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, 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 - MARCH 31, 1998
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS - March 31, 1998 and December 31, 1997
STATEMENTS OF OPERATIONS - For the three months ended March 31, 1998
and 1997
STATEMENT OF PARTNERS' EQUITY - For the three months ended March 31,
1998
STATEMENTS OF CASH FLOWS - For the three months ended March 31, 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>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Leased aircraft, net of accumulated depreciation of
$65,436,564 and $71,503,840 and allowance for
equipment impairment of $20,787,000 and $24,100,000 $17,978,488 $20,012,212
Cash and cash equivalents ............................. 11,129,970 6,432,713
Note receivable - installment sale .................... 2,758,660 2,911,906
Restricted cash - security deposits ................... 512,502 506,120
Accounts receivable ................................... 463,745 505,730
Deferred costs ........................................ 63,415 95,505
Other receivables ..................................... 46,806 89,891
Prepaid expenses ...................................... 20,867 13,170
----------- -----------
$32,974,453 $30,567,247
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Maintenance reserves .................................. $ 1,651,365 $ 2,129,110
Security deposits payable ............................. 512,502 506,120
Deferred income ....................................... 137,558 133,217
Deferred costs payable ................................ 50,000 50,000
Accounts payable and accrued expenses ................. 314,402 168,561
----------- -----------
Total liabilities .................................. 2,665,827 2,987,008
----------- -----------
Commitments and contingencies
Partners' equity
Limited partners' equity (385,805 units
issued and outstanding) ........................ 27,268,808 24,813,260
General partner's equity ........................... 3,039,818 2,766,979
----------- -----------
Total partners' equity ............................. 30,308,626 27,580,239
----------- -----------
$32,974,453 $30,567,247
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the three months ended
March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues
Rental .............................................. $ 1,470,088 $ 1,911,475
Interest ............................................ 95,794 83,725
Interest - installment note ......................... 62,754 75,897
----------- -----------
1,628,636 2,071,097
Costs and expenses
Depreciation ........................................ 892,324 1,846,216
Operating ........................................... 165,215 65,323
General and administrative .......................... 74,736 100,253
Other expenses ...................................... 20,301 16,728
Management fee ...................................... -- 103,000
----------- -----------
1,152,576 2,131,520
476,060 (60,423)
Gain on disposition of aircraft, net ..................... 2,252,327 --
----------- -----------
Net income (loss) ........................................ $ 2,728,387 $ (60,423)
=========== ===========
Net income (loss) attributable to
Limited partners .................................... $ 2,455,548 $ (54,381)
General partners .................................... 272,839 (6,042)
----------- -----------
$ 2,728,387 $ (60,423)
=========== ===========
Net income (loss) per unit of limited partnership interest
(385,805 units outstanding) ......................... $ 6.36 $ (0.14)
=========== ===========
</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 three months
ended March 31, 1998 ............ 2,455,548 272,839 2,728,387
----------- ----------- -----------
Balance, March 31, 1998 .............. $27,268,808 $ 3,039,818 $30,308,626
=========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
For the three months ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities
Net income (loss) .................................... $ 2,728,387 $ (60,423)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation .................................. 892,324 1,846,216
Gain on disposition of aircraft, net .......... (2,252,327) --
Changes in assets and liabilities
Accounts receivable ............................... 41,985 57,836
Deferred rents and modification advances receivable -- 254,432
Restricted cash - security deposits ............... (6,382) (5,739)
Security deposits payable ......................... 6,382 5,739
Deferred costs .................................... 32,090 32,090
Other receivables ................................. 43,085 419,116
Prepaid expenses .................................. (7,697) 25,816
Maintenance reserves .............................. (477,745) 63,168
Management fee payable ............................ -- 9,000
Deferred income ................................... 4,341 --
Accounts payable and accrued expenses ............. 145,841 17,628
------------ ------------
Net cash provided by operating activities . 1,150,284 2,664,879
------------ ------------
Cash flows from investing activities
Proceeds from sale of aircraft, net .................. 3,393,727 --
Proceeds from installment sale note receivable ....... 153,246 536,103
------------ ------------
Net cash provided by investing activities . 3,546,973 536,103
------------ ------------
Cash flows from financing activities
Distributions to partners ............................ -- (2,357,697)
------------ ------------
Net increase in cash and cash equivalents ................. 4,697,257 843,285
Cash and cash equivalents, beginning of period ............ 6,432,713 6,279,937
------------ ------------
Cash and cash equivalents, end of period .................. $ 11,129,970 $ 7,123,222
============ ============
</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 three months ended March 31, 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. On August 28, 1997, an
affiliate of NorthStar Capital Partners acquired all of the Class B
shares of Presidio, the corporate parent of IAFM. This acquisition,
when aggregated with previous acquisitions, caused NorthStar Capital
Partners to acquire indirect control 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 expired on May 3, 1998. Under the terms of the ASA,
Wexford provided consulting and administrative services to Presidio and
its affiliates, including IAFM and the Partnership. Presidio also
entered into a management agreement with NorthStar Presidio Management
Company, LLC ("NorthStar Presidio"). Under the terms of the management
agreement, NorthStar Presidio provides the day-to-day management of
Presidio and its direct and indirect subsidiaries and affiliates. For
the three months ended March 31, 1998 and 1997, reimbursable expenses
paid to NorthStar Presidio (1998) and Wexford (1997) amounted to $3,750
and $7,500, respectively.
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, IAFM received distributions totaling $257,203. No
distribution was paid with respect to the three months ended March 31,
1998.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES(continued)
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
$103,000 for the three months ended March 31, 1997. No management fees
were earned for the three months ended March 31, 1998.
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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
4 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
4 COMMITMENTS AND CONTINGENCIES (continued)
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
March 31, 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 March 31, 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 March 31, 1998, such maintenance reserves aggregated
approximately $1,012,000. 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 lease terms.
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 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
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
4 COMMITMENTS AND CONTINGENCIES (continued)
e. Aloha Airlines, Inc. (continued)
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 is
actively remarketing the aircraft for sale or 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.
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.
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.
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. 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
4 COMMITMENTS AND CONTINGENCIES (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.
5 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.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership did not declare a cash distribution for the quarter
ended March 31, 1998, as compared to a cash distribution of $6.50 per
Unit with respect to the quarter ended March 31, 1997. The Partnership
generated cash from operations of approximately $1,557,000 for the
three months ended March 31, 1998 (the "1998 Period") or approximately
$3.63 per Unit, as compared to $2,692,000 for the three months ended
March 31, 1997 (the "1997 Period") or approximately $6.28 per Unit.
Additionally, during the three months ended March 31, 1998, the
Partnership collected proceeds of approximately $3,394,000 or $7.92 per
Unit from the sale of one Boeing 737-2H4 aircraft which had been
off-lease since January 1998.
During the 1998 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 $4,473,000 from approximately $6,386,000 at December 31,
1997 to approximately $10,859,000 at March 31, 1998. The aggregate cash
reserves were comprised of approximately $7,279,000 which represented
undistributed cash from operations and cash from sales, as well as
original working capital of $1,929,000 (1% of original offering
proceeds) and approximately $1,651,000 of collected maintenance
reserves, net of approximately $478,000 of maintenance reserves
utilized during the 1998 period.
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 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 for bridging costs in
order to facilitate such remarketing. Furthermore, because of market
conditions, the Partnership will 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 has encountered 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.
<PAGE>
Liquidity and Capital Resources (continued)
The Partnership has decided to suspend distributions pending a
determination of the necessity to fund the foregoing costs. Although
the Partnership believes that its anticipated gross cash flow during
the remainder of 1998 will be less than previous gross cash flow
generated (approximately 60% of the 1997 cash flow based upon gross
firm term leases), 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 March
31, 1998, the Partnership had an interest in 10 of the aircraft
(inclusive of an undivided 47.92231% joint venture interest in one
aircraft), which had an original cost of approximately $104,202,000
(net book value of approximately $17,978,000). During the remainder of
1998, excluding rents from renewals and sales, the Partnership
anticipates receiving approximately $4,437,000 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 is
actively remarketing the aircraft for sale or lease.
<PAGE>
Liquidity and Capital Resources (continued)
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.
Results of Operations
Net income increased for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997, principally due to
the gain on sale of the Southwest Aircraft in 1998. There were no
dispositions of aircraft for the three months ended March 31, 1997. The
additional income was attributable to the reduction in depreciation
partially offset by the reduction in rental revenues.
Revenues decreased overall for the three months ended March 31, 1998
compared to the corresponding period 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) and the expiration of a
lease with Southwest Airlines Co.
<PAGE>
Results of Operations (continued)
Expenses decreased for the three months ended March 31, 1998 as
compared to the corresponding period of the prior year as follows: (i)
decrease in depreciation due to two ATA Aircraft and one Southwest
aircraft having previously reached their salvage value, (ii) no
management fee to IAFM for the three months ended March 31, 1998 as
compared to $103,000 for the corresponding 1997 period (iii) decrease
in general and administrative expenses, offset by (i) 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
Vice President and
Chief Financial Officer
Date: May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the financial
statements of the March 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,129,970
<SECURITIES> 0
<RECEIVABLES> 3,222,405
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,995,965
<PP&E> 83,415,052
<DEPRECIATION> 65,436,564
<TOTAL-ASSETS> 32,974,453
<CURRENT-LIABILITIES> 2,665,827
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 30,308,626
<TOTAL-LIABILITY-AND-EQUITY> 32,974,453
<SALES> 0
<TOTAL-REVENUES> 3,880,963
<CGS> 0
<TOTAL-COSTS> 260,252
<OTHER-EXPENSES> 892,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,728,387
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,728,387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,728,387
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
