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, 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, Suite 270, Greenwich, CT 06830
(Address of principal executive offices)
(203) 862-7444
(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 [ ]
<PAGE>
AIRCRAFT INCOME PARTNERS L. P.
FORM 10-Q - SEPTEMBER 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS - September 30, 1997 and December 31, 1996
STATEMENTS OF OPERATIONS - For the three months ended September 30,
1997 and 1996 and the nine months ended September 30, 1997 and 1996
STATEMENT OF PARTNERS' EQUITY - For the nine months ended September 30,
1997
STATEMENTS OF CASH FLOWS - For the nine months ended September 30, 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 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
September 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Leased aircraft, net of accumulated depreciation of
$70,086,434 and $72,647,508 and allowance for
equipment impairment of $24,100,000 and $27,500,000 . $21,429,618 $27,529,419
Cash and cash equivalents .............................. 6,316,210 6,279,937
Note receivable - installment sale ..................... 3,061,755 3,887,665
Accounts receivable .................................... 633,060 769,547
Restricted cash - security deposits .................... 499,753 481,677
Deferred costs ......................................... 127,595 223,866
Other receivables ...................................... 103,754 523,915
Prepaid expenses ....................................... 22,725 95,361
Deferred rents and modification advances receivable .... -- 254,432
----------- -----------
$32,194,470 $40,045,819
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Maintenance reserves ................................... $ 2,031,896 $ 2,167,329
Distributions payable .................................. 1,929,025 2,357,697
Security deposits payable .............................. 499,753 481,677
Deferred income ........................................ 325,050 131,550
Accounts payable and accrued expenses .................. 100,288 103,765
Management fee payable ................................. 80,000 94,000
Deferred costs payable ................................. 48,928 48,016
----------- -----------
Total liabilities ................................... 5,014,940 5,384,034
----------- -----------
Commitments and contingencies
Partners' equity
Limited partners' equity (as restated) (385,805 units
issued and outstanding) ......................... 24,452,622 31,186,652
General partner's equity (as restated) .............. 2,726,908 3,475,133
----------- -----------
Total partners' equity .............................. 27,179,530 34,661,785
----------- -----------
$32,194,470 $40,045,819
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the three months ended For the nine months ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental ............................. $1,911,474 $2,284,428 $5,734,430 $7,801,049
Interest ........................... 95,089 131,660 291,736 391,627
Interest - installment note ........ 69,473 27,012 218,091 27,012
---------- ---------- ---------- ----------
2,076,036 2,443,100 6,244,257 8,219,688
---------- ---------- ---------- ----------
Depreciation ....................... 1,417,406 1,835,203 4,809,903 6,750,979
Management fee ..................... 80,000 111,000 268,000 328,000
General and administrative ......... 66,406 59,541 341,702 255,435
Operating .......................... 22,325 16,844 94,585 49,653
Other expenses ..................... 20,090 9,416 56,909 20,762
Provision for bad debts ............ -- -- -- 66,133
Interest expense ................... -- -- -- 1,570
---------- ---------- ---------- ----------
1,606,227 2,032,004 5,571,099 7,472,532
---------- ---------- ---------- ----------
469,809 411,096 673,158 747,156
Gain on sale of aircraft - net -- 1,654,880 632,368 5,222,948
---------- ---------- ---------- ----------
$ 469,809 $2,065,976 $1,305,526 $5,970,104
========== ========== ========== ==========
Net income attributaable to
Limited partners ................... $ 422,828 $1,859,378 $1,174,973 $5,373,094
General partners ................... 46,981 206,598 130,553 597,010
---------- ---------- ---------- ----------
$ 469,809 $2,065,976 $1,305,526 $5,970,104
========== ========== ========== ==========
Net income per unit of limited
partnership interest (385,805 units
outstanding......................... $ 1.10 $ 4.82 $ 3.05 $ 13.93
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENT 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 income for the nine months
ended September 30, 1997 ................... 1,174,973 130,553 1,305,526
Distributions to partners for the nine months
ended September 30, 1997 ($20.50 per limited
partnership unit) .......................... (7,909,003) (878,778) (8,787,781)
------------ ------------ ------------
Balance, September 30, 1997 ..................... $ 24,452,622 $ 2,726,908 $ 27,179,530
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
For the nine months ended
September 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities
Net income ........................................... $ 1,305,526 $ 5,970,104
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation .................................. 4,809,903 6,750,979
Gain on sale of aircraft - net ................ (632,368) (5,222,948)
Changes in assets and liabilities
Accounts receivable ............................... 136,487 505,247
Restricted cash - security deposits ............... (18,076) (17,218)
Deferred costs .................................... 96,271 96,270
Other receivables ................................. 420,161 (13,351)
Prepaid expenses .................................. 72,636 24,314
Deferred rents and modification advances receivable 254,432 286,707
Maintenance reserves .............................. (135,433) (262,394)
Security deposits payable ......................... 18,076 17,218
Deferred income ................................... 193,500 (47,666)
Accounts payable and accrued expenses ............. (3,477) (20,749)
Management fee payable ............................ (14,000) (26,000)
------------ ------------
Net cash provided by operating activities . 6,503,638 8,040,513
------------ ------------
Cash flows from investing activities
Proceeds from sale of aircraft - net ................. 1,922,266 6,784,400
Proceeds from installment sale note receivable ....... 825,910 150,835
Additions and modifications to leased aircraft, net .. 912 (74,036)
------------ ------------
Net cash provided by investing activities . 2,749,088 6,861,199
------------ ------------
Cash flows from financing activities
Distributions to partners ............................ (9,216,453) (15,646,538)
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
(continued)
For the nine months ended
September 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents ...... 36,273 (744,826)
Cash and cash equivalents, beginning of period ............ 6,279,937 7,448,455
------------ ------------
Cash and cash equivalents, end of period .................. $ 6,316,210 $ 6,703,629
============ ============
Supplemental disclosure of cash flow information
Interest paid ........................................ $ -- $ 1,570
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
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 nine months ended September 30, 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.
<PAGE>
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.
Recently issued accounting pronouncement
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 128, "Earnings per Share"
establishes standards for computing and presenting earnings per share,
and is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Statement No. 129, "Disclosure
of Information about Capital Structure" establishes standards for
disclosing information about an entity's capital structure, and is
effective for financial statements for periods ending after December
15, 1997. Statement No. 130, "Reporting Comprehensive Income"
establishes standards for reporting and display of comprehensive income
and its components, and is effective for fiscal years beginning after
December 15, 1997. Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" establishes standards for the way
that public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers, and is effective for financial
statements for periods beginning after December 15, 1997.
Management of the Company does not believe that these new standards
will have a material effect on the Company's reported operating
results, per share amounts, financial position or cash flows.
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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (continued)
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. On November 2, 1997,
the Administrative Services Agreement between Presidio and Wexford
Management LLC ("Wexford"), the administrator for Presidio, expired.
Pursuant to that agreement Wexford had authority to designate directors
of IAFM. Effective November 3, 1997, Wexford and Presidio entered into
a new Administrative Services Agreement dated as of November 3, 1997
(the "ASA"), which expires on May 3, 1998. Under the terms of the ASA,
Wexford will provide consulting and administrative services to Presidio
and its affiliates, including IAFM and the Partnership, for a term of
six months. For the nine months ended September 30, 1997 and 1996,
reimbursable expenses paid to Wexford amounted to $20,883 and $24,140,
respectively.
Effective November 3, 1997, officers and employees of Wexford that had
served as officers and/or directors of IAFM tendered their resignation.
On the same date, the Board of Directors of Presidio appointed new
individuals to serve as officers and/or directors of IAFM.
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, 1997 and 1996, IAFM received or accrued
distributions totaling $878,778 and $1,500,353, 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.
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
$268,000 and $328,000 for the nine months ended September 30, 1997 and
1996, respectively.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (continued)
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 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, other than legal fees, are
paid by IAFM. The agreement with Fieldstone was scheduled to terminate
November 3, 1997. IAFM and certain affiliates are currently negotiating
a possible extension of the agreement. Fieldstone has indicated that it
will continue to perform services in respect of the Partnership pending
the conclusion of such negotiation.
4 DISTRIBUTIONS TO PARTNERS
Distributions payable to Limited Partners and the General Partner of
$1,736,122 ($4.50 per unit) and $192,903, respectively, at September
30, 1997, were paid in November 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
5 PARTNERS' EQUITY (continued)
(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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
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 original 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 November 1991, in connection with its reorganization under the
United States Bankruptcy Code, Continental Airlines, Inc.
("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
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
c. Continental Air Micronesia (continued)
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 September 30, 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 September 30,
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, respectively. 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, 1997, such maintenance reserves aggregated
approximately $1,393,000. 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 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. The Ladeco aircraft leases,
originally scheduled to expire in October 1997 and March 1998, were
each renewed for a one year period at the same lease rate beginning at
the expiration of the original leases.
e. Aloha Airlines, Inc.
Aloha Airlines, Inc. ("Aloha") leases a 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, and the aircraft is scheduled to be returned following the
expiration of the term and the completion of certain repairs and
maintenance to bring the aircraft into compliance with the lease return
provisions.
On November 15, 1997, the lease of a Boeing 737-200 Advanced aircraft
leased to Aloha Airlines, Inc. ("Aloha") is scheduled to expire in
accordance with the terms of the lease. Aloha has indicated that
certain modifications to the aircraft as required by the Airworthiness
Directives issued by the Federal Avaiation Administration ("FAA") are
not applicable under the return conditions of the lease.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
e. Aloha Airlines, Inc. (continued)
On November 14, 1997, First Security Bank, National Association, acting
not in its individual capacity, but solely as trustee under a trust
agreement in which the Partnership is beneficiary, filed a complaint
for declaratory judgment in the United States District Court, Southern
District of New York. The complaint requests interpretation of the
language under the lease regarding return conditions for the aircraft.
There can be no assurance as to how the court may interpret the
language under the lease.
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
and the aircraft is scheduled to be returned following the expiration
of the term and the completion of certain repairs and maintenance to
bring the aircraft into compliance with the lease return provisions.
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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
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.
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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
h. Tax assessment (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 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 in vigorously contesting 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 $80,000 and $94,000 at September 30, 1997 and
December 31, 1996, respectively, represents Partnership management
fees.
8 AIRCRAFT SALE
On May 22, 1997, a Boeing 737-297 Advanced aircraft, owned by the
Partnership, was sold to an unaffiliated third party for proceeds of
approximately $1,982,000 exclusive of selling expenses of approximately
$60,000. The aircraft, which was formerly leased to Aloha, had been
off-lease since October 15, 1996. Associated with the aircraft was
approximately $639,000 of net maintenance and return provision reserves
that Aloha had previously paid the Partnership as provided under the
lease agreement. The reserves on the Aloha aircraft will be held back
until certain contingent liabilities related to the aircraft are
satisfied. Specifically, 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. At the time of the sale, the aircraft had a
net carrying value of approximately $1,290,000.
<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 $4.50 per unit of
limited partnership interest ("Unit") for the quarter ended September
30, 1997, which represented an annualized cash distribution rate of
3.6% (based on initial offering price of $500 per Unit) as compared to
a cash distribution of $6.50 per Unit with respect to the quarter ended
September 30, 1996. The Partnership generated cash from operations of
approximately $6,859,000 for the nine months ended September 30, 1997
(the "1997 Period") or approximately $16.00 per Unit, as compared to
$8,382,000 for the nine months ended September 30, 1996 (the "1996
Period") or approximately $19.55 per Unit.
During the 1997 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 $356,000 from approximately $4,397,000 at December 31,
1996 to approximately $4,255,000 at September 30, 1997. The aggregate
cash reserves were comprised of approximately $293,000 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 $2,032,000 of collected maintenance
reserves.
As the Partnership's aircraft come off-lease (one of which has expired
as of November 15, 1997 and one of which is scheduled to come off lease
in December 1997 pending completion of return conditions), 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
<PAGE>
Liquidity and Capital Resources (continued)
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 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 73% of the 1996 cash flow based upon gross
firm term leases), the anticipated cash flow for the remainder of 1997
and the foreseeable future should be sufficient to pay the
Partnership's operating expenses and to make distributions.
Of the 18 aircraft originally purchased by the Partnership, at
September 30, 1997, the Partnership had an interest in 11 of the
aircraft (inclusive of an undivided 47.92231% joint venture interest in
one aircraft), which had an original cost of approximately $115,616,000
(net book value of approximately $21,430,000). During the remainder of
1997, excluding rents from renewals and sales, the Partnership
anticipates receiving approximately $1,683,000 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.
On November 15, 1997, the lease of a Boeing 737-200 Advanced aircraft
leased to Aloha is scheduled to expire in accordance with the terms of
the lease. On or about December 5, 1997, the lease of one Boeing
737-200 Advanced aircraft leased to Southwest is scheduled to expire.
The Partnership has commenced its remarketing efforts with respect to
this aircraft. There can be no assurance that the Partnership will be
successful with respect to its remarketing activities.
Of the remaining 11 aircraft, two aircraft as discussed above, which
generate aggregate gross rental revenues of approximately $1,508,000
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 during 1998 (8 aircraft) and 1999 (1 aircraft).
<PAGE>
Liquidity and Capital Resources (continued)
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
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.
On May 22, 1997, a Boeing 737-297 Advanced aircraft, owned by the
Partnership, was sold to an unaffiliated third party for proceeds of
approximately $1,982,000 exclusive of selling expenses of approximately
$60,000. The aircraft, which was formerly leased to Aloha had been
off-lease since October 15, 1996. Associated with the aircraft was
approximately $639,000 of net maintenance and return provision reserves
that Aloha had previously paid the Partnership as provided under the
lease agreement. The reserves on the Aloha aircraft will be held back
until certain contingent liabilities related to the aircraft are
satisfied. Specifically, 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. At the time of the sale, the aircraft had a
net carrying value of approximately $1,290,000.
Additionally, Aloha leases another Boeing 737-200 Advanced aircraft
from the Partnership, the lease of which was previously 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 and will return the aircraft to the Partnership upon completion of
certain repairs and maintenance required to bring the aircraft into
compliance with the return conditions of the lease.
On November 15, 1997, the lease of a Boeing 737-200 Advanced aircraft
leased to Aloha Airlines, Inc. ("Aloha") is scheduled to expire in
accordance with the terms of the lease. Aloha has indicated that
certain modifications to the aircraft as required by the Airworthiness
Directives issued by the Federal Avaiation Administration ("FAA") are
not applicable under the return conditions of the lease.
On November 14, 1997, First Security Bank, National Association, acting
not in its individual capacity, but solely as trustee under a trust
agreement in which the Partnership is beneficiary, filed a complaint
for declaratory judgment in the United States District Court, Southern
District of New York. The complaint requests interpretation of the
language under the lease regarding return conditions for the aircraft.
There can be no assurance as to how the court may interpret the
language under the lease.
<PAGE>
Liquidity and Capital Resources (continued)
On December 1, 1997, the leases of three McDonnell Douglas DC-9-30
aircraft leased to Continental are schedulted to expire. Continental
and the Partnership have agreed in principal to extend the leases of
two of the aircraft to October 1998 and one aircraft to December 1998.
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 and
Hawaiian 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.
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 in vigorously contesting 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 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, other than legal fees, are paid by the General Partner. The
agreement with Fieldstone was scheduled to terminate November 3, 1997.
IAFM and certain affiliates are currently negotiating a possible
extension of the agreement. Fieldstone has indicated that it will
continue to perform services in respect of the Partnership pending the
conclusion of such negotiation.
<PAGE>
Results of Operations
Net income decreased for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1996, principally due
to the gain on sale of the Southwest Aircraft and the Hawaiian Aircraft
in 1996 being higher than the gain on sale of the Aloha Aircraft in
1997.
Revenues decreased overall for the nine months ended September 30, 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 reduced rentals on the second Aloha Aircraft, and the
Hawaiian Aircraft which is currently being accounted for on an
installment sale basis.
Expenses decreased for the nine months ended September 30, 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 as well as the Hawaiian Aircraft which were sold
subsequent to the prior year period and reduced depreciation on the
Aloha Aircraft sold during the current 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 and, (ii) increase
general and administrative expenses due to higher legal costs on the
sale of the Aloha aircraft.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 15, 1997, the lease of a Boeing 737-200 Advanced aircraft
leased to Aloha Airlines, Inc. ("Aloha") is scheduled to expire in
accordance with the terms of the lease. Aloha has indicated that
certain modifications to the aircraft as required by the Airworthiness
Directives issued by the Federal Avaiation Administration ("FAA") are
not applicable under the return conditions of the lease.
On November 14, 1997, First Security Bank, National Association, acting
not in its individual capacity, but solely as trustee under a trust
agreement in which the Partnership is beneficiary, filed a complaint
for declaratory judgment in the United States District Court, Southern
District of New York. The complaint requests interpretation of the
language under the lease regarding return conditions for the aircraft.
There can be no assurance as to how the court may interpret the
language under the lease.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
Current reports on Form 8-K dated July 25, 1997 and August 28, 1997.
<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/ Richard Sabella
-------------------
Richard Sabella
President
/s/ Kevin Reardon
-----------------
Kevin Reardon
Vice President, Treasurer and Secretary
(Chief Accounting Officer)
Date: November 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of the September 30, 1997 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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,316,210
<SECURITIES> 0
<RECEIVABLES> 3,694,815
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,764,852
<PP&E> 91,516,052
<DEPRECIATION> 70,086,434
<TOTAL-ASSETS> 32,194,470
<CURRENT-LIABILITIES> 5,014,940
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 27,179,530
<TOTAL-LIABILITY-AND-EQUITY> 32,194,470
<SALES> 0
<TOTAL-REVENUES> 6,876,625
<CGS> 0
<TOTAL-COSTS> 761,196
<OTHER-EXPENSES> 4,809,903
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,305,526
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,305,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,305,526
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
