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 June 30, 1998
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 - JUNE 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS - June 30, 1998 and December 31, 1997 ................
STATEMENTS OF OPERATIONS - For the three months ended June 30, 1998
and 1997 and for the six months ended June 30, 1998 and 1997......
STATEMENT OF PARTNERS' EQUITY - For the six months ended June 30, 1998
STATEMENTS OF CASH FLOWS - For the six months ended June 30, 1998 and
1997
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 .....................................................................
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
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AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Leased aircraft, net of accumulated depreciation of
$58,348,224 and $71,503,840 and allowance for
equipment impairment of $19,787,000 and $24,100,000 $14,570,828 $20,012,212
Cash and cash equivalents ............................. 16,063,142 6,432,713
Note receivable - installment sale .................... 2,601,941 2,911,906
Accounts receivable ................................... 457,259 505,730
Restricted cash - security deposits ................... 431,500 506,120
Other receivables ..................................... 73,090 89,891
Deferred costs ........................................ 72,537 95,505
Prepaid expenses ...................................... 11,348 13,170
----------- -----------
$34,281,645 $30,567,247
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Distribution payable .................................. $11,874,221 $ --
Maintenance reserves .................................. 1,228,679 2,129,110
Security deposits payable ............................. 431,500 506,120
Accounts payable and accrued expenses ................. 215,303 168,561
Management fee payable ................................ 180,200 --
Deferred income ....................................... 135,654 133,217
Deferred costs payable ................................ 50,000 50,000
----------- -----------
Total liabilities .................................. 14,115,557 2,987,008
----------- -----------
Commitments and contingencies
Partners' equity
Limited partners' equity (385,805 units
issued and outstanding) ........................ 18,140,524 24,813,260
General partner's equity ........................... 2,025,564 2,766,979
----------- -----------
Total partners' equity ............................. 20,166,088 27,580,239
----------- -----------
$34,281,645 $30,567,247
=========== ===========
</TABLE>
See notes to financial statements.
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<TABLE>
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the three months ended For the six months ended
June 30, June 30,
------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Rental ............................ $1,426,556 $1,911,481 $2,896,644 $3,822,956
Interest .......................... 269,406 112,922 365,200 196,647
Interest - installment note ....... 59,281 72,721 122,035 148,618
---------- ---------- ---------- ----------
1,755,243 2,097,124 3,383,879 4,168,221
---------- ---------- ---------- ----------
Costs and expenses
Depreciation ...................... 791,735 1,546,281 1,684,059 3,392,497
Operating ......................... 332,254 6,937 497,469 72,260
Management fee .................... 180,200 85,000 180,200 188,000
General and administrative ........ 57,566 175,043 132,302 275,296
Other expenses .................... 22,274 20,091 42,575 36,819
---------- ---------- ---------- ----------
1,384,029 1,833,352 2,536,605 3,964,872
---------- ---------- ---------- ----------
371,214 263,772 847,274 203,349
Gain on sale of aircraft - net ......... 1,360,469 632,368 3,612,796 632,368
---------- ---------- ---------- ----------
Net income ............................. $1,731,683 $ 896,140 $4,460,070 $ 835,717
========== ========== ========== ==========
Net income attributable to
Limited partners .................. $1,558,515 $ 806,526 $4,014,063 $ 752,145
General partners .................. 173,168 89,614 446,007 83,572
---------- ---------- ---------- ----------
$1,731,683 $ 896,140 $4,460,070 $ 835,717
========== ========== ========== ==========
Net income per unit of limited
partnership interest (385,805 units
outstanding) ...................... $ 4.04 $ 2.09 $ 10.40 $ 1.95
========== ========== ========== ==========
</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, 1998 ................... $ 24,813,260 $ 2,766,979 $ 27,580,239
Net income for the six months
ended June 30, 1998 ................... 4,014,063 446,007 4,460,070
Distributions to partners for the six months
ended June 30, 1998 ($27.70 per limited
partnership unit) ..................... (10,686,799) (1,187,422) (11,874,221)
------------ ------------ ------------
Balance, June 30, 1998 ..................... $ 18,140,524 $ 2,025,564 $ 20,166,088
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
For the six months ended
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities
Net income .............................................. $ 4,460,070 $ 835,717
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation ..................................... 1,684,059 3,392,497
Gain on disposition of aircraft, net ............. (3,612,796) (632,368)
Changes in assets and liabilities
Accounts receivable .................................. 48,471 105,378
Restricted cash - security deposits .................. 74,620 (11,950)
Other receivables .................................... 16,801 427,425
Deferred costs ....................................... 22,968 64,181
Prepaid expenses ..................................... 1,822 62,841
Deferred rents and modification advances receivable .. -- 254,432
Maintenance reserves ................................. (900,431) 11,917
Security deposits payable ............................ (74,620) 11,950
Accounts payable and accrued expenses ................ 46,742 50,471
Management fee payable ............................... 180,200 (9,000)
Deferred income ...................................... 2,437 --
------------ ------------
Net cash provided by operating activities .... 1,950,343 4,563,491
------------ ------------
Cash flows from investing activities
Proceeds from sale of aircraft, net ..................... 7,370,121 1,922,266
Proceeds from installment sale note receivable .......... 309,965 679,382
Additions and modifications to leased aircraft, net ..... -- 251
------------ ------------
Net cash provided by investing activities .... 7,680,086 2,601,899
------------ ------------
Cash flows from financing activities
Distributions to partners ............................... -- (4,929,730)
------------ ------------
Net increase in cash and cash equivalents .................... 9,630,429 2,235,660
Cash and cash equivalents, beginning of period ............... 6,432,713 6,279,937
------------ ------------
Cash and cash equivalents, end of period ..................... $ 16,063,142 $ 8,515,597
============ ============
</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, 1997. The results of
operations for the six months ended June 30, 1998 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.
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. Effective July 31,
1998, Presidio is indirectly controlled by NorthStar Capital Investment
Corp., a Maryland corporation. Effective as of August 28, 1997,
Presidio has a management agreement with NorthStar Presidio Management
Company, LLC ("NorthStar Presidio") pursuant to which NorthStar
Presidio provides the day-to-day managment of Presidio and its direct
and indirect subsidiaries and affiliates. For the six months ended June
30, 1998, reimbursable expenses paid to NorthStar Presidio amounted to
$11,250.
IAFM is entitled to a 10 percent interest in the net income, loss and
distributions from operations and cash from sales. For the six months
ended June 30, 1998 and 1997, IAFM received or accrued distributions
totaling $1,187,422 and $685,875, respectively.
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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (continued)
All costs associated with the retention of 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
$180,200 and $188,000 for the six months ended June 30, 1998 and 1997,
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 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 performed certain management and administrative
services relating to the Partnership. Substantially all costs
associated with the retention of Fieldstone, other than legal fees,
were paid by IAFM. Fieldstone continued to perform such services until
July 31, 1998.
4 DISTRIBUTION TO PARTNERS
Distributions payable to the limited partners and general partners of
$10,686,799 ($27.70 per unit) and $1,187,422, respectively, at June 30,
1998, were paid in July 1998.
5 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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
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
payments due from Continental. Continental was repaying the Lessor
Financing credits through monthly installments which were amortized at
the rate of 9.31% per annum over the remaining lease term. Through June
30, 1998, 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 June 30, 1998 and December 31,
1997.
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 June 30, 1998, such maintenance reserves aggregated
approximately $590,000. 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
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
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 lease terms.
e. Aloha Airlines, Inc.
Aloha Airlines, Inc. ("Aloha") leases a Boeing 737-297 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 was scheduled to be returned following the
expiration of the term and the completion of certain repairs and
maintenance to bring the aircraft in compliance with the lease return
provisions. On November 15, 1997, the lease was scheduled to expire in
accordance with the terms of the lease. Aloha had indicated that
certain modifications to the aircraft as required by the Airworthiness
Directives issued by the FAA were 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 sought interpretation of the
language under the lease regarding return conditions for the aircraft.
In December 1997, the foregoing action was settled and Aloha agreed to
satisfy certain return conditions of the lease.
On May 19, 1998, the aircraft was sold to an unaffiliated third party
for proceeds of $4,100,000, exclusive of selling expenses of
approximately $124,000. The aircraft had a net carrying value of
approximately $2,617,000 at the time of sale.
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 has leased two other Boeing 727-200 Advanced aircraft
(the "ATA Aircraft") pursuant to separate leases that commenced in
November and December 1994, respectively. Each of the leases had an
initial term of approximately 39 months and provides for monthly
rentals of $59,000. During early 1995, the Partnership contributed
$75,000 per aircraft, in the form of cash or rental credits, towards
bridging "C" check inspections.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 COMMITMENTS AND CONTINGENCIES (continued)
In March 1998, the Partnership and ATA agreed to amend all three of the
leases, extending the term at the same lease rentals through December
31, 2000, at which time ATA will have a purchase obligation of
approximately $3.3 million per aircraft. During the term of the amended
leases, ATA may, at its expense, retrofit the aircraft to comply with
the Stage III noise emission standards pursuant to FAR Part 36.
On July 30, 1998, the Partnership entered into an agreement for the
sale, subject to the lease with ATA, of its undivided interest in the
JV Aircraft to an unaffiliated third party for gross sale proceeds of
approximately $2,000,000 as discussed in Note 7.
g. Tax assessment
In September 1996, the Partnership received proposed notices of
assessment from the State of Hawaii with respect to general excise tax
("GET") aggregating approximately $1,338,000 (including interest and
penalties) for the years 1991, 1992, 1993 and 1994. In July 1998, the
Partnership received additional proposed notices of assessment for GET
aggregating approximately $585,000 for the years 1995, 1996 and 1997.
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.
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 provision or liability as a result of the proposed
notices of assessment.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 AIRCRAFT SALES
(i) 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 were 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 AlliedSignal, the TBT Lessor, retains the federal income
tax benefits that normally accrue from ownership of the
aircraft, other than lease rentals. There are approximately
two 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.
(ii) On March 31, 1998, a Boeing 737-2H4 aircraft owned by the
Partnership was sold to an unaffiliated third party for
proceeds of $3,500,000 exclusive of selling expenses of
approximately $106,000. The aircraft, which was formerly
leased to Southwest Airlines Co., had been off-lease since
January 1998. At the time of sale, the aircraft had a net
carrying value of approximately $1,141,000.
(iii) On May 19, 1998, a Boeing 737-297 Advanced aircraft owned by
the Partnership was sold to an unaffiliated third party for
proceeds of $4,100,000, exclusive of selling expenses of
approximately $124,000. The aircraft, which was formerly
leased to Aloha Airlines, Inc. had a net carrying value of
approximately $2,617,000 at the time of sale.
7 SUBSEQUENT EVENT
On July 30, 1998, the Partnership entered into an agreement with an
unaffiliated third party to sell, subject to the lease with ATA, its
undivided 47.92231% joint venture interest in one Boeing 727-200
Advanced aircraft. Upon the consummation of the sale, gross proceeds
are anticipated to be approximately $2,000,000. On July 31, 1998, the
Partnership entered into a non-binding letter of intent to sell five
aircraft for an aggregate purchase price of approximately $16,000,000.
The letter is subject to various conditions as well as the execution of
definitive documentation. Accordingly, there can be no assurance that
such sales will be consummated.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership is actively seeking to sell a significant portion of
its equipment portfolio in order to take advantage of the currently
strong aircraft market and on July 30, 1998, entered into an agreement
for the sale of the JV Aircraft for an aggregate purchase price of
approximately $2,000,000. Additionally, on July 31, 1998, the
Partnership entered into a non-binding letter of intent to sell five
aircraft for purchase prices aggregating approximately $16,000,000. The
letter is subject to various conditions as well as the execution of
definitive documentation. Accordingly, there can be no assurance that
such sales will be consummated.
The Partnership declared a cash distribution of $27.70 per unit of
limited partnership interest totaling $11,874,221 which was paid in
July 1998. After giving effect to the foregoing distribution, the
Partnership had cash available of approximately $2,666,000, inclusive
of the original general working capital reserves of $1,929,000. In
addition, the Partnership had approximately $1,229,000 of collected
maintenance reserves at June 30, 1998.
The Partnership generated cash from operations of approximately
$2,913,000 for the six months ended June 30, 1998 (the "1998 Period")
or approximately $6.80 per Unit, as compared to $4,762,000 for the six
months ended June 30, 1997 (the "1997 Period") or approximately $11.11
per Unit. Additionally, during the six months ended June 30, 1998, the
Partnership collected proceeds of approximately $7,370,000 or $17.19
per Unit from the sale of two aircraft as discussed in Note 6.
As the Partnership's aircraft come off-lease (five of which are
scheduled to come off-lease in 1998, one in 1999 and three in 2000), 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 if
the Partnership determines that such expenditures are in its best
interests in order to maximize remarketing value. 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 anticipated cash flow for the remainder of 1998 and the foreseeable
future, combined with reserves, should be sufficient to pay the
Partnership's operating expenses. The Partnership's ability to make
future distributions will be impacted by its obligation to pay such
costs.
Of the 18 aircraft originally purchased by the Partnership, at June 30,
1998, the Partnership had an interest in 9 of the aircraft (inclusive
of an undivided 47.92231% joint venture interest in one aircraft),
which had an original cost of approximately $92,706,000 (net book value
of approximately $14,571,000). During the remainder of 1998, excluding
<PAGE>
Liquidity and Capital Resources (continued)
rents from renewals and sales, the Partnership anticipates receiving
approximately $2,286,000 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).
Aloha had leased a Boeing 737-200 Advanced Aircraft (the "Aloha
Aircraft") whose lease was scheduled to expire in accordance with its
terms on February 1, 1996. The Aloha Aircraft is subject to a tax
benefit transfer lease ("TBT lease") under which AlliedSignal, the TBT
Lessor, retains the federal income tax benefits that normally accrue
from ownership of the aircraft, other than lease rentals. There are
approximately two years remaining on the TBT lease, through May 21,
2000.
On May 22, 1997, the Aloha Aircraft was sold to an unaffiliated third
party for proceeds of approximately $1,982,000 exclusive of selling
expenses of approximately $60,000. Associated with the aircraft were
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 restricted
until certain contingent liabilities related to the aircraft are
satisfied. At the time of sale, the aircraft had a net carrying value
of approximately $1,290,000.
On November 15, 1997, the lease of a Boeing 737-200 Advanced aircraft
leased to Aloha was scheduled to expire in accordance with the terms of
the lease. Aloha had indicated that certain modifications to the
aircraft as required by the Airworthiness Directives issued by the FAA
were 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 sought interpretation of the
language under the lease regarding return conditions for the aircraft.
In December 1997, the foregoing action was settled and Aloha agreed to
satisfy certain return conditions of the lease. The Partnership sold
the aircraft on May 19, 1998 to an unaffiliated third party for gross
sale proceeds of $4,100,000.
In September 1996 and July 1998, the Partnership received proposed
notices of assessment from the State of Hawaii with respect to general
excise tax of approximately $1,923,000 (including interest and
penalties) for the years 1991 through 1997. 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.
<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 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.
Results of Operations
Net income increased for the three and six month periods ended June 30,
1998 as compared to the three and six month periods ended June 30,
1997, principally due to the gain on sale of the Southwest Aircraft and
the Aloha Aircraft in 1998 which aggregated approximately $3,613,000 as
compared to a gain on sale of another Aloha Aircraft of approximately
$632,000 during the six months ended June 30, 1997.
Revenues decreased overall for the three and six month periods ended
June 30, 1998 compared to the corresponding periods of the prior year.
Rental income decreased due to reduced rentals from the Aloha lease,
certain aircraft leased to Continental (as of December 1, 1997) at
lower rates and the expiration of a lease with Southwest Airlines Co.
Interest income increased due to larger balances of undistributed cash
available for investment.
Expenses decreased for the three and six month periods ended June 30,
1998 as compared to the corresponding periods of the prior year as
follows: (i) decrease in depreciation due to two ATA Aircraft and one
Southwest aircraft having previously reached their salvage values, as
well as the sale of the Aloha Aircraft, (ii) decrease in general and
administrative expenses, primarily due to lower legal costs, offset by
(iii) increase in operating expenses due to maintenance costs related
to a Boeing 737 aircraft to comply with certain airworthiness
directives and insurance and storage for another Boeing 737 aircraft
which was off lease since January 1998 and sold on March 31, 1998.
<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/ Richard Sabella
--------------------
Richard Sabella
President
/s/ Lawrence Schachter
-----------------------
Lawrence Schachter
Senior Vice President and
Chief Financial Officer
Date: August 7, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the financial
statements of the June 30, 1998 Form 10-Q of Aircraft Income Partners L.P. and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,063,142
<SECURITIES> 0
<RECEIVABLES> 3,059,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,710,817
<PP&E> 72,919,052
<DEPRECIATION> 58,348,224
<TOTAL-ASSETS> 34,281,645
<CURRENT-LIABILITIES> 14,115,557
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 20,166,088
<TOTAL-LIABILITY-AND-EQUITY> 34,281,645
<SALES> 0
<TOTAL-REVENUES> 6,996,675
<CGS> 0
<TOTAL-COSTS> 852,546
<OTHER-EXPENSES> 1,684,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,460,070
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,460,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,460,070
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
