<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
--------------------------------------------------
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, 1998 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
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at June 30, 1998 and December 31, 1997 3
Statement of Operations
for the three and six months ended June 30, 1998 and 1997 4
Statement of Cash Flows
for the six months ended June 30, 1998 and 1997 5
Notes to the Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
PART II. OTHER INFORMATION:
Items 1 - 6 14
</TABLE>
2
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
June 30, 1998 and December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,441,319 $ 2,102,494
Rents receivable 71,954 65,120
Accounts receivable - affiliate 214,171 305,359
Equipment at cost, net of accumulated depreciation of
$40,125,665 and $43,339,081 at June 30, 1998
and December 31, 1997, respectively 5,256,677 7,292,133
----------------- ----------------
Total assets $ 8,984,121 $ 9,765,106
----------------- ----------------
----------------- ----------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 2,336,583 $ 2,677,520
Accrued interest 33,975 29,618
Accrued liabilities 324,664 8,250
Accrued liabilities - affiliate 57,848 42,524
Deferred rental income 76,439 167,067
----------------- ----------------
Total liabilities 2,829,509 2,924,979
----------------- ----------------
Partners' capital (deficit):
General Partner (2,687,726) (2,653,450)
Limited Partnership Interests
(2,714,647 Units; initial purchase price of $25 each) 8,842,338 9,493,577
----------------- ----------------
Total partners' capital 6,154,612 6,840,127
----------------- ----------------
Total liabilities and partners' capital $ 8,984,121 $ 9,765,106
----------------- ----------------
----------------- ----------------
</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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income:
Lease revenue $ 937,552 $ 776,395 $ 1,719,994 $ 1,459,497
Interest income 35,911 23,988 67,975 54,009
Gain on sale of equipment 127,265 -- 127,265 --
--------------- --------------- --------------- ---------------
Total income 1,100,728 800,383 1,915,234 1,513,506
--------------- --------------- --------------- ---------------
Expenses:
Depreciation 768,736 844,337 1,609,022 1,688,675
Interest expense 52,434 69,313 109,237 142,618
Equipment management fees
- affiliate 46,878 38,820 86,000 72,975
Operating expenses - affiliate 655,246 367,353 796,490 458,136
--------------- --------------- --------------- ---------------
Total expenses 1,523,294 1,319,823 2,600,749 2,362,404
--------------- --------------- --------------- ---------------
Net loss $ (422,566) $ (519,440) $ (685,515) $ (848,898)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net loss
per limited partnership unit $ (0.15) $ (0.18) $ (0.24) $ (0.30)
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net loss $ (685,515) $ (848,898)
Adjustments to reconcile net loss to net cash from (used in) operating
activities:
Depreciation 1,609,022 1,688,675
Gain on sale of equipment (127,265) --
Changes in assets and liabilities Decrease (increase) in:
rents receivable (6,834) (59,723)
accounts receivable - affiliate 91,188 (58,866)
Increase (decrease) in:
accrued interest 4,357 3,103
accrued liabilities 316,414 (376,534)
accrued liabilities - affiliate 15,324 (441,011)
deferred rental income (90,628) 37,367
--------------- ---------------
Net cash from (used in) from operating activities 1,126,063 (55,887)
--------------- ---------------
Cash flows from investing activities:
Proceeds from equipment sale 553,699 --
--------------- ---------------
Net cash from investing activities 553,699 --
--------------- ---------------
Cash flows used in financing activities:
Principal payments - notes payable (340,937) (337,767)
--------------- ---------------
Net cash used in financing activities (340,937) (337,767)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,338,825 (393,654)
Cash and cash equivalents at beginning of period 2,102,494 2,347,762
--------------- ---------------
Cash and cash equivalents at end of period $ 3,441,319 $ 1,954,108
--------------- ---------------
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 104,880 $ 139,515
--------------- ---------------
--------------- ---------------
</TABLE>
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, 1998
(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 1997 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1997 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, 1998 and December 31, 1997 and results of operations for
the three and six months ended June 30, 1998 and 1997 have been made and are
reflected.
NOTE 2 - CASH
At June 30, 1998, the Partnership had $3,335,539 invested in federal agency
discount notes and 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
$4,196,177 are due as follows:
<TABLE>
<S> <C>
For the year ending June 30, 1999 $ 2,455,929
2000 1,180,248
2001 560,000
--------------
Total $ 4,196,177
--------------
--------------
</TABLE>
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at June
30, 1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from June 30, 1998 under contracted lease terms. 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)
<TABLE>
<CAPTION>
Remaining
Lease
Term Equipment
Equipment Type (Months) at Cost
- -------------------------------------- --------- ---------------
<S> <C> <C>
One Lockheed L-1011-100 (Classic) 31 $ 16,644,138
One Boeing 727-208 ADV (ATA) 7 12,928,710
One Boeing 727-251 ADV (Transmeridian) 4 9,732,714
Two McDonnell-Douglas MD-82 (Finnair) 10 4,157,280
Three Boeing 737-2H4 (Southwest) 18 1,919,500
---------------
Total equipment cost 45,382,342
Accumulated depreciation (40,125,665)
Equipment, net of accumulated depreciation $ 5,256,677
---------------
---------------
</TABLE>
The costs of 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 April 29, 1998, at the expiration of the aircraft's lease term, the
Partnership sold its proportional interest in a Lockheed L-1011-50 aircraft,
previously leased to Aer Lease Limited, to the lessee for net proceeds of
$553,699. The Partnership's interest in the aircraft had a net book of $426,434
at the time of sale, resulting in the recognition of a gain on sale, for
financial statement purposes, of $127,265.
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, 1998 and 1997, which were paid or accrued by the Partnership to
EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- --------
<S> <C> <C>
Equipment management fees $ 86,000 $ 72,975
Administrative charges 26,838 23,460
Reimbursable operating expenses
due to third parties 769,652 434,676
------------- -------------
Total $ 882,490 $ 531,111
------------- -------------
------------- -------------
</TABLE>
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, 1998, the
Partnership was owed $214,171 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in July 1998.
7
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 6 - NOTES PAYABLE
Notes payable at June 30, 1998 consisted of installment notes payable to
banks of $2,336,583. 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. 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, 1998.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C>
For the year ending June 30, 1999 $ 2,122,552
2000 214,031
-------------
Total $ 2,336,583
</TABLE>
NOTE 7 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth the terms pursuant to which a settlement
of the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and supersedes a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement.
The Stipulation of Settlement was filed with the Court on July 23, 1998 and
remains pending. Ultimately, the Court must review and approve the Stipulation
of Settlement prior to its becoming effective. The Stipulation of Settlement
contemplates various changes that, if effected, would alter the future
operations of the Nominal Defendants. With respect to the Partnership and 10
affiliated partnerships (hereafter referred to as the "Exchange Partnerships"),
the Stipulation of Settlement provides for the restructuring of their respective
business operations into a single successor company whose securities would be
listed and traded on a national securities exchange. The partners of the
Exchange Partnerships would receive both common stock in the new company and a
cash distribution in exchange for their existing partnership interests. Such a
transaction would, among other things, allow for the consolidation of the
Partnership's operating expenses with other similarly organized equipment
leasing programs. The Stipulation of Settlement prescribes certain conditions
necessary to effecting the
8
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
settlement, including providing the partners of the Exchange Partnerships with
the opportunity to vote on the participation of their partnership in the
restructuring. To the extent that the Stipulation of Settlement is approved by
the Court, the complete terms thereof will be communicated to all of the
partners of the Exchange Partnerships to enable them to vote on the
restructuring.
There can be no assurance that the Stipulation of Settlement will be
approved by the Court, or that the outcome of the voting by the partners of the
Exchange Partnerships, including the Partnership, will result in a settlement
finally being effected or in the Partnership being included in the
restructuring. The General Partner and its affiliates, in consultation with
counsel, concur that there is a reasonable basis to believe that the Stipulation
of Settlement will be approved by the Court. In the absence of a Stipulation of
Settlement approved by the Court, the Defendants intend to defend vigorously
against the claims asserted in the Class Action Lawsuit. The General Partner and
its affiliates cannot predict with any degree of certainty the ultimate outcome
of such litigation.
9
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements in this quarterly report of AIRFUND II International
Limited Partnership (the "Partnership") 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
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, and the ability of Equis Financial Group Limited
Partnership (formerly American Finance Group) ("EFG") to collect all rents due
under the attendant lease agreements and successfully remarket the Partnership's
equipment upon the expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. The computer
programs of EFG were designed and written using four digits to define the
applicable year. As a result, EFG does not anticipate system failure or
miscalculations causing disruptions of operations. Based on recent assessments,
EFG determined that minimal modification of software is required so that its
network operating system will function properly with respect to dates in the
year 2000 and thereafter. EFG believes that with these modifications to the
existing operating system, the Year 2000 Issue will not pose significant
operational problems for its computer systems. EFG will utilize internal
resources to upgrade software for Year 2000 modifications and anticipates
completing the Year 2000 project by December 31, 1998, which is prior to any
anticipated impact on its operating system. The total cost of the Year 2000
project is expected to be insignificant and have no effect on the results of
operations of the Partnership.
Three and six months ended June 30, 1998 compared to the three and six months
ended June 30, 1997:
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. At June 30, 1998, the Partnership owned three aircraft
and proportionate interests in five additional aircraft, all of which were on
lease. 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.
Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit. The
outcome of the Class Action Lawsuit could alter the nature of the Partnership's
organization and its future business operations. See Note 7 to the accompanying
financial statements.
Results of Operations
For the three and six months ended June 30, 1998, the Partnership
recognized lease revenue of $937,552 and $1,719,994, respectively, compared to
$776,395 and $1,459,497 for the same periods in 1997. The increase in lease
revenue from 1997 to 1998 resulted primarily from the re-lease of the
Partnership's L-1011-100 aircraft to Classic Airways Limited ("Classic")
commencing in the fourth quarter of 1997 (see discussion below). In addition,
the increase was attributable to a 1-year lease agreement which the Partnership
entered into with Aer Lease Limited ("Aer Lease") related to its interest in a
Lockheed L-1011-50 aircraft, partially offset by a scheduled reduction in the
base rent payable under the lease agreement related to the Partnership's Boeing
727-251 ADV aircraft (see discussion below). The lease agreement with Aer Lease
provided for base rent to the Partnership of
10
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
$39,550 per month beginning April 27, 1997. In 1997, prior to the commencement
of this 1-year lease, this aircraft was undergoing heavy maintenance and was not
on lease. On April 29, 1998, at the expiration of the aircraft's lease term, the
Partnership sold its interest in this aircraft to Aer Lease for net proceeds of
$553,699. The Partnership's interest in the aircraft had a net book value of
$426,434 at the time of sale, resulting in a net gain, for financial statement
purposes, of $127,265. There were no other equipment sales during either of the
six month periods ending June 30, 1998 and 1997.
The three Boeing 737-2H4 aircraft in which the Partnership holds a
proportionate interest (the "Southwest Aircraft") are currently on lease to
Southwest Airlines, Inc. These leases are scheduled to expire on December 31,
1999 and provide lease revenue of $31,464 per month to the Partnership.
Additionally, the two McDonnell-Douglas MD-82 aircraft, in which the Partnership
holds a proportionate interest (the "Finnair Aircraft"), are currently on lease
to Finnair OY. These leases are scheduled to expire on April 28, 1999 and
provide lease revenue of $159,981 per quarter to the Partnership.
The Partnership entered into an agreement with Classic to lease the
Partnership's Lockheed L1011-100 aircraft for a period of three years with a
base rent of $80,000 per month, effective November 1, 1997. Due to certain
refurbishments required to be performed by Classic, the Partnership agreed to
defer rents required under the attendant lease agreement for the three month
period ended March 31, 1998. The lease agreement was therefore extended three
months through January 31, 2001. The Partnership recognized lease revenue in the
amount of $240,000 related to this aircraft during the six months ended June 30,
1998. During the six months ended June 30, 1997, this aircraft was off lease,
undergoing certain maintenance prior to being placed in storage until it was
re-leased to Classic.
The Partnership's Boeing 727-208 ADV aircraft is under a two year renewal
agreement with American Trans Air, Inc. The renewal agreement, scheduled to
expire in January 1999, provides lease revenue of $63,500 per month to the
Partnership. The Partnership recognized lease revenue of $381,000 from this
aircraft for each of the six month periods ended June 30, 1997 and 1998. The
Partnership's Boeing 727-251 ADV aircraft, is under a 26 month re-lease
agreement with Transmeridian Airlines, Inc. which commenced on September 11,
1996. The Partnership recognized lease revenue from this aircraft of $433,333
and $480,000 for the six months ended June 30, 1998 and 1997, respectively. In
the future, the Partnership's aggregate lease revenue is scheduled to decline
due to the sale of the Aer Lease aircraft and the expiration of the lease terms
related to the Partnership's remaining aircraft.
At June 30, 1998, the Partnership held a proportionate ownership interest
in the Southwest and Finnair Aircraft (see Note 4 to the financial statements).
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 gain or loss reported in the financial statements is
not necessarily indicative of the total residual value the Partnership achieved
from leasing the aircraft.
11
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Interest income for the three and six months ended June 30, 1998 was
$35,911 and $67,975, respectively, compared to $23,988 and $54,009 for the same
periods in 1997. Interest income is typically generated from temporary
investments of rental receipts and equipment sale proceeds in short-term
instruments.
For the three and six months ending June 30, 1998, the Partnership incurred
interest expense of $52,434 and $109,237, respectively, compared to $69,313 and
$142,618 for the same periods in 1997. Interest expense in future periods will
continue to 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, 1998 and 1997, 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
$655,246 and $796,490 for the three and six months ended June 30, 1998,
respectively, compared to $367,353 and $458,136 for the same periods in 1997.
During the six months ended June 30, 1998, the Partnership incurred or accrued
approximately $334,000 for certain legal and administrative expenses related to
the Class Action Lawsuit described in Note 7 to the accompanying financial
statements. Additionally, the increase in operating expenses from 1997 to 1998
was due to legal costs incurred in connection with the legal proceedings related
to Northwest Airlines, Inc. and Transmeridian Airlines, Inc. (refer to Note 7 in
the 1997 Annual Report) and certain remarketing costs. In 1997, significant
operating expenses were incurred in connection with the refurbishment of the
L-1011-50 aircraft, in which the Partnership held an interest, to meet the needs
of Aer Lease. 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 $768,736 and $1,609,022 for the three and six months ended June 30,
1998 compared to $844,337 and $1,688,675 for the same periods in 1997.
Liquidity and Capital Resources and Discussion of Cash Flows
The Partnership by its nature is a limited life entity which was
established for specific purposes described in the preceding "Overview". As an
equipment leasing program, the Partnership's principal operating activities
derive from aircraft rental transactions. Accordingly, the Partnership's
principal source of cash from operations is provided by the collection of
periodic rents. These cash inflows are used to satisfy debt service obligations
associated with leveraged leases, and to pay management fees and operating
costs. Operating activities generated a net cash inflow of $1,126,063 for the
six months ended June 30, 1998 compared to a net cash outflow of $55,887 for the
same period in 1997. The cash outflow in 1997 reflected the expiration of the
leases related to the Partnership's Lockheed L-1011-100 aircraft and remarketing
expenses related to its interest in the L-1011-50 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 realized from aircraft disposal transactions is reported under
investing activities on the accompanying Statement of Cash Flows. For the six
months ended June 30,1998, the Partnership realized net cash proceeds of
$553,699. No aircraft sales occurred during the corresponding period in 1997.
Such proceeds related to the sale, to Aer Lease, of the Partnership's interest
in the L-1011-50 aircraft. Future inflows of cash from aircraft disposals will
vary in timing and amount and will be influenced by many factors including, but
not limited to, the frequency
12
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AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
and timing of lease expirations, the type of aircraft being sold, their
condition and age, and future market conditions.
The Partnership obtained long-term financing in connection with 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 influenced by the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements. The General Partner anticipates that cash proceeds
resulting from upon the collection of contractual rents and the outcome of
residual activities 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 significant heavy maintenance costs in recent
years in connection with its remarketing efforts related to the two L-1011
aircraft and the Boeing 727-251 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 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
<TABLE>
<S> <C>
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
</TABLE>
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, 1998
By: /s/ Gary Romano
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1998
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,441,319
<SECURITIES> 0
<RECEIVABLES> 286,125
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,727,444
<PP&E> 45,382,342
<DEPRECIATION> 40,125,665
<TOTAL-ASSETS> 8,984,121
<CURRENT-LIABILITIES> 492,926
<BONDS> 2,336,583
0
0
<COMMON> 0
<OTHER-SE> 6,154,612
<TOTAL-LIABILITY-AND-EQUITY> 8,984,121
<SALES> 0
<TOTAL-REVENUES> 1,915,234
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,491,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,237
<INCOME-PRETAX> (685,515)
<INCOME-TAX> 0
<INCOME-CONTINUING> (685,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (685,515)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
