UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
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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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For Quarter Ended March 31, 1999 Commission File No. 0-18368
AIRFUND INTERNATIONAL LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3037350
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 BROAD STREET, BOSTON, MA 02110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes No
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AIRFUND International Limited Partnership
FORM 10-Q
INDEX
PAGE
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Statement of Financial Position
at March 31, 1999 and December 31, 1998 3
Statement of Operations
for the three months ended March 31, 1999 and 1998 4
Statement of Cash Flows
for the three months ended March 31, 1999 and 1998 5
Notes to the Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
PART II. OTHER INFORMATION:
Items 1 - 6 16
2
AIRFUND International Limited Partnership
STATEMENT OF FINANCIAL POSITION
March 31, 1999 and December 31, 1998
(Unaudited)
March 31, December 31,
1999 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 3,448,800 $ 3,540,736
Rents receivable -- 104,184
Equipment at cost, net of accumulated depreciation of
$6,368,311 and $5,857,207 at March 31, 1999
and December 31, 1998, respectively 13,750,000 14,261,104
------------- -------------
Total assets $ 17,198,800 $ 17,906,024
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 5,476,688 $ 6,279,100
Accrued interest 67,731 83,223
Accrued liabilities 251,800 288,500
Accrued liabilities - affiliate 27,461 20,698
Deferred rental income 164,767 158,882
------------- -------------
Total liabilities 5,988,447 6,830,403
------------- -------------
Partners' capital (deficit):
General Partner (1,138,478) (1,145,215)
Limited Partnership Interests
(3,040,000 Units; initial purchase price of $25 each) 12,348,831 12,220,836
------------- -------------
Total partners' capital 11,210,353 11,075,621
------------ ------------
Total liabilities and partners' capital $ 17,198,800 $ 17,906,024
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------------- -------------
The accompanying notes are an integral part
of these financial statements.
3
AIRFUND International Limited Partnership
STATEMENT OF OPERATIONS
for the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
---------- ----------
Income:
Lease revenue $ 836,275 $1,013,595
Interest income 37,947 34,956
---------- ----------
Total income 874,222 1,048,551
---------- ----------
Expenses:
Depreciation 511,104 619,487
Interest expense 128,440 188,053
Equipment management fees - affiliate 41,814 50,680
Operating expenses - affiliate 58,132 41,172
---------- ----------
Total expenses 739,490 899,392
---------- ----------
Net income $ 134,732 $ 149,159
---------- ----------
---------- ----------
Net income per limited partnership unit $ 0.04 $ 0.05
---------- ----------
---------- ----------
The accompanying notes are an integral part
of these financial statements.
4
AIRFUND International Limited Partnership
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1999 and 1998
(Unaudited)
1999 1998
----------- -----------
Cash flows from (used in) operating activities:
Net income $ 134,732 $ 149,159
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 511,104 619,487
Changes in assets and liabilities Decrease (increase) in:
Rents receivable 104,184 15,403
Accounts receivable - affiliate -- (61,128)
Increase (decrease) in:
Accrued interest (15,492) 8,919
Accrued liabilities (36,700) (1,360)
Accrued liabilities - affiliate 6,763 (8,457)
Deferred rental income 5,885 (48,520)
----------- -----------
Net cash from operating activities 710,476 673,503
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Cash flows used in financing activities:
Principal payments - notes payable (802,412) (558,844)
----------- -----------
Net cash used in financing activities (802,412) (558,844)
----------- -----------
Net increase (decrease) in cash and cash equivalents (91,936) 114,659
Cash and cash equivalents at beginning of period 3,540,736 2,671,041
----------- -----------
Cash and cash equivalents at end of period $ 3,448,800 $ 2,785,700
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 143,932 $ 179,134
----------- -----------
----------- -----------
The accompanying notes are an integral part
of these financial statements.
5
AIRFUND International Limited Partnership
Notes to the Financial Statements
March 31, 1999
(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 1998 Annual Report. Except as disclosed herein, there
has been no material change to the information presented in the footnotes to the
1998 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, 1999 and December 31, 1998 and results of operations for
the three month periods ended March 31, 1999 and 1998 have been made and are
reflected.
NOTE 2 - CASH
At March 31, 1999, the Partnership had $3,337,601 invested in federal
agency discount notes and in reverse repurchase agreements, secured by U.S.
Treasury Bills or interests in U.S. Government securities.
NOTE 3 - REVENUE RECOGNITION
Rents are payable to the Partnership monthly and quarterly and no
significant amounts are calculated on factors other than the passage of time.
All leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$3,940,727 are due as follows:
For the year ending March 31, 2000 $ 2,888,489
2001 1,052,238
---------
Total $ 3,940,727
---------
---------
In December 1998, the Partnership and the other affiliated leasing programs
owning interests in two McDonnell Douglas MD-82 aircraft entered into lease
extension agreements with Finnair OY. The lease extensions, effective upon the
expiration of the existing primary lease terms on April 28, 1999, extended the
leases for nine months and two years, respectively. In aggregate, these lease
extensions will provide additional lease revenue of approximately $2,899,000 to
the Partnership. The lease revenue from these lease extensions is included in
the future minimum rents summary above.
NOTE 4 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at March
31, 1999. Remaining Lease Term (Months), as used below, represents the number of
months remaining from March 31, 1999 under contracted lease terms. In the
opinion of Equis Financial Group Limited Partnership ("EFG") the acquisition
cost of the equipment did not exceed its fair market value.
6
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
REMAINING
LEASE
TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST
- ------------------------------------- ---------- --------------
Two McDonnell-Douglas MD-82 (Finnair) 10-25 $ 13,762,438
Three Boeing 737-2H4 (Southwest) 9 6,355,873
--------------
Total equipment cost 20,118,311
Accumulated depreciation (6,368,311)
--------------
Equipment, net of accumulated depreciation $ 13,750,000
--------------
--------------
The cost of each of the Partnership's aircraft represent proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All Partnerships individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.
All of the remaining aircraft summarized above and related lease payment
streams were used to secure term loans with third-party lenders (see Note 6).
NOTE 5 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three month
periods ended March 31, 1999 and 1998, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
1999 1998
----------- -----------
Equipment management fees $ 41,814 $ 50,680
Administrative charges 13,251 13,251
Reimbursable operating expenses
due to third parties 44,881 27,921
----------- -----------
Total $ 99,946 $ 91,852
----------- -----------
----------- -----------
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.
NOTE 6 - NOTES PAYABLE
Notes payable at March 31, 1999 consisted of installment notes payable to
banks of $5,476,688. All of the installment notes are non-recourse, with
interest rates ranging between 8.65% and 8.89% and are collateralized by the
equipment and assignment of the related lease payments. The installment notes
related to the aircraft on lease to Southwest Airlines, Inc. will be fully
amortized by noncancellable rents. The Partnership has a balloon
7
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
payment obligation at the expiration of the primary lease term related to the
aircraft on lease to Finnair OY of $4,671,150 (see Note 8 regarding the
extension of the maturity date of the Finnair indebtedness in April 1999). The
carrying amount of notes payable approximates fair value at March 31, 1999. All
of the Partnership's notes payable are scheduled to mature during the year
ending March 31, 2000.
NOTE 7 - LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP
LIMITED PARTNERSHIP, ET AL., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
Prior to issuing a final order, the Court will hold a fairness hearing that will
be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff class
members in the Class Action Lawsuit will receive a Notice of Settlement and
other information pertinent to the settlement of their claims that will be
mailed to them in advance of the fairness hearing. Since first executing the
Stipulation of Settlement, the Court has scheduled two fairness hearings, the
first on December 11, 1998 and the second on March 19, 1999, each of which was
postponed because of delays in finalizing certain information materials that are
subject to regulatory review prior to being distributed to investors.
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divides the
Class Action Lawsuit into two separate sub-classes that can be settled
individually. This revision is expected to expedite the settlement of one
sub-class by the middle of 1999. However, the second sub-class, involving the
Partnership and 10 affiliated partnerships (collectively referred to as the
"Exchange Partnerships"), is expected to remain pending for a longer period due,
in part, to the complexity of the proposed settlement pertaining to this class.
8
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
Specifically, the settlement of the second sub-class is premised on the
consolidation of the Exchange Partnerships' net assets (the "Consolidation"),
subject to certain conditions, into a single successor company ("Newco"). Under
the proposed Consolidation, the partners of the Exchange Partnerships would
receive both common stock in Newco and a cash distribution; and thereupon the
Exchange Partnerships would be dissolved. In addition, EFG would contribute
certain management contracts, operations personnel, and business opportunities
to Newco and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate as a finance company specializing in the
acquisition, financing and servicing of equipment leases for its own account and
for the account of others on a contract basis. Newco also would use its best
efforts to list its shares on the NASDAQ National Market or another national
exchange or market as soon after the Consolidation as Newco deems that market
conditions and its business operations are suitable for listing its shares and
Newco has satisfied all necessary regulatory and listing requirements. The
potential benefits and risks of the Consolidation will be presented in a
Solicitation Statement that will be mailed to all of the partners of the
Exchange Partnerships as soon as the associated regulatory review process is
completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24, 1998 and remains pending. Class members will be notified of the
actual fairness hearing date when it is confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the Partnership's
customary business operations until all of its assets are disposed in the
ordinary course of business. To facilitate the realization of this objective,
the Amended Stipulation provides, among other things, that commencing March 22,
1999, the Exchange Partnerships may collectively invest up to 40% of the total
aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believe to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations, including that the Exchange Partnerships retain
sufficient cash balances to pay their respective shares of the cash distribution
referenced above in connection with the proposed Consolidation.
In the absence of the Court's authorization to enter into such activities,
the Partnership's Restated Agreement, as amended, would not permit new
investment activities without the approval of limited partners owning a majority
of the Partnership's outstanding Units. Accordingly, to the extent that the
Partnership invests in new equipment, the Manager (being EFG) will (i) defer,
until the earlier of the effective date of the Consolidation or December 31,
1999, any acquisition fees resulting therefrom and (ii) limit its management
fees on all such assets to 2% of rental income. In the event that the
Consolidation is consummated, all such acquisition and management fees will be
paid to Newco. To the extent that the Partnership invests in other business
activities not consisting of equipment acquisitions, the Manager will forego any
acquisition fees and management fees related to such investments. In the event
that the Partnership has acquired new investments, but the Partnership does not
participate in the Consolidation, Newco will acquire such new investments for an
amount equal to the Partnership's net equity investment plus an annualized
return thereon of 7.5%. Finally, in the event that the Partnership has acquired
new investments and the Consolidation is not effected, the General Partner will
use its best efforts to divest all such new investments in an orderly and timely
fashion and the Manager will cancel or return to the Partnership any acquisition
or management fees resulting from such new investments.
The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting final settlements, including providing
the partners of the Exchange Partnerships with the opportunity to object to the
participation of their partnership in the Consolidation. Assuming the proposed
settlement is effected according to present terms, the Partnership's share of
legal fees and expenses related to the Class Action Lawsuit is estimated to be
approximately $81,000, all of which was accrued and expensed by the Partnership
in 1998. In addition, the Partnership's share of fees and expenses related to
the proposed Consolidation is estimated to be approximately $255,000, all of
which was also accrued and expensed by the Partnership in 1998.
9
AIRFUND International Limited Partnership
Notes to the Financial Statements
(Continued)
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permits the partners to transfer Units to family members or as a
result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
There can be no assurance that settlement of either sub-class of the Class
Action Lawsuit will receive final Court approval and be effected. There also can
be no assurance that all or any of the Exchange Partnerships will participate in
the Consolidation because if limited partners owning more than one-third of the
outstanding Units of a partnership object to the Consolidation, then that
partnership will be excluded from the Consolidation. The General Partner and its
affiliates, in consultation with counsel, concur that there is a reasonable
basis to believe that final settlements of each sub-class will be achieved.
However, in the absence of final settlements approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. Neither the General Partner nor its affiliates can predict with
any degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome.
NOTE 8 - SUBSEQUENT EVENT
On April 29, 1999, the Partnership and certain affiliated investment
programs (collectively, the "Programs") entered into agreements with a
third-party lender to extend the maturity date of the Programs' indebtedness
related to the two aircraft leased to Finnair OY (the "Finnair Aircraft"). Under
the existing loan agreements, the Programs had balloon payment obligations
scheduled to mature in April 1999. Consistent with the extension terms of the
lease agreements related to the Finnair Aircraft (see Note 3), the maturity
dates of the indebtedness were extended to January 2000 and April 2001,
respectively. The Partnership will have balloon payment obligations related to
this indebtedness on the respective maturity dates of $1,654,607 and $441,154.
10
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.
Certain statements in this annual report of AIRFUND 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 important factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, the collection of all rents due under the Partnership's
lease agreements and remarketing of the Partnership's equipment.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer
programming logic to correctly identify the calendar year. Many companies
utilize computer programs or hardware with date sensitive software or embedded
chips that could interpret dates ending in "00" as the year 1900 rather than the
year 2000. In certain cases, such errors could result in system failures or
miscalculations that disrupt the operations of the affected businesses. The
Partnership uses information systems provided by Equis Financial Group Limited
Partnership (formerly American Finance Group) ("EFG") and has no information
systems of its own. EFG has adopted a plan to address the Year 2000 Issue that
consists of four phases: assessment, remediation, testing, and implementation
and has elected to utilize principally internal resources to perform all phases.
EFG has completed substantially all of its Year 2000 project at an aggregate
cost of less than $50,000 and at a di minimus cost to the Partnership. All costs
incurred in connection with EFG's Year 2000 project have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of
original design to use a four-digit field to identify calendar year. All of the
Partnership's lease billings, cash receipts and equipment remarketing processes
are performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Partnership's significant vendors and third-party servicers are in the process,
or have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried have indicated that their systems would be
Year 2000 compliant by the end of 1998.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Partnership's results of operations,
liquidity, or financial position. The Partnership's equipment leases were
structured as triple net leases, meaning that the lessees are responsible for,
among other things, (i) maintaining and servicing all equipment during the lease
term, (ii) ensuring that all equipment functions properly and is returned in
good condition, normal wear and tear excepted, and (iii) insuring the assets
against casualty and other events of loss. Non-compliance with lease terms on
the part of a lessee, including failure to address Year 2000 Issues could result
in lost revenues and impairment of residual values of the Partnership's
equipment assets under a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Partnership's business operations. However, EFG has no means of ensuring that
all customers, vendors and third-party servicers will conform ultimately to Year
2000 standards. The effect of this risk to the Partnership is not determinable.
11
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998:
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. Upon its inception in 1989, the Partnership
purchased three used commercial jet aircraft and a proportionate interest in a
fourth aircraft, which were leased by major carriers engaged in passenger
transportation. Initially, each aircraft generated rental revenues pursuant to
primary-term lease agreements. In 1991, one of the Partnership's original
aircraft was sold to a third party and a portion of the sale proceeds was
reinvested in a proportionate interest in another aircraft. 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, 1999, the
Partnership owned a proportionate interest in five aircraft. All of the
Partnership's aircraft are currently on lease. Upon expiration of the lease
agreements, each aircraft will be re-leased or sold depending on prevailing
market conditions and the assessment of such conditions by EFG to obtain the
most advantageous economic benefit. 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 7 to the accompanying financial statements. Pursuant to the
Restated Agreement, as amended, the Partnership is scheduled to be dissolved by
December 31, 2004.
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, the Partnership recognized lease
revenue of $836,275 compared to $1,013,595 for the same period in 1998. The
decrease in lease revenue from 1998 to 1999 is the result of the sale in April
1998 of the Partnership's interest in a Lockheed L-1011-50 aircraft. In the
future, the Partnership's aggregate lease revenue is expected to decline due to
aircraft sales and the expiration of the lease terms related to the
Partnership's remaining aircraft.
The three Boeing 737-2H4 aircraft (the "Southwest Aircraft") in which the
Partnership holds a proportionate interest are currently on lease to Southwest
Airlines, Inc. These leases are scheduled to expire on December 31, 1999 and
provide lease revenue of $104,184 per month to the Partnership. The two
McDonnell-Douglas MD-82 aircraft (the "Finnair Aircraft"), in which the
Partnership holds a proportionate interest, are currently on lease to Finnair
OY. These leases, which provide lease revenue of $529,608 per quarter to the
Partnership, were scheduled to expire on April 28, 1999, but have been extended
(see additional discussion below).
At March 31, 1999, the Partnership held a proportionate ownership interest
in the Southwest and Finnair aircraft (see Note 4 to the financial statements).
The remaining interests are owned by other affiliated partnerships sponsored by
EFG. All partnerships individually report, in proportion to their respective
ownership interests, their respective shares of assets, liabilities, revenues
and expenses associated with the aircraft.
The ultimate realization of residual value for aircraft is dependent upon
many factors, including EFG's ability to sell and re-lease the aircraft.
Changing market conditions, industry trends, technological advances, and many
other events can converge to enhance or detract from asset values at any given
time. EFG attempts to monitor these changes in the airline industry in order to
identify opportunities which may be advantageous to the Partnership and which
will maximize total cash returns for each aircraft.
The total economic value realized upon final disposition of each aircraft
is comprised of all primary lease term revenue generated from that aircraft,
together with its residual value. The latter consists of cash proceeds realized
upon the aircraft's sale in addition to all other cash receipts obtained from
renting the aircraft on a re-lease, renewal or month-to-month basis.
Consequently, the amount of any future gain or loss reported in the financial
statements will not necessarily be indicative of the total residual value the
Partnership achieved from leasing the aircraft.
12
Interest income for the three-month period ending March 31, 1999 was
$37,947 compared to $34,956 for the same period in 1998. Interest income is
typically generated from temporary investments of rental receipts and equipment
sale proceeds in short-term instruments.
For the three months ending March 31, 1999 and 1998, the Partnership
incurred interest expense of $128,440 and $188,053, respectively. Interest
expense in future periods is expected to continue to decline as the principal
balance of notes payable is reduced through the application of rent receipts to
outstanding debt.
Management fees were 5% of lease revenue during each of the periods ended
March 31, 1999 and 1998.
Operating expenses were $58,132 and $41,172 for the three months ended
March 31, 1999 and 1998, respectively. Operating expenses consist principally of
administrative charges, professional service costs, such as audit and legal
fees, as well as insurance, printing, distribution and other remarketing
expenses. Depreciation expense was $511,104 for the three months ended March 31,
1999, compared to $619,487 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. 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 a net cash inflow of $710,476 and $673,503 for the three months ended
March 31, 1999 and 1998, respectively. Overall, expenses associated with rental
activities, such as management fees, and net cash flow from operating activities
decline as the Partnership remarkets its aircraft. Conversely, the Partnership
may incur increased costs to facilitate the successful remarketing of these
aircraft. Ultimately, the Partnership will dispose of all aircraft under lease.
This will occur principally through sale transactions whereby each aircraft will
be sold to the existing lessee or to a third party. Generally, this will occur
upon expiration of each aircraft's primary or renewal/re-lease term.
At March 31, 1999, the Partnership was due aggregate future minimum lease
payments of $3,940,727 from contractual 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 $5,476,688 (see Note 6 to the financial statements).
At the expiration of the individual primary lease terms underlying the
Partnership's future minimum lease payments, the Partnership will sell the
aircraft or enter re-lease or renewal agreements when considered advantageous by
the General Partner and EFG. Such future remarketing activities will result in
the realization of additional cash inflows in the form of sale proceeds or rents
from renewals and 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. Accordingly, as the terms of the
currently existing contractual lease agreements expire, the cash flows of the
Partnership will become less predictable. In addition, the Partnership will need
cash outflows to satisfy interest on indebtedness and to pay management fees and
operating expenses.
In December 1998, the Partnership and the other affiliated leasing programs
owning interests in the Finnair Aircraft entered into lease extension agreements
with Finnair OY. The lease extensions, effective upon the expiration of the
existing primary lease terms on April 28, 1999, extended the leases for nine
months and two years, respectively. In aggregate, these lease extensions will
provide additional lease revenue of approximately $2,899,000 to the Partnership
(see Note 3 to the financial statements).
13
The Partnership obtained long-term financing in connection with 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, the rental payment will be used to repay
principal and interest. The Partnership also has balloon payment obligations at
the expiration of the primary lease term related to the Finnair Aircraft of
$4,671,150. All of the Partnership's indebtedness matures in the year ended
March 31, 2000 (see Note 8 to the financial statements regarding the extension
of the maturity date of the Finnair indebtedness in April 1999).
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 equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base 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 air worthiness 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. Individually,
these repairs can cost in excess of $1 million and, collectively; they could
require the disbursement of several million dollars, depending upon the extent
of refurbishment. In addition, the Partnership's equipment portfolio includes an
interest in three Stage 2 aircraft having scheduled lease expiration dates of
December 31, 1999. These aircraft are prohibited from operating in the United
States after December 31, 1999 unless they are retro-fitted with hush-kits to
meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. The cost to hush-kit an aircraft, such as the Partnership's
Boeing 737s, can approach $2 million. Although the Partnership is not required
to retro-fit its aircraft with hush-kits, insufficient liquidity could
jeopardize the re-marketing of these aircraft and risk their disposal at a
depressed value at a time when a better economic return would be realized from
refurbishing the aircraft and re-leasing them to another user. Collectively, the
aggregation of the Partnership's potential liquidity needs related to aircraft
and other working capital requirements could be significant. Accordingly, the
General Partner has maintained significant cash reserves within the Partnership
in order to minimize the risk of a liquidity shortage.
Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit
described in Note 7 to the accompanying financial statements. A preliminary
court order has allowed the Partnership to invest in new equipment or other
activities, subject to certain limitations, effective March 22, 1999. To the
extent that the Partnership continues to own aircraft investments that could
require capital reserves, the General Partner does not anticipate that the
Partnership will invest in new assets, regardless of its authority to do so.
Until the Class Action Lawsuit is adjudicated, the General Partner does not
expect to declare any distributions to the Partners. In addition, the proposed
settlement, if effected, will materially change the future organizational
structure and business interests of the Partnership, as well as its cash
distribution policies. See Note 7 to the accompanying financial statements.
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
14
and/or re-lease rents, and the residual value realized for each aircraft at its
disposal date. No distributions were declared for either of the three months
ended March 31, 1999 or 1998.
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the financial statements presented in the Partnership's 1998
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. Such items consist of the cumulative difference
between income or loss for tax purposes and financial statement income or loss
and the difference between distributions (declared vs. paid) for income tax and
financial reporting purposes, if any. The principal component of the cumulative
difference between financial statement income or loss and tax income or loss
results from different depreciation policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at March 31, 1999. 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 Amended and Restated
Agreement and Certificate of Limited Partnership, 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, 1998, the
General Partner had a positive tax capital account balance.
The future liquidity of the Partnership will be influenced by, among other
factors, prospective market conditions, aircraft refurbishment requirements
(discussed above), the ability of EFG to manage and remarket the Partnership's
aircraft, and many other events and circumstances, that could enhance or detract
from individual aircraft yields and the collective performance of the
Partnership's aircraft portfolio. However, the outcome of the Class Action
Lawsuit described in Note 7 to the accompanying financial statements will be the
principal factor in determining the future of the Partnership's operations.
15
AIRFUND International Limited Partnership
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Response:
Refer to Note 7 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
16
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AIRFUND International Limited Partnership
By: AFG Aircraft Management Corporation, a
Massachusetts corporation and the General
Partner of the Registrant.
By: /s/ Michael J. Butterfield
-------------------------------------------------
Michael J. Butterfield
Treasurer of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Accounting Officer)
Date: May 14, 1999
-------------------------------------------------
By: /s/ Gary M. Romano
-------------------------------------------------
Gary M. Romano
Clerk of AFG Aircraft Management Corporation
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 14, 1999
-------------------------------------------------
17