UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
----------------------
For Quarter Ended June 30, 1996 Commission File No. 0-18368
AIRFUND International Limited Partnership
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3037350
- ----------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 North Washington Street, Boston, MA 02114
- ---------------------------------------- -------------------
(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
--- ---
AIRFUND International Limited Partnership
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position at June 30, 1996
and December 31, 1995 3
Statement of Operations for the three and six
months ended June 30, 1996 and 1995 4
Statement of Cash Flows for the six months ended
June 30, 1996 and 1995 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
June 30, 1996 and December 31, 1995
(Unaudited)
June 30, December 31,
1996 1995
------------- -------------
ASSETS
- ------
Cash and cash equivalents $ 1,403,784 $ 1,079,341
Contractual right for equipment -- 4,360,599
Rents receivable -- 562,594
Accounts receivable - affiliate -- 353,803
Equipment at cost, net of accumulated
depreciation of $24,397,070 and
$22,741,547 at June 30, 1996 and
December 31, 1995, respectively 22,639,184 10,532,269
----------- -----------
Total assets $24,042,968 $16,888,606
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $12,510,993 $ 4,742,968
Accrued interest 131,364 63,568
Accrued liabilities 40,027 40,527
Accrued liabilities - affiliate 64,872 71,661
Deferred rental income 164,789 136,139
Cash distributions payable to partners -- 600,000
----------- -----------
Total liabilities 12,912,045 5,654,863
----------- -----------
Partners' capital (deficit):
General Partner (1,142,450) (1,137,309)
Limited Partnership Interests
(3,040,000 Units; initial purchase
price of $25 each) 12,273,373 12,371,052
----------- -----------
Total partners' capital 11,130,923 11,233,743
----------- -----------
Total liabilities and partners'
capital $24,042,968 $16,888,606
=========== ===========
The accompanying notes are ann integarl part
of these financial statements.
3
AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the three and six months ended June 30, 1996 and 1995
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
--------------- -------------- ------------ -----------
Income:
Lease revenue $1,161,279 $1,110,038 $2,141,350 $2,247,400
Interest income 17,649 14,884 162,573 28,999
---------- ---------- ---------- ----------
Total income 1,178,928 1,124,922 2,303,923 2,276,399
---------- ---------- ---------- ----------
Expenses:
Depreciation 889,782 723,401 1,655,523 1,446,802
Interest expense 291,906 -- 392,014 --
Equipment management fees
- affiliate 58,064 55,502 107,068 112,370
Operating expenses - affiliate 186,891 92,306 252,138 142,117
---------- ---------- ---------- ----------
Total expenses 1,426,643 871,209 2,406,743 1,701,289
---------- ---------- ---------- ----------
Net income (loss) $ (247,715) $ 253,713 $ (102,820) $ 575,110
========== ========== ========== ==========
Net income (loss)
per limited partnership unit $ (0.08) $ 0.08 $ (0.03) $ 0.18
=========== ========== =========== ==========
Cash distributions declared
per limited partnership unit $ -- $ 0.31 $ -- $ 0.62
=========== ========== =========== ==========
The accompanying notes are ann integarl part
of these financial statements.
4
AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
------------ ------------
Cash flows from (used in) operating
activities:
Net income (loss) $ (102,820) $ 575,110
Adjustments to reconcile net income
(loss) to net cash from operating
activities:
Depreciation 1,655,523 1,446,802
Changes in assets and liabilities
Decrease (increase) in:
rents receivable 562,594 (8,193)
accounts receivable - affiliate 353,803 (181)
Increase (decrease) in:
accrued interest 67,796 --
accrued liabilities (500) (32,188)
accrued liabilities - affiliate (6,789) (1,680)
deferred rental income 28,650 9,172
----------- -----------
Net cash from operating activities 2,558,257 1,988,842
----------- -----------
Cash flows used in investing activities:
Purchase of equipment (240,726) --
----------- -----------
Net cash used in investing activities (240,726) --
----------- -----------
Cash flows used in financing activities:
Principal payments - notes payable (1,393,088) --
Distributions paid (600,000) (2,000,000)
----------- -----------
Net cash used in financing activities (1,993,088) (2,000,000)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 324,443 (11,158)
Cash and cash equivalents at beginning
of period 1,079,341 1,067,046
----------- -----------
Cash and cash equivalents at end of
period $ 1,403,784 $ 1,055,888
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest $ 324,218 $ --
=========== ===========
Supplemental disclosure of non-cash investing activities:
See Note 5 to the Financial Statements.
The accompanying notes are ann integarl part
of these financial statements.
5
AIRFUND International Limited Partnership
Notes to the Financial Statements
June 30, 1996
(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 1995 Annual Report. Except as disclosed
herein, there has been no material change to the information presented in the
footnotes to the 1995 Annual Report.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary to present fairly the financial
position at June 30, 1996 and December 31, 1995 and results of operations for
the three and six month periods ended June 30, 1996 and 1995 have been made and
are reflected.
NOTE 2 - CASH
- -------------
The Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. The reverse repurchase
agreements are 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 $10,702,573 are
due as follows:
For the year ending June 30, 1997 $ 3,788,778
1998 3,368,778
1999 2,815,729
2000 729,288
-----------
Total $10,702,573
===========
In September 1995, the Partnership transferred its ownership interest in a
Boeing 747-SP-21 commercial jet aircraft (the "United Aircraft") to the existing
lessee, United Air Lines, Inc., pursuant to the rules for a like-kind exchange
transaction for income tax reporting purposes (See Note 5 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.
(the "Southwest Aircraft"). The Partnership will receive approximately
$1,250,000 of rental revenue in each of the years in the period ending June 30,
1999, and approximately $729,000 in the year ending June 30, 2000, pursuant to
the Southwest Aircraft lease agreement.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with a 49.17% interest in two McDonnell-Douglas MD-82 Aircraft
leased by Finnair OY (the "Finnair Aircraft"). The Partnership will receive
approximately $2,118,000 of rental revenue in each of the years in the period
ending
6
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
June 30, 1998 and approximately $1,566,000 in the year ending June 30, 1999,
pursuant to the Finnair Aircraft lease agreement.
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by American Finance
Group ("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
six month periods ended June 30, 1996 and 1995, which were paid or accrued by
the Partnership to AFG or its Affiliates, are as follows:
1996 1995
--------- ---------
Equipment management fees $107,068 $112,370
Administrative charges 10,500 10,500
Reimbursable operating expenses
due to third parties 241,638 131,617
-------- --------
Total $359,206 $254,487
======== ========
NOTE 5 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at June 30,
1996. 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
- ------------------------ ---------- -------------
Two McDonnell-Douglas MD-82 (Finnair) 36 $ 13,762,438
One Boeing 727-251 (Northwest) 18 9,520,359
One Boeing 727-251 (Northwest) 18 9,520,359
One Lockheed L-1011-50 (Cathay) -- 7,877,225
Three Boeing 737-2H4 (Southwest) 49 6,355,873
------------
Total equipment cost 47,036,254
Accumulated depreciation (24,397,070)
------------
Equipment, net of accumulated depreciation $ 22,639,184
============
The cost of the Lockheed L-1011-50 aircraft, the three Boeing 737-2H4 aircraft
and the two McDonnell-Douglas MD-82 aircraft represent proportionate ownership
interests. The remaining interests are owned by other affiliated partnerships
sponsored by 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.
7
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
In September 1995, the Partnership transferred its 76.8% interest in the United
Aircraft, pursuant to the rules for a like-kind exchange 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 the Southwest
Aircraft, at an aggregate cost of $6,355,873. To acquire the interests in the
Southwest Aircraft, the Partnership obtained financing of $4,742,968 from a
third-party lender and utilized $1,612,905 of the cash consideration received
from the transfer of the United Aircraft. The remaining ownership interest of
56.59% in the Southwest Aircraft is held by affiliated equipment leasing
programs sponsored by AFG.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with a 49.17% ownership interest in the Finnair Aircraft at a
total cost to the Partnership of $13,762,438. To acquire the ownership interest
in the Finnair Aircraft, the Partnership paid $4,601,325 in cash and obtained
financing of $9,161,113 from a third-party lender. The remaining ownership
interests of 50.83% in the Finnair Aircraft are held by affiliated equipment
leasing programs sponsored by AFG.
On June 30, 1996, the Lockheed l-1011-50 aircraft, in which the Partnership has
a proportionate ownership interest, was returned by the lessee. The General
Partner is currently negotiating a re-lease with a new lessee.
NOTE 6 - NOTES PAYABLE
- ----------------------
Notes payable at June 30, 1996 consisted of installment notes payable to banks
of $12,510,993. All of the installment notes are non-recourse, with interest
rates ranging between 8.65% and 8.76% and are collateralized by the equipment
and assignment of the related lease payments. All of the notes were originated
in connection with the Southwest Aircraft and the Finnair Aircraft. 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. The
carrying amount of notes payable approximates fair value at June 30, 1996.
The annual maturities of the installment notes payable are as follows:
For the year ending June 30, 1997 $ 2,367,046
1998 2,583,792
1999 6,949,526
2000 610,629
-----------
Total $12,510,993
===========
NOTE 7 - SUBSEQUENT EVENT
- -------------------------
During July 1996, the Partnership sold a Boeing 727-251 Advanced aircraft to
the lessee, Northwest Airlines, Inc. The Partnership received lease termination
rents of $240,000 and sale proceeds of $3,150,000. At June 30, 1996, the net
carrying value of the aircraft was $481,515.
8
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 and six months ended June 30, 1996 compared to the three and six months
- -----------------------------------------------------------------------------
ended June 30, 1995:
- --------------------
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
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., 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 for which a re-lease agreement is
currently being negotiated. At June 30, 1996, the Partnership also owned
complete interests in two other aircraft, one which was sold in July 1996 (See
Note 7 - Subsequent Events) and the other which is currently being leased
pursuant to a renewal lease agreement which will expire in October 1996. The
General Partner is currently negotiating the sale of the second aircraft at the
expiration of its lease term. 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 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
- ---------------------
For the three and six months ended June 30, 1996, the Partnership recognized
lease revenue of $1,161,279 and $2,141,350, respectively, compared to $1,110,038
and $2,247,400 for the same periods in 1995. The fluctuation in lease revenue
from 1995 to 1996 reflects the effects of a temporary decline in aircraft lease
revenues associated with the Partnership's aircraft exchange (discussed below)
which was concluded late in the first quarter of 1996. As a result of this
exchange, the Partnership replaced its ownership interest in a Boeing 747-SP,
having aggregate quarterly lease revenues of $495,360, 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) having aggregate
quarterly lease revenues of $845,665. The Finnair Aircraft was exchanged into
the Partnership on March 25, 1996. Accordingly, revenue for the six months
ended June 30, 1996 reflected only a portion of the rents ultimately anticipated
from the like-kind exchange. Lease revenue in the near-term will fluctuate due
to anticipated renewal lease agreements and the anticipated sale of certain
aircraft. Thereafter, the level of lease revenue will decline due to the
expiration of renewal lease terms described herein.
The Partnership's two lease agreements with Northwest Airlines, Inc.
("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 initial twelve month
renewals generated aggregate monthly revenue of $124,000 per month compared to
$120,000 per month for the second twelve month renewals. Northwest opted to
extend these leases for an additional six months until October 31, 1996 at an
aggregate of $120,000 per month. During July 1996, the Partnership sold one of
the aircraft to Northwest (See Note 7 - Subsequent Events) and, in addition to
the sales proceeds, received
9
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
lease termination rents of $240,000. The second aircraft will be returned to the
Partnership at the expiration of its renewal lease term. The General Partner is
currently negotiating the sale of this aircraft.
The Partnership's original lease agreement with Cathay Pacific Airways, Ltd
("Cathay") provided for semi-annual rent adjustments based on the six month
London Inter-bank Offered Rate ("LIBOR"). Accordingly, rents generated from
this lease fluctuated 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) 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. The fixed extension agreement
generated approximately $127,000 in renewal revenue for the Partnership. The
re-lease of this aircraft is currently being negotiated. 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 and, currently, a large domestic air carrier is
expected to retire eleven L-1011 aircraft from its fleet. Such circumstances may
inhibit the remarketing of the Partnership's L-1011 aircraft and may require the
Partnership to upgrade or refurbish the aircraft to meet the needs of a
potential successor lessee. Accordingly, until the Partnership's L-1011 aircraft
is remarketed, the General Partner expects to reserve a portion of the
Partnership's cash for such purposes. In addition, the General Partner will
engage the services of a third party to provide a new appraisal of the
Partnership's L-1011 aircraft in light of current market conditions.
The Partnership holds a proportionate ownership interest in the Cathay,
Southwest and Finnair Aircraft, 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 5 to the financial statements.)
The Partnership typically earns interest income from temporary investments of
rental receipts in short-term instruments. For the three and six months ended
June 30, 1996, the Partnership earned interest income of $17,649 and $162,573,
respectively, compared to $14,884 and $28,999 for the same periods in 1995. The
increase in interest income in 1996 compared to 1995 is a result of interest of
$130,268 earned on cash held in a special-purpose escrow account in connection
with the like-kind exchange transactions, discussed above.
In September 1995, the Partnership transferred its 76.8% ownership interest in
the United Aircraft, pursuant to the rules for a like-kind exchange for income
tax reporting purposes (See Notes 3 and 5 to the financial statements). In
November 1995, the Partnership partially replaced the United Aircraft with a
43.41% ownership interest in the Southwest Aircraft, at an aggregate cost of
$6,355,873. To acquire the interest in the Southwest Aircraft, the Partnership
obtained financing of $4,742,968 from a third-party lender and utilized
$1,612,905 of the cash consideration received from the transfer of the United
Aircraft. The remaining ownership interest of 56.59% in the Southwest Aircraft
is held by affiliated equipment leasing programs sponsored by AFG.
Additionally, in March 1996, the Partnership completed the replacement of the
United Aircraft with a 49.17% ownership interest in the Finnair Aircraft at a
total cost to the Partnership of $13,762,438. To acquire the ownership interest
in the Finnair Aircraft, the Partnership paid $4,601,325 in cash and obtained
financing of $9,161,113 from a third-party lender. The remaining ownership
interest of 50.83% in the Finnair Aircraft is held by affiliated equipment
leasing programs sponsored by AFG. 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 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 lessees.
During the three and six months ended June 30, 1996, the Partnership incurred
interest expense of $291,906 and $392,014, respectively. Interest expense
resulted from financing obtained from third-party lenders in connection with the
Southwest Aircraft and the Finnair Aircraft, described above. 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.
10
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
Management fees were 5% of lease revenue during each of the periods ended June
30, 1996 and 1995 and will not change as a percentage of lease revenue in future
periods.
Operating expenses consist principally of administrative charges, professional
service costs, such as audit and legal fees, as well as insurance, printing,
distribution and remarketing expenses. Collectively, operating expenses
represented 16.1% and 11.8% of lease revenue during the three and six months
ended June 30, 1996, respectively, compared to 8.3% and 6.3% of lease revenue
for the same periods in 1995. The increase in operating expenses from 1995 to
1996 was due primarily to legal expenses and broker fees incurred in connection
with the like-kind exchange transactions, discussed above. 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 $889,782 and
$1,655,523 for the three and six months ended June 30, 1996, respectively,
compared to $723,401 and $1,446,802 for the same periods in 1995.
The ultimate realization of residual value for any aircraft will be 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 is
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 under re-lease or renewal lease agreements. 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.
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
aircraft rental transactions. Accordingly, the Partnership's principal source
of cash from operations is provided by the collection of periodic rents. These
cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs. Operating
activities generated net cash inflows of $2,558,257 and $1,988,842 for the six
months ended June 30, 1996 and 1995, respectively. The expiration of the
Partnership's current lease agreements will cause a decline in the Partnership's
future 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 of renewal/re-lease term.
Cash expended for equipment acquisitions is reported under investing activities
on the accompanying Statement of Cash Flows. 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 1995.
11
AIRFUND International Limited Partnership
FORM 10-Q
PART I. FINANCIAL INFORMATION
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 has balloon payment
obligations at the expiration of the primary lease term related to the Finnair
Aircraft.
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. As a result of
anticipated expenditures related to the remarketing of aircraft, discussed
below, the Partnership did not declare cash distributions for either of the
three month periods ended March 31, 1996 and June 30, 1996. However, in July
1996, the Partnership will collect cash of $3,390,000, consisting of lease
termination rents equal to $240,000 and sale proceeds equal to $3,150,000, from
the sale of one of its Boeing 727 - Advanced jet aircraft to the lessee,
Northwest. It is anticipated that the resumption and amount of future
distributions will be dependent upon the timing and extent of cash payments
required to refurbish and/or remarket the Partnership's other aircraft.
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 return of the Cathay aircraft in June 1996 presents
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 has reserved 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.
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: August 14, 1996
-------------------------------------
By: /s/ Gary M. Romano
-------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1996
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