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AIRFUND International Limited Partnership
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-6
FINANCIAL STATEMENTS:
Report of Independent Auditors 7
Statement of Financial Position
at December 31, 1995 and 1994 8
Statement of Operations
for the years ended December 31, 1995, 1994 and 1993 9
Statement of Changes in Partners' Capital
for the years ended December 31, 1995, 1994 and 1993 10
Statement of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 11
Notes to the Financial Statements 12-20
ADDITIONAL FINANCIAL INFORMATION:
Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings 21
Schedule of Costs Reimbursed to the
General Partner and its Affiliates as
Required by Section 10.4 of the Amended and
Restated Agreement and Certificate of
Limited Partnership 22
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the five years in the period ended December 31, 1995:
Summary of
Operations 1995 1994 1993 1992 1991
Lease revenue $ 4,588,609 $ 5,166,392 $ 5,822,874 $ 6,227,077 $ 8,193,498
Net income (loss) $ (2,283,720) $ (1,463,495) $ (5,435,348) $ 1,099,052 $ 11,128,151
Per Unit:
Net income (loss) $ (0.71) $ (0.46) $ (1.70) $ 0.34 $ 2.92
Cash distributions
declared $ 1.00 $ 1.25 $ 2.00 $ 2.25 $ 10.75
Financial
Position
Total assets $ 16,888,606 $ 17,961,111 $ 24,263,282 $ 36,143,240 $ 42,324,675
Total long-term obligations $ 4,742,968 -- -- -- --
Partners' capital $ 11,233,743 $ 16,717,463 $ 22,180,958 $ 34,016,306 $ 40,117,254
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1995 compared to the year
ended December 31, 1994 and the year ended December 31, 1994
compared to the year ended December 31, 1993
Overview
As an equipment leasing partnership, AIRFUND International Limited
Partnership (the "Partnership") was organized to acquire and lease a portfolio
of commercial jet aircraft subject to lease agreements with third parties. Upon
its inception in 1989, the Partnership purchased three commercial jet aircraft
and a proportionate interest in a fourth aircraft which were leased by major
carriers engaged in passenger transportation. Initially, each aircraft generated
rental revenues pursuant to primary-term lease agreements. In 1991, one of the
Partnership's original aircraft was sold to a third party and a portion of the
sale proceeds was reinvested in a proportionate interest in another aircraft.
During the third quarter of 1995, the Partnership transferred its ownership
interest in the fourth aircraft to the existing lessee, United Air Lines, Inc.
("United") in exchange for a proportionate interest in three aircraft leased to
Southwest Airlines, Inc. ("Southwest") pursuant to lease agreements which
expired in 1999. The Partnership continues to own a proportionate interest in
one aircraft and a complete interest in two other aircraft held in its original
portfolio, all of which are being leased pursuant to renewal lease agreements
which will expire in 1996. Upon expiration of the renewal lease agreements, each
aircraft will be re-leased or sold depending on prevailing market conditions and
the assessment of such conditions by American Finance Group ("AFG") to obtain
the most advantageous economic benefit. Ultimately, all aircraft will be sold
and the net proceeds will be distributed to the Partners, after all liabilities
and obligations of the Partnership have been satisfied.
Results of Operations
In September 1995, the Partnership transferred its entire ownership
interest (76.8%) in a Boeing 747-SP aircraft (the "Aircraft") to its lessee,
United. The transaction was structured as a like-kind exchange for income tax
reporting purposes, thereby enabling the Partnership to exchange its interest in
the Aircraft for other aircraft which are expected to generate a better economic
benefit to the Partnership than the Aircraft. The Partnership received aggregate
cash consideration of $6,325,760, including $352,256 for rent accrued through
the transfer date. The net cash consideration of $5,973,504 was deposited into a
special-purpose escrow account through a third-party exchange agent pending the
completion of the aircraft exchange. The Partnership's interest in the Aircraft
had a net book value of $7,914,422 at the date of transfer and resulted in a net
loss for financial reporting purposes of $1,940,918.
In November 1995, the Partnership partially replaced the Aircraft with a
43.41% interest in three Boeing 737-2H4 aircraft leased by Southwest Airlines,
Inc. (the "Southwest Aircraft") at an aggregate cost of $6,355,873. To enable
the Partnership to better achieve its investment objectives, maximize its
aircraft replacement capabilities and enhance the overall economic potential of
the like-kind exchange, the General Partner arranged to finance a portion of the
acquisition cost through a third-party lender. Accordingly, the Partnership
obtained financing of $4,742,968 from a third-party lender and utilized
$1,612,905 of the cash consideration received from United. The Southwest
Aircraft, which are under lease through December 31, 1999, will generate
aggregate lease revenues to the Partnership of $5,563,425. The remaining
ownership interest of 56.59% in the Southwest Aircraft is held by affiliated
equipment leasing programs sponsored by AFG. For financial statement purposes,
the remaining cash consideration of $4,360,599 is reported as Contractual Right
for Equipment on the Statement of Financial Position at December 31, 1995. On
March 25, 1996, the Partnership exchanged the remaining cash consideration,
which was supplemented by additional financing, for a 49.17% interest in two
McDonnell-Douglas MD-82 aircraft leased by Finnair OY (the "Finnair Aircraft"),
thereby concluding all anticipated components of the like-kind exchange. See
Note 7 herein.
For the year ended December 31, 1995, the Partnership recognized lease
revenue of $4,588,609 compared to $5,166,392 and $5,822,874 for the years ended
December 31, 1994 and 1993, respectively. The decrease in lease revenue from
1993 to 1995 is due to a decline in the monthly rental rate of two Boeing 727
aircraft leased by Northwest Airlines, Inc. ("Northwest") and to the loss of
rental revenue associated with the United Aircraft during the exchange period.
Future lease revenue will fluctuate due to variations in the rental rates
between the United Aircraft and its replacement aircraft and the expiration of
renewal lease terms described herein. The Partnership also earns interest income
from temporary investments of rental receipts and equipment sales proceeds in
short-term instruments.
The Partnership's two lease agreements with Northwest were renewed for a
period of twelve months commencing May 1, 1994. Subsequently, Northwest extended
the renewal period for an additional twelve months through April 30, 1996. Rents
due under the original expired leases generated aggregate monthly revenue of
$250,000, compared to $124,000 per month for the first twelve month renewal and
$120,000 for the second twelve month renewal. Northwest has opted to extend
these leases for an additional six months until October 31, 1996 at $120,000 per
month.
The Partnership's lease agreement with Cathay Pacific Airways, Ltd
("Cathay") provides for semi-annual rent adjustments based on the six month
London Inter-bank Offered Rate ("LIBOR"). Accordingly, rents generated from this
lease fluctuate in relation to the prevailing LIBOR rate on a semi-annual basis.
The Partnership's renewal lease agreement with Cathay (having an adjusted
semi-annual rent of $535,802) which expires on February 14, 1996 has been
extended until April 11, 1996 and will be adjusted by the applicable LIBOR rate.
Subsequent to this extension, Cathay will lease the aircraft at a fixed rate
until June 30, 1996. The fixed extension agreement will generate approximately
$127,000 in renewal revenue for the Partnership.
The Partnership holds a proportionate ownership interest in the Cathay
and Southwest aircrafts discussed above. The remaining interests are owned by
other affiliated partnerships sponsored by AFG. All partnerships individually
report, in proportion to their respective ownership interests, their respective
shares of assets, liabilities, revenues and expenses associated with the
aircraft. (See Note 3 to the financial statements, herein.)
The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during each of the years ended December 31, 1995, 1994
and 1993. The resulting charges, $1,740,960 ($0.54 per limited partnership unit)
in 1995, $2,534,000 ($0.79 per limited partnership unit) in 1994 and $5,607,584
($1.75 per limited partnership unit) in 1993, were based on a comparison of
estimated net realizable values and corresponding carrying values for each of
the Partnership's aircraft.
Net realizable values were estimated based on (i) third-party appraisals
of the Partnership's aircraft and (ii) AFG's assessment of prevailing market
conditions for similar aircraft. In recent years, market values for used
commercial jet aircraft have deteriorated. Consistent price competition and
other pressures within the airline industry have inhibited sustained
profitability for many carriers. Most major airlines have had to re-evaluate
their aircraft fleets and operating strategies. Such issues complicate the
determination of net realizable value for specific aircraft, and particularly
used aircraft, because cost-benefit and market considerations may differ
significantly between the major airlines. Aircraft condition, age, passenger
capacity, distance capability, fuel efficiency, and other factors also influence
market demand and market values for passenger jet aircraft.
Certain aircraft, such as the 747-SP aircraft previously owned by the
Partnership, suffered market declines due to their nature as Special Purpose
(SP) aircraft. These aircraft were designed to travel long distances on a
non-stop basis. Distance capability was achieved, in part, by reducing the
number of passenger seats contained on a traditional 747 aircraft. In recent
years, new aircraft have become available which compete with the 747-SP in both
passenger capacity and fuel efficiency. This development depressed market values
of used 747-SP aircraft and was the basis for the write-down recognized by the
Partnership in 1994.
Another significant consideration in evaluating used commercial aircraft
is compliance with The Airport Capacity Act of 1990 (the "Airport Act"), which
prohibits the operation of Stage 2 commercial jet aircraft to or from U.S.
airports after December 31, 1999. Stage designations range from Stage 1 to Stage
3 and are indicative of an aircraft's compliance with noise level regulations
promulgated by the Federal Aviation Administration. Stage 3 designates the
highest level of compliance. The Partnership's two Boeing 727 aircraft leased to
Northwest are Stage 2 aircraft. Various hush kit and re-engineering programs are
available to retrofit Stage 2 aircraft to comply with the Airport Act; however,
the cost to effect such improvements is estimated to range from $2 million to $3
million per aircraft. Accordingly, this factor is a major consideration in
assessing estimated net realizable value for used aircraft and is a principal
reason for the write-downs which the Partnership recognized in 1993. The
write-down in 1995 resulted from deterioration in the market value for the
Partnership's L1011 aircraft on lease to Cathay.
Notwithstanding the foregoing, the ultimate realization of residual
value for any aircraft is dependent upon many factors, including AFG'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. Accordingly, AFG will attempt to
monitor 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 will be comprised of all primary lease term revenues 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.
During 1995 and 1994, the Partnership incurred interest expense of
$63,568 and $8,133, respectively. Interest expense in 1995 resulted from
financing obtained from a third-party lender in connection with the Southwest
Aircraft described previously. Interest expense will increase in the near term
as a result of this transaction and will be further increased by financing costs
associated with the Finnair Aircraft. The contracted rental streams of both the
Southwest and Finnair aircraft will be sufficient to retire the indebtedness and
related interest costs.
Interest expense in 1994 was incurred on a $600,000 short-term unsecured
note agreement with an institutional lender. Interest was charged at a floating
rate equal to the lender's prime rate of interest plus 2% during the period of
borrowing. The sole purpose of this note was to fund a cash requirement caused
by timing differences between rent receipts and cash distributions to the
Partners. The note matured and was repaid fully on March 11, 1994.
Management fees were 5% of lease revenue during 1995, 1994 and 1993
and will not change as a percentage of lease revenue in future years.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as insurance,
printing, and distribution expenses. Collectively, operating expenses
represented 5.2%, 2.8% and 1.8% of lease revenue in 1995, 1994 and 1993,
respectively. The increase in operating expenses from 1993 to 1995 is due
primarily to remarketing expenses incurred in connection with the renewal of two
aircraft on lease to Northwest. 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. Depreciation and
amortization expense was $2,716,474, $3,720,315 and $5,284,452 for the years
ended December 31, 1995, 1994 and 1993, respectively.
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 pay management fees and operating
costs. Operating activities generated net cash inflows of $3,612,295, $4,550,408
and $5,451,244 in 1995, 1994 and 1993, respectively. The expiration of the
Partnership's current lease agreements will cause a decline in the Partnership's
lease revenue and corresponding sources of operating cash. This will be
partially offset by rents generated in connection with the Southwest Aircraft
and the Finnair Aircraft. 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.
As described in Results of Operations, the Partnership obtained
long-term financing in connection with the like-kind exchange transactions
involving United, Southwest and Finnair. 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.
Financing activities in 1994 reflect proceeds of $600,000 from a
short-term unsecured note as discussed in Results of Operations. The note was
originated and repaid during the three month period ended March 31, 1994.
Cash distributions to the General Partner and Recognized Owners are
declared and generally paid within fifteen days following the end of each
calendar quarter. The payment of such distributions is presented as a component
of financing activities. For the year ended December 31, 1995, the Partnership
declared total cash distributions of Distributable Cash From Operations of
$3,200,000. In accordance with the Amended and Restated Agreement and
Certificate of Limited Partnership (the "Restated Agreement, as amended"), the
Recognized Owners were allocated 95% of these distributions, or $3,040,000, and
the General Partner was allocated 5%, or $160,000. The fourth quarter 1995 cash
distribution was paid on January 22, 1996.
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 AFG 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.
The future liquidity of the Partnership will be greatly dependent upon
the collection of contractual rents and the outcome of residual activities. The
General Partner anticipates that cash proceeds resulting from these sources will
satisfy the Partnership's future expense obligations. However, the amount of
cash available for distribution in future periods is expected to fluctuate
widely as the General Partner attempts to remarket the Partnership's aircraft
and possibly upgrade certain aircraft to meet the standards of potential
successor lessees. The like-kind exchange, involving the United, Southwest and
Finnair aircraft, was undertaken, in part, to mitigate the Partnership's
economic risk resulting from the United aircraft being returned to the
Partnership upon its lease expiration in April 1996 and remaining off-lease for
an extended time period. The exchange enabled the Partnership to replace a
specialized aircraft with other aircraft which are used more widely in the
industry and also to significantly extend its rental stream with two
creditworthy users.
The lease expirations of Northwest in October 1996 will present
additional demands on the Partnership's cash position, depending upon upgrades
or refurbishments which may be necessary to remarket the aircraft. Accordingly,
the General Partner expects to reserve a portion of the Partnership's cash for
such purposes. Over time, aircraft disposals and other remarketing events will
cause the Partnership's net cash from operating activities to diminish.
Accordingly, fluctuations in the level of future quarterly cash distributions
will occur. It is possible that the General Partner will elect not to declare a
cash distribution in a given quarter, depending upon the overall cash
requirements of the Partnership.
REPORT OF INDEPENDENT AUDITORS
To the Partners of AIRFUND International Limited Partnership:
We have audited the accompanying statements of financial position of
AIRFUND International Limited Partnership as of December 31, 1995 and 1994, and
the related statements of operations, changes in partners' capital, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AIRFUND
International Limited Partnership at December 31, 1995 and 1994, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Partners is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts March 12, 1996, except for the fourth paragraph of Note 7,
as to which the date is March 25, 1996
The accompanying notes are an integral part of
these financial statements.
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AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 1995 and 1994
1995 1994
ASSETS
Cash and cash equivalents $ 1,079,341 $ 1,067,046
Contractual right for equipment 4,360,599 --
Rents receivable 562,594 344,077
Accounts receivable - affiliate 353,803 1,736
Equipment at cost, net of accumulated
depreciation of $22,741,547 and $27,446,669
at December 31, 1995 and 1994, respectively 10,532,269 16,548,252
Total assets $ 16,888,606 $ 17,961,111
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 4,742,968 --
Accrued interest 63,568 --
Accrued liabilities 40,527 $ 106,797
Accrued liabilities - affiliate 71,661 19,029
Deferred rental income 136,139 117,822
Cash distributions payable to partners 600,000 1,000,000
Total liabilities 5,654,863 1,243,648
Partners' capital (deficit):
General Partner (1,137,309) (863,123)
Limited Partnership Interests
(3,040,000 Units; initial purchase
price of $25 each) 12,371,052 17,580,586
Total partners' capital 11,233,743 16,717,463
Total liabilities and partners' capital $ 16,888,606 $ 17,961,111
AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Income:
Lease revenue $ 4,588,609 $ 5,166,392 $ 5,822,874
Interest income 58,206 34,315 29,068
Loss on exchange of equipment (1,940,918) -- --
Total income 2,705,897 5,200,707 5,851,942
Expenses:
Depreciation and amortization 2,716,474 3,720,315 5,284,452
Write-down of equipment 1,740,960 2,534,000 5,607,584
Interest expense 63,568 8,133 --
Equipment management fees - affiliate 229,430 258,320 291,144
Operating expenses - affiliate 239,185 143,434 104,110
Total expenses 4,989,617 6,664,202 11,287,290
Net loss $ (2,283,720) $ (1,463,495) $ (5,435,348)
Net loss
per limited partnership unit $ (0.71) $ (0.46) $ (1.70)
Cash distributions declared
per limited partnership unit $ 1.00 $ 1.25 $ 2.00
AIRFUND International Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1995, 1994 and 1993
General
Partner Recognized Owners
Amount Units Amount Total
Balance at December 31, 1992 $ 1,819 3,040,000 $ 34,014,487 $ 34,016,306
Net loss - 1993 (271,767) -- (5,163,581) (5,435,348)
Cash distributions declared (320,000) -- (6,080,000) (6,400,000)
Balance at December 31, 1993 (589,948) 3,040,000 22,770,906 22,180,958
Net loss - 1994 (73,175) -- (1,390,320) (1,463,495)
Cash distributions declared (200,000) -- (3,800,000) (4,000,000)
Balance at December 31, 1994 (863,123) 3,040,000 17,580,586 16,717,463
Net loss - 1995 (114,186) -- (2,169,534) (2,283,720)
Cash distributions declared (160,000) -- (3,040,000) (3,200,000)
Balance at December 31, 1995 $ (1,137,309) 3,040,000 $12,371,052 $11,233,743
AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Cash flows from (used in) operating activities:
Net loss $ (2,283,720) $ (1,463,495) $ (5,435,348)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization 2,716,474 3,720,315 5,284,452
Write-down of equipment 1,740,960 2,534,000 5,607,584
Loss on exchange of equipment 1,940,918 -- --
Changes in assets and liabilities:
Decrease (increase) in:
rents receivable (218,517) -- 26,021
accounts receivable - affiliate (352,067) (1,736) 13,145
Increase (decrease) in:
accrued interest 63,568 -- --
accrued liabilities (66,270) (19,015) 12,396
accrued liabilities - affiliate 52,632 (72,914) 81,394
deferred rental income 18,317 (146,747) (138,400)
Net cash from operating activities 3,612,295 4,550,408 5,451,244
Cash flows from (used in) financing activities:
Proceeds from notes payable -- 600,000 --
Principal payments - notes payable -- (600,000) --
Distributions paid (3,600,000) (4,600,000) (6,400,000)
Net cash used in financing activities (3,600,000) (4,600,000) (6,400,000)
Net increase (decrease) in cash and
cash equivalents 12,295 (49,592) (948,756)
Cash and cash equivalents at beginning of year 1,067,046 1,116,638 2,065,394
Cash and cash equivalents at end of year $ 1,079,341 $ 1,067,046 $ 1,116,638
Supplemental disclosure of cash flow information:
Cash paid during the year for interest -- $ 8,133 --
Supplemental disclosure of non-cash investing activities:
See Note 3 to the Financial Statements.
AIRFUND International Limited Partnership
Notes to the Financial Statements
December 31, 1995
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NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on January 31,
1989 for the purpose of acquiring and leasing to third parties a specified
portfolio of used commercial aircraft. Partners' capital initially consisted of
contributions of $1,000 from the General Partner (AFG Aircraft Management
Corporation, a Massachusetts corporation) and $100 from the Initial Limited
Partner (AFG Assignor Corporation, a Massachusetts corporation). On July 26,
1989, the Partnership issued 3,040,000 units representing assignments of limited
partnership interests (the "Units") to 4,147 investors. Unitholders and Limited
Partners (other than the Initial Limited Partner) are collectively referred to
as Recognized Owners. The General Partner is an affiliate of American Finance
Group ("AFG"), a Massachusetts partnership. The common stock of the General
Partner is owned by AF/AIP Programs Limited Partnership, of which AFG and a
wholly-owned affiliate are the 99% limited partners and AFG Programs, Inc., a
Massachusetts corporation which is wholly-owned by Geoffrey A. MacDonald, is the
1% general partner. The capital contribution of the General Partner, in
consideration of its general partner interests, equals $1,000. The General
Partner is not required to make any other capital contributions except as may be
required under the Uniform Act and Section 6.1(b) of the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended").
AFG is a successor to the business of American Finance Group, Inc., a
Massachusetts corporation engaged since its inception in 1980 in various aspects
of the equipment leasing business. In 1990, certain members of AFG's management,
principally Geoffrey A. MacDonald, Chief Executive Officer and co-founder of
AFG, established AFG Holdings (Massachusetts) Limited Partnership ("Holdings
Massachusetts") to acquire ownership and control of AFG. Holdings Massachusetts
effected this event by acquiring all of the equity interests of AFG's two
partners, AFG Holdings Illinois Limited Partnership ("Holdings Illinois") and
AFG Corporation. Holdings Massachusetts incurred significant indebtedness to
finance this acquisition, a significant portion of which was scheduled to mature
in 1995.
On December 16, 1994, the senior lender to Holdings Massachusetts (the
"Senior Lender") assumed control of its security interests in Holdings Illinois
and AFG Corporation and sold all such interests to GDE Acquisitions Limited
Partnership, a Massachusetts limited partnership owned and controlled entirely
by Gary D. Engle, President and member of the Executive Committee of AFG. As a
result of this transaction, GDE Acquisitions Limited Partnership acquired all of
the assets, rights and obligations of AFG from the Senior Lender and assumed
control of AFG. Geoffrey A. MacDonald remains as Chief Executive Officer of AFG
and member of its Executive Committee.
In 1990, AFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with AFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with AFG's former majority-owned subsidiary, AIRFUND Corporation
("AFC"), for the provision of aircraft remarketing services.
Significant operations commenced July 27, 1989 when the Partnership made
its initial equipment purchase. Pursuant to the Restated Agreement, as amended,
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings will be allocated 95% to the Recognized Owners and 5% to the
General Partner for the life of the Partnership. Payout will occur when the
Recognized Owners have received distributions equal to their original investment
plus a cumulative annual return of 10% (compounded quarterly) on undistributed
invested capital.
Under the terms of a Management Agreement between the Partnership and
AFG, management services are provided by AFG to the Partnership at fees which
the General Partner believes to be competitive for similar services. (Also see
Note 4.)
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. Under the terms of the
agreements, title to the underlying securities passes to the Partnership. The
securities underlying the agreements are book entry securities. At December 31,
1995, the Partnership had $1,075,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.
Revenue Recognition
Rents are payable to the Partnership monthly or semi-annually. Rents
from Cathay, as provided for in the lease agreement, are adjusted semi-annually
for changes of the six month LIBOR rate. Future rents from Cathay, included
below, reflect the most recent LIBOR effected rental payment. The LIBOR rates
prevailing at future rent adjustment dates will cause fluctuations in the
periodic rental rate to be generated from this lease. All leases are accounted
for as operating leases and are noncancellable. Rents received prior to their
due dates are deferred. Future minimum rents of $7,029,152 are due as follows:
For the year ending December 31, 1996 $ 3,174,344
1997 1,250,208
1998 1,250,208
1999 1,250,208
2000 104,184
Total $ 7,029,152
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1995, 1994 and 1993 is as
follows:
1995 1994 1993
Northwest Airlines, Inc.
(Two Boeing 727-251ADV) $ 1,456,000 $ 2,203,638 $ 3,000,000
United Airlines, Inc.
(One Boeing 747-SP-21) $ 1,471,286 $ 1,935,360 $ 1,909,409
Cathay Pacific Airways Limited
(One Lockheed L-1011) $ 1,098,730 $ 1,027,394 $ 913,465
Southwest Airlines, Inc.
(Three Boeing 737-2H4) $ 562,594 -- --
The Partnership's two lease agreements with Northwest were renewed for a
period of twelve months commencing May 1, 1994. Subsequently, Northwest extended
the renewal period for an additional twelve months through April 30, 1996. Rents
due under the original expired leases generated aggregate monthly revenue of
$250,000 compared to $124,000 per month for the first twelve month renewal and
$120,000 for the second twelve month renewal. Northwest has opted to extend the
renewal period for an additional six months until October 31, 1996 at $120,000
per month, at which time the aircraft are expected to be returned. The General
Partner is currently pursuing the re-lease of these aircraft and expects to
incur refurbishment costs.
The Partnership's renewal lease agreement with Cathay which expires
February 14, 1996 was extended until April 11, 1996 and will be adjusted by the
applicable LIBOR rate. Subsequent to this extension, Cathay will lease the
aircraft at a fixed rate until June 30, 1996. The fixed extension agreement will
generate approximately $127,000 in renewal revenue for the Partnership. Cathay
has the option to extend this renewal beyond June 30, 1996 or return the
aircraft to the Partnership.
In September 1995, the Partnership transferred its ownership interests
in a Boeing 747-SP-21 commercial jet aircraft to the existing lessee, United Air
Lines, Inc. ("United"), pursuant to the rules for a like-kind exchange
transaction for income tax reporting purposes. (See Note 3 herein). In November
1995, the Partnership partially replaced the United aircraft with a 43.41%
interest in three Boeing 737-2H4 aircraft leased to Southwest Airlines, Inc.
("Southwest"). The Partnership will receive approximately $1,709,000 in rental
revenue for the year ending December 31, 1996, $1,250,000 in each of the three
years in the period ending December 31, 1999 and $104,000 on January 1, 2000.
This revenue reflects the Partnership's 43.41% ownership interest in the
aircraft.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
All aircraft were acquired from AFG or one of its Affiliates. Equipment
cost represents asset base price plus acquisition fees and was determined in
accordance with the Restated Agreement, as amended, and certain regulatory
guidelines. Asset base price was the lower of (i) the actual price paid for the
aircraft by AFG or the Affiliate plus all actual costs accrued by AFG or the
Affiliate while carrying the aircraft less, for the aircraft leased to United
and Cathay, the amount of all interim rents received by AFG or the Affiliate
prior to selling the aircraft or (ii) fair market value as determined by the
General Partner in its best judgment, including all liens and encumbrances on
the aircraft, carrying costs and acquisition costs. In no event did the
equipment cost exceed the appraised value of the aircraft.
Depreciation and Amortization
The Partnership's depreciation policy is intended to allocate the cost
of aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of each aircraft to determine whether it exceeds
estimated net realizable value. Adjustments to reduce the net carrying value of
aircraft are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value. Such adjustments are reflected
separately on the accompanying Statement of Operations as Write-Down of
Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including AFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. AFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
Organization costs were amortized using the straight-line method over a
period of five years.
Accrued Liabilities - Affiliate
Unpaid operating expenses paid by AFG on behalf of the Partnership are
reported as Accrued Liabilities Affiliate. (See Note 4.)
Allocation of Profits and Losses
For financial statement purposes, net income or loss is allocated to
each Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
Net Loss and Cash Distributions Per Unit
Net loss and cash distributions per Unit are based on 3,040,000 Units
outstanding during each of the three years in the period ended December 31, 1995
and computed after allocation of the General Partner's 5% share of net loss and
cash distributions.
Provision for Income Taxes
No provision or benefit from income taxes is included in the
accompanying financial statements. The Partners are responsible for reporting
their proportionate shares of the Partnership's taxable income or loss and other
tax attributes on their tax returns.
Reclassification
Certain reclassifications have been made to prior year financial
statements to conform to the 1995 presentation.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Partnership will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the impact of adoption to be material to
the financial statements of the Partnership.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
December 31, 1995. In the opinion of AFG, the acquisition cost of the equipment
did not exceed its fair market value.
Lease
Term Equipment
Equipment Type (Months) at Cost Location
One Boeing 727-251ADV (Northwest) 24 $ 9,520,359 MN
One Boeing 727-251ADV (Northwest) 24 9,520,359 MN
One Lockheed L-1011-50 (Cathay) 18 7,877,225 Foreign
Three Boeing 737-2H4 (Southwest) 49 6,355,873 TX
Total equipment cost 33,273,816
Accumulated depreciation (22,741,547)
Equipment, net of accumulated depreciation $ 10,532,269
The cost of the Lockheed L-1011-50 aircraft and the three Boeing 737-2H4
aircraft represent proportionate ownership interests. The remaining interests
are owned by other affiliated partnerships sponsored by AFG. All partnerships
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the aircraft.
In September 1995, the Partnership transferred its entire ownership
interest (76.8%) in a Boeing 747-SP aircraft (the "Aircraft") to its lessee,
United. The transaction was structured as a like-kind exchange for income tax
reporting purposes, thereby enabling the Partnership to exchange its interest in
the Aircraft for other aircraft which are expected to generate a better economic
benefit to the Partnership than the Aircraft. The Partnership received aggregate
cash consideration of $6,325,760 including $352,256 for rent accrued through the
transfer date. The net cash consideration of $5,973,504 was deposited into a
special-purpose escrow account through a third-party exchange agent pending the
completion of the aircraft exchange. The Partnership's interest in the Aircraft
had a net book value of $7,914,422 at the date of transfer and resulted in a net
loss for financial reporting purposes of $1,940,918.
In November 1995, the Partnership partially replaced the Aircraft with a
43.41% interest in three Boeing 737-2H4 aircraft leased by Southwest Airlines,
Inc. (the "Southwest Aircraft") at an aggregate cost of $6,355,873. To enable
the Partnership to better achieve its investment objective, maximize its
aircraft replacement capabilities and enhance the overall economic potential of
the like-kind exchange, the General Partner arranged to finance a portion of the
acquisition cost through a third-party lender. Accordingly, the Partnership
obtained financing of $4,742,968 from a third-party lender and utilized
$1,612,905 of the cash consideration received from United. The Southwest
Aircraft, which are under lease through December 31, 1999, will generate
aggregate lease revenues to the Partnership of $5,563,425. The remaining
ownership interest of 56.59% in the Southwest Aircraft is held by affiliated
equipment leasing programs sponsored by AFG. For financial statement purposes,
the remaining cash consideration of $4,360,599 is reported as Contractual Right
for Equipment on the Statement of Financial Position at December 31, 1995.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $6,356,000
and a net book value of approximately $6,192,000 at December 31, 1995. (See Note
5.)
Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to reduce
the economic risk arising from certain losses. Specifically, the Partnership is
insured under supplemental policies for "Aircraft Hull Total Loss Only" and
"Aircraft Hull Total Loss Only War and Other Perils."
As aircraft are sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the aircraft at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the aircraft is dependent upon, among other things, AFG's
ability to maximize proceeds from selling or re-leasing the aircraft upon the
expiration of the primary lease terms. No aircraft were held for sale or
re-lease at December 31, 1995.
The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during each of the years ended December 31, 1995, 1994
and 1993. The resulting charges, $1,740,960 ($0.54 per limited partnership unit)
in 1995, $2,534,000 ($0.79 per limited partnership unit) in 1994 and $5,607,584
($1.75 per limited partnership unit) in 1993 were based on a comparison of
estimated net realizable values and corresponding carrying values for each of
the Partnership's aircraft.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by AFG on
behalf of the Partnership and AFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1995, which were paid or accrued by the
Partnership to AFG or its Affiliates, are as follows:
1995 1994 1993
Equipment management fees $ 229,430 $ 258,320 $ 291,144
Administrative charges 21,000 12,000 14,955
Reimbursable operating expenses
due to third parties 218,185 131,434 89,155
Total $ 468,615 $ 401,754 $ 395,254
As provided under the terms of the Management Agreement, AFG is
compensated for its services to the Partnership. Such services include all
aspects of acquisition, management and sale of equipment. For acquisition
services, AFG was compensated by an amount equal to 1.6% of Equipment Base Price
paid by the Partnership. For management services, AFG is compensated by an
amount equal to the lesser of (i) 5% of gross operating lease rental revenues
and 2% of gross full payout lease rental revenues received by the Partnership or
(ii) fees which the General Partner reasonably believes to be competitive for
similar services for similar equipment. Both of these fees are subject to
certain limitations defined in the Management Agreement. Compensation to AFG for
services connected to the sale of equipment is calculated as the lesser of (i)
3% of gross sale proceeds or (ii) one-half of reasonable brokerage fees
otherwise payable under arm's length circumstances. Payment of the remarketing
fee is subordinated to Payout and is subject to certain limitations defined in
the Management Agreement.
Administrative charges represent amounts owed to AFG, pursuant to
Section 10.4(c) of the Restated Agreement, as amended, for persons employed by
AFG who are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by AFG
on behalf of the Partnership which are reimbursed to AFG.
All equipment was purchased from AFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2.
Substantially all rents and proceeds from the sale of aircraft are paid
directly to AFG. AFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At
December 31, 1995, the Partnership was owed $353,803 by AFG for interest on such
funds. These funds were remitted to the Partnership in January 1995.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1995 consisted of three installment notes
aggregating $4,742,968 payable to a bank. All three notes, which were originated
in connection with the Southwest Aircraft, had interest rates of 8.65% and are
collateralized by the equipment and assignment of the related lease payments.
The installment notes will be fully amortized by noncancellable rents. The
carrying amount of notes payable approximates fair value at December 31, 1995.
The annual maturities of the installment notes payable are as follows:
For the year ending December 31, 1996 $ 1,449,949
1997 1,004,523
1998 1,094,958
1999 1,193,538
Total $ 4,742,968
NOTE 6 - INCOME TAXES
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income
or loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). The
allocation of net income or loss for financial statement purposes differs from
the net income or loss allocation requirements for income tax and Dissolution
Event purposes, as delineated in the Restated Agreement, as amended. For income
tax purposes, the Partnership allocates net income or net loss in accordance
with the provisions of such agreement. The Restated Agreement, as amended,
requires that upon 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, 1995, the General Partner had a negative tax capital account
balance of $406,000.
The following is a reconciliation between net loss reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1995, 1994 and 1993:
1995 1994 1993
Net loss $ (2,283,720) $ (1,463,495) $ (5,435,348)
Financial statement depreciation
in excess of (less than) tax depreciation (1,813,446) (997,570) 284,590
Write-down of equipment 1,740,960 2,534,000 5,607,584
Prepaid rental income 18,317 (146,747) (138,400)
Other 2,020,977 (28,953) 18,975
Net income (loss) for federal income
tax reporting purposes $ (316,912) $ (102,765) $ 337,401
The principal component of "Other" consists of the difference between
the tax gain on equipment disposals and the financial statement gain (loss) on
disposals.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1995 and 1994:
1995 1994
Partners' capital $ 11,233,743 $ 16,717,463
Add back selling commissions and
organization and offering costs 7,975,000 7,975,000
Financial statement distributions in
excess of tax distributions 30,000 50,000
Cumulative difference between federal income
tax and financial statement income (loss) (2,527,694) (4,494,503)
Partners' capital for federal income tax
reporting purposes $ 16,711,049 $20,247,960
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 7 - SUBSEQUENT EVENT
On January 1, 1995, AFG entered into a series of agreements with PLM
International, Inc., a Delaware corporation headquartered in San Francisco,
California ("PLM"), whereby PLM would: (i) purchase, in a multi-step
transaction, certain of AFG's assets and (ii) provide accounting, asset
management and investor services to AFG and certain of AFG's affiliates,
including the Partnership and all other equipment leasing programs managed by
AFG (the "Investment Programs").
On January 3, 1996, AFG and PLM executed an amendment to the 1995
agreements whereby PLM purchased: (i) AFG's lease origination business and
associated contracts, (ii) the rights to the name "American Finance Group" and
associated logo, and (iii) certain furniture, fixtures and computer software.
PLM hired AFG's marketing force and certain other support personnel effective
January 1, 1996 in connection with the transaction and relinquished its
responsibilities under the 1995 agreements to provide accounting, asset
management and investor services to AFG, its affiliates and the Investment
Programs after December 31, 1995. Accordingly, AFG and its affiliates retain
ownership and control and all authority and rights with respect to each of the
general partners or managing trustees of the Investment Programs; and AFG, as
Manager, will continue to provide accounting, asset management and investor
services to the Partnership.
Pursuant to the 1996 amendment to the 1995 agreements, AFG and certain
of its affiliates agreed not to compete with the lease origination business sold
to PLM for a period of five years. AFG reserved the right to satisfy all
equipment needs of the Partnership and all other Investment Programs and
reserved certain other rights not material to the Partnership. AFG also agreed
to change its name, except where it is used in connection with the Investment
Programs. AFG's management considers the amendment to the 1995 agreements to be
in the best interest of AFG and the Partnership.
With respect to the like-kind exchange referred to in Note 3, on March
25, 1996, the Partnership partially replaced the United Aircraft with a 49.17%
interest in two McDonnell-Douglas MD-82 aircraft leased by Finnair OY at an
aggregate cost of $13,620,090. To enable the Partnership to better achieve its
investment objectives, maximize its aircraft replacement capabilities and
enhance the overall economic potential of the like-kind exchange, the General
Partner arranged to finance a portion of the acquisition cost through a
third-party lender. Accordingly, the Partnership obtained financing of
$9,165,396 from a third-party lender and utilized $4,454,694 of the cash
consideration received from United including interest thereon. The Finnair
Aircraft, which are under lease through April 30, 1999, will generate aggregate
lease revenues to the Partnership of $6,567,133. The remaining ownership
interest of 50.83% in the Finnair Aircraft is held by affiliated equipment
leasing programs sponsored by AFG. This exchange concludes all anticipated
components of the like-kind exchange described previously.
AIRFUND International Limited Partnership
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1995
Sales and
Operations Refinancings Total
Net loss $ (2,283,720) -- $ (2,283,720)
Add:
Depreciation 2,716,474 -- 2,716,474
Write-down of equipment 1,740,960 -- 1,740,960
Management fees 229,430 -- 229,430
Loss on exchange of equipment 1,940,918 -- 1,940,918
Cash from operations, sales
and refinancings 4,344,062 -- 4,344,062
Less:
Management fees (229,430) -- (229,430)
Distributable cash from operations, sales
and refinancings 4,114,632 -- 4,114,632
Other sources and uses of cash:
Cash at beginning of year 1,067,046 -- 1,067,046
Net change in receivables and accruals (502,337) -- (502,337)
Less:
Cash distributions paid (3,600,000) -- (3,600,000)
Cash at end of year $ 1,079,341 -- $ 1,079,341
AIRFUND International Limited Partnership
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1995
For the year ended December 31, 1995, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
Operating expenses $ 212,999