<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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[_]
1
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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 September 30, 2000 and December 31, 1999............................ 3
Statement of Operations
for the three and nine months ended September 30, 2000 and 1999........ 4
Statement of Cash Flows
for the nine months ended September 30, 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
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
September 30, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................... $ 2,982,781 $ 5,719,642
Rents receivable........................................................ 18,790 -
Accounts receivable - affiliate......................................... 11,172 1,476
Accounts receivable - other............................................. 49,015 -
Other assets............................................................ - 31,742
Investment in real estate venture....................................... 3,557,650 -
Equipment at cost, net of accumulated depreciation of $8,522,136
and $18,449,875, at September 30, 2000 and December 31, 1999,
respectively........................................................... 2,914,811 3,359,619
----------- -----------
Total assets....................................................... $ 9,534,219 $ 9,112,479
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable........................................................... $ 980,585 $ 981,775
Accrued interest........................................................ 7,725 13,356
Accrued liabilities..................................................... 459,328 463,324
Accrued liabilities - affiliate......................................... 21,680 78,593
Deferred rental income.................................................. 27,244 51,380
----------- -----------
Total liabilities.................................................. 1,496,562 1,588,428
----------- -----------
Partners' capital (deficit):
General Partner........................................................ (2,593,573) (2,619,254)
Limited Partnership Interests (2,714,647 Units; initial purchase
price of $25 each).................................................... 10,631,230 10,143,305
----------- -----------
Total partners' capital............................................ 8,037,657 7,524,051
----------- -----------
Total liabilities and partners' capital............................ $ 9,534,219 $ 9,112,479
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
For the three and nine months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Income:
Lease revenue............................. $ 106,446 $ 393,846 $ 364,468 $1,584,193
Interest income........................... 50,577 87,871 154,751 185,945
Gain on sale of equipment................. 43,102 - 793,102 3,109,500
Other income.............................. - - 300,977 -
--------- --------- ---------- ----------
Total income.......................... 200,125 481,717 1,613,298 4,879,638
--------- --------- ---------- ----------
Expenses:
Depreciation.............................. 72,591 155,639 232,265 570,663
Interest expense.......................... 25,399 27,061 79,472 98,394
Equipment management fees--affiliate...... 5,322 19,693 18,223 79,210
Operating expenses--affiliate............. 440,387 421,553 687,382 1,469,582
Partnership's share of unconsolidated
real estate venture's loss............... 59,013 - 82,350 -
--------- --------- ---------- ----------
Total expenses........................ 602,712 623,946 1,099,692 2,217,849
--------- --------- ---------- ----------
Net (loss) income.......................... $(402,587) $(142,229) $ 513,606 $2,661,789
========= ========= ========== ==========
Net (loss) income $ (0.14) $ (0.05) $ 0.18 $ 0.93
per limited partnership unit............. ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income................................................................... $ 513,606 $ 2,661,789
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation............................................................... 232,265 570,663
Gain on sale of equipment.................................................. (793,102) (3,109,500)
Partnership's share of unconsolidated real estate venture's loss........... 82,350 -
Changes in assets and liabilities
Decrease (increase) in:
Rents receivable........................................................... (18,790) (22,995)
Accounts receivable - affiliate............................................ (9,696) 71,178
Accounts receivable - other................................................ (49,015) -
Other assets............................................................... 31,742 43,734
Increase (decrease) in:
Accrued interest........................................................... (5,631) (9,020)
Accrued liabilities........................................................ (3,996) (93,861)
Accrued liabilities - affiliate............................................ (56,913) 119,983
Deferred rental income..................................................... (24,136) 3,383
----------- -----------
Net cash (used in) provided by operating activities..................... (101,316) 235,354
----------- -----------
Cash flows provided by (used in) investing activities:
Investment in real estate venture........................................... (3,640,000) -
Proceeds from equipment sales............................................... 1,005,645 3,109,500
----------- -----------
Net cash (used in) provided by investing activities..................... (2,634,355) 3,109,500
----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from notes payable................................................. 201,247 -
Principal payments on notes payable......................................... (202,437) (623,174)
----------- -----------
Net cash used in financing activities................................... (1,190) (623,174)
----------- -----------
Net (decrease) increase in cash and cash equivalents......................... (2,736,861) 2,721,680
Cash and cash equivalents at beginning of period............................. 5,719,642 3,425,762
----------- -----------
Cash and cash equivalents at end of period................................... $ 2,982,781 $ 6,147,442
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................................... $ 85,103 $ 107,414
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Note 1--Basis of Presentation
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles for interim financial information and
with 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 have been no material changes 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 September 30, 2000 and December 31, 1999 and results of operations
for the three and nine month periods ended September 30, 2000 and 1999 have been
made and are reflected.
Note 2--Cash
At September 30, 2000, AIRFUND II International Limited Partnership ("the
Partnership") had $2,867,125 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 $1,546,756, which include the
aircraft releases discussed in Note 4 herein, are due as follows:
For the year ending September 30,
2001................................ $ 571,006
2002................................ 412,079
2003................................ 294,089
2004................................ 269,582
----------
Total............................... $1,546,756
==========
6
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS (Continued)
Note 4--Equipment
The following is a summary of equipment owned by the Partnership at September
30, 2000. Remaining Lease Term (Months), as used below, represents the number of
months remaining from September 30, 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.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment,
Equipment Type (Months) at Cost
-------------- -------- ----------
<S> <C> <C>
Two Rolls Royce aircraft engines..................... 0 $ 6,000,000
One McDonnell-Douglas MD-82 (Finnair)................ 7 2,078,640
One McDonnell-Douglas MD-82 (Aero Mexico)............ 47 2,078,640
One Boeing 737-2H4 (Air Slovakia).................... 35 639,834
One Boeing 737-2H4................................... 0 639,833
-----------
Total equipment cost 11,436,947
Accumulated depreciation 8,522,136
-----------
Equipment, net of $ 2,914,811
accumulated depreciation ===========
</TABLE>
The costs of the two McDonnell-Douglas MD-82 aircraft and the two 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 $2,504,217 at September 30, 2000.
The Partnership entered into a three year re-lease agreement with Air Slovakia
for its proportionate interest in a Boeing 737-2H4 aircraft, effective September
2000. Under the terms of this agreement, the Partnership will receive rents of
$344,138 over the term of the lease. In addition, the Partnership entered into a
four year re-lease agreement with Aero-Mexico for its proportionate interest in
a McDonnell-Douglas MD-82 aircraft, effective September 2000. Under the terms of
this agreement, the Partnership will receive rents of $1,151,849 over the term
of the lease.
The summary above includes equipment held for re-lease or sale with an
original cost of approximately $6,640,000 and a net book value of $205,297 at
September 30, 2000. This equipment included the Partnership's interest in a
Boeing 737 aircraft, formerly leased to Southwest Airlines Inc., that had an
original cost of approximately $640,000 and a net book value of $205,297 at
September 30, 2000. This aircraft was returned by the lessee upon the lease term
expiration in December 1999 and was remarketed in October 2000. In addition, the
Partnership's 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 September 30, 2000. The two Rolls Royce
aircraft engines were fully depreciated at September 30, 2000 and had an
original cost of approximately $6,000,000. The General Partner is actively
seeking the sale or re-lease of these engines.
7
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Note 5--Investment in Real Estate Venture
On March 8, 2000, the Partnership and 10 affiliated partnerships (the
"Exchange Partnerships") collectively loaned $32 million to Echelon Residential
Holdings LLC ("Echelon Residential Holdings"), a newly formed real estate
development company. Echelon Residential Holdings is owned by several investors,
including James A. Coyne, Executive Vice President of EFG. Mr. Coyne, in his
individual capacity, is the only equity investor in Echelon Residential Holdings
related to EFG. In addition, certain affiliates of the General Partner made
loans to Echelon Residential Holdings in their individual capacities.
The Partnership's participation in the loan is $3,640,000. Echelon Residential
Holdings, through a wholly-owned 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 8, 2002, and an annual interest rate of 14% for
the first 24 months and 18% for the final six months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings 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.
Using the guidance set forth in the Third Notice to Practitioners by the AICPA
in February 1986 entitled "ADC Arrangements" (the "Third Notice"), the
Partnership has evaluated this investment to determine whether loan, joint
venture or real estate accounting is appropriate. Such determination affects the
Partnership's balance sheet classification of the investment and the recognition
of revenues derived therefrom. The Third Notice was issued to address those real
estate acquisition, development and construction arrangements where a lender has
virtually the same risk and potential awards as those of owners or joint
ventures. EITF 86-21, "Application of the AICPA Notice to Practitioners
regarding Acquisition, Development and Construction Arrangements to Acquisition
of an Operating Property" expanded the applicability of the Third Notice to
entities other than financial institutions.
Based on the applicability of the Third Notice, EITF 86-21 and consideration
of the economic substance of the transaction, the loan is considered to be an
investment in a real estate venture for accounting purposes. In accordance with
the provisions of Statement of Position No. 78-9, "Accounting for Investments in
Real Estate Ventures", the Partnership reports its share of income or loss of
Echelon Residential Holdings under the equity method of accounting
The Partnership's accompanying financial statements as of and for the three
and nine months ended September 30, 2000 are presented in accordance with the
guidance above. The investment is net of the Partnership's share of loss in this
real estate venture. For the three and nine months ended September 30, 2000, the
Partnership's share of losses is $59,013 and $82,350, respectively, and is
reflected on the Statement of Operations as "Partnership's share of
unconsolidated real estate venture's loss".
The summarized financial information for Echelon Residential Holdings as of
September 30, 2000 and for the period March 8, 2000 (commencement of operations)
through September 30, 2000 is as follows:
(Unaudited)
-----------------
Total assets.............. $63,457,759
Total liabilities......... $64,221,109
Total deficit............. $ (763,350)
Total revenues............ $ 1,565,618
Total expenses............ $ 5,109,324
Net loss.................. $(3,543,706)
8
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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 the nine month periods ended
September 30, 2000 and 1999, which were paid or accrued by the Partnership to
EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
For the nine months ended
September 30,
2000 1999
-------- ----------
<S> <C> <C>
Equipment management fees................................ $ 18,223 $ 79,210
Administrative charges................................... 39,178 59,108
Reimbursable operating expenses due to third parties..... 648,204 1,410,474
-------- ----------
Total............................................... $705,605 $1,548,792
======== ==========
</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 September 30,
2000, the Partnership was owed $11,172 by EFG for such funds and the interest
thereon. These funds were remitted to the Partnership in October 2000.
Note 7--Notes Payable
Notes payable at September 30, 2000 consisted of installment notes payable to
banks of $980,585. The installment notes bear an interest rate of either 8.225%
or a fluctuating interest rate based on LIBOR (approximately 6.62% at September
30, 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 matured in August 2000. The General
Partner is currently negotiating with the existing lender to extend the term of
this indebtedness and the Partnership is currently paying interest-only on the
outstanding debt amount. 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 and was re-leased in September 2000. The
carrying amount of notes payable approximates fair value at September 30, 2000.
All of the Partnership's debt matures during the year ending September 30,
2001.
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
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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 and nine months ended September 30, 2000 compared to the three and nine
months ended September 30, 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 September 30, 2000, the Partnership owned two
aircraft engines and proportionate interests in four 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 and nine months ended September 30, 2000, the Partnership
recognized lease revenue of $106,446 and $364,468, respectively, compared to
$393,846 and $1,584,193, respectively for the same periods in 1999. The decrease
in lease revenue from 1999 to 2000 resulted from the expiration of lease terms
related to the Partnership's interest in three Boeing 737-2H4 aircraft (one of
which was sold in July 2000) and a McDonnell-Douglas MD-82 aircraft, and the
sales of the Partnership's Boeing 727-208 ADV aircraft in April 1999 and the
Partnership's Boeing 727-251 ADV aircraft in May 2000. 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 increase due to the re-
lease of the McDonnell-Douglas MD-82 aircraft and one of the Boeing 737-2H4
aircraft in September 2000. Subsequently, the Partnership's lease revenue is
expected to decline due to primary and renewal lease term expirations and
aircraft sales.
The lease terms related to the three Boeing 737-2H4 aircraft, in which the
Partnership held proportionate interest, expired on December 31, 1999 and the
aircraft were stored pending their remarketing. In July 2000, one of the Boeing
737-2H4 aircraft was sold resulting in $255,645 of proceeds and a net gain, for
financial statement purposes, of $43,102 for the Partnership's proportional
interest in the aircraft. In September 2000, one of the Boeing 737-2H4 aircraft
was re-leased, with a lease term expiring in September 2003. Under the terms of
this re-lease agreement, the Partnership will receive rents of $344,138 over the
term of the lease. The
10
<PAGE>
remaining Boeing 737-2H4 aircraft was remarketed in October 2000. The
Partnership recognized lease revenue of $8,194 and $283,176, respectively, from
these three aircraft during the nine months ended September 30, 2000 and 1999.
The lease term associated with a McDonnell-Douglas MD-82 aircraft, in which the
Partnership holds an ownership interest, expired in January 2000. The aircraft
was re-leased in September 2000, with a lease term expiring in September 2004.
Under the terms of this re-lease agreement, the Partnership will receive rents
of $1,151,849 over the term of the lease. The Partnership recognized lease
revenue of $47,883 and $238,194 during the nine months ended September 30, 2000
and 1999, respectively.
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. See Note 7 to
the financial statements presented in the Partnership's 1999 Annual Report for
details regarding the legal action undertaken by the Partnership related to this
situation. The Partnership recognized lease revenue of $70,000 and $560,000,
respectively, related to this aircraft during the nine months ended September
30, 2000 and 1999. In May 2000, the Partnership sold the Boeing 727-251 ADV
aircraft to a third-party for proceeds of $750,000. This aircraft was fully
depreciated at the time of sale, resulting in a net gain, for financial
statement purposes, of $750,000 for the nine months ended September 30, 2000.
In April 1999, the Partnership sold its Boeing 727-208 ADV aircraft,
previously leased to American Trans Air, Inc., to the lessee for net proceeds of
$3,109,500. The aircraft was fully depreciated at the time of sale, resulting in
a net gain, for financial statement purposes of $3,109,500. The Partnership
recognized lease revenue of $246,000 from this aircraft for the nine months
ended September 30, 1999.
During the nine months ended September 30, 1999, the Partnership recognized
revenue of $19,980 related to the aircraft previously leased to Classic Airways
Limited.
As of September 30, 2000, the Partnership's ownership interests in the two
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.
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 gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
aircraft.
Interest income for the three and nine months ended September 30, 2000 was
$50,577 and $154,751, respectively, compared to $87,871and $185,945 for the same
periods in 1999. Interest income is typically generated from temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. On March 8,
11
<PAGE>
2000, the Partnership utilized $3,640,000 of available cash for a loan to
Echelon Residential Holdings LLC ("Echelon Residential Holdings"). (See Note 5
to the financial statements herein). 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.
Other income for the nine months ended September 30, 2000, reflects the
receipt of $245,977 of unused aircraft maintenance reserves related to a sold
aircraft and $55,000 for the sale of certain aircraft records, respectively.
Depreciation expense was $72,591 and $232,265, respectively, for the three
and nine months ended September 30, 2000 compared to $155,639 and $570,663 for
the same periods in 1999.
During the three and nine months ended September 30, 2000, the Partnership
incurred interest expense of $25,399 and $79,472, respectively, compared to
$27,061 and $98,394 for the same periods in 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.
Management fees were $5,322 and $18,223, respectively, for the three and
nine month periods ended September 30, 2000 compared to $19,693 and $79,210,
respectively, for the same periods in 1999. Management fees are based on 5% of
gross lease revenue.
Operating expenses were $440,387 and $687,382, respectively, for the three
and nine months ended September 30, 2000 and $421,553 and $1,469,582,
respectively, for the same periods in 1999. Operating expenses in 2000 include
storage and remarketing costs associated with the Partnership's off-lease
aircraft and approximately $200,000 accrued for the Partnership's proportionate
share of the cost of a required D-check on the McDonnell Douglas MD-82 aircraft
leased to Finnair OY. In addition, operating expenses in 2000 include
approximately $40,000 of costs incurred in connection with the Class Action
Lawsuit discussed in Note 7 to the financial statements presented in the
Partnership's 1999 Annual Report. Operating expenses in 1999 included engine
leasing costs of $738,000 incurred related to the aircraft formerly leased to
Transmeridian. In addition, in 1999, the Partnership incurred legal fees in
connection with the litigation with Transmeridian. 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.
For the three and nine months ended September 30, 2000, the Partnership's
share of losses in Echelon Residential Holdings is $59,013 and $82,350,
respectively, and is reflected on the Statement of Operations as "Partnership's
share of unconsolidated real estate venture's loss". See further discussion
below.
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 $101,316 and a net inflow of $235,354 for the
nine months ended September 30, 2000 and 1999, respectively. In the near term,
lease revenue is expected to increase due to the re-leases of aircraft discussed
above. Subsequently, aircraft remarketing activities will 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. 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. See additional discussion below regarding the loan made by the Partnership
to Echelon Residential Holdings in March 2000.
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Cash realized for asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows. For the nine months
ended September 30, 2000, the Partnership realized $1,005,645 in equipment sales
proceeds compared to $3,109,500 for the same period in 1999. 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 September 30, 2000, the Partnership was due aggregate future minimum
lease payments of $1,546,756 from contractual lease agreements, a portion of
which will be used to amortize the principal balance of notes payable of
$980,585. (See Notes 3 and 7 to the financial statements herein). 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 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, which matures in April 2001. 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 plus a margin with interest payments due monthly. The
Partnership's aggregate share of the refinanced and new indebtedness was
$701,062, which matured in August 2000. The General Partner is currently
negotiating with the existing lender to extend the term of this indebtedness and
the Partnership is currently paying interest-only on the outstanding
indebtdeness. The aircraft was returned in January 2000 upon its lease term
expiration and was re-leased in September 2000. (See discussion above).
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) collectively loaned $32 million to Echelon Residential Holdings a
newly-formed real estate development company owned by several investors,
including James A. Coyne, Executive Vice President of EFG. Mr. Coyne, in his
individual capacity, is the only equity investor in Echelon Residential Holdings
related to EFG. In addition, certain affiliates of the General Partner made
loans to Echelon Residential Holdings in their individual capacities.
The Partnership's participation in the loan is $3,640,000. Echelon
Residential Holdings, through a wholly-owned 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 8, 2002, and an annual interest rate of
14% for the first 24 months and 18% for the final six months. Interest accrues
and compounds monthly and is payable at maturity. In connection with the
transaction, Echelon Residential Holdings 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.
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As discussed in Note 5 to the Partnership's financial statements herein,
the loan is considered to be an investment in a real estate venture for
accounting purposes. In accordance with the provisions of Statement of Position
No. 78-9, "Accounting for Investments in Real Estate Ventures", the
Partnership reports its share of income or loss of Echelon Residential Holdings
under the equity method of accounting.
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 September 30, 2000, the Partnership had ownership interests in four
commercial jet aircraft and two aircraft engines. Two 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. In September 2000 and October 2000,
the aircraft were re-leased and remarketed, respectively, to users outside of
the United States. The remaining two aircraft in the Partnership's portfolio
have lease agreements that expire in April 2001 and September 2004,
respectively.
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 September 30, 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,
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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.
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AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
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
27 Financial Data Schedule
Item 6(b). Reports on Form 8-K
Response: None
Exhibit Description
------- -----------
27 Financial Data Schedule
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the General
Partner of the Registrant.
By: /s/ Michael J. Butterfield
----------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: November 14, 2000
17
