of lease revenue during the three and six
months ended June 30, 1997, respectively, compared to approximately $203,000 and
$299,000 for the same periods 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 at a cost to the
Partnership of $984,000, all of which was incurred or accrued during the year
ended
9
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
December 31, 1996. In September 1996, the Partnership entered into a new
28-month lease agreement with Transmeridian Airlines, to re-lease this aircraft
for aggregate rents over the lease term of approximately $1,941,000. This
aircraft generated $240,000 and $480,000 of lease revenue during the three and
six months ended June 30, 1997, respectively, and was off lease for 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 $429,000 and $858,000 for the three and six months ended June 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 $315,000 and $1,083,000 related to the
two Cathay aircraft during the three and six months ended June 30, 1996,
respectively. Cathay subsequently returned both aircraft to the Partnership upon
the expiration of the extensions. The Lockheed L-1011-50 underwent heavy
maintenance which cost the Partnership approximately $400,000, all of which was
accrued or incurred at June 30, 1997. The Partnership entered into a new 1-year
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,
beginning April 27, 1997. The Partnership recognized lease revenue of
approximately $83,000 related to this aircraft during the three and six months
ended June 30, 1997. The Lockheed L-1011-100 is currently undergoing heavy
maintenance expected to cost the Partnership approximately $610,000 all of which
was accrued or incurred at June 30, 1997. The Partnership entered into a new
3-year lease agreement with Classic Airways Limited related to this aircraft at
a base rent to the Partnership of $80,000 per month, effective August 18, 1997.
In addition, Classic Airways Limited has been granted the 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 Limited and Classic Airways Limited.
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 $381,000 from this aircraft for each of the three and six month periods
ended June 30, 1996 and 1997.
The Partnership holds a proportionate ownership interest in the Lockheed
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
10
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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.
Interest income for the three and six months ended June 30, 1997 was
$23,988 and $54,009, respectively, compared to $50,401 and $134,128 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.
For the three and six months ended June 30, 1997, the Partnership incurred
interest expense of $69,313 and $142,618, respectively, compared to $88,170 and
$118,404 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 six months ended June 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
June 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 six months ended
June 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 six months ended June 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 $844,337 and
$1,688,675 for the three and six months ended June 30, 1997, respectively,
compared to $1,015,990 and $1,994,509 for the same periods 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 $55,887
for the six months ended June 30, 1997 compared to a net cash
11
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
inflow of $1,815,485 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 and Finnair
aircraft, and the re-lease of the aircraft to Transmeridian Airlines and Aer
Lease Limited. 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 is reported under investing
activities on the accompanying Statement of Cash Flows. For the six months ended
June 30, 1996, the Partnership expended $72,550 in cash in connection with the
like-kind exchange transactions referred to above. There were no equipment
acquisitions during the same period in 1997.
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 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 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 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
12
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 and second
quarter 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: August 14, 1997
By: /s/ Gary M. Romano
------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1997
15
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JAN-30-1997
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<SECURITIES> 0
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0
0
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<INCOME-PRETAX> (848,898)
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