UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
For Quarter Ended March 31, 1997 Commission File No. 0-18368
AIRFUND International Limited Partnership
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3037350
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 North Washington Street, Boston, MA 02114
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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- --------------------------------------------------------------------------------
(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
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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
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AIRFUND International Limited Partnership
FORM 10-Q
INDEX
Page
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1997 and December 31, 1996 3
Statement of Operations
for the three months ended March 31, 1997 and 1996 4
Statement of Cash Flows
for the three months ended March 31, 1997 and 1996 5
Notes to the Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II. OTHER INFORMATION:
Items 1 - 6 13
2
AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 1997 and December 31, 1996
(Unaudited)
March 31, December 31,
1997 1996
----------- ------------
ASSETS
Cash and cash equivalents $ 2,569,887 $ 4,126,851
Rents receivable 43,601 --
Accounts receivable - affiliate 18,286 --
Equipment at cost, net of accumulated
depreciation of $9,047,298 and $8,421,801 at
March 31, 1997 and December 31, 1996,
respectively 18,948,237 19,573,734
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Total assets $21,580,011 $23,700,585
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $10,885,646 $11,321,769
Accrued interest 163,959 118,940
Accrued liabilities 16,750 442,400
Accrued liabilities - affiliate 25,007 63,930
Deferred rental income -- 158,904
Cash distributions payable to partners -- 1,000,000
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Total liabilities 11,091,362 13,105,943
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Partners' capital (deficit):
General Partner (1,174,564) (1,169,264)
Limited Partnership Interests
(3,040,000 Units; initial purchase price
of $25 each) 11,663,213 11,763,906
----------- -----------
Total partners' capital 10,488,649 10,594,642
----------- -----------
Total liabilities and partners' capital $21,580,011 $23,700,585
----------- -----------
----------- -----------
The accompanying notes are an integral part
of these financial statements.
3
AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the three months ended March 31, 1997 and 1996
(Unaudited)
1997 1996
--------- ---------
Income:
Lease revenue $ 836,298 $ 980,071
Interest income 33,923 144,924
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Total income 870,221 1,124,995
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Expenses:
Depreciation 625,497 765,741
Interest expense 242,688 100,108
Equipment management fees - affiliate 41,815 49,004
Operating expenses - affiliate 66,214 65,247
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Total expenses 976,214 980,100
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Net income (loss) $(105,993) $ 144,895
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Net income (loss)
per limited partnership unit $ (0.03) $ 0.05
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--------- ---------
Cash distribution declared
per limited partnership unit $ -- $ --
--------- ---------
--------- ---------
The accompanying notes are an integral part
of these financial statements.
4
AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1997 and 1996
(Unaudited)
1997 1996
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Cash flows from (used in) operating activities:
Net income (loss) $ (105,993) $ 144,895
Adjustments to reconcile net income (loss) to
net cash from (used in) operating activities:
Depreciation 625,497 765,741
Changes in assets and liabilities
Decrease (increase) in:
rents receivable (43,601) 454,937
accounts receivable - affiliate (18,286) 353,803
Increase (decrease) in:
accrued interest 45,019 6,742
accrued liabilities (425,650) (2,500)
accrued liabilities - affiliate (38,923) 55,111
deferred rental income (158,904) (136,139)
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Net cash from (used in) operating activities (120,841) 1,642,590
----------- -----------
Cash flows used in investing activities:
Purchase of equipment -- (240,726)
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Net cash used in investing activities -- (240,726)
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Cash flows used in financing activities:
Principal payments - note payable (436,123) (677,595)
Distributions paid (1,000,000) (600,000)
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Net cash used in financing activities (1,436,123) (1,277,595)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,556,964) 124,269
Cash and cash equivalents at beginning of period 4,126,851 1,079,341
----------- -----------
Cash and cash equivalents at end of period $ 2,569,887 $ 1,203,610
----------- -----------
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 197,669 $ 93,366
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Supplemental disclosure of investing and financing activities:
At December 31, 1995, the Partnership held $4,360,599 in a special-purpose
escrow account pending the completion of an aircraft exchange (See Results
of Operations). The Partnership completed the exchange in March 1996
obtaining interests in aircraft at an aggregate cost of $13,762,438,
utilizing cash of $4,601,325 (including the escrowed funds) and third-party
financing of $9,161,113.
The accompanying notes are an integral part
of these financial statements.
5
AIRFUND International Limited Partnership
Notes to the Financial Statements
March 31, 1997
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented herein are prepared in conformity with
generally accepted accounting principles and the instructions for preparing Form
10-Q under Rule 10-01 of Regulation S-X of the Securities and Exchange
Commission and are unaudited. As such, these financial statements do not
include all information and footnote disclosures required under generally
accepted accounting principles for complete financial statements and,
accordingly, the accompanying financial statements should be read in conjunction
with the footnotes presented in the 1996 Annual Report. Except as disclosed
herein, there has been no material change to the information presented in the
footnotes to the 1996 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at March 31, 1997 and December 31, 1996 and results of operations for
the three month periods ended March 31, 1997 and 1996 have been made and are
reflected.
NOTE 2 - CASH
At March 31, 1997, the Partnership had $2,455,000 invested in reverse
repurchase agreements, secured by U.S. Treasury Bills or interests in U.S.
Government securities.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Partnership monthly and quarterly and no
significant amounts are calculated on factors other than the passage of time.
All leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$7,779,116 are due as follows:
For the year ending March 31, 1998 $3,368,638
1999 3,368,638
2000 1,041,840
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Total $7,779,116
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NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
March 31, 1997. In the opinion of Equis Financial Group Limited Partnership
("EFG"), (formerly American Finance Group), the acquisition cost of the
equipment did not exceed its fair market value.
6
Lease
Term Equipment
Equipment Type (Months) at Cost
- ------------------------------------- -------- -----------
Two McDonnell-Douglas MD-82 (Finnair) 36 $13,762,438
One Lockheed L-1011-50 18 7,877,224
Three Boeing 737-2H4 (Southwest) 49 6,355,873
-----------
Total equipment cost 27,995,535
Accumulated depreciation (9,047,298)
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Equipment, net of accumulated depreciation $18,948,237
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-----------
The cost of each of the Partnership's aircraft represent proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All Partnerships individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.
On June 30, 1996, the Lockheed L-1011-50 aircraft, in which the Partnership
has a proportionate ownership interest, was returned by the lessee. Currently
the aircraft is undergoing heavy maintenance expected to cost the Partnership
approximately $505,000, all of which was accrued or incurred during the year
ended December 31, 1996. The Partnership entered into a new 12-month lease
agreement with Aer Lease Limited at a base rent to the Partnership of $60,450
per month, effective upon completion of the heavy maintenance.
NOTE 5 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three month
periods ended March 31, 1997 and 1996, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
1997 1996
Equipment management fees $ 41,815 $ 49,004
Administrative charges 7,095 5,250
Reimbursable operating expenses
due to third parties 59,119 59,997
-------- --------
Total $108,029 $114,251
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NOTE 6 - NOTES PAYABLE
Notes payable at March 31, 1997 consisted of installment notes payable to
banks of $10,885,646. All of the installment notes are non-recourse, with
interest rates ranging between 8.65% and 8.89% and are collateralized by the
equipment and assignment of the related lease payments. All of the notes were
originated in connection with the like-kind exchange transaction involving the
Southwest Aircraft and the Finnair Aircraft (See Results of Operations). The
installment notes related to the Southwest Aircraft will be fully amortized by
noncancellable rents. The Partnership has a balloon payment obligation at the
expiration of the primary lease term related to the Finnair Aircraft of
$4,671,150. The carrying amount of notes payable approximates fair value at
March 31, 1997.
The annual maturities of the installment notes payable are as follows:
For the year ending March 31, 1998 $ 2,580,179
1999 2,731,812
2000 5,573,655
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Total $10,885,646
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AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996:
OVERVIEW
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. Upon its inception in 1989, the Partnership
purchased three used 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. In 1995, the
Partnership transferred its ownership interest in the fourth aircraft to the
existing lessee, United Air Lines, Inc.("United"), in exchange for proportionate
interests in three aircraft leased to Southwest Airlines, Inc., pursuant to
lease agreements which expire in 1999. During the first quarter of 1996, the
Partnership completed the replacement of the United Aircraft with proportionate
interests in two aircraft leased to Finnair OY, pursuant to lease agreements
which also expire in 1999. The Partnership continues to own a proportionate
interest in an aircraft which was returned by the lessee on June 30, 1996 and is
currently undergoing heavy maintenance. The Partnership entered into a new 12-
month lease agreement with Aer Lease Limited with respect to its interest in
this aircraft, effective upon completion of the heavy maintenance (see below).
In the second half of 1996, the Partnership sold two of its original aircraft to
the lessee, Northwest Airlines, Inc. ("Northwest") (see below). Upon expiration
of the lease agreements, each aircraft will be re-leased or sold depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Ultimately, all aircraft will be
sold and the net proceeds will be distributed to the Partners, after all
liabilities and obligations of the Partnership have been satisfied.
RESULTS OF OPERATIONS
For the three months ended March 31, 1997, the Partnership recognized lease
revenue of $836,298 compared to $980,071 for the same period in 1996. The
decrease in lease revenue from 1996 to 1997 resulted from the expiration of the
leases related to the Partnership's interest in a Lockheed L-1011-50 aircraft
and the sale of two 727-251 Advanced aircraft (discussed below). These
decreases were largely offset by the Partnership's aircraft exchange, which was
concluded in the first quarter of 1996. As a result of the aircraft exchange,
the Partnership replaced its ownership interest in a Boeing 747-SP, with
interests in five other aircraft (three Boeing 737 aircraft leased by Southwest
Airlines, Inc. and two McDonnell Douglas MD-82 aircraft leased by Finnair OY).
The Southwest aircraft were exchanged into the Partnership in 1995 while the
Finnair Aircraft were exchanged into the Partnership on March 25, 1996.
Accordingly, the first quarter of 1996 reflected only a portion of the rents
ultimately earned from the like-kind exchange. In aggregate, the replacement
aircraft generated approximately $836,000 of lease revenue during the first
quarter of 1997 compared to approximately $316,000 for the same period in 1996.
In the near-term lease revenue will be consistent with the three months ended
March 31, 1997, thereafter, lease revenue will decline due to the expiration of
the primary and renewal lease terms, described herein.
The Partnership's two lease agreements with Northwest expired on
October 31, 1996. The Partnership sold both of the aircraft to Northwest during
the second half of 1996 and, in addition to the sales proceeds, received lease
termination rents with respect to one of the aircraft. The Partnership
recognized aggregate lease revenue of $360,000 from these aircraft during the
first quarter of 1996.
9
The Partnership's renewal lease agreement with Cathay Pacific Airways, Ltd
("Cathay") related to the L-1011-50 aircraft expired on February 14, 1996 and
was extended until April 11, 1996. Subsequent to this extension, Cathay leased
the aircraft at a fixed rate until June 30, 1996 at which date the aircraft was
returned to the Partnership. In aggregate, the Partnership recognized lease
revenue of $304,000 related to this aircraft during the first quarter of 1996.
Currently the aircraft is undergoing heavy maintenance expected to cost the
Partnership approximately $505,000, all of which was accrued or incurred during
the year ended December 31, 1996. The Partnership entered into a new 12-month
lease agreement with Aer Lease Limited at a base rent to the Partnership of
$60,450 per month, effective upon completion of the heavy maintenance.
Currently, the demand for L-1011 aircraft is weak, limited principally to air
cargo carriers and operators of passenger charters. Several major airlines have
reduced their commitment to the L-1011. Such circumstances inhibited the
remarketing of the Partnership's L-1011-50 aircraft and required the Partnership
to refurbish the aircraft to meet the needs of Aer Lease Limited.
The Partnership holds a proportionate ownership interest in the L-1011-50
aircraft and the Southwest and Finnair Aircraft, discussed above. The remaining
interests are owned by other affiliated partnerships sponsored by EFG. All
partnerships individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues and expenses
associated with the aircraft. (See Note 4 to the financial statements.)
The ultimate realization of residual value for aircraft is dependent upon
many factors, including EFG's ability to sell and re-lease the aircraft.
Changing market conditions, industry trends, technological advances, and many
other events can converge to enhance or detract from asset values at any given
time. EFG attempts to monitor these changes in the airline industry in order to
identify opportunities which may be advantageous to the Partnership and which
will maximize total cash returns for each aircraft.
The total economic value realized upon final disposition of each aircraft
is comprised of all primary lease term revenue generated from that aircraft,
together with its residual value. The latter consists of cash proceeds realized
upon the aircraft's sale in addition to all other cash receipts obtained from
renting the aircraft on a re-lease, renewal or month-to-month basis.
Consequently, the amount of any future gain or loss reported in the financial
statements will not necessarily be indicative of the total residual value the
Partnership achieved from leasing the aircraft.
Interest income for the three month period ending March 31, 1997 was
$33,923 compared to $144,924 for the same period in 1996. Interest income is
typically generated from temporary investments of rental receipts and equipment
sale proceeds in short-term instruments. Interest income in 1996 included
interest of $130,268 earned on cash held in a special-purpose escrow account in
connection with the like-kind exchange transaction, discussed above.
For the three months ending March 31, 1997 and 1996, the Partnership
incurred interest expense of $242,688 and $100,108, respectively. Interest
expense in 1997 and 1996 resulted from financing obtained from third-party
lenders in connection with the Southwest Aircraft and the Finnair Aircraft. The
financing of the Finnair Aircraft occurred on March 25, 1996. Therefore,
interest expense related to the Finnair debt during the first quarter of 1996
was only incurred from that date through the end of the quarter. Interest
expense in future periods is expected to decline as the principal balance of
notes payable is reduced through the application of rent receipts to outstanding
debt.
Management fees were 5% of lease revenue during each of the periods ended
March 31, 1997 and 1996, and will not change as a percentage of lease revenue in
future periods.
10
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as insurance,
printing, distribution and remarketing expenses. Collectively, operating
expenses represented 7.9% of lease revenue during the three months ended March
31, 1997, compared to 6.7% for the same period in 1996. The amount of future
operating expenses cannot be predicted with certainty; however, such expenses
are usually higher during the acquisition and liquidation phases of a
partnership. Other fluctuations will occur in relation to the volume and timing
of aircraft remarketing activities. Depreciation expense was $625,497 for the
three months ended March 31, 1997, compared to $765,741 for the same period in
1996.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity which was
established for specific purposes described in the preceding "Overview". As an
equipment leasing program, the Partnership's principal operating activities
generally derive from aircraft rental transactions. Accordingly, the
Partnership's principal source of cash from operations is generally provided by
the collection of periodic rents. These cash inflows are used to satisfy debt
service obligations associated with leveraged leases, and to pay management fees
and operating costs. Operating activities generated a net cash outflow of
$120,841 for the three months ended March 31, 1997 compared to a net cash inflow
of $1,642,590 for the same period in 1996. The expiration of the Partnership's
lease agreement related to its interest in the Lockheed L-1011-50 aircraft and
the sale of the two Boeing 727-251 Advanced aircraft have caused a decline in
the Partnership's lease revenue and corresponding sources of operating cash.
This has been partially offset by rents generated in connection with the
Southwest and the Finnair aircraft. In addition, the Partnership has expended
substantial funds in connection with the remarketing of the Lockheed L-1011-50
aircraft. Overall, expenses associated with rental activities, such as
management fees, and net cash flow from operating activities decline as the
Partnership remarkets its aircraft. Conversely, the Partnership may incur
increased costs to insure the successful remarketing of these aircraft.
Ultimately, the Partnership will dispose of all aircraft under lease. This will
occur principally through sale transactions whereby each aircraft will be sold
to the existing lessee or to a third party. Generally, this will occur upon
expiration of each aircraft's primary or renewal/re-lease term.
Cash expended for equipment acquisitions is reported under investing
activities on the accompanying Statement of Cash Flows. In 1996, the
Partnership expended $240,726 in cash in connection with the like-kind exchange
transactions referred to above. There were no equipment acquisitions during the
same period in 1997.
As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, a portion or all of the rental payment will be
used to repay principal and interest. The Partnership also has balloon payment
obligations at the expiration of the primary lease term related to the Finnair
Aircraft of $4,671,150.
Cash distributions paid to the Recognized Owners consist of both a return
of and a return on capital. To the extent that cash distributions consist of
Cash From Sales or Refinancings, substantially all of such cash distributions
should be viewed as a return of capital. Cash distributions do not represent
and are not indicative of yield on investment. Actual yield on investment
cannot be determined with any certainty until conclusion of the Partnership and
will be dependent upon the collection of all future contracted rents, the
generation of renewal and/or re-lease rents, and the residual value realized for
each aircraft at its disposal date. Future market conditions, technological
changes, the ability of EFG to manage and remarket the aircraft, and many other
events and circumstances, could enhance or detract from individual asset yields
and the collective performance of the Partnership's aircraft portfolio.
11
Overall, the future liquidity of the Partnership will be greatly dependent
upon the collection of contractual rents and the outcome of residual activities.
The General Partner anticipates that cash proceeds resulting from these sources
and current cash reserves 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. Accordingly, the General
Partner did not declare a cash distribution for the first quarter of 1997 and
expects to suspend the declaration of quarterly cash distributions between the
periods corresponding to major remarketing events.
12
AIRFUND International Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
13
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 International Limited Partnership
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the General
Partner of the Registrant.
By: /s/ Michael J. Butterfield
------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: May 15, 1997
------------------------------------------------
By: /s/ Gary Romano
------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 15, 1997
------------------------------------------------
14