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 March 31, 1997
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.
FORM 10-Q - MARCH 31, 1997
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS - March 31, 1997 and December 31, 1996 .................
STATEMENTS OF OPERATIONS - For the three months ended
March 31, 1997 and 1996 .............................................
STATEMENT OF PARTNERS' EQUITY - For the three months ended
March 31, 1997 ......................................................
STATEMENTS OF CASH FLOWS - For the three months ended
March 31, 1997 and 1996 ............................................
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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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
March 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Leased aircraft, net of accumulated depreciation of
$74,493,724 and $72,647,508 and allowance for
equipment impairment of $27,500,000................... $25,683,203 $27,529,419
Cash and cash equivalents ............................... 7,123,222 6,279,937
Note receivable - installment sale ...................... 3,351,562 3,887,665
Accounts receivable ..................................... 711,711 769,547
Deferred rents and modifications advances receivable .... -- 254,432
Restricted cash - security deposits ..................... 487,416 481,677
Deferred costs .......................................... 191,776 223,866
Other receivables ....................................... 104,799 523,915
Prepaid expenses ........................................ 69,545 95,361
----------- -----------
$37,723,234 $40,045,819
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Distributions payable ................................... $ 2,572,033 $ 2,357,697
Maintenance reserves .................................... 2,230,497 2,167,329
Security deposits payable ............................... 487,416 481,677
Deferred income ......................................... 131,550 131,550
Management fee payable .................................. 103,000 94,000
Deferred costs payable................................... 48,016 48,016
Accounts payable and accrued expenses ................... 121,393 103,765
----------- -----------
Total liabilities .................................... 5,693,905 5,384,034
----------- -----------
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AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
(continued)
March 31, December 31,
1997 1996
----------- -----------
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Commitments and contingencies
Partners' equity
Limited partners' equity (as restated) (385,805 units
issued and outstanding) .......................... 28,817,441 31,186,652
General partner's equity (as restated) ............... 3,211,888 3,475,133
----------- -----------
Total partners' equity ............................... 32,029,329 34,661,785
----------- -----------
$37,723,234 $40,045,819
=========== ===========
See notes to financial statements.
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the three months ended
March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues
Rental ................................................. $ 1,911,475 $ 2,879,560
Interest ............................................... 83,725 100,822
Interest - Installment note ............................ 75,897 --
----------- -----------
2,071,097 2,980,382
----------- -----------
Costs and expenses
Depreciation ........................................... 1,846,216 2,563,023
Management fee ......................................... 103,000 120,000
General and administrative ............................. 100,253 69,302
Operating .............................................. 65,323 11,096
Other expenses ......................................... 16,728 4,447
Provision for bad debt ................................. -- 66,133
Interest expense ....................................... -- 1,254
----------- -----------
2,131,520 2,835,255
----------- -----------
Net (loss)income ......................................... $ (60,423) $ 145,127
=========== ===========
Net (loss) income attributable to
Limited partners ....................................... $ (54,381) $ 130,614
General partners ....................................... (6,042) 14,513
----------- -----------
$ (60,423) $ 145,127
=========== ===========
Net (loss) income per unit of limited partnership interest
(385,805 units outstanding) ............................ $ (0.14) $ 0.34
=========== ===========
See notes to financial statements.
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF PARTNERS' EQUITY
Limited General Total
Partners' Partner's Partners'
Equity Equity Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1,1997 ...................... $ 50,476,902 $(15,815,117) $ 34,661,785
Reallocation of partners' equity ............. (19,290,250) 19,290,250 ---
------------ ------------ ------------
Balance, January 1,1997 (as restated) ........ 31,186,652 3,475,133 34,661,785
Net loss for the three months
ended March 31, 1997 ........................ (54,381) (6,042) (60,423)
Distributions to partners for the three months
ended March 31, 1997 ($6.00 per limited
partnership unit) ........................... (2,314,830) (257,203) (2,572,033)
------------ ------------ ------------
Balance, March 31, 1997 $ 28,817,441 $ 3,211,888 $ 32,029,329
============ ============ ============
See notes to financial statements.
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
For the three months ended
March 31,
1997 1996
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities
Net (loss) income ............................................ $ (60,423) $ 145,127
Adjustments to reconcile net (loss) income to net
cash provided by operating activities
Depreciation .......................................... 1,846,216 2,563,023
Provision for bad debt ................................ -- 66,133
Changes in assets and liabilities
Accounts receivable ....................................... 57,836 132,322
Deferred rents and modification advances receivable ....... 254,432 93,117
Restricted cash - security deposits ....................... (5,739) (5,760)
Security deposits payable ................................. 5,739 5,760
Deferred costs ............................................ 32,090 32,090
Other receivables ......................................... 419,116 18,111
Prepaid expenses .......................................... 25,816 12,238
Maintenance reserves ...................................... 63,168 158,860
Management fee payable .................................... 9,000 (17,000)
Accounts payable and accrued expenses ..................... 17,628 (12,287)
----------- -----------
Net cash provided by operating activities ......... 2,664,879 3,191,734
----------- -----------
Cash flows from investing activities
Proceeds from installment sale note receivable ............... 536,103 --
Additions and modifications to leased aircraft, net .......... -- (44,110)
----------- -----------
Net cash provided by (used in) investing activities 536,103 (44,110)
----------- -----------
Cash flows from financing activities
Distributions to partners .................................... (2,357,697) (3,429,378)
----------- -----------
Net increase (decrease) in cash and cash equivalents .............. 843,285 (281,754)
Cash and cash equivalents, beginning of period .................... 6,279,937 7,448,455
----------- -----------
Cash and cash equivalents, end of period .......................... $ 7,123,222 $ 7,166,701
=========== ===========
Supplemental disclosure of cash flow information
Interest paid ................................................ $ -- $ 1,254
=========== ===========
See notes to financial statements.
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AIRCRAFT INCOME PARTNERS L. P.
NOTES TO FINANCIAL STATEMENTS
1 INTERIM FINANCIAL INFORMATION
The summary 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, 1996. The results of
operations for the three months ended March 31, 1997 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.
The allowance is inherently subjective and is based upon management's
best estimate of current conditions and assumptions about expected
future conditions. The Partnership may provide for additional losses in
subsequent periods and such provisions could be material.
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.
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AIRCRAFT INCOME PARTNERS L. P.
NOTES TO FINANCIAL STATEMENTS
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred costs
Deferred costs represent amounts paid, directly or through rent
credits, based upon the terms of certain leases, for maintenance which
enhanced the marketability of such aircraft. Deferred costs are
amortized over the terms of a remarketed lease.
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 controls 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 the authority to
designate directors of IAFM. For the three months ended March 31, 1997
and 1996, reimbursable expenses paid to Wexford amounted to $7,500 and
$10,500.
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. 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 three months
ended March 31, 1997 and 1996, IAFM received or accrued distributions
totaling $257,203 and $300,071, 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 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 performs 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) are 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
$103,000 and $120,000 for the three months ended March 31, 1997 and
1996, 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 are paid by IAFM.
4 DISTRIBUTIONS TO PARTNERS
Distributions payable to Limited Partners and the General Partner of
$2,314,830 ($6.00 per unit) and $257,203, respectively, at March 31,
1997, were paid in May 1997.
5 PARTNERS' EQUITY
The General Partner holds a 10% equity interest in the Partnership. At
the inception of the Partnership, the General Partner's equity account
was credited with only the actual capital contributed in cash, $9,950.
The Partnership's management determined that this accounting does not
appropriately reflect the limited partners' and the General Partner's
relative participations in the Partnership's net assets, since it does
not reflect the General Partner's 10% equity interest in the
Partnership. Thus, the Partnership has restated its financial
statements to reallocate $19,290,250 (10% of the gross proceeds raised
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AIRCRAFT INCOME PARTNERS L. P.
NOTES TO FINANCIAL STATEMENTS
5 PARTNERS' EQUITY (continued)
at the Partnership's formation) of the partners' equity to the General
Partner's equity account. This reallocation was made as of the
inception of the Partnership and all periods presented in the financial
statements have been restated to reflect the reallocation. The
reallocation has no impact on the Partnership's financial position,
results of operations, cash flows, distributions to partners, or the
partners' tax basis capital accounts.
6 COMMITMENTS AND CONTINGENCIES
a. Hawaiian Airlines, Inc.
On September 1, 1996, the Partnership and Hawaiian Airlines, Inc.
("Hawaiian") amended the lease agreement of a McDonnell Douglas model
DC9-51 aircraft (the "Hawaiian Aircraft"). Under the terms of the
agreement, Hawaiian paid 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 for 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 $4,052,000 less principal paid, on the balance sheet
as note receivable-installment sale. On 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.
In October 1991, the Partnership and Continental Airlines, Inc.
("Continental") restructured the leases (the "Continental Restructured
Leases") of the three McDonnell Douglas Model DC9-32 aircraft (the
"Continental Aircraft"). The leases, which were scheduled to expire in
November 1993, were extended to December 1, 1997 at a rate of $64,500
per aircraft per month. Additionally, the Partnership funded certain
improvements and modifications to the aircraft through the application
of rent credits to be repaid with simple interest accruing at a rate of
12% per annum.
Through March 31, 1997, Continental has repaid all aggregate rental
credits taken, as well as all of the modifications funded by the
Partnership.
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
"Continental Rent Deferral"). Pursuant to the terms of the Continental
Rent Deferral, the deferred rents (aggregating $580,500), plus interest
accrue at a rate equal to 8.64%. As of March 31, 1997, Continental had
repaid the Second Continental Rent Deferral.
<PAGE>
AIRCRAFT INCOME PARTNERS L. P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
b. Continental Airlines, Inc. (continued)
In November 1991, in connection with its reorganization under the
United States Bankruptcy Code, Continental rejected the leases of the
three Boeing 727-100 aircraft owned by the Partnership, 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 to be 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 would
recoup 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 up to $813,500 of financing for certain new image
modifications through credits ("Lessor Financing") against base rental
payments due from Continental. Continental is currently repaying the
Lessor Financing credits through monthly installments which are
amortized at the rate of 9.31% per annum over the remaining lease term.
Through March 31, 1997, the Partnership had provided financing of
approximately $755,000. Such amounts, net of amounts repaid, are
included within deferred costs on the balance sheet at March 31, 1997
and December 31, 1996.
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 March 31,
1997, such maintenance reserves aggregated approximately $1,473,000. At
lease inception of both aircraft, 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 causing the aircraft
<PAGE>
AIRCRAFT INCOME PARTNERS L. P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
d. Ladeco S.A. (continued)
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.
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 March 31, 1997, the balance for such maintenance reserves is
approximately $758,000, inclusive of a $391,000 return provision
allowance.
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 accrued from ownership of the
aircraft other than lease rentals. There are approximately three years
remaining on the TBT Lease, until its expiration on May 21, 2000.
Prior to the originally scheduled 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 marketable. The
Partnership is currently engaged in actively seeking a new lessee or a
purchaser for the Aloha Aircraft.
Additionally, Aloha leases another Boeing 737-200 Advanced aircraft
from the Partnership, the lease of which was scheduled to expire in
accordance with its lease terms on August 15, 1996. Aloha agreed to a
fifteen month lease extension at 50% of the prior lease rate.
<PAGE>
AIRCRAFT INCOME PARTNERS L. P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
f. American Trans Air, Inc.
In May 1996, American Trans Air, Inc. ("ATA"), the lessee of a Boeing
727-200 Advanced aircraft (in which the Partnership owns an undivided
47.92231% joint venture interest) (the "JV Aircraft") exercised its
renewal option. The lease, originally scheduled to expire in November
1996, was renewed for an additional two years at the same lease rate.
In addition, ATA leases two Boeing 727-200 Advanced aircraft (the "ATA
Aircraft"), since November and December 1994, each with an initial term
of approximately 39 months ("Basic Term"), which provides for monthly
rentals of $59,000. The Partnership has contributed in the form of cash
or rental credits during early 1995, $75,000 per aircraft towards
bridging "C" check inspections. In addition, if the transition to ATA's
maintenance program requires that both ATA Aircraft 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 ATA Aircraft to comply with the Stage III
noise emission standards pursuant to FAR Part 36 of the Federal
Aviation Registry Act. In the event that the Partnership consents to
the retrofitting of the ATA 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 ATA Aircraft to revenue service, 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 such aircraft are
returned to service. During this five year period, the monthly rentals
shall be increased by an amount reflecting the enhanced value of the
ATA Aircraft including the Improvements. In addition, at lease
inception, ATA paid security deposits of $59,000 per aircraft.
g. Southwest Airlines Co.
In July 1995, Southwest Airlines Co. agreed to an additional 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. 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
and Hawaiian under the leases between the Partnership and each of the
airlines.
<PAGE>
AIRCRAFT INCOME PARTNERS L. P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
h. Tax assessment (continued)
The leases with both Aloha and Hawaiian provided 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 21, 1993, when Hawaiian and its
affiliates sought bankruptcy protection. In any event, it is the
Partnership, as taxpayer, which is ultimately liable for the GET, if it
is applicable.
The State of Hawaii 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 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 both airlines 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.
7 MANAGEMENT FEE PAYABLE
The amount due to IAFM of $103,000 and $94,000 at March 31, 1997 and
December 31, 1996, respectively, represents Partnership management
fees.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The General Partner holds a 10% equity interest in the Partnership. At
the inception of the Partnership, the General Partner's equity account
was credited with only the actual capital contributed in cash, $9,950.
The Partnership's management determined that this accounting does not
appropriately reflect the limited partners' and the General Partner's
relative participations in the Partnership's net assets, since it does
not reflect the General Partner's 10% equity interest in the
Partnership. Thus, the Partnership has restated its financial
statements to reallocate $19,290,250 (10% of the gross proceeds raised
at the Partnership's formation) of the partners' equity to the General
Partner's equity account. This reallocation was made as of the
inception of the Partnership and all periods presented in the financial
statements have been restated to reflect the reallocation. The
reallocation has no impact on the Partnership's financial position,
results of operations, cash flows, distributions to partners, or the
partners' tax basis capital accounts.
The Partnership declared a cash distribution of $6.00 per unit of
limited partnership interest ("Unit") for the quarter ended March 31,
1997, which represented an annualized cash distribution rate of 4.8%
(based on initial offering price of $500 per Unit) as compared to a
cash distribution of $7.00 per Unit with respect to the quarter ended
March 31, 1996. The Partnership generated cash from operations (before
rent credits) of approximately $2,692,000 for the three months ended
March 31, 1997 (the "1997 Period") or approximately $6.28 per Unit, as
compared to $2,989,000 for the three months ended March 31, 1996 (the
"1996 Period") or approximately $6.97 per Unit.
During the 1997 Period, the Partnership increased its gross aggregate
cash reserves, inclusive of collected maintenance reserves and original
working capital (1% of original offering proceeds), by an aggregate of
approximately $183,000, from approximately $4,397,000 at December 31,
1996 to approximately $4,580,000 at March 31, 1997. The aggregate cash
reserves were comprised of approximately $421,000, 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 $2,230,000 of collected maintenance
reserves.
As the Partnership's aircraft come off-lease (one of which came off
lease in 1996 and six of which are scheduled to come off-lease in
1997), 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 aircraft, to increase
marketability and is reviewing its possible future obligations to pay
<PAGE>
Liquidity and Capital Resources (continued)
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 1997 will be less than previous gross cash flow
generated (approximately 76% of the 1996 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 1997 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 March
31, 1997, 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 $152,613,000
(net book value of approximately $25,683,000). During the remainder of
1997, excluding rents from renewals and sales, the Partnership
anticipates receiving approximately $6,140,000 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, six aircraft which generate aggregate
gross rental revenues of approximately $4,399,000 per year are
scheduled to come off-lease or be sold during 1997. The Partnership's
remaining aircraft are leased pursuant to leases which expire in 1998
(5 aircraft) and the Aloha Aircraft which is currently off-lease and
being actively remarketed.
On September 1, 1996, the Partnership and Hawaiian amended the lease
agreement of the Hawaiian Aircraft. Under the terms of the agreement,
Hawaiian has paid the Partnership a down payment of $450,000 and the
balance will be paid in monthly installments (39 payments of $72,000
<PAGE>
Liquidity and Capital Resources (continued)
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 $4,052,000 less principal payments, on the balance sheet
as note receivable-installment sale. On 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.
Aloha had leased a Boeing 737-200 Advance Aircraft (the "Aloha
Aircraft") whose lease expired in accordance with its terms on February
1, 1996. 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 three years
remaining on the TBT Lease, until its expiration on May 21, 2000.
Prior to the scheduled 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 marketable. The
Partnership is currently engaged in actively seeking a new lessee or a
purchaser for the Aloha Aircraft.
Additionally, Aloha leases another Boeing 737-200 Advanced aircraft
from the Partnership the lease of which was scheduled to expire in
accordance with its lease terms on August 15, 1996. Aloha agreed to a
fifteen month lease extension at 50% of the prior lease rate.
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. 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 21, 1993, when Hawaiian and its
affiliates sought bankruptcy protection. In any event, it is the
Partnership, as taxpayer, which is ultimately liable for the GET, if it
is applicable.
<PAGE>
Liquidity and Capital Resources (continued)
The State of Hawaii 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 both airlines
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.
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 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 are paid by the General Partner.
Results of Operations
There was a net loss for the three months ended March 31, 1997 as
compared to the net income for the three months ended March 31, 1996,
as the reduction in revenue exceeded the reduction in expenses.
Revenues decreased overall for the three months ended March 31, 1997
compared to the corresponding period of the prior year. Rental income
decreased due to the expiration, in October 1996, of a lease with
Aloha, as well as the Hawaiian Aircraft which is currently being
accounted for on an installment sale basis.
Expenses decreased for the three months ended March 31, 1997 as
compared to the corresponding period of the prior year as follows; (i)
no depreciation in the current period on the aircraft previously leased
to Southwest Aircraft as well as the Hawaiian Aircraft which were sold
subsequent to the prior year period and, (ii) reduction in provision
for bad debts due to no provision considered necessary in the current
period (iii) reduced management fee due to decreased distribution on
which such fee is based, offset by (i) increase in operating expenses
due to higher insurance costs on the off-lease Aloha Aircraft, and (ii)
higher general and administrative expenses due to increased legal fees
in the current period.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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
/s/ Douglas J. Lambert
----------------------
Douglas J. Lambert
President and Chief Financial Officer
May 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of the March 31, 1997 Aircraft Income Partners L.P.
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,610,638
<SECURITIES> 0
<RECEIVABLES> 4,063,273
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,040,031
<PP&E> 100,176,927
<DEPRECIATION> 74,493,724
<TOTAL-ASSETS> 37,723,234
<CURRENT-LIABILITIES> 5,693,905
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 32,029,329
<TOTAL-LIABILITY-AND-EQUITY> 37,723,234
<SALES> 0
<TOTAL-REVENUES> 2,071,097
<CGS> 0
<TOTAL-COSTS> 285,304
<OTHER-EXPENSES> 1,846,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 60,423
<INCOME-TAX> 0
<INCOME-CONTINUING> 60,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,423
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
