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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-17785
AIRCRAFT INCOME PARTNERS L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3430508
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 West Putnam Avenue, Greenwich, CT 06830
(Address of principal executive offices)
(203) 862-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
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AIRCRAFT INCOME PARTNERS L.P.
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FORM 10-Q - SEPTEMBER 30, 1996
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS - September 30, 1996 and December 31, 1995
STATEMENTS OF OPERATIONS - For the three months ended September 30,
1996 and 1995 and the nine months ended September 30, 1996
and 1995
STATEMENT OF PARTNERS' EQUITY - For the nine months ended
September 30, 1996
STATEMENTS OF CASH FLOWS - For the nine months ended
September 30, 1996 and 1995
NOTES TO FINANCIAL STATEMENTS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
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AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Leased aircraft, net of accumulated depreciation of
$70,789,948 and $78,518,396 and allowance for
equipment impairment of $27,500,000 and $32,225,000 ..... $ 29,386,979 $ 41,868,907
Cash and cash equivalents .................................. 6,703,629 7,448,455
Note receivable - installment sale ......................... 4,018,662 --
Accounts receivable ........................................ 882,779 1,388,026
Restricted cash - security deposits ........................ 475,901 458,683
Deferred rents and modification advances receivable ........ 355,038 641,745
Deferred costs ............................................. 255,956 352,226
Other receivables .......................................... 130,303 116,952
Prepaid expenses ........................................... 66,314 90,628
------------ ------------
$ 42,275,561 $ 52,365,622
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Distributions payable ...................................... $ 2,786,369 $ 3,429,378
Maintenance reserves ....................................... 1,660,084 1,922,478
Security deposits payable .................................. 475,901 458,683
Deferred income ............................................ 131,550 179,216
Accounts payable and accrued expenses ...................... 61,351 82,100
Management fee payable ..................................... 111,000 137,000
Deferred costs payable ..................................... 47,894 121,930
------------ ------------
Total liabilities ....................................... 5,274,149 6,330,785
------------ ------------
Commitments and contingencies
Partners' equity
Limited partners' equity (385,805 units
issued and outstanding) ............................. 52,582,566 60,712,648
General partners' deficit ............................... (15,581,154) (14,677,811)
------------ ------------
Total partners' equity .................................. 37,001,412 46,034,837
------------ ------------
$ 42,275,561 $ 52,365,622
============ ============
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the three months ended For the nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Rental .............................................. $ 2,284,428 $ 2,950,584 $ 7,801,049 $ 8,852,144
Interest ............................................ 131,660 129,533 391,627 325,980
Interest - installment sale ......................... 27,012 -- 27,012 --
Other (expense) income .............................. (9,416) 2,267 (20,762) 106,906
----------- ----------- ----------- -----------
2,433,684 3,082,384 8,198,926 9,285,030
----------- ----------- ----------- -----------
Costs and expenses
Depreciation ........................................ 1,835,203 2,654,118 6,750,979 8,231,449
Management fee ...................................... 111,000 171,000 328,000 411,000
General and administrative .......................... 59,541 68,612 255,435 244,979
Provision for bad debt .............................. -- -- 66,133 --
Operating ........................................... 16,844 10,301 49,653 182,239
Interest expense .................................... -- 3,065 1,570 11,799
----------- ----------- ----------- -----------
2,022,588 2,907,096 7,451,770 9,081,466
----------- ----------- ----------- -----------
411,096 175,288 747,156 203,564
Gain on sale of aircraft - net ........................... 1,654,880 -- 5,222,948 --
Realized gain on acquisition and sale of
marketable securities - net ......................... -- 120,627 -- 1,001,731
----------- ----------- ----------- -----------
$ 2,065,976 $ 295,915 $ 5,970,104 $ 1,205,295
Net income ............................................... =========== =========== =========== ===========
Net income attributable to
Limited partners .................................... $ 1,859,378 $ 266,323 $ 5,373,094 $ 1,084,765
General partners .................................... 206,598 29,592 597,010 120,530
----------- ----------- ----------- -----------
$ 2,065,976 $ 295,915 $ 5,970,104 $ 1,205,295
=========== =========== =========== ===========
Net income per unit of limited partnership
interest (385,805 units outstanding) ................ $ 4.82 $ 0.69 $ 13.93 $ 2.81
=========== =========== =========== ===========
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENT OF PARTNERS' EQUITY
Limited General Total
Partners' Partners' Partners'
Equity Deficit Equity
------ ------- ------
<S> <C> <C> <C>
Balance, January 1, 1996 ........................ $ 60,712,648 $(14,677,811) $ 46,034,837
Net income for the nine months
ended September 30, 1996 ................... 5,373,094 597,010 5,970,104
Distributions to partners for the nine months
ended September 30, 1996 ($35.00 per limited
partnership unit) .......................... (13,503,176) (1,500,353) (15,003,529)
------------ ------------ ------------
Balance, September 30, 1996 ..................... $ 52,582,566 $(15,581,154) $ 37,001,412
============ ============ ============
See notes to financial statements.
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
For the nine months ended
September 30,
1996 1995
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities
Net income ........................................... $ 5,970,104 $ 1,205,295
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation .................................. 6,750,979 8,231,449
Realized gain on acquisition and sale
of marketable securities ................... -- (1,001,731)
Gain on sale of aircraft - net ................ (5,222,948) --
Amortization of installment note discount ..... (27,012) --
Changes in assets and liabilities
Accounts receivable ............................... 505,247 205,278
Deferred rents and modification advances receivable 286,707 918,251
Restricted cash - security deposits ............... (17,218) (16,938)
Deferred costs .................................... 96,270 96,272
Prepaid expenses .................................. 24,314 17,978
Other receivables ................................. (13,351) 91,735
Maintenance reserves .............................. (262,394) 614,751
Security deposits payable ......................... 17,218 16,938
Deferred income ................................... (47,666) --
Management fee payable ............................ (26,000) 51,000
Accounts payable and accrued expenses ............. (20,749) (56,576)
------------ ------------
Net cash provided by operating activities .. 8,013,501 10,373,702
------------ ------------
Cash flows from investing activities
Proceeds from sale of aircraft - net ................. 6,784,400 --
Proceeds from installment sale ....................... 177,847 --
Proceeds from sale of marketable securities .......... -- 1,045,941
Additions and modifications to leased aircraft, net .. (74,036) (124,293)
------------ ------------
Net cash provided by investing activities .. 6,888,211 921,648
------------ ------------
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
(continued)
For the nine months ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities
Distributions to partners ............................ (15,646,538) (9,002,117)
------------ ------------
Net (decrease) increase in cash equivalents ............... (744,826) 2,293,233
Cash and cash equivalents, beginning of period ............ 7,448,455 6,350,177
------------ ------------
Cash and cash equivalents, end of period .................. $ 6,703,629 $ 8,643,410
============ ============
Supplemental disclosure of cash flow information
Interest paid ........................................ $ 1,570 $ 11,799
============ ============
See notes to financial statements.
</TABLE>
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AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
1 INTERIM FINANCIAL INFORMATION
The summarized financial information contained herein is unaudited;
however, in the opinion of management, all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of such
financial information have been included. The accompanying financial
statements, footnotes and discussion should be read in conjunction with
the financial statements, related footnotes and discussions contained
in the Aircraft Income Partners L.P. (the "Partnership") annual report
on Form 10-K for the year ended December 31, 1995. The results of
operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leased aircraft
The cost of leased aircraft represents the initial cost of the aircraft
to the Partnership plus miscellaneous acquisition and closing costs and
is carried at the lower of depreciated cost or net realizable value.
Depreciation is computed using the straight-line method, over the
estimated useful lives of such aircraft (15 years for McDonnell Douglas
DC9-32 aircraft, 12 to 12.5 years for Boeing 737-200 Advanced aircraft,
Boeing 727-200 Advanced aircraft and McDonnell Douglas DC9-51
aircraft). The Partnership capitalizes major additions to its aircraft
and depreciates such capital improvements over the remaining estimated
useful life of the aircraft.
When aircraft are sold or otherwise disposed of, the cost and
accumulated depreciation (and any related allowance for equipment
impairment) are removed from the accounts and any gain or loss on such
sale or disposal is reflected in operations. Normal maintenance and
repairs are charged to operations as incurred. The Partnership provides
allowances for equipment impairment based upon a quarterly review of
all aircraft in its portfolio, when management believes that, based
upon market analysis, appraisal reports and leases currently in place
with respect to specific aircraft, the investment in such aircraft may
not be recoverable.
Maintenance reserves
Maintenance reserves represent cash received in accordance with the
terms of the leases of certain aircraft, which has been set aside for
certain required repairs or scheduled maintenance on the aircraft.
Deferred costs
Deferred costs represent amounts paid, directly or through rent
credits, based upon the terms of certain leases, for maintenance which
enhances the marketability of such aircraft. Deferred costs are
amortized over the terms of a remarketed lease.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The general partner of the Partnership, Integrated Aircraft Fund
Management Corp. ("IAFM"), is a wholly owned subsidiary of Presidio
Capital Corp. ("Presidio"). Other limited partnerships and similar
investment programs have been formed by affiliates of IAFM to acquire
equipment and, accordingly, conflicts of interest may arise between the
Partnership and such other limited partnerships. Affiliates of IAFM
have also engaged in businesses related to the management of equipment
and the sale of various types of equipment and may transact business
with the Partnership.
Subject to the rights of the Limited Partners under the Limited
Partnership Agreement, Presidio will control the Partnership through
its indirect ownership of all of the shares of IAFM. Presidio is
managed by Presidio Management Company, LLC ("Presidio Management"), a
company controlled by a director of Presidio. Presidio is also party to
an administrative services agreement with Wexford Management LLC
("Wexford") pursuant to which Wexford is responsible for the day-to-day
management of Presidio and, among other things, has authority to
designate directors of IAFM. During the nine months ended September 30,
1996, reimbursable expenses to Wexford by the Partnership amounted to
$24,140.
Presidio is a liquidating company. Although Presidio has no immediate
plans to do so, it will ultimately seek to dispose of the interests it
acquired from Integrated Resources, Inc. including IAFM, through
liquidation; however, there can be no assurance of the timing of such
transaction or the effect it may have on the Partnership.
IAFM is entitled to a 10 percent interest in the net income, loss and
distributions from operations and cash from sales. For the nine months
ended September 30, 1996 and 1995, IAFM received or accrued
distributions totaling $1,500,353 and $1,028,813, respectively.
In June 1992, IAFM assumed responsibilities to provide certain
management services previously provided by Citicorp Aircraft Management
Inc. ("CAMI"). IAFM has also retained the aviation consulting firm of
Simat, Helliesen & Eichner, Inc. ("SH&E") to provide consulting
services with respect to the Partnership. Services to be provided by
SH&E include advice as to commercial aviation market conditions,
long-term marketing and financial strategies, as well as technical and
financial advice on the sale or re-lease of the Partnership's aircraft.
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AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (continued)
IAFM has also entered into an agreement with Aviation Capital Group
("ACG"), an entity comprised primarily of former management of IAFM,
pursuant to which ACG will perform remarketing services with respect to
the sale or re-lease of certain of the Partnership's aircraft. ACG has
previously performed certain administrative services for IAFM.
All costs associated with the retention of SH&E and ACG (other than
normal competitive aircraft sales commissions, if any) will be paid by
IAFM.
As compensation for the foregoing services, IAFM receives the
management fee provided for in the Limited Partnership Agreement which
is equal to 4% of Distributions of Cash from Operations from Operating
Leases and 2% of Distributions of Cash from Operations from Full Payout
Leases, as such terms are defined in the Limited Partnership Agreement.
In conjunction with such services, IAFM earned management fees of
$328,000 and $411,000 for the nine months ended September 30, 1996 and
1995, respectively.
Upon ultimate liquidation of the Partnership, IAFM may be required to
remit to the Partnership certain payments representing capital account
deficit restoration based upon a formula provided within the Limited
Partnership Agreement. Such restoration amount may be less than the
recorded IAFM's deficit, which could result in distributions to the
limited partners of less than their recorded equity.
In April 1995, IAFM and certain affiliates entered into an agreement
with Fieldstone Private Capital Group, L.P. ("Fieldstone") pursuant to
which Fieldstone performs certain management and administrative
services relating to the Partnership. Substantially all costs
associated with the retention of Fieldstone will be paid by IAFM.
4 DISTRIBUTIONS TO PARTNERS
Distributions payable to Limited Partners and the General Partner of
$2,507,732 ($6.50 per unit) and $278,637 respectively, at September 30,
1996, were paid in November 1996.
5 COMMITMENTS AND CONTINGENCIES
a. Hawaiian Airlines, Inc.
On September 21, 1993, Hawaiian Airlines, Inc. ("Hawaiian"), the lessee
of a McDonnell Douglas Model DC9-51 aircraft (the "Hawaiian Aircraft"),
filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the United States Bankruptcy Code. On
August 30, 1994 the United States Bankruptcy Court entered an order
confirming Hawaiian's plan of reorganization. On September 12, 1994
(the "Effective Date"), Hawaiian's plan of reorganization became
effective.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
a. Hawaiian Airlines, Inc. (continued)
The Partnership and Hawaiian had entered into an agreement to settle
both the Partnership's proof of claim and its administrative claim
filed in the Hawaiian bankruptcy case with respect to the Hawaiian
Aircraft. Hawaiian has since settled such claims through the issuance
of Hawaiian Class A Common stock to the Partnership (Note 6).
In September 1994, the Partnership entered into a new lease (the "New
Lease") with Hawaiian which commenced on the Effective Date. The New
Lease provided for monthly rentals of $60,000, payable on a weekly
basis, which stepped up to $65,000 per month effective August 1, 1995.
To date, Hawaiian has continued to make its scheduled weekly payments.
The New Lease was scheduled to expire in November 1999.
On September 1, 1996, the Partnership and Hawaiian have agreed in
principle for the sale of the Hawaiian Aircraft. Under the terms of the
agreement, Hawaiian will pay the Partnership a down payment of $450,000
and the balance will be paid in monthly installments (39 payments of
$72,000 and then 36 payments of $50,000) until November 30, 2002, at
which time Hawaiian has a bargain purchase option on the aircraft. The
Partnership has treated this transaction as an installment sale and has
classified the net present value of the anticipated future cash flows
of approximately $4,019,000 on the balance sheet as note
receivable-installment sale. As of September 1, 1996 the Partnership
removed the associated cost of the equipment and the net carrying value
from the books of the Partnership, and recognized a gain on the sale of
approximately $1,655,000.
b. Continental Airlines, Inc.
The Partnership originally owned three McDonnell Douglas Model DC9-32
aircraft (the "DC9-32 Aircraft") and three Boeing Model 727-100
aircraft which were leased to Continental Airlines, Inc.
("Continental") for terms originally scheduled to expire in November
1993. On December 3, 1990, Continental Airlines Holdings, Inc. and its
subsidiary companies, including Continental, filed a petition for
reorganization under the United States Bankruptcy Code. In April 1993,
Continental's plan of reorganization was confirmed by the Bankruptcy
Court.
In October 1991, the Partnership and Continental restructured the
leases of the three DC9-32 Aircraft (the "Continental Restructured
Leases"), under which the leases were extended to December 1, 1997.
Pursuant to the restructuring, rents accrued at a rate of $76,500 per
aircraft per month effective September 1, 1990 for 13 months, with
simple interest accruing at a rate of 12% per annum (the "Continental
Deferred Rents"), and were repaid over a 36 month period commencing
July 1, 1992. The accrual of such interest is included in other revenue
on the statements of operations and the related receivable is included
in deferred rents and modification advances receivable on the balance
sheets.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
b. Continental Airlines, Inc. (continued)
The Continental Restructured Leases provide for monthly rental payments
of $64,500 per aircraft per month to December 1, 1997. Additionally,
either Continental or the Partnership may fund certain improvements and
modifications to such DC9-32 Aircraft; however, if such amounts are
funded by Continental, the Partnership will allow Continental a rental
credit with simple interest accruing at a rate of 12% per annum.
Continental is obligated to repay the aggregate rental credits taken,
as well as any modifications funded by the Partnership, over the
remaining term of the Continental Restructured Leases accruing interest
at a rate of 12% per annum. To date, such credits and Partnership
fundings have aggregated approximately $762,400 and the remaining
amounts to be recovered are included in deferred rents and modification
advances receivable on the balance sheets.
In October 1992, the Partnership and Continental entered into an
agreement to defer rentals due under the Continental Restructured
Leases for a three month period beginning January 1, 1993 (the "Second
Continental Rent Deferral"). Pursuant to the terms of the Second
Continental Rent Deferral, the deferred rents (aggregating $580,500),
plus interest accruing at a rate equal to 8.64% per annum, are being
repaid over a 42 month period commencing October 1, 1993.
In November 1991, Continental rejected the leases of the three Boeing
727-100 aircraft, which had been out of service since 1991. Due to the
condition and the related market for such aircraft, the Partnership
provided aggregate allowances for equipment impairment of approximately
$6,483,000. During 1993, the Partnership sold all three Boeing 727-100
aircraft. The Partnership retains its rights pursuant to a proof of
claim and an administrative claim filed in the Continental Bankruptcy
case with respect to such aircraft. The amount of recovery under such
claims, if any, is impossible to predict at this time.
c. Continental Air Micronesia
On January 20, 1993, the Partnership leased a Boeing 727-200 Advanced
aircraft to Continental for a term of approximately 71 months to be
used by Continental Air Micronesia (the "Air Mike Lease"). The Air Mike
Lease provides for a monthly base rent of $76,750, subject to
adjustments for rental credits relating to initial modifications
(including Traffic Collision Avoidance Systems, windshear detection,
upgrade avionics and auxiliary fuel tank) aggregating approximately
$794,000, of which approximately $300,000 was contributed in cash and
the balance was contributed in the form of rental credits provided to
Continental. Continental was allowed to take such rental credits
($13,741 per month through May 1996) such that they recouped their
aggregate cost of the initial modifications over a 36 month period with
interest at 9.31% per annum. Further, the Partnership agreed to provide
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
C. Continental Airlines Micronesia (continued)
up to $813,500 of financing for certain new image modifications through
credits ("Lessor Financing") against base rental payments due from
Continental. Continental is repaying the Lessor Financing credits
through monthly installments which will be amortized at the rate of
9.31% per annum over the remaining lease term. Through September 30,
1996, the Partnership had provided financing of approximately $755,000.
Such amounts, net of amounts repaid, are included within deferred costs
on the balance sheets.
d. Ladeco S.A.
During 1993, the Partnership consummated two leases with Ladeco S.A.
("Ladeco"), each for a Boeing 737-200 Advanced aircraft, for terms of
48 and 60 months. Both leases provide for, among other things, monthly
rentals of $47,500 each, plus certain maintenance reserves for engines
and landing gear, based upon the number of hours flown. As of September
30, 1996, such maintenance reserves aggregated approximately
$1,260,000. At lease inception, Ladeco paid a security deposit of
$125,000 per aircraft. Pursuant to the terms of the above mentioned
leases, the Partnership removed the two aircraft from the United States
Federal Aviation Administration ("FAA") Registry and caused the
aircraft to be re-registered under Chilean Registry. The Partnership
may be obligated to contribute in the form of rental credits to the
completion of certain airworthiness directives and FAA regulations
based on certain thresholds. The amount of such obligation, if any, is
undeterminable at this time. Ladeco has recently filed a voluntary
petition in the Chilean Courts for a reorganization similar to a
Chapter 11 proceeding in an American bankruptcy court. The Partnership
engaged Chilean counsel to monitor the court proceedings. To date,
Ladeco has remained current on all of its payments under the leases,
and based on information provided to the Partnership by Chilean counsel
and by Ladeco itself, the Partnership is fairly confident that there
will be no adverse consequences as a result of this situation.
e. Aloha Airlines, Inc.
In December 1993, Aloha Airlines, Inc. ("Aloha"), the lessee of a
Boeing 737-200 Advanced aircraft (the "Aloha Aircraft"), and the
Partnership agreed to amend the terms of its lease which was originally
scheduled to terminate on September 1, 1994. Pursuant to the lease
amendment, Aloha agreed to extend the term of the lease to February 1,
1996, providing for rentals of approximately 66% of the original lease
rate plus maintenance reserves, both payable quarterly in arrears. As
of September 30, 1996, the balance for such maintenance reserves is
approximately $400,000. The Aloha Aircraft is subject to a tax benefit
transfer lease ("TBT Lease") under which Allied Signal, the TBT Lessor,
retains the federal income tax benefits that normally accrue from
ownership of the aircraft other than lease rentals. There are
approximately five years remaining on the TBT Lease.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
b. Aloha Airlines, Inc. (continued)
Prior to the expiration of the Aloha lease on February 1, 1996, the
Partnership and Aloha agreed to a three month lease extension with rent
based on $300 per flight hour. The Partnership and Aloha subsequently
agreed on a further short-term lease extension, to October 15, 1996, on
the same terms, and on October 15, 1996, the Aloha Aircraft was
returned by Aloha to the Partnership at a facility in Marana, Arizona.
At Marana, the Aloha Aircraft is undergoing significant repair and
modification work required to bring it into compliance with certain
current FAA standards and to make it more readily able to be
remarketed. The Partnership is currently engaged and actively seeking a
new lessee or, possibly a purchaser for the Aloha Aircraft. The
Partnership anticipates a lengthy remarketing process for the Aloha
Aircraft.
f. American Trans Air, Inc.
In October 1994, USAir, Inc. ("USAir"), the lessee of two Boeing
727-200 Advanced aircraft (the "Aircraft"), notified the Partnership of
its intention to terminate the leases relating to such Aircraft
effective December 31, 1994. In light of USAir's intention to terminate
its leases, the Partnership entered into lease negotiations with
American Trans Air ("ATA") in an effort to remarket the Aircraft to
ATA. To meet certain ATA fleet scheduling needs, USAir agreed, pursuant
to an early termination agreement, to return one Aircraft in November
1994 and the second Aircraft in December 1994. The Partnership
consummated the lease of one of the Aircraft to ATA in November 1994
and the lease of the second Aircraft in December 1994 (collectively the
"ATA Leases"). Each of the ATA Leases, with an initial term of
approximately 39 months ("Basic Term"), provides for monthly rentals of
$59,000. In addition, at lease inception, ATA paid security deposits of
$59,000 per Aircraft. In early 1995, the Partnership contributed
$75,000 per aircraft in the form of cash or rental credits towards
bridging "C" check inspections. In addition, if the transition to ATA's
maintenance program requires the Aircraft to undergo heavy maintenance
checks during the Basic Term, an additional $150,000 per Aircraft will
be contributed by the Partnership towards the completion of such work.
Additionally, during the Basic Term, ATA may request that the
Partnership retrofit the Aircraft to comply with the Stage III noise
emission standards pursuant to FAR Part 36 of the Federal Aviation Act.
In the event that the Partnership consents to the retrofitting of the
Aircraft, ATA will perform such work (the "Improvements") as may be
required to bring such Aircraft into compliance with such standards.
Upon completion of the Improvements and the return of the Aircraft to
revenue service, the Partnership will reimburse ATA for the cost of the
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
f. American Trans Air, Inc. (continued)
Improvements. In consideration for the Partnership's consenting to the
Improvements, the ATA Leases will be extended for a term of five years
from the date such Aircraft are returned to service. During this five
year period, the monthly rentals will be increased by an amount
reflecting the enhanced value of the Aircraft including the
Improvements.
In May 1996, ATA exercised its renewal option for the lease of a third
Boeing 727-200 Advanced aircraft in which the Partnership has an
undivided 47.92231% joint venture interest. The lease, originally
scheduled to expire in November 1996, was renewed for an additional two
years at the same lease rate.
g. Southwest Airlines Co.
In July 1994, Southwest Airlines Co. ("Southwest") agreed to extend the
lease of another Boeing 737-200 Advanced aircraft, originally scheduled
to terminate in November 1994, for an additional one year period.
During the extension period, the lease provided for reduced rentals
equal to approximately 29% of the original lease rate.
In July 1995, Southwest agreed to a second lease extension on the lease
scheduled to terminate in November 1995, for an additional two year
period. During the second lease extension, the lease provides for
increased rentals of approximately 125% of the prior lease rate.
h. Complaints
In December 1993, a class action complaint was filed by Carla Wright,
Plato Kinias, Gertrude E. Boland and Hilda Duarte purportedly on behalf
of the limited partners of the Partnership (the "Plaintiffs") in the
Supreme Court of the State of New York, County of New York (the "New
York Action"). This action was substantially identical to a class
action filed by certain of the same plaintiffs in March 1993, in the
District of Columbia Superior Court, which action was dismissed in
October 1993. The New York Action also named as defendants the
Partnership, IAFM, Dean Witter Reynolds, Inc., Integrated Resources
Marketing, Inc., Integrated Resources Equity Corporation and CAMI. The
complaint alleged, among other things, that the offering material used
in connection with the Partnership's 1988 public offering of limited
partnership units contained false and misleading representations
constituting common law fraud, breach of fiduciary duty and negligence
on the part of the defendants. The complaint sought rescission of the
plaintiffs' investment in the Partnership plus rescissionary and
compensatory damages, plus interest and punitive damages.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
h. Complaints (continued)
On February 8, 1994, the Partnership filed a motion to dismiss the New
York Action. In response to such motion, the Plaintiffs filed an
Amended Complaint which, among other things, removed the Partnership
and CAMI as defendants. Subsequent to the filing of the Amended
Complaint, the defendants filed a motion to dismiss.
In October 1995, the New York Action was dismissed in its entirety
without leave to replead. Plaintiffs filed a Notice of Appeal of that
decision on or about January 26, 1996. However, in a stipulation dated
June 26,1996, Plaintiffs agreed not to perfect their appeal,and their
appeal expired as of October 26, 1996.
i. Tax assessment
In September 1996, the Partnership received proposed notices of
assessment from the State of Hawaii with respect to general excise tax
("GET") of approximately $1,338,000 (including interest and penalties)
for the years 1991, 1992, 1993 and 1994. The state is alleging that GET
is owed by the Partnership with respect to rents received from Aloha
Airlines, Inc. and Hawaiian Airlines, Inc. under the leases between the
Partnership and each of the airlines.
The leases with both Aloha and Hawaiian provide for full
indemnification of the Partnership for such taxes, but the bankruptcy
of Hawaiian may relieve Hawaiian of its indemnification obligation for
any periods prior to September 12, 1994, when Hawaiian and its
affiliates emerged from bankruptcy. In any event, it is the
Partnership, as taxpayer, which is ultimately liable for the GET, if it
is applicable.
The state has never previously applied the GET to rentals received by a
lessor of aircraft where the lessor's only contact with the state of
Hawaii is the fact that it has leased its aircraft to airlines which
are based in the state. Aloha and Hawaiian, as well as the Partnership,
have separately engaged tax counsel and are cooperating with the
Partnership to vigorously contest the proposed assessments.
Final notices of assessment have not yet been issued. Although there
can be no assurance that the contest of the assessments will be
successful, the Partnership believes that the state's position on the
applicability of GET in this instance is without merit. The Partnership
has not recorded any liability as a result of the proposed notices of
assessment.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 MARKETABLE SECURITIES
In June 1995, the Partnership received approximately 227,000 shares of
Class A Common stock in the reorganized Hawaiian Airlines, Inc. in
consideration of its general unsecured claims filed against Hawaiian.
During 1995, the Partnership sold all shares for net proceeds
aggregating $1,045,941.
7 MANAGEMENT FEE PAYABLE
The amount due to IAFM of $111,000 and $137,000 at September 30, 1996
and December 31, 1995, respectively, represents Partnership management
fees.
8 AIRCRAFT SALE
On April 15, 1996, the Partnership sold to Southwest a Boeing 737-200
Advanced aircraft leased to Southwest through May 1996 and early
terminated such lease. The Partnership received proceeds of
approximately $6,784,000, net of an associated aircraft sales
commission and other related costs. The net proceeds from the sale were
distributed to partners in August 1996. The Southwest aircraft was
originally purchased by the Partnership in July, 1988 for approximately
$12,804,377 inclusive of associated acquisition costs. As of April 15,
1996, when it was sold, the net carrying value of the aircraft was
approximately $3,216,000 (net of allowance for equipment impairment of
$2,300,000).
On September 1, 1996, the Partnership and Hawaiian have agreed in
principle for the sale of the Hawaiian Aircraft. Under the terms of the
agreement, Hawaiian will pay the Partnership a down payment of $450,000
and the balance will be paid in monthly installments (39 payments of
$72,000 and then 36 payments of $50,000) until November 30, 2002, at
which time Hawaiian has a bargain purchase option on the aircraft. The
Partnership has treated this transaction as an installment sale and has
classified the net present value of the anticipated future cash flows
of approximately $4,019,000 on the balance sheet as note
receivable-installment sale. As of September 1, 1996 the Partnership
removed the associated cost of the equipment and the net carrying value
from the books of the Partnership, and recognized a gain on the sale of
approximately $1,655,000.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership declared a cash distribution of $6.50 per unit of
limited partnership interest ("Unit") for the quarter ended September
30, 1996, as compared to a cash distribution of $10.00 per Unit with
respect to the quarter ended September 30, 1995. The Partnership
generated cash from operations (before rent credits and proceeds from
the sale of the Southwest aircraft) of approximately $8,382,000 for the
nine months ended September 30, 1996 (the "1996 Period") or
approximately $19.55 per Unit, as compared to $9,673,000 for the nine
months ended September 30, 1995 (the "1995 Period") or approximately
$22.57 per Unit.
During the 1996 Period, the Partnership decreased its gross aggregate
cash reserves, inclusive of collected maintenance reserves and original
working capital (1% of original offering proceeds), by an aggregate of
approximately $222,000 from approximately $4,296,000 at December 31,
1995 to approximately $4,074,000 at September 30, 1996. The aggregate
cash reserves were comprised of approximately $485,000 which
represented undistributed cash from operations and cash from sales, as
well as original working capital of $1,929,000 (1% of original offering
proceeds) and approximately $1,660,000 of collected maintenance
reserves.
During the first quarter of 1995, the Partnership provided ATA with
$150,000 of aggregate rent credits representing the Partnerships'
obligation to contribute $75,000 per aircraft towards bridging "C"
check inspections with respect to the aircraft leased to ATA during the
1994 Period. Further, if the transition to ATA's maintenance program
requires that the aircraft undergo heavy maintenance checks during the
lease term (the "Basic Term"), the Partnership will contribute an
additional $150,000 per aircraft towards the completion of such heavy
maintenance checks. Additionally, during the Basic Term, ATA may
request that the Partnership retrofit the aircraft to comply with the
Stage III noise emission standards pursuant to FAR Part 36. In the
event that the Partnership consents to retrofitting the aircraft, ATA
will make Improvements as may be required to bring the aircraft into
compliance with such standards. Upon completion of the Improvements,
the Partnership will reimburse ATA for the cost of the Improvements. In
consideration for the Partnership's consenting to the Improvements, the
ATA leases will be extended for a term of five years from the date the
aircraft are returned to service. During this five year period, the
lease rentals will be increased by an amount reflecting the enhanced
value of the aircraft including the Improvements.
As the Partnership's aircraft come off-lease (one of which came
off-lease on October 15, 1996), it may be necessary for the Partnership
to use a portion of its operating reserves and/or its anticipated
future cash flow, which would otherwise be available for distribution,
to upgrade or enhance these aircraft or related engines if the
Partnership determines that such expenditures are in its best interests
in order to maximize remarketing value. The Partnership is currently
evaluating strategies, including potential engine upgrades for certain
<PAGE>
Liquidity and Capital Resources (continued)
aircraft, to increase marketability and is reviewing its possible
future obligations to pay for bridging costs in order to facilitate
such remarketing. Furthermore, because of market conditions, the
Partnership may be required to bear some of the related costs of
compliance with recent mandatory federal regulations covering
maintenance and upgrading of aging aircraft. The Partnership's ability
to make distributions may be impacted by its obligation to pay such
costs.
The Partnership has encountered severe competition in attempting to
re-lease its aircraft as they have come off-lease due to a surplus in
the market of narrow-body aircraft similar to the types owned by the
Partnership. The substantial costs required to maintain and bring used
aircraft into compliance with FAA noise and maintenance requirements
adopted since 1990 are the primary factors which have adversely
affected the narrow body aircraft market. In addition, the Partnership
will also have to compete with newer, more fuel efficient aircraft
which comply with recently adopted FAA noise requirements. The
Partnership also believes that as a result of the factors listed above
there has been a significant decline in the re-sale value of
narrow-body aircraft similar to the types owned by the Partnership.
Although the Partnership believes that its anticipated gross cash flow
during the remainder of 1996 will be less than previous gross cash flow
generated (approximately 71% of the 1995 cash flow based upon gross
firm term leases plus the net amounts due under notes issued by
Continental Airlines, Inc. ("Continental") as repayment for deferred
rent and modification advances), the anticipated cash flow for the
remainder of 1996 and the foreseeable future should be sufficient to
pay its operating expenses and make distributions.
Of the 18 aircraft originally purchased by the Partnership; at
September 30, 1996, the Partnership had an interest in 12 of the
aircraft (inclusive of an undivided 47.92231% joint venture interest in
one aircraft) which had an original cost of approximately $127,677,000
(net book value of approximately $29,387,000). During the remainder of
1996, excluding rents from renewals and sales, the Partnership
anticipates receiving approximately $2,088,000 of rentals on
non-cancelable leases (inclusive of amounts which may be set-off by
lessees against basic rent as reimbursement for certain modifications
required under the applicable leases). After deducting operating
expenses, the foregoing aggregate rentals are not sufficient to
maintain previous distribution levels.
Of the remaining 12 aircraft, one aircraft which generated aggregate
gross rental revenues of approximately $60,000 per month came off-lease
in October 1996. The Partnership is currently engaged and actively
seeking a new lessee or, possibly a purchaser. The Partnership's
remaining aircraft are leased pursuant to leases which expire in 1997
(6 aircraft), 1998 (5 aircraft).
On September 1, 1996, the Partnership and Hawaiian have agreed in
principle for the sale of the Hawaiian Aircraft. Under the terms of the
agreement, Hawaiian will pay the Partnership a down payment of $450,000
and the balance will be paid in monthly installments (39 payments of
$72,000 and then 36 payments of $50,000) until November 30, 2002, at
<PAGE>
Liquidity and Capital Resources (continued)
which time Hawaiian has a bargain purchase option on the aircraft. The
Partnership has treated this transaction as an installment sale and has
classified the net present value of the anticipated future cash flows
of approximately $4,019,000 on the balance sheet as note
receivable-installment sale. As of September 1, 1996 the Partnership
removed the associated cost of the equipment and the net carrying value
from the books of the Partnership, and recognized a gain on the sale of
approximately $1,655,000.
On April 15, 1996, the Partnership sold to Southwest Airlines Co.
("Southwest") a Boeing 737-200 Aircraft leased to Southwest through May
1996 and early terminated such lease. The Partnership received proceeds
of approximately $6,784,000, net of an associated aircraft sales
commission and other related closing costs. The net proceeds from the
sale of the Southwest aircraft were distributed to partners in August
1996.
Inflation has not had any material effect on the Partnership's revenues
since its inception nor does the Partnership anticipate any material
effect on its business from this factor. The prior softness in the
aircraft industry and resulting declines in the value of the types of
aircraft owned by the Partnership have resulted in the Partnership
providing allowances for equipment impairment. Additionally, because of
the financial troubles of certain airlines which are lessees of the
Partnership's aircraft, cash flow and, therefore, distributions have
been reduced.
In September 1996, the Partnership received proposed notices of
assessment from the State of Hawaii with respect to general excise tax
of approximately $1,338,000 (including interest and penalties) for the
years 1991, 1992, 1993, and 1994, relating to the lease rents paid by
Hawaiian and Aloha. While the leases with Hawaiian and Aloha indemnify
the Partnership for such taxes, the obligation is ultimately the
Partnership's as lessor. The Partnership believes the assessment is
without merit and is contesting the assessment vigorously. There is no
assurance that the Partnership will be successful in contesting the
assessment. The Partnership has not recorded any liability as a result
of their assessment.
In April 1995, the General Partner and certain affiliates entered into
an agreement with Fieldstone pursuant to which Fieldstone performs
certain management and administrative services relating to the
Partnership. Substantially all costs associated with the retention of
Fieldstone will be paid by the General Partner.
Results of Operations
Net income increased for the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995, primarily due to
the gain on sale of the Southwest aircraft and the installment sale of
the Hawaiian aircraft.
<PAGE>
Results of Operations (continued)
Rental revenues decreased overall for the nine months ended September
30, 1996 compared to the corresponding period of the prior year due to
reduced rentals pertaining to leases with Aloha Airlines, Inc., which
was renewed past its originally scheduled expiration date of February
1, 1996 for an aggregate of eight and one-half months generating rents
based on actual usage, and Southwest Airlines (N702ML) which was early
terminated and sold effective April 15, 1996 and which generated rents
through May 15, 1996. This was partially offset by a rental increase on
the renewal by Southwest Airlines, Inc. (N28SW) in November 1995 for
two years at 125% of the prior lease rate.
Expenses decreased for the nine months ended September 30, 1996 as
compared to the corresponding period of the prior year as follows: (i)
operating expenses decreased due to the expense of a "C" check
performed on both Aircraft in the 1995 Period which were remarketed to
ATA; (ii) reduced depreciation on aircraft which have been sold or
depreciated to its salvage value prior to the current period; (iii)
management fees decreased due to the decrease in rental revenue on
which such fees are based; and (iv) such reductions were offset
partially by an increase in bad debt expense in the current period used
to recognize a write off of the receivable from Midway Airlines, Inc.
which was deemed to have no value in litigation.
A gain was recognized during the quarter ended September 30, 1996 due
to the Hawaiian aircraft sale. No gain was recognized in the comparable
prior period.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In December 1993, a class action complaint was filed by Carla Wright,
Plato Kinias, Gertrude E. Boland and Hilda Duarte, purportedly on
behalf of the limited partners of the Partnership (the "Plaintiffs"),
in the Supreme Court of the State of New York, County of New York (the
"New York Action"). This action was substantially identical to a class
action filed by certain of the same plaintiffs in March 1993 in the
District of Columbia Superior Court, which action was dismissed in
October 1993. The New York Action named as defendants the Partnership,
IAFM, Dean Witter Reynolds, Inc., Integrated Resources Marketing,
Inc., Integrated Resources Equity Corporation and Citicorp Aircraft
Management, Inc. ("CAMI"). The complaint alleged, among other things,
that the offering material used in connection with the Partnership's
1988 public offering of Units contained false and misleading
representations constituting common law fraud, breach of fiduciary
duty and negligence on the part of the defendants. The complaint
sought rescission of the plaintiffs' investment in the Partnership
including rescissionary and compensatory damages, plus interest and
punitive damages.
On February 8, 1994, the Partnership filed a motion to dismiss the New
York Action. In response to such motion, Plaintiffs filed an Amended
Complaint which, among other things, removed the Partnership and CAMI
as defendants. Subsequent to the Amended Complaint, the defendants
filed a motion to dismiss that pleading.
In October 1995, the New York Action was dismissed in its entirety
without leave to replead. Plaintiffs filed a Notice of Appeal of that
decision on or about January 26, 1996. However, in a stipulation dated
June 26, 1996, Plaintiffs agreed not to perfect their appeal, and their
appeal expired as of October 26, 1996.
ITEM 5 - OTHER INFORMATION
In September 1996, Equity Resource Bay Fund, an unaffiliated third
party commenced an unsolicited offer to purchase up to 18,000 units of
limited partnership interest ("Units") of the Partnership for $22.50
per Unit. As required by Rule 14e-2 under the Securities Exchange Act
of 1934, the Partnership provided limited partners with its position
with respect to this offer. The Partnership recommends rejecting the
offer due to its inadequacy in price.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRCRAFT INCOME PARTNERS L.P.
By: Integrated Aircraft Fund Management Corp.,
General Partner
Dated: November 12, 1996 /s/Douglas J. Lambert
------------------
Douglas J. Lambert
President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of the September 30, 1996 Form 10-Q of Aircraft Income Partners L.P.
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,703,629
<SECURITIES> 0
<RECEIVABLES> 4,901,441
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,605,070
<PP&E> 127,676,927
<DEPRECIATION> 70,789,948
<TOTAL-ASSETS> 42,275,561
<CURRENT-LIABILITIES> 3,090,270
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 37,001,412
<TOTAL-LIABILITY-AND-EQUITY> 42,275,561
<SALES> 0
<TOTAL-REVENUES> 13,421,874
<CGS> 0
<TOTAL-COSTS> 633,088
<OTHER-EXPENSES> 6,750,979
<LOSS-PROVISION> 66,133
<INTEREST-EXPENSE> 1,570
<INCOME-PRETAX> 5,970,104
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,970,104
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
