UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2001
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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
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Commission File No. 0-19137
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3057290
- ----------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 BROAD STREET, BOSTON, MA 02110
- ----------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION: PAGE
----
Item 1. Financial Statements
Statement of Financial Position
at March 31, 2001 and December 31, 2000 3
Statement of Operations
for the three months ended March 31, 2001 and 2000 4
Statement of Cash Flows
for the three months ended March 31, 2001 and 2000 5
Notes to the Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION:
Items 1 - 6 19
2
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
MARCH 31, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 3,091,241 $ 2,827,385
Rents receivable -- 116,820
Accounts receivable - affiliate 70,169 33,452
Other assets 48,595 24,508
Investment in real estate venture 3,289,008 3,363,711
Net investment in sales-type lease 184,686 240,330
Equipment at cost, net of accumulated depreciation
of $8,218,291 and $8,152,945 at March 31, 2001
and December 31, 2000, respectively 2,578,823 2,644,169
------------ ------------
Total assets $ 9,262,522 $ 9,250,375
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 1,191,557 $ 906,869
Accrued interest 118 7,161
Accrued liabilities 413,515 591,617
Accrued liabilities - affiliate 25,120 17,207
Deferred rental income 52,092 27,244
------------ ------------
Total liabilities 1,682,402 1,550,098
------------ ------------
Partners' capital (deficit):
General Partner (2,616,451) (2,610,443)
Limited Partnership Interests
(2,714,647 Units; initial purchase price of $25 each) 10,196,571 10,310,720
------------ ------------
Total partners' capital 7,580,120 7,700,277
------------ ------------
Total liabilities and partners' capital $ 9,262,522 $ 9,250,375
============ ============
The accompanying notes are an integral part of these financial statements.
3
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
--------- ---------
INCOME
Operating lease revenue $ 155,995 $ 109,420
Sales-type lease revenue 3,351 --
Interest income 30,121 66,936
Other income -- 55,000
--------- ---------
Total income 189,467 231,356
--------- ---------
EXPENSES
Depreciation 65,346 79,837
Interest expense 17,393 30,685
Equipment management fees - affiliate 10,750 5,471
Operating expenses - affiliate 141,432 116,277
Partnership's share of unconsolidated
real estate venture's loss 74,703 3,562
--------- ---------
Total expenses 309,624 235,832
--------- ---------
Net loss $(120,157) $ (4,476)
========= =========
Net loss per limited partnership unit $ (0.04) $ --
========= =========
Cash distributions declared
per limited partnership unit $ -- $ --
========= =========
The accompanying notes are an integral part of these financial statements.
4
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss $ (120,157) $ (4,476)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 65,346 79,837
Sales-type lease revenue (3,351) --
Partnership's share of unconsolidated
real estate venture's loss 74,703 3,562
Changes in assets and liabilities:
Rents receivable 116,820 --
Accounts receivable - affiliate (36,717) (53,543)
Other assets (24,087) 31,742
Collections on net investment in sales-type lease 58,995 --
Accrued interest (7,043) (4,099)
Accrued liabilities (178,102) (235,767)
Accrued liabilities - affiliate 7,913 (1,730)
Deferred rental income 24,848 (26,636)
----------- -----------
Net cash used in operating activities (20,832) (211,110)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Investment in real estate venture -- (3,640,000)
----------- -----------
Net cash used in investing activities -- (3,640,000)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from notes payable 505,028 201,247
Principal payments - notes payable (220,340) (59,430)
----------- -----------
Net cash provided by financing activities 284,688 141,817
----------- -----------
Net increase (decrease) in cash and cash equivalents 263,856 (3,709,293)
Cash and cash equivalents at beginning of period 2,827,385 5,719,642
----------- -----------
Cash and cash equivalents at end of period $ 3,091,241 $ 2,010,349
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest $ 24,436 $ 34,784
=========== ===========
See Note 8 to the financial statements regarding the refinancing of one of
the Partnership's notes payable in February 2001.
The accompanying notes are an integral part of these financial statements.
5
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2001
(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 2000 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
2000 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, 2001 and December 31, 2000 and results of operations for
the three month periods ended March 31, 2001 and 2000 have been made and are
reflected.
NOTE 2 - CASH
At March 31, 2001, AIRFUND II International Limited Partnership (the
"Partnership") had $2,842,755 invested in federal agency discount notes,
repurchase agreements secured by U.S. Treasury Bills or interests in U.S.
Government securities, or other highly liquid overnight investments.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Partnership monthly or quarterly and no significant
amounts are calculated on factors other than the passage of time. The majority
of the leases are accounted for as operating leases and are noncancellable.
Rents received prior to their due dates are deferred. In certain instances, the
Partnership may enter renewal or re-lease agreements which expire beyond the
Partnership's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Partnership's business activities as the
General Partner and Equis Financial Group Limited Partnership ("EFG") would seek
to sell the then-remaining equipment assets either to the lessee or to a third
party, taking into consideration the amount of future noncancellable rental
payments associated with the attendant lease agreements. See also Note 9 to the
financial statements regarding the Class Action Lawsuit. Future minimum rents
for operating leases of $1,289,947 are due as follows:
For the year ending March 31, 2002 $ 412,079
2003 412,079
2004 343,252
2005 122,537
-----------
Total $ 1,289,947
===========
Lease payments for the sales-type lease are due monthly and the related revenue
is recognized by a method which produces a constant periodic rate of return on
the outstanding investment in the lease. Future minimum lease payments for the
sales-type lease of $196,412 are due through the date of the lease expiration in
January 2002.
6
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at March 31,
2001. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 2001 under contracted lease terms. A Remaining
Lease Term equal to zero reflects equipment held for sale or re-lease. In the
opinion of EFG, the acquisition cost of the equipment did not exceed its fair
market value.
REMAINING
LEASE
TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST
- ------------------------------------------------------ --------- ------------
Two Rolls Royce aircraft engines 0 $ 6,000,000
One McDonnell-Douglas MD-82 (Finnair) 1 2,078,640
One McDonnell-Douglas MD-82 41 2,078,640
(Aerovias de Mexico S.A. de C.V.)
One Boeing 737-2H4 (Air Slovakia) 29 639,834
-----------
Total equipment cost 10,797,114
Accumulated depreciation (8,218,291)
-----------
Equipment, net of accumulated depreciation $ 2,578,823
===========
The costs 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.
One of the Partnership's aircraft and the related lease payment streams secures
the Partnership's loan with a third-party lender (see Note 8). The preceding
summary includes leveraged equipment having an original cost of approximately
$2,079,000 and a net book value of approximately $1,194,000 at March 31, 2001.
At March 31, 2001, all of the Partnership's aircraft were subject to contracted
leases, however, the Rolls Royce aircraft engines were warehoused. In April
2001, the lease with Finnair OY related to a McDonnell-Douglas MD-82 aircraft
expired and the aircraft was returned to the General Partner. The General
Partner is attempting to remarket this aircraft and the Rolls Royce aircraft
engines.
NOTE 5 - INVESTMENT IN REAL ESTATE VENTURE
On March 8, 2000, the Partnership and 10 affiliated partnerships (the "Exchange
Partnerships") collectively loaned $32 million to Echelon Residential Holdings
LLC ("Echelon Residential Holdings"), a newly formed real estate company.
Echelon Residential Holdings is owned by several investors, including James A.
Coyne, Executive Vice President of EFG. In addition, certain affiliates of the
General Partner made loans to Echelon Residential Holdings in their individual
capacities.
The Partnership's original loan was $3,640,000. Echelon Residential Holdings,
through a wholly-owned subsidiary (Echelon Residential LLC), used the loan
proceeds to acquire various real estate assets from Echelon International
Corporation, a Florida-based real estate company. The loan has a term of 30
months, maturing on September 8, 2002, and an annual interest rate of 14% for
the first 24 months and 18% for the final six months. Interest accrues and
compounds monthly and is payable at maturity. In connection with the
transaction, Echelon
7
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
Residential Holdings has pledged a security interest in all of its right, title
and interest in and to its membership interests in Echelon Residential LLC to
the Exchange Partnerships as collateral.
The loan is presented, in accordance with the guidance set forth in the Third
Notice to Practitioners by the American Institute of Certified Public
Accountants in February 1986 entitled "ADC Arrangements", as an investment in
real estate venture and is presented net of the Partnership's share of losses in
Echelon Residential Holdings. The Partnership is allocated its proportionate
share of the unconsolidated real estate venture's net income or loss, adjusted
for interest on the ADC arrangements, based on the balance of its ADC
arrangement in relation to the real estate venture's total equity and notes
payable, including the ADC arrangements. For the periods ended March 31, 2001
and 2000, the Partnership's share of losses in Echelon Residential Holdings were
$74,703 and $3,562, respectively, and are reflected on the Statement of
Operations as "Partnership's share of unconsolidated real estate venture's
loss."
The Partnership took into consideration the following characteristics of the
loan in determining that the loan should be accounted for as an investment in a
real estate venture: (i) the Exchange Partnerships who made the loans
collectively have provided substantially all of the necessary funds to acquire
the underlying properties without taking title to such properties, (ii) by
virtue of a pledged security interest in the wholly owned subsidiary of Echelon
Residential Holdings that holds title to the properties, the Partnership's loan
is secured only by the underlying properties, (iii) Echelon Residential Holdings
will only repay the Partnership at maturity, including all interest accrued on
the loan through maturity, (iv) it is expected that Echelon Residential Holdings
can only repay the loan through sales of undeveloped and developed property; and
(v) the structure of the loan (i.e. no payments due until maturity) makes it
unlikely that the properties will be taken in foreclosure as a result of
delinquency.
The summarized financial information for Echelon Residential Holdings as of
March 31, 2001 and for the quarter ended March 31, 2001 is as follows:
(Unaudited)
Total assets $ 72,861,183
Total liabilities $ 76,780,082
Minority interest $ 1,906,448
Total deficit $ (5,825,347)
Total revenues $ 1,063,439
Total expenses, minority interest
and equity in loss of unconsolidated
joint venture $ 3,096,648
Net loss $ (2,033,209)
NOTE 6 - NET INVESTMENT IN SALES-TYPE LEASE
The Partnership's net investment in a sales-type lease is the result of the
conditional sale of the Partnership's proportionate interest in a Boeing 737
aircraft executed in October 2000. The title to the aircraft transfers to Royal
Aviation Inc., at the expiration of the lease term. The sale of the aircraft has
been recorded by the Partnership as a sales-type lease, with a lease term
expiring in January 2002. For the quarter ended March 31, 2001, the Partnership
recognized sales-type lease revenue of $3,351 from this lease. At March 31,
2001, the components of the net investment in the sales-type lease are as
follows:
8
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
Total minimum lease payments to be received $196,412
Less: Unearned income 11,726
--------
Total $184,686
========
Unearned income is being amortized to revenue over the lease term, expiring in
January 2002.
NOTE 7 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on behalf of
the Partnership and EFG is reimbursed at its actual cost for such expenditures.
Fees and other costs incurred during the three month periods ended March 31,
2001 and 2000, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
2001 2000
-------- --------
Equipment management fees $ 10,750 $ 5,471
Administrative charges 13,965 11,248
Reimbursable operating expenses
due to third parties 127,467 105,029
-------- --------
Total $152,182 $121,748
======== ========
All rents and the proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At March 31, 2001, the Partnership was owed $70,169 by EFG for such funds. These
funds were remitted to the Partnership in April 2001.
NOTE 8 - NOTE PAYABLE
The Partnership has one note payable outstanding at March 31, 2001 in the amount
of $1,191,557. This installment note is non-recourse and is collateralized by
Partnership's interest in an aircraft leased to Aerovias de Mexico, S. A. de
C.V. and assignment of the related lease payments. This indebtedness bears a
fixed interest rate of 7.65%, principal is amortized monthly and the Partnership
has a balloon payment obligation at the expiration of the lease term of $404,138
in September 2004.
In February 2001, the Partnership and certain affiliated investment programs
(collectively "the Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft on lease to Aerovias de Mexico, S.A. de
C.V. In addition to refinancing the Programs' total existing indebtedness and
accrued interest of $4,758,845, the Programs received additional debt proceeds
of $3,400,177. The Partnership's aggregate share of the refinanced and new
indebtedness was $1,211,860 including $706,831 used to repay the existing
indebtedness on the refinanced aircraft. The Partnership used a portion of its
share of the additional proceeds of $505,028 to repay the outstanding balance of
the indebtedness and accrued interest related to the aircraft then on lease to
Finnair OY of $130,852 and certain aircraft reconfiguration costs that the
Partnership had accrued at December 31, 2000.
Management believes that the carrying amount of the note payable approximates
fair value at March 31, 2001 based on its experience and understanding of the
market for instruments with similar terms.
9
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
The annual maturities of the note payable are as follows:
For the year ending March 31, 2002 $ 210,082
2003 226,733
2004 244,699
2005 510,043
----------
Total $1,191,557
==========
NOTE 9 - LEGAL PROCEEDINGS
As described more fully in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 2000, the Partnership is a Nominal Defendant in a Class
Action Lawsuit, the outcome of which could significantly alter the nature of the
Partnership's organization and its future business operations.
On March 12, 2001, after a status conference and hearing, the Court issued an
order that required the parties, no later than May 15, 2001, to advise the Court
on (a) whether the Securities and Exchange Commission ("SEC") has completed its
review of the solicitation statement and related materials submitted to the SEC
in connection with the proposed settlement, and (b) whether parties request the
Court to schedule a hearing for final approval of the proposed settlement or are
withdrawing the proposed settlement from judicial consideration and resuming the
litigation of the Plaintiffs' claims. The Court also directed the parties to use
their best efforts to assist the SEC so that its regulatory review may be
completed on or before May 15, 2001. The Court continued the Final Approval
Settlement Hearing until a date to be scheduled in July 2001 after receipt from
the parties of a request to schedule a hearing. There are a number of issues to
be resolved with the staff of the SEC before the staff's review of the
solicitation materials is completed.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the Investment Company
Act of 1940, as amended (the "1940 Act"). The SEC staff noted that Section 7 of
the 1940 Act makes it unlawful for an unregistered investment company to offer
or sell or purchase any security or engage in any business in interstate
commerce. Accordingly, Section 7 would prohibit any partnership that is an
unregistered investment company from engaging in any business in interstate
commerce, except transactions that are merely incidental to its dissolution. The
SEC staff asked that the general partners advise them within the next 30 days as
to what steps the Designated Partnerships will take to address their status
under the 1940 Act. The SEC staff asserts that the notes evidencing the loans to
Echelon Residential Holdings are investment securities and the ownership of the
notes by said partnerships cause them to be investment companies and that, in
the case of American Income Partners V-A Limited Partnership and American Income
Partners V-B Limited Partnership, they may have become investment companies when
they received the Semele Group Inc. ("Semele") securities as part of the
compensation for the sale of a vessel to Semele in 1997. The general partners
have consulted with counsel who specializes in the 1940 Act and, based on
counsel's advise, do not believe that the Designated Partnerships are investment
companies.
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit are
scheduled to appear before the court in the near future to consider a
10
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2001
(UNAUDITED)
proposed settlement, and that the SEC staff's views, as expressed in the letter,
are relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and special 1940 Act
counsel's submissions to the SEC staff setting forth the reasons why the 1940
Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, counsel is willing to issue an opinion of the
firm that none of the partnerships is an investment company under the 1940 Act.
The Defendants stated their belief that the proposed settlement is still viable
and in the best interests of the parties and that final approval should be
pursued. The Defendants advised the court that they believe that if the court
were to address the issue of whether or not the 1940 Act applies to the
partnerships and the proposed consolidation, it could remove the major obstacle
to the settlement being finally consummated. The Defendants also requested that
the court schedule a hearing to address on a preliminary basis the objection to
the proposed settlement raised in the staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has yet
to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion.
Apart from the language of the order, the Court has not stated what action it
might order if the SEC's review were not completed by May 15, 2001. If the Court
were to decline to continue the date for the Final Approval Settlement Hearing
and there is no settlement alternative offered by the parties that meets the
Court's approval, the Court may direct that the parties resume the litigation
and abandon the proposed settlement and consolidation.
11
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements in this quarterly report of AIRFUND II International Limited
Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of factors that could cause actual results to
differ materially from those expressed in any forward-looking statements made
herein. These factors include, but are not limited to, the outcome of the Class
Action Lawsuit described in Note 9 to the accompanying financial statements, the
remarketing of the Partnership's aircraft and the performance of the
Partnership's non-aircraft assets.
The Investment Company Act of 1940 (the "1940 Act") places restrictions on the
capital structure and business activities of companies registered thereunder.
The Partnership has active business operations in the financial services
industry, including equipment leasing and the loan to Echelon Residential
Holdings LLC ("Echelon Residential Holdings"). The Partnership does not intend
to engage in investment activities in a manner or to an extent that would
require the Partnership to register as an investment company under the 1940 Act.
However, it is possible that the Partnership may unintentionally engage in an
activity or activities that may be construed to fall within the scope of the
1940 Act. The General Partner is engaged in discussions with the staff of the
Securities and Exchange Commission ("SEC") regarding whether or not the
Partnership may be an inadvertent investment company as a consequence of the
above-referenced loan. The General Partner has consulted counsel and believes
that the Partnership is not an investment company. If the Partnership were
determined to be an unregistered investment company, its business would be
adversely affected. The 1940 Act, among other things, prohibits an unregistered
investment company from offering securities for sale or engaging in any business
in interstate commerce and, consequently, leases and contracts entered into by
partnerships that are unregistered investment companies may be voidable. If
necessary, the Partnership intends to avoid being deemed an investment company
by disposing or acquiring certain assets that it might not otherwise dispose or
acquire.
On May 11, 2001, the general partners of the partnerships that are nominal
defendants in the Class Action Lawsuit received a letter dated May 10, 2001 from
the Associate Director and Chief Counsel of the Division of Investment
Management of the SEC informing the general partners that the staff of the
Division believes that American Income Partners V-A Limited Partnership,
American Income Partners V-B Limited Partnership, American Income Partners V-C
Limited Partnership, American Income Partners V-D Limited Partnership, American
Income Fund I-A, American Income Fund I-B, American Income Fund I-E and AIRFUND
II International Limited Partnership (the "Designated Partnerships") are
investment companies as defined in Section 3(a)(1)(c) of the 1940 Act. The SEC
staff noted that Section 7 of the 1940 Act makes it unlawful for an unregistered
investment company to offer or sell or purchase any security or engage in any
business in interstate commerce. Accordingly, Section 7 would prohibit any
partnership that is an unregistered investment company from engaging in any
business in interstate commerce, except transactions that are merely incidental
to its dissolution. The SEC staff asked that the general partners advise them
within the next 30 days as to what steps the Designated Partnerships will take
to address their status under the 1940 Act. The SEC staff asserts that the notes
evidencing the loans to Echelon Residential Holdings are investment securities
and the ownership of the notes by said partnerships cause them to be investment
companies and that, in the case of American Income Partners V-A Limited
Partnership and American V-B Limited Partnership, they may have become
investment companies when they received the Semele Group Inc. ("Semele")
securities as part of the compensation for the sale of a vessel to Semele in
1997. The general partners have consulted with counsel who specializes in the
1940 Act and, based on counsel's advice, do not believe that the Designated
Partnerships are investment companies.
12
The letter also stated that the Division is considering enforcement action with
respect to this matter. Noting that the parties to the Class Action Lawsuit are
scheduled to appear before the court in the near future to consider a proposed
settlement, and that the SEC staff's views, as expressed in the letter, are
relevant to the specific matters that will be considered by the court at the
hearing, the SEC staff submitted the letter to the court for its consideration.
On May 15, 2001, Defendants' Counsel filed with the court Defendants' Status
Report pursuant to the court's March 12, 2001 Order. Defendants reported that,
notwithstanding the parties' best efforts, the staff of the SEC has not
completed its review of the solicitation statement in connection with the
proposed settlement of the Class Action Lawsuit. Nonetheless, the Defendants
stated their belief that the parties should continue to pursue the court's final
approval of the proposed settlement.
The Defendants also referred to the SEC staff's letter of May 10, 2001 asserting
that certain of the partnerships are investment companies and special 1940 Act
counsel's submissions to the SEC staff setting forth the reasons why the 1940
Act does not apply to the Designated Partnerships, noting that counsel had
informed the staff of the Division of Investment Management that, based upon
counsel's understanding of the surrounding circumstances and after an in-depth
analysis of the applicable law, counsel is willing to issue an opinion of the
firm that none of the partnerships is an investment company under the 1940 Act.
The Defendants stated their belief that the proposed settlement is still viable
and in the best interests of the parties and that final approval should be
pursued. The Defendants advised the court that they believe that if the court
were to address the issue of whether or not the 1940 Act applies to the
partnerships and the proposed consolidation, it could remove the major obstacle
to the settlement being finally consummated. The Defendants also requested that
the court schedule a hearing to address on a preliminary basis the objection to
the proposed settlement raised in the SEC staff's May 10, 2001 letter.
Plaintiffs' Counsel also submitted a Plaintiffs' Status Report to the court on
May 15, 2001 in which they reported that the SEC review has not been concluded
and that they notified the Defendants that they would not agree to continue to
stay the further prosecution of the litigation in favor of the settlement and
that they intend to seek court approval to immediately resume active prosecution
of the claims of the Plaintiffs. Plaintiffs' Counsel stated in the Report that
the "[p]laintiffs continue to believe that the settlement is in the best
interests of the Operating Partnership Sub-class. However, since the SEC has yet
to complete its review of the proxy, the Plaintiffs do not believe that the
litigation should continue to be stayed so that the SEC may continue its
regulatory review for an indefinite period of time." Plaintiffs requested a
pre-trial conference to schedule filing of Plaintiffs' motion for class
certification on or before May 29, 2001 and resumption of merits discovery and
discovery related to the class certification motion. See Note 9 to the financial
statements for additional discussion.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000:
As an equipment leasing partnership, the Partnership was organized to acquire
and lease a portfolio of commercial jet aircraft subject to lease agreements
with third parties. During 1990 and 1991, the Partnership purchased four
commercial jet aircraft and a proportionate interest in two additional aircraft,
which were leased by major carriers, engaged in passenger transportation.
Initially, each aircraft generated rental revenue pursuant to primary-term lease
agreements. Subsequently, all of the aircraft in the Partnership's original
portfolio have been re-leased, renewed, exchanged for other aircraft, or sold.
At March 31, 2001, the Partnership's equipment portfolio included proportionate
ownership interests in three aircraft, all of which were on lease at that date,
and two aircraft engines which were warehoused. In addition, in 2000 the
Partnership entered into a conditional sales agreement related to its interest
in an aircraft. Presently, the Partnership is a Nominal Defendant in a Class
Action Lawsuit, the outcome of which could significantly alter the nature of the
Partnership's organization and its future business operations. (See Note 9 to
the accompanying financial statements.) Pursuant to the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended"), the Partnership is scheduled to be dissolved by December 31, 2005.
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RESULTS OF OPERATIONS
For the three months ended March 31, 2001, the Partnership recognized operating
lease revenue of $155,995 compared to $109,420 for the same period in 2000. The
increase in operating lease revenue from 2000 to 2001 resulted from the re-lease
of certain of the Partnership's aircraft, as discussed below. In the future,
operating lease revenue is expected to decline due to lease term expirations and
aircraft sales.
The lease term associated with the Boeing 737-2H4, in which the Partnership
holds an ownership interest, expired in December 1999. The aircraft was
re-leased in September 2000 to Air Slovakia BWJ, Ltd., with a lease term
expiring in September 2003. The Partnership recognized operating lease revenue
of $29,498 for the quarter ended March 31, 2001.
The lease term associated with a McDonnell-Douglas MD-82 aircraft, in which the
Partnership holds an ownership interest, expired in January 2000. The aircraft
was re-leased in September 2000 to Aerovias de Mexico S.A. de C.V., with a lease
term expiring in September 2004. The Partnership recognized lease revenue of
$73,522 and $29,074 related to this aircraft during the three months ended March
31, 2001 and 2000, respectively.
In October 2000, the Partnership and certain of its affiliates executed a
conditional sales agreement with Royal Aviation Inc. for the sale of the
Partnership's interest in a Boeing 737-2H4 aircraft. This aircraft had been
stored in the warehouse from January 2000 through the date of the conditional
sale in October 2000. The title to the aircraft transfers to Royal Aviation
Inc., at the expiration of the lease term. The sale of the aircraft has been
recorded by the Partnership as a sales-type lease, with a lease term expiring in
January 2002. For the three months ended March 31, 2001, the Partnership
recognized sales-type lease revenue of $3,351.
The Partnership's aircraft interests represent proportionate ownership
interests. In such cases, the remaining interests are owned by an affiliated
equipment leasing program sponsored by Equis Financial Group Limited Partnership
("EFG"). The Partnership and each affiliate individually report, in proportion
to their respective ownership interests, their respective shares of assets,
liabilities, revenues, and expenses associated with the aircraft.
Interest income for the three months ended March 31, 2001 was $30,121 compared
to $66,936 for the same period in 2000. Interest income is typically generated
from temporary investment of rental receipts and equipment sale proceeds in
short-term instruments. The amount of future interest income is expected to
fluctuate as a result of changing interest rates and the amount of cash
available for investment, among other factors. The Partnership also recognized
other income of $55,000 for the three months ended March 31, 2000 related to the
sale of certain aircraft records.
The ultimate realization of residual value for the Partnership's aircraft will
be 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 aircraft values at
any given time. EFG attempts to monitor these changes and the airline industry
in general in order to identify opportunities which may be advantageous to the
Partnership and which will maximize total cash returns for each aircraft.
The total economic value realized 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.
For the three months ended March 31, 2001 and 2000, the Partnership incurred
interest expense of $17,393 and $30,685, respectively. Interest expense in the
near term will increase as a result of the Partnership's debt
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refinancing in February 2001, as described below. Subsequently, interest expense
will decline as the principal balance of the note payable is reduced through the
application of rent receipts to the outstanding debt.
Management fees were $10,750 and $5,471, respectively, during the periods ended
March 31, 2001 and 2000. Management fees are based on 5% of gross lease revenue
generated by leases and 2% of gross revenue generated by full payout leases.
Operating expenses were $141,432 and $116,277 for the three months ended March
31, 2001 and 2000, respectively. In 2001, operating expenses included
approximately $27,000 related to the Class Action Lawsuit discussed in Note 9 to
the financial statements herein. Other operating expenses consist principally of
administrative charges, professional service costs, such as audit and other
legal fees, as well as insurance, printing, distribution and remarketing
expenses. In certain cases, equipment storage or repairs and maintenance costs
may be incurred in connection with equipment being remarketed.
Depreciation expense was $65,346 for the three months ended March 31, 2001
compared to $79,837 for the same period in 2000.
For the three months ended March 31, 2001 and 2000, the Partnership's share of
losses in Echelon Residential Holdings were $74,703 and $3,562, respectively.
The losses are reflected in the Statement of Operations as "Partnership's share
of unconsolidated real estate venture's loss". See further discussion below.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. The Partnership's
principal operating activities derive from aircraft rental transactions.
Accordingly, the Partnership's principal source of cash from operations is
provided by the collection of periodic rents. These cash inflows are used to
satisfy debt service obligations associated with leveraged leases, and to pay
management fees and operating costs. Operating activities generated a net cash
outflow of $20,832 and $211,110 for the three months ended March 31, 2001 and
2000, respectively. 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. The Partnership, however, may continue to
incur significant costs to facilitate the successful remarketing of its aircraft
in the future. 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.
At March 31, 2001, the Partnership was due aggregate future minimum lease
payments of $1,486,359 from contractual operating and sales-type lease
agreements (see Note 3 to the financial statements), a portion of which will be
used to amortize the principal balance of notes payable of $1,191,557 (see Note
8 to the financial statements). At the expiration of the individual lease term
underlying the Partnership's future minimum lease payments, the Partnership will
sell the aircraft or enter into a re-lease or renewal agreement when considered
by advantageous by the General Partner or EFG. In addition, the General Partner
and EFG are currently attempting to remarket the McDonnell-Douglas MD-82
aircraft and the two aircraft engines that are currently off lease. Such
remarketing activities will result in the realization of additional cash inflows
in the form of sale proceeds or rents from renewals or re-leases, the timing and
extent of which cannot be predicted with certainty. This is because the timing
and extent of remarketing events often is dependent upon the needs and interests
of the existing lessees. Some lessees may choose to renew their lease contracts,
while others may elect to return the aircraft. In the latter instances, the
aircraft could be re-leased to another lessee or sold to a third party.
In connection with a preliminary settlement agreement for a Class Action Lawsuit
described in Note 9 to the financial statements, the court permitted the
Partnership to invest in any new investment, including but not limited to new
equipment or other business activities, subject to certain limitations. On March
8, 2000, the Partnership loaned $3,640,000 to a newly formed real estate
company, Echelon Residential Holdings, to finance the acquisition of real estate
assets by that company. Echelon Residential Holdings, through a wholly owned
subsidiary ("Echelon Residential LLC"), used the loan proceeds, along with the
loan proceeds from similar loans by ten affiliated partnerships representing $32
million in the aggregate, to acquire various real estate assets from
15
Echelon International Corporation, an independent Florida-based real estate
company. Echelon Residential Holding's interest in Echelon Residential LLC is
pledged pursuant to a pledge agreement to the partnerships as collateral for the
loans. The loan has a term of 30 months, maturing on September 8, 2002, and an
annual interest rate of 14% for the first 24 months and 18% for the final six
months. Interest accrues and compounds monthly and is payable at maturity.
As discussed in Note 5 to the Partnership's financial statements, the loan is
considered to be an investment in a real estate venture for accounting purposes.
In accordance with the provisions of Statement of Position No. 78-9, "Accounting
for Investments in Real Estate Ventures", the Partnership reports its share of
income or loss of Echelon Residential Holdings under the equity method of
accounting.
The loan made by the Partnership to Echelon Residential Holdings is, and will
continue to be, subject to various risks, including the risk of default by
Echelon Residential Holdings, which could require the Partnership to foreclose
under the pledge agreement on its interests in Echelon Residential LLC. The
ability of Echelon Residential Holdings to make loan payments and the amount the
Partnership may realize after a default would be dependent upon the risks
generally associated with the real estate lending business including, without
limitation, the existence of senior financing or other liens on the properties,
general or local economic conditions, property values, the sale of properties,
interest rates, real estate taxes, other operating expenses, the supply and
demand for properties involved, zoning and environmental laws and regulations,
rent control laws and other governmental rules. A default by Echelon Residential
Holdings could have a material adverse effect on the future cash flow and
operating results of the Partnership.
The Restated Agreement, as amended, prohibits the Partnership from making loans
to the General Partner or its affiliates. Since the acquisition of the several
parcels of real estate from the owner had to occur prior to the admission of
certain independent third parties as equity owners, Echelon Residential Holdings
and its wholly owned subsidiary, Echelon Residential LLC, were formed in
anticipation of their admission. The General Partner agreed to an officer of the
Manager serving as the initial equity holder of Echelon Residential Holdings and
as an unpaid manager of Echelon Residential Holdings. The officer made a
$185,465 equity investment in Echelon Residential Holdings. His return on his
equity investment is restricted to the same rate of return as the partnerships
realize on their loans. There is a risk that the court may object to the general
partner's action in structuring the loan in this way since the officer may be
deemed an affiliate and the loans in violation of the prohibition against loans
to affiliates and the court's statement in its order permitting New Investments
that all other provisions of the Partnership Agreements governing the investment
objectives and policies of the Partnership shall remain in full force and
effect. The court may require the partnerships to restructure or divest the
loan.
The Partnership obtained long-term financing in connection with certain
aircraft. The origination of such indebtedness and the subsequent repayments of
principal are reported as components of financing activities in the accompanying
Statement of Cash Flows. The Partnership's outstanding loan agreement is
recourse only to the specific aircraft financed and to the minimum rental
payments contracted to be received during the debt amortization period (which
coincides with the lease term). As rental payments are collected, a portion or
all of the rental payment is used to repay associated indebtedness. In the near
term, the amount of cash used to repay the debt obligation will increase due to
the refinancing discussed below. Subsequently, the amount of cash used will
decline as the principal balance of the note payable is reduced through the
collection and application of rents.
In February 2001, the Partnership's and certain affiliated investment programs
collectively, (the "Programs") refinanced the outstanding indebtedness and
accrued interest related to the aircraft. In addition to refinancing the
Programs' total existing indebtedness and accrued interest of $4,758,845, the
Programs received additional debt proceeds of $3,400,177. The Partnership's
aggregate share of the refinanced and new indebtedness was $1,211,860 including
$706,831 used to repay the existing indebtedness on the refinanced aircraft. The
Partnership used a portion of its share of the additional proceeds of $505,028
to repay the outstanding balance of the indebtedness and accrued interest
related to the aircraft then on lease to Finnair OY of $130,852 and certain
aircraft reconfiguration costs that the Partnership had accrued at December 31,
2000. The new indebtedness bears a fixed interest rate of 7.65%, principal is
amortized monthly and the Partnership has a balloon payment obligation at the
expiration of the lease term of $404,138 in September 2004. In the three months
ended March 31, 2000, the Partnership refinanced the indebtedness associated
with the same aircraft and in addition to refinancing the existing indebtedness,
received additional debt proceeds of $201,247.
16
There are no formal restrictions under the Restated Agreement, as amended, that
materially limit the Partnership's ability to pay cash distributions, except
that the General Partner may suspend or limit cash distributions to ensure that
the Partnership maintains sufficient working capital reserves to cover, among
other things, operating costs and potential expenditures, such as refurbishment
costs to remarket aircraft upon lease expiration. In addition to the need for
funds in connection with the Class Action Lawsuit, liquidity is especially
important as the Partnership matures and sells aircraft, because the remaining
aircraft portfolio consists of fewer revenue-producing assets that are available
to cover prospective cash disbursements. Insufficient liquidity could inhibit
the Partnership's ability to sustain its operations or maximize the realization
of proceeds from remarketing its remaining aircraft.
The management and remarketing of aircraft can involve, among other things,
significant costs and lengthy remarketing initiatives. Although the
Partnership's lessees are required to maintain the aircraft during the period of
lease contract, repair, maintenance, and/or refurbishment costs at lease
expiration can be substantial. For example, an aircraft that is returned to the
Partnership meeting minimum airworthiness standards, such as flight hours or
engine cycles, nonetheless may require heavy maintenance in order to bring its
engines, airframe and other hardware up to standards that will permit its
prospective use in commercial air transportation.
At March 31, 2001, the Partnership's equipment portfolio included ownership
interests in three commercial jet aircraft, one of which is a Boeing 737
aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is
prohibited from operating in the United States unless it is retro-fitted with
hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ,
Ltd. through September 2003.The remaining two aircraft in the Partnership's
portfolio already are Stage 3 compliant. These aircraft have lease terms
expiring in April 2001 and September 2004, respectively. In April 2001 upon its
lease expiration, Finnair OY returned a McDonnell Douglas MD-82 aircraft which
the General Partner is attempting to remarket.
In any given year, it is possible that Recognized Owners will be allocated
taxable income in excess of distributed cash. This discrepancy between tax
obligations and cash distributions may or may not continue in the future, and
cash may or may not be available for distribution to the Recognized Owners
adequate to cover any tax obligation.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 8 to the financial statements presented in the Partnership's 2000
Annual Report). For instance, selling commissions and organization and offering
costs pertaining to syndication of the Partnership's limited partnership units
are not deductible for federal income tax purposes, but are recorded as a
reduction of partners' capital for financial reporting purposes. Therefore, such
differences are permanent differences between capital accounts for financial
reporting and federal income tax purposes. Other differences between the bases
of capital accounts for federal income tax and financial reporting purposes
occur due to timing differences consisting of the cumulative difference between
income or loss for tax purposes and financial statement income or loss. The
principal components of the cumulative difference between financial statement
income or loss and tax income or loss result from different depreciation
policies for book and tax purposes and different treatment for book and tax
purposes related to the real estate venture.
For financial reporting purposes, the General Partner has accumulated a capital
deficit at March 31, 2001. This is the result of aggregate cash distributions to
the General Partner being in excess of its capital contribution of $1,000 and
its allocation of financial statement net income or loss. Ultimately, the
existence of a capital deficit for the General Partner for financial reporting
purposes is not indicative of any further capital obligations to the Partnership
by the General Partner. The Restated Agreement, as amended, requires that upon
the dissolution of the Partnership, the General Partner will be required to
contribute to the Partnership an amount equal to any negative balance, which may
exist in the General Partner's tax capital account. At December 31, 2000, the
General Partner had a positive tax capital account balance.
The Partnership is a Nominal Defendant in a Class Action Lawsuit described in
Note 9 to the accompanying financial statements The proposed settlement to that
lawsuit, if effected, will materially change the future organizational structure
and business interests of the Partnership, as well as its cash distribution
policies. In
17
addition, the General Partner will continue to suspend the payment of quarterly
cash distributions pending final resolution of the Class Action Lawsuit.
Accordingly, future cash distributions are not expected to be paid until the
Class Action Lawsuit is settled or adjudicated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's financial statements include financial instruments that are
exposed to interest rate risks.
The Partnership has one note payable outstanding at March 31, 2001 which bears a
fixed interest rate of 7.65%. The fair market value of fixed interest rate debt
may be adversely impacted due to a decrease in interest rates. The effect of
interest rate fluctuations on the Partnership in the quarter ended March 31,
2001 was not material.
The Partnership's acquisition, development and construction loan to Echelon
Residential Holdings matures on September 8, 2002 and earns interest at a fixed
annual rate of 14% for the first 24 months and a fixed annual rate of 18% for
the last 6 months of the loan. Investments earning a fixed rate of interest may
have their fair market value adversely impacted due to a rise in interest rates.
The effect of interest rate fluctuations on the Partnership in the quarter ended
March 31, 2001 was not material.
18
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 9 to the financial statements herein.
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6(a). Exhibits
Response: None
Item 6(b). Reports on Form 8-K
Response: None
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRFUND II International Limited Partnership
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the General
Partner of the Registrant.
By: /s/ MICHAEL J. BUTTERFIELD
-------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: MAY 21, 2001
-------------------------------------------------
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