<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
-------------------------------------------------
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, 2000 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
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<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 2000 and December 31, 1999 3
Statement of Operations
for the three months ended March 31, 2000 and 1999 4
Statement of Cash Flows
for the three months ended March 31, 2000 and 1999 5
Notes to the Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
PART II. OTHER INFORMATION:
Items 1 - 6 15
</TABLE>
2
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 2,010,349 $ 5,719,642
Accounts receivable 33,973 --
Accounts receivable - affiliate 55,019 1,476
Other assets -- 31,742
Note receivable 3,640,000 --
Equipment at cost, net of accumulated depreciation
of $18,529,712 and $18,449,875, at March 31, 2000
and December 31,1999, respectively 3,279,782 3,359,619
------------ ------------
Total assets $ 9,019,123 $ 9,112,479
============ ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 1,123,592 $ 981,775
Accrued interest 9,257 13,356
Accrued liabilities 227,557 463,324
Accrued liabilities - affiliate 76,863 78,593
Deferred rental income 24,744 51,380
------------ ------------
Total liabilities 1,462,013 1,588,428
------------ ------------
Partners' capital (deficit):
General Partner (2,617,601) (2,619,254)
Limited Partnership Interests (2,714,647 Units;
initial purchase price of $25 each) 10,174,711 10,143,305
------------ ------------
Total partners' capital 7,557,110 7,524,051
------------ ------------
Total liabilities and partners' capital $ 9,019,123 $ 9,112,479
============ ============
</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, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Income:
Lease revenue $ 109,420 $ 708,129
Interest income 100,909 38,418
Other income 55,000 --
--------- ---------
Total income 265,329 746,547
--------- ---------
Expenses:
Depreciation 79,837 260,649
Interest expense 30,685 38,797
Equipment management fees - affiliate 5,471 35,406
Operating expenses - affiliate 116,277 523,420
--------- ---------
Total expenses 232,270 858,272
--------- ---------
Net income (loss) $ 33,059 $(111,725)
========= =========
Net income (loss)
per limited partnership unit $ 0.01 $ (0.04)
========= =========
</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 three months ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 33,059 $ (111,725)
Adjustments to reconcile net income (loss) to
net cash from (used in) operating
activities:
Depreciation 79,837 260,649
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable -- 39,933
Accounts receivable (33,973) --
Accounts receivable - affiliate (53,543) (63,332)
Other assets 31,742 82,002
Increase (decrease) in:
Accrued interest (4,099) (4,680)
Accrued liabilities (235,767) (45,385)
Accrued liabilities - affiliate (1,730) 21,170
Deferred rental income (26,636) 1,775
----------- -----------
Net cash from (used in) operating activities (211,110) 180,407
----------- -----------
Cash flows used in investing activities:
Note receivable (3,640,000) --
----------- -----------
Net cash used in investing activities (3,640,000) --
----------- -----------
Cash flows from (used in) financing activities:
Proceeds from notes payable 201,247 --
Principal payments - notes payable (59,430) (242,361)
----------- -----------
Net cash from (used in) financing activities 141,817 (242,361)
----------- -----------
Net decrease in cash and cash equivalents (3,709,293) (61,954)
Cash and cash equivalents at beginning of period 5,719,642 3,425,762
----------- -----------
Cash and cash equivalents at end of period $ 2,010,349 $ 3,363,808
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 34,784 $ 43,477
=========== ===========
</TABLE>
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, 2000
(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 1999 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1999 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, 2000 and December 31, 1999 and results of operations for
the three month periods ended March 31, 2000 and 1999 have been made and are
reflected.
NOTE 2 - CASH
- -------------
At March 31, 2000 the Partnership had $1,897,724 invested in federal agency
discount notes, repurchase agreements secured by U.S. Treasury Bills or
interests in U.S. Government securities, or other highly liquid overnight
investments.
NOTE 3 - REVENUE RECOGNITION
- ----------------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually
and no significant amounts are calculated on factors other than the passage of
time. The leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Partnership's business activities as the
General Partner and Equis Financial Group Limited Partnership ("EFG") would seek
to sell the then-remaining equipment assets either to the lessee or to a third
party, taking into consideration the amount of future noncancellable rental
payments associated with the attendant lease agreements. See also Note 7 to the
financial statements presented in the Partnership's 1999 Annual Report regarding
the Class Action Lawsuit. Future minimum rents of $317,854 are due for the year
ending March 31, 2001.
NOTE 4 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at March
31, 2000. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2000 under contracted lease terms. A Remaining
Lease Term equal to zero reflects equipment held for sale or re-lease. In the
opinion of 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 Boeing 727-251 ADV 0 $ 9,732,714
Two Rolls Royce aircraft engines 0 6,000,000
One McDonnell-Douglas MD-82 (Finnair) 13 2,078,640
One McDonnell-Douglas MD-82 0 2,078,640
Three Boeing 737-2H4 0 1,919,500
-----------------
Total equipment cost 21,809,494
Accumulated depreciation (18,529,712)
-----------------
Equipment, net of accumulated depreciation $ 3,279,782
=================
</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.
Certain of the aircraft and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary includes
leveraged equipment having an original cost of approximately $4,157,000 and a
net book value of approximately $2,620,000 at March 31, 2000 (see Note 6).
The summary above includes equipment held for sale or re-lease with an
original cost of approximately $19,731,000 and a net book value of approximately
$1,970,000 at March 31, 2000. This equipment includes the Partnership's
interests in three Boeing 737 aircraft formerly leased to Southwest Airlines
Inc. Each of the Partnership's interests in these aircraft had an original cost
of approximately $640,000 and a net book value of approximately $220,000 at
March 31, 2000. Equipment held for sale or re-lease also includes the
Partnership's interest in a McDonnell-Douglas MD-82 aircraft formerly leased to
Finnair OY. The Partnership's interest in this aircraft had an original cost of
approximately $2,079,000 and a net book value of approximately $1,310,000 at
March 31, 2000. The Southwest aircraft and the Finnair aircraft were returned by
the lessees in December 1999 and January 2000, respectively, upon expiration of
the underlying lease terms. In addition, the Partnership's Boeing 727-251 ADV
aircraft and two Rolls Royce aircraft engines previously leased to Classic
Airways Limited by virtue of its lease of a Lockheed L-1011-100 aircraft were
also held for sale or re-lease at March 31, 2000. The Boeing 727-251 ADV
aircraft and the aircraft engines were fully depreciated at March 31, 2000 and
had an original cost of approximately $9,733,000 and $6,000,000, respectively.
On March 20, 2000, the Partnership accepted an offer from a third party to
purchase the Boeing 727-251 ADV aircraft for $750,000. The sale of that
aircraft, which is subject to certain conditions, is expected to close in the
second quarter of 2000. The General Partner is actively seeking the sale or
re-lease of all equipment not on lease.
NOTE 5 - NOTE RECEIVABLE
- ------------------------
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
"Exchange Partnerships) (see Note 7 to the financial statements presented in the
Partnership's 1999 Annual Report) collectively loaned $32 million to Echelon
Residential Holdings LLC, a newly-formed real estate development company that
will be owned by
7
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
several investors, including James A. Coyne, Executive Vice President of EFG.
Mr. Coyne, in his individual capacity, is the only investor in Echelon
Residential Holdings LLC who is related to EFG.
The Partnership's participation in the loan is $3,640,000. Echelon
Residential Holdings LLC, through a subsidiary (Echelon Residential LLC), used
the loan proceeds to acquire various real estate assets from Echelon
International Corporation, a Florida based real estate company. The loan has a
term of 30 months maturing on September 7, 2002 and bears interest at the annual
rate of 14% for the first 24 months and 18% for the final six months of the
term. Interest accrues and compounds monthly but is not payable until maturity.
The Partnership accrued interest income of $33,973 related to this loan during
the three months ended March 31, 2000. In connection with the transaction,
Echelon Residential Holdings LLC has pledged a security interest in all of its
right, title and interest in and to its membership interests in Echelon
Residential LLC to the Exchange Partnerships as collateral.
NOTE 6 - 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, 2000 and 1999, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Equipment management fees $ 5,471 $ 35,406
Administrative charges 11,248 13,419
Reimbursable operating expenses
due to third parties 105,029 510,001
------------- -------------
Total $ 121,748 $ 558,826
============= =============
</TABLE>
All rents and proceeds from the sale of equipment are paid directly to EFG
or to a lender. EFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At March
31, 2000, the Partnership was owed $55,019 by EFG for such funds and the
interest thereon. These funds were remitted to the Partnership in April 2000.
NOTE 7 - NOTES PAYABLE
- ----------------------
Notes payable at March 31, 2000 consisted of installment notes payable to
banks of $1,123,592. The installment notes bear an interest rate of either
8.225% or a fluctuating interest rate based on LIBOR (approximately 6% at March
31, 2000) plus a margin. The Partnership has a balloon payment obligation at the
expiration of the renewal lease term related to the aircraft on lease to Finnair
OY of $130,575, which matures in April 2001. In addition, the Partnership has a
balloon payment obligation of $701,062 which matures in August 2000. This
obligation is related to the Partnership's interest in a McDonnell-Douglas MD-82
aircraft which was returned in January 2000 upon its lease term expiration. This
aircraft is being stored in a warehouse pending its remarketing. The carrying
amount of notes payable approximates fair value at March 31, 2000.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C>
For the year ending March 31, 2001 $ 993,017
2002 130,575
------------
Total $ 1,123,592
============
</TABLE>
8
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 8 - LEGAL PROCEEDINGS
- --------------------------
As described more fully in the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1999, the Partnership is a Nominal Defendant in a
Class Action Lawsuit, the outcome of which could significantly alter the nature
of the Partnership's organization and its future business operations. In
addition, the Partnership's 1999 Annual Report describes certain other pending
litigation that has arisen out of the conduct of the Partnership's business,
principally involving disputes or disagreements with lessees over lease terms
and conditions.
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 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 financial statements presented in the
1999 Annual Report, the remarketing of the Partnership's aircraft, and the
performance of the Partnership's non-aircraft assets.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999:
- --------------------------------------------------------------------------------
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. In addition, see the Partnership's 1999 Annual Report
for discussion related to the detention and subsequent loss of one of the
Partnership's aircraft in the United Kingdom in 1999. At March 31, 2000, the
Partnership owned one aircraft, two aircraft engines and proportionate interests
in five additional aircraft. The Partnership is a Nominal Defendant in a Class
Action Lawsuit, the outcome of which could significantly alter the nature of the
Partnership's organization and its future business operations. See Note 7 to the
financial statements presented in the Partnership's 1999 Annual Report. Pursuant
to the Amended and Restated Agreement and Certificate of Limited Partnership
(the "Restated Agreement, as amended"), the Partnership is scheduled to be
dissolved by December 31, 2005.
RESULTS OF OPERATIONS
- ---------------------
For the three months ended March 31, 2000, the Partnership recognized lease
revenue of $109,420 compared to $708,129 for the same period in 1999. The
decrease in lease revenue from 1999 to 2000 is primarily the result of the sale
of the Partnership's Boeing 727-208 ADV aircraft in April 1999 and the
expiration of the lease terms pertaining to the Partnership's Boeing 727-251 ADV
aircraft, the three Boeing 737-2H4 aircraft, and one McDonnell-Douglas MD-82
aircraft. See below for a detailed discussion of variances in lease revenue
between the respective periods. The amount of future lease revenues in the near
term will be dependent upon the results of ongoing remarketing efforts related
to aircraft currently off lease. Subsequently, the Partnership's lease revenue
is expected to decline due to aircraft sales and lease term expirations.
The lease terms related to the three Boeing 737-2H4 aircraft, in which the
Partnership holds proportionate interests, expired on December 31, 1999. These
aircraft are currently being stored in a warehouse while the General Partner
pursues remarketing alternatives. The Partnership recognized lease revenue of
$94,392 related to these aircraft during the three months ended March 31, 1999.
One of the McDonnell-Douglas MD-82 aircraft, in which the Partnership holds
a proportionate interest, is currently on lease to Finnair OY. This lease, which
was renewed upon the expiration of the primary lease term in April 1999, will
expire in April 2001. The Partnership recognized lease revenue of $80,346 and
$79,102 related to this aircraft during the three months ended March 31, 2000
and 1999, respectively. The lease term associated with the second
McDonnell-Douglas MD-82 aircraft, in which the Partnership holds an ownership
interest, expired in January 2000. That aircraft, which is being stored in a
warehouse pending its remarketing, generated lease revenue to the Partnership of
$29,074 and $79,102 during the three months ended March 31, 2000 and 1999,
respectively.
10
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
The Partnership's Boeing 727-251 ADV aircraft was damaged in an on-ground
accident in October 1998 while being leased on a month-to-month basis by
Transmeridian Airlines, Inc. ("Transmeridian"). In September 1999, Transmeridian
ceased paying rent with respect to this aircraft. The aircraft is now being
stored at a repair facility in Louisiana. See discussion below and Note 7 to the
financial statements presented in the Partnership's 1999 Annual Report for
details regarding the remarketing of this aircraft and legal action undertaken
by the Partnership related to this situation, respectively. The Partnership
recognized lease revenue of $210,000 related to this aircraft during the three
months ended March 31, 1999.
In April 1999, the Partnership sold its Boeing 727-208 ADV aircraft,
previously leased to American Trans Air, Inc. The Partnership recognized lease
revenue of $245,533 from this aircraft for the three-months ended March 31,
1999.
The Partnership's ownership interests in the three Boeing 737-2H4 aircraft
and the two McDonnell-Douglas MD-82 aircraft represent proportionate ownership
interests. The remaining interests are owned by other affiliated partnerships
sponsored by 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.
Interest income for the three months ended March 31, 2000 was $100,909
compared to $38,418 for the same period in 1999. Interest income is typically
generated from temporary investment of rental receipts and equipment sale
proceeds in short-term instruments. During the three months ended March 31,
2000, interest income included interest earned on a note receivable from Echelon
Residential Holdings LLC in the amount of $33,973 (see below). The amount of
future interest income is expected to fluctuate as a result of changing interest
rates and the amount of cash available for investment, among other factors. The
Partnership also recognized income of $55,000 that is reflected as other income
on the accompanying Statement of Operations for the three months ended March 31,
2000 related to the sale of certain aircraft records.
The ultimate realization of residual value for any aircraft will be
dependent upon many factors, including EFG's ability to sell and re-lease the
aircraft. Changes in market conditions, industry trends, technological advances,
and other events could converge to enhance or detract from asset values at any
given time. EFG attempts to monitor these changes and the airline industry in
general 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 for 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 may not
necessarily be indicative of the total residual value the Partnership achieved
from leasing the aircraft.
For the three months ended March 31, 2000 and 1999, the Partnership
incurred interest expense of $30,685 and $38,797, respectively. Interest expense
resulted from financings obtained from third-party lenders in connection with
the acquisition of the Partnership's interest in the three Boeing 737-2H4
aircraft and the two McDonnell-Douglas MD-82 aircraft. The indebtedness related
to the Boeing 737-2H4 aircraft was fully amortized at December 31, 1999.
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. See additional discussion below regarding the refinancing of certain
indebtedness during the three months ended March 31, 2000.
Management fees were 5% of lease revenue during each of the three month
periods ended March 31, 2000 and 1999. Operating expenses were $116,277 and
$523,420 for the three months ended March 31, 2000 and 1999, respectively. The
decrease in operating expenses from 1999 to 2000 primarily reflects engine
leasing costs of $246,000 incurred in 1999 related to the aircraft formerly
leased to Transmeridian. See Note 7 to the financial statements presented in the
Partnership's 1999 Annual Report for additional discussion of the engine leasing
11
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
costs and the litigation related to Transmeridian. In addition, in 1999, the
Partnership incurred legal fees in connection with a separate litigation with
Transmeridian. Other operating expenses consist principally of administrative
charges, professional service costs, such as audit and other legal fees, as well
as insurance, printing, distribution and remarketing expenses. Depreciation
expense was $79,837 for the three months ended March 31, 2000 compared to
$260,649 for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity. As an aircraft
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 outflow of $211,110 and a net cash inflow of $180,407 for
the three months ended March 31, 2000 and 1999, respectively. Future renewal,
re-lease and aircraft sales activities will continue to cause a decline in the
Partnership's lease revenue and corresponding sources of operating cash.
Overall, expenses associated with rental activities, such as management fees,
and net cash flow from operating activities will decline as the Partnership
remarkets its aircraft. Conversely, the Partnership may incur increased costs to
insure the successful remarketing of its aircraft. Ultimately, the Partnership
will dispose of all aircraft under lease. This will occur principally through
sale transactions whereby each aircraft will be sold to the existing lessee or
to a third party. Generally, this will occur upon expiration of each aircraft's
primary or renewal/re-lease term.
On March 20, 2000, the Partnership accepted an offer from a third party to
purchase its Boeing 727-251 ADV aircraft for $750,000. The sale of the aircraft,
which is subject to certain conditions, is expected to close in the second
quarter of 2000. The aircraft had a cost of $9,732,714 and was fully depreciated
at March 31, 2000. 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 and timing of lease expirations, the type of aircraft
being sold, their condition and age, and future market conditions.
At March 31, 2000, the Partnership was due aggregate future minimum lease
payments of $317,854 from contractual lease agreements (see Note 3 to the
financial statements), a portion of which will be used to amortize the principal
balance of notes payable of $1,123,592 (see Note 7 to the financial statements).
At the expiration of the individual lease term underlying the Partnership's
future minimum lease payments, the Partnership will sell the aircraft or enter
into a re-lease or renewal agreement. In addition, the General Partner and EFG
are currently attempting to remarket the five aircraft (including the Boeing
727-251 ADV aircraft discussed above) and the two aircraft engines, which are
currently off lease. Such remarketing activities will result in the realization
of additional cash inflows in the form of sale proceeds or rents from renewals
or re-leases, the timing and extent of which cannot be predicted with certainty.
The Partnership obtained long-term financing in connection with the
McDonnell Douglas MD-82 and the Boeing 737-2H4 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
periods. As rental payments are collected, they are used to repay associated
indebtedness. The Partnership has a balloon payment obligation of $130,575
related to the indebtedness associated with the McDonnell Douglas MD-82 aircraft
leased to Finnair OY. The debt associated with the Boeing 737-2H4 aircraft was
fully amortized at December 31, 1999.
In addition, in February 2000, the Partnership and certain affiliated
investment programs (collectively, the "Programs") refinanced the indebtedness
which matured in January 2000 associated with a McDonnell-Douglas MD-82 aircraft
formerly leased to Finnair OY. In addition to refinancing the existing
indebtedness of $3,370,000, the Programs received additional debt proceeds of
$1,350,000 required to perform a D-Check on the aircraft. The Partnership
received $201,247 from such proceeds. The note bears a fluctuating interest rate
based on LIBOR
12
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
plus a margin with interest payments due monthly. The Partnership's aggregate
share of the refinanced and new indebtedness was $701,062 which is due at
maturity on August 9, 2000. The aircraft was returned in January 2000 upon its
lease term expiration and is currently being stored in a warehouse pending its
remarketing.
In connection with a preliminary settlement agreement for the Class Action
Lawsuit described in Note 7 to the financial statements presented in the
Partnership's 1999 Annual Report, the Partnership is permitted to invest in new
equipment or other business activities, subject to certain limitations. On March
8, 2000, the Partnership and 10 affiliated partnerships (the "Exchange
Partnerships) (see Note 7 to the financial statements presented in the
Partnership's 1999 Annual Report) collectively loaned $32 million to Echelon
Residential Holdings LLC, a newly-formed real estate development company that
will be owned by several investors, including James A. Coyne, Executive Vice
President of EFG. Mr. Coyne, in his individual capacity, is the only investor in
Echelon Residential Holdings LLC who is related to EFG.
The Partnership's participation in the loan is $3,640,000. Echelon
Residential Holdings LLC, through a subsidiary (Echelon Residential LLC), used
the loan proceeds to acquire various real estate assets from Echelon
International Corporation, a Florida based real estate company. The loan has a
term of 30 months maturing on September 7, 2002 and bears interest at the annual
rate of 14% for the first 24 months and 18% for the final six months of the
term. Interest accrues and compounds monthly but is not payable until maturity.
In connection with the transaction, Echelon Residential Holdings LLC has pledged
a security interest in all of its right, title and interest in and to its
membership interests in Echelon Residential LLC to the Exchange Partnerships as
collateral.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket aircraft upon lease expiration. Liquidity is
especially important as the Partnership matures and sells aircraft, because the
remaining aircraft portfolio consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft.
The management and remarketing of aircraft can involve, among other things,
significant costs and lengthy remarketing initiatives. Although the
Partnership's lessees are required to maintain the aircraft during the period of
lease contract, repair, maintenance, and/or refurbishment costs at lease
expiration can be substantial. For example, an aircraft that is returned to the
Partnership meeting minimum airworthiness standards, such as flight hours or
engine cycles, nonetheless may require heavy maintenance in order to bring its
engines, airframe and other hardware up to standards that will permit its
prospective use in commercial air transportation. At March 31, 2000, the
Partnership had ownership interests in six commercial jet aircraft and two
aircraft engines. Three of the aircraft are Boeing 737 aircraft formerly leased
to Southwest Airlines, Inc. ("Southwest"). The lease agreements for each of
these aircraft expired on December 31, 1999 and Southwest elected to return the
aircraft. A fourth aircraft, a Boeing 727 aircraft formerly leased to
Transmeridian, is being stored at a repair facility in Louisiana. Each of these
aircraft are Stage 2 aircraft, meaning that they are prohibited from operating
in the United States after December 31, 1999 unless they are retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. The cost to hush-kit an aircraft, such as the Partnership's
Boeing 727 and Boeing 737s, can approach $2 million. At this time, the General
Partner is attempting to remarket these assets without further capital
investment by either re-leasing the aircraft to a user outside of the United
States or selling the aircraft as they are without retro-fitting the aircraft to
conform to Stage 3 standards. The remaining two aircraft in the Partnership's
portfolio already are Stage 3 compliant. One of these aircraft had a lease term
that expired in January 2000 and is being held in storage pending the outcome of
ongoing remarketing efforts. The other aircraft has a lease term expiring in
April 2001.
13
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the financial statements presented in the 1999 Annual Report). For
instance, selling commissions and organization and offering costs pertaining to
syndication of the Partnership's limited partnership units are not deductible
for federal income tax purposes, but are recorded as a reduction of partners'
capital for financial reporting purposes. Therefore, such differences are
permanent differences between capital accounts for financial reporting and
federal income tax purposes. Other differences between the bases of capital
accounts for federal income tax and financial reporting purposes occur due to
timing differences consisting of the cumulative difference between income or
loss for tax purposes and financial statement income or loss. The principal
component of the cumulative difference between financial statement income or
loss and tax income or loss results from different depreciation policies for
book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at March 31, 2000. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 1999, the General Partner had a positive tax capital account
balance.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described
in Note 7 to the financial statements presented in the Partnership's 1999 Annual
Report. The proposed settlement to that lawsuit, if effected, will materially
change the future organizational structure and business interests of the
Partnership, as well as its cash distribution policies. In addition, the General
Partner will continue to suspend the payment of quarterly cash distributions
pending final resolution of the Class Action Lawsuit. Accordingly, future cash
distributions are not expected to be paid until the Class Action Lawsuit is
adjudicated.
14
<PAGE>
AIRFUND II International Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings
Response:
Refer to Note 8 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>
15
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AIRFUND II International Limited Partnership
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the
General Partner of the Registrant.
By: /s/ Michael J. Butterfield
-------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: May 15, 2000
-------------------------------------------------
By: /s/ Gary M. Romano
-------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 2000
-------------------------------------------------
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,010,319
<SECURITIES> 0
<RECEIVABLES> 3,728,992
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,739,341
<PP&E> 21,809,494
<DEPRECIATION> 18,529,712
<TOTAL-ASSETS> 9,019,123
<CURRENT-LIABILITIES> 338,421
<BONDS> 1,123,592
0
0
<COMMON> 0
<OTHER-SE> 7,557,110
<TOTAL-LIABILITY-AND-EQUITY> 9,019,123
<SALES> 0
<TOTAL-REVENUES> 265,329
<CGS> 0
<TOTAL-COSTS> 201,585
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,685
<INCOME-PRETAX> 33,059
<INCOME-TAX> 0
<INCOME-CONTINUING> 33,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,059
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
