FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1997 0-17785
AIRCRAFT INCOME PARTNERS L.P.
(Exact name of Registrant as specified in its charter)
Delaware 13-3430508
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
411 West Putnam Avenue, Greenwich, CT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 862-7444
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
Indicate by check mark whether 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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
There is no public market for the Limited Partnership Units. Accordingly,
information with respect to the aggregate market value of Limited Partnership
Units held by non-affiliates of Registrant has not been supplied.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Documents incorporated by reference
Location in Form 10-K in which
Document Document is Incorporated
- -------- ------------------------
Registrant's Prospectus, dated Parts I, II and III
February 29, 1988, as supplemented
by Supplements dated May 20, 1988, Exhibit Index: page IV-1
August 16, 1988, November 4, 1988,
January 6, 1989 and February 28, 1989.
<PAGE>
PART I
Item 1. Business
General
Registrant was organized as a Delaware limited partnership on October 8, 1987
with Integrated Aircraft Fund Management Corp. (the "General Partner"), as its
general partner.
Through November 2, 1994, the General Partner was a wholly-owned subsidiary of
Integrated Resources, Inc. ("Integrated"). On November 3, 1994, as a result of
the consummation of the reorganization plan relating to Integrated's bankruptcy,
indirect ownership of the General Partner was purchased by Presidio Capital
Corp. ("Presidio"). On August 28, 1997, an affiliate of NorthStar Capital
Partners acquired all of the Class B shares of Presidio, the corporate parent of
the General Partner. This acquisition, when aggregated with previous
acquisitions, caused NorthStar Capital Partners to acquire indirect control of
the General Partner. Presidio was also party to an Administrative Services
Agreement with Wexford Management LLC ("Wexford") pursuant to which Wexford was
responsible for the day-to-day management of Presidio and, among other things,
had authority to designate directors of the General Partner.
On November 2, 1997, the Administrative Services Agreement between Presidio and
Wexford expired. Effective November 3, 1997, Wexford and Presidio entered into a
new Administrative Services Agreement (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 the General Partner and
Registrant. Presidio also entered into a management agreement with NorthStar
Presidio Management Company, LLC ("NorthStar Presidio"). Under the terms of the
management agreement, NorthStar Presidio will provide the day-to-day management
of Presidio and its direct and indirect subsidiaries and affiliates.
Effective November 3, 1997, officers and employees of Wexford that had served as
officers and/or directors of the General Partner tendered their resignation. On
the same date, the Board of Directors of Presidio appointed new individuals to
serve as officers and/or directors of the General Partner.
Description of business
Registrant is engaged in the business of owning and leasing aircraft. Commencing
February 29, 1988, Registrant offered a maximum of 500,000 limited partnership
units (the "Units") at an offering price of $500 per Unit. The Units were
registered under the Securities Act of 1933 (Registration No. 33-18891) and sold
pursuant to a prospectus, dated February 29, 1988, as supplemented by
supplements dated May 20, 1988, August 16, 1988, November 4, 1988, January 6,
1989 and February 28, 1989 (the "Prospectus"). The Prospectus is incorporated
herein by reference (see Exhibit 28). Registrant terminated the offering as of
May 1, 1989, at which time it had accepted subscriptions for a total of 385,800
Units, aggregating $192,900,000. Registrant completed the investment of the net
proceeds of the offering on May 31, 1989.
<PAGE>
The aircraft owned by Registrant, consisting of used commercial jet aircraft as
well as related engines and other aircraft parts, were initially leased to
various lessees for terms ranging from 17 to 88 months. Through December 31,
1997, Registrant had acquired interests in 18 aircraft (including an undivided
47.92231% joint venture interest in one aircraft) at a cost of approximately
$169,748,000 (inclusive of associated acquisition fees). Through December 31,
1997, Registrant had sold or disposed of seven aircraft with original purchase
prices aggregating approximately $54,132,000 (See below; Item 2, "Properties";
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations"; and Item 8, "Financial Statements and Supplementary Data" for a
more detailed description of business developments, the acquisition and
disposition of such aircraft.)
Of the 18 aircraft originally purchased by Registrant, at December 31, 1997,
Registrant had an interest in 11 of the aircraft (inclusive of an undivided
47.92231% joint venture interest in one aircraft) which had an aggregate
original cost (inclusive of capitalized major additions and improvements) of
approximately $115,616,000 (net carrying value of approximately $20,012,000).
During 1998, excluding rents from future renewals, Registrant anticipates
receiving rentals of approximately $5,176,000 on non-cancelable leases
(inclusive of amounts which may be set-off by lessees against basic rent
obligations (i.e., rent credits) as reimbursement for, in general, modifications
to the aircraft which are the obligation of Registrant as provided in the
applicable leases). After deducting operating expenses, the foregoing aggregate
rentals are not sufficient to maintain previous distribution levels.
All of Registrant's remaining Aircraft are currently on lease with the exception
of one aircraft returned by Southwest Airlines, Inc. ("Southwest") in January
1998. One Boeing 737-200 Advanced aircraft previously leased to Aloha Airlines
Inc. ("Aloha"), came off lease on October 15, 1996, and was sold on May 22, 1997
to an unaffiliated third party for proceeds of approximately $1,982,000
exclusive of selling expenses of approximately $60,000. Of the 11 remaining
aircraft, 10 aircraft will generate aggregate gross rental revenues of
approximately $5,176,000 during 1998. Of Registrant's leases, six are currently
scheduled to expire in 1998, one is scheduled to expire in 1999 and three are
scheduled to expire in 2000.
Recent Developments
A. Aloha Airlines, Inc.
Aloha Airlines, Inc. ("Aloha") had leased a Boeing 737-297 Advanced aircraft
(the "Aloha Aircraft") whose lease was originally 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 Allied Signal, the TBT
Lessor, retains the federal income tax benefits that normally accrue from
ownership of the aircraft other than lease rentals. There are approximately two
years remaining on the TBT Lease, until May 21, 2000.
Prior to the expiration of the Aloha lease on February 1, 1996, Registrant and
Aloha agreed to a three month lease extension with rent based on $300 per flight
hour. Registrant and Aloha subsequently agreed on a further short-term lease
extension, to October 15, 1996, on the same terms, and on October 15, 1996, the
Aloha Aircraft was returned by Aloha to Registrant and maintained at a storage
facility.
<PAGE>
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 was approximately $639,000
of net maintenance and return provision reserves that Aloha had previously paid
Registrant 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 the sale, the aircraft had a net carrying
value of approximately $1,290,000.
On November 15, 1997, the lease to Aloha of a Boeing 737-200 Advanced aircraft
expired 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 Aviation 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 Registrant is the
beneficiary, filed a complaint for declaratory judgment in the United States
District Court, Southern District of New York. The complaint requested
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 aircraft is
scheduled to be returned by April 30, 1998 and Registrant is actively
remarketing such aircraft for sale or lease.
B. Tax assessment
In September 1996, Registrant 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 Registrant with respect to rents
received from Aloha and Hawaiian Airlines, Inc. ("Hawaiian") under the leases
between Registrant and each of the airlines.
The leases with both Aloha and Hawaiian provide for full indemnification of
Registrant 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 Registrant, 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 Registrant, have separately engaged tax counsel and
both airlines are cooperating with Registrant to vigorously contest the proposed
assessments.
Final notices of assessment have not yet been issued. Although there can be no
assurance that the contest of the assessments will be successful, Registrant
believes that the state's position on the applicability of GET in this instance
is without merit. Registrant has not recorded any liability as a result of the
proposed notices of assessment.
<PAGE>
C. American Trans Air, Inc.
In March 1998, Registrant and American Trans Air, Inc. ("ATA") agreed to amend
the leases extending the term through December 31, 2000 at the current lease
rental at which time ATA will have a purchase obligation of approximately $3.3
million per aircraft. During the term of the amended lease, ATA may, at its
expense, retrofit the aircraft to comply with the Stage III noise emission
standards pursuant to FAR Part 36.
Significant Lessees
Registrant's revenues from aircraft are derived from lease payments from
lessees. None of such lessees are affiliated with Registrant. During the year
ended December 31, 1997, lease payments due from the following lessees were the
source of 10% or more of Registrant's gross rental revenues: Continental (30%),
Aloha (11%), ATA (24%), Ladeco S.A. ("Ladeco") (15%) and Continental Micronesia
Inc. ("Air Micronesia") (12%). At December 31, 1997, the Continental deferred
rents and modification advances were fully repaid by Continental. (See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 8, "Financial Statements and Supplementary Data".)
Competition
The equipment leasing industry, particularly as it relates to aircraft, is
highly competitive. The aircraft leasing industry offers users an alternative to
the purchase of nearly every type of aircraft. The competitive conditions vary
considerably depending on the type of aircraft and the nature of the prospective
user.
Registrant will encounter competition from lessors which may write leases for
longer terms and at lower rates than Registrant can offer. Competitors of
Registrant may, at the writing of their initial leases, give their lessees
options to renew their leases or purchase the aircraft at the expiration of the
lease at favorable or bargain rates, and, as a result, Registrant may be at a
competitive disadvantage if it does not also grant such bargain renewals and
purchase options. Manufacturers and other leasing companies may provide certain
ancillary services, which Registrant cannot offer, such as maintenance services
(including possible substitution of aircraft or engines), crews, warranty
services and trade-in privileges. Also, there are numerous other entities,
including distributors, manufacturers, airlines, equipment managers, leasing
companies, financial institutions and public and private limited partnerships
organized and managed similarly to Registrant, some of which have greater
financial resources and more experience than Registrant and the General Partner.
Registrant has encountered severe competition in attempting to re-lease its
aircraft as they have come off-lease due to a surplus in the market of
narrow-body aircraft similar to the types owned by Registrant. 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,
Registrant's aircraft will also have to compete with newer, more fuel-efficient
aircraft, which comply with the recently adopted FAA noise requirements.
Registrant 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 of the
types owned by Registrant.
<PAGE>
As Registrant's aircraft come off-lease, Registrant may need to use a portion of
its operating reserves and/or its cash flow, which would otherwise be available
for distribution, to upgrade or enhance these aircraft if Registrant determines
that such expenditures are in its best interest in order to maximize the
remarketing value. Registrant is currently evaluating strategies, including
potential engine upgrades for certain aircraft, to increase marketability and is
reviewing its ability to pay for bridging costs in order to facilitate
remarketing. Upgrades to aircraft may include "Hush Kits", which reduce the
noise levels of engines. The estimated costs of the Hush Kits range from
approximately $1,200,000 for Boeing 737 aircraft to approximately $2,000,000 for
Boeing 727 aircraft. Furthermore, because of market conditions, Registrant may
be required to bear some of the related costs of compliance with mandatory
federal regulations covering maintenance and upgrading of aging aircraft. In
determining what may be in its best interests, Registrant's ability to make
distributions may be impacted by its obligation to pay such costs.
Employees
Registrant does not have any employees. NorthStar Presidio currently performs
accounting, secretarial, transfer and administrative services for Registrant.
NorthStar Presidio also performs similar services for other affiliates of the
General Partner. Aviation Capital Group, L.P. ("ACG"), an entity comprised
primarily of former officers of the General Partner, periodically performs
remarketing services with respect to Registrant's aircraft, and Simat, Helliesen
& Eichner, Inc. ("SH&E"), an aviation consulting firm, provides consulting
services to Registrant. All fees for SH&E's and ACG's services are paid by the
General Partner (other than normal competitive aircraft sales commissions, if
any) and are not reimbursed by Registrant.
In April 1995, the General Partner 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 Registrant. Substantially all costs associated with the retention of
Fieldstone are paid by the General Partner. The agreement with Fieldstone was
scheduled to expire on November 3, 1997. The General Partner and certain
affiliates are currently negotiating a possible extension of the agreement.
Fieldstone has indicated that it will continue to perform services with respect
to Registrant pending the conclusion of such negotiation. (See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", Item 8, "Financial Statements" and Item 10, "Directors and
Executive Officers of the Registrant".)
Foreign Operations
Registrant currently has three aircraft operated in foreign countries. Two of
such aircraft are leased to Ladeco, a Chilean airline, and are operated
primarily in South America. A third aircraft is leased to Air Micronesia, a
stand-alone air carrier affiliated with Continental, and such aircraft is
operated primarily in Southeast Asia. (See Item 8, "Financial Statements and
Supplementary Data - Notes 9 and 10".)
<PAGE>
Item 2. Properties
The aircraft owned by Registrant as of March 1, 1998 (see "General" under Item 1
"Business" hereof) consists of the following:
<TABLE>
<CAPTION>
Type of Ownership
Type of Equipment Date of Purchase or Interest
- ----------------- ---------------- -----------
<S> <C> <C>
One McDonnell April 20, 1988 Full ownership, not subject
Douglas DC-9-32 to any lien.
aircraft
Two McDonnell Douglas May 13, 1988 Full ownership, not subject
DC-9-32 aircraft to any lien.
One Boeing 727-200 June 15, 1988 Full ownership, not subject
Advanced aircraft (1) to any lien.
One Boeing 737-200 August 23, 1988 Full ownership, not subject
Advanced aircraft (1) to any lien.
One Boeing 737-200 November 4, 1988 Full ownership, not subject
Advanced aircraft (1) to any lien.
One Boeing 727-200 December 15, 1988 Full ownership, not subject
Advanced aircraft to any lien.
One Boeing 727-200 January 18, 1989 Full ownership, not subject
Advanced aircraft to any lien.
One Boeing 737-200 February 9, 1989 Full ownership, not subject
Advanced aircraft to any lien.
One Boeing 737-200 March 31, 1989 Full ownership, not subject
Advanced aircraft to any lien.
One Boeing 727-200 May 31, 1989 Full ownership of a
Advanced aircraft (2) 47.92231% undivided
interest.
</TABLE>
(1) Such aircraft are operated in foreign countries. See Item 1,
"Business"; and Notes 9 and 10 to Registrant's Financial Statements
included in Item 8, "Financial Statements and Supplementary Data" to
this report, for further discussion.
(2) The remaining interest is owned by an affiliate of the General Partner.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
There is no developed public market for the Units of the Registrant.
As of March 1, 1998, there were approximately 15,000 record holders of Units,
owning an aggregate of 385,805 Units.
During the years ended December 31, 1997 and 1996, Registrant has made the
following cash distributions with respect to the Units to holders thereof as of
the dates set forth below in the amounts set forth opposite such dates:
<TABLE>
<CAPTION>
Distribution with respect to
Quarter Ended Amount of Distribution Per Unit (1)
------------- -----------------------------------
1997 1996
---- ----
<S> <C> <C>
March 31 $6.00 $7.00
June 30 $10.00 $21.50
September 30 $4.50 $6.50
December 31 $ - $5.50
</TABLE>
(1) The amounts listed represent distributions of cash from operations and
cash from sales. (See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", for information
relating to Registrant's future distributions.)
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 8,154,952 $ 10,284,238 $ 12,372,475 $ 13,755,528 $ 16,227,532
Net Income (Loss)(2) $ 1,706,235 $ 5,988,174 $ 1,496,774 $ 564,907 $ (10,306,115)
Net income (Loss)
Per Unit (2) $ 3.98 $ 13.97 $ 3.49 $ 1.32 $ (24.04)
Distribution Per Unit $ 20.50 $ 40.50 $ 32.00 $ 31.00 $ 34.50
Total Assets $ 30,567,247 $ 40,045,819 $ 52,365,622 $ 63,596,742 $ 76,239,996
Total Partners' Equity $ 27,580,239 $ 34,661,785 $ 46,034,837 $ 58,255,574 $ 70,979,506
</TABLE>
(1) Included in this amount is $659,851, $582,674, $443,904, $259,805 and
$195,071 of interest income for the years ended December 31, 1997, 1996,
1995, 1994 and 1993, respectively. Additionally, revenues include
$(76,999), $(32,767), $108,487, $184,033 and $968,541 of other income or
loss for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(2) Registrant provided allowances for equipment impairment of $848,000 and
$13,460,000 (including $20,000 provided in respect to a 727-100 aircraft
sold in August 1993), for the years ended December 31, 1994 and 1993,
respectively, to recognize the loss in value of certain aircraft. No
allowance was considered necessary for the years ended December 31, 1997,
1996 and 1995.
Additionally, Registrant realized approximately $1,002,000 from the sale of
the marketable securities for the year ended December 31, 1995. Such amount
is included in Net Income (Loss).
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Registrant did not make a cash distribution with respect to the quarter ended
December 31, 1997 as compared to $5.50 per Unit with respect to the quarter
ended December 31, 1996. For the year ended December 31, 1997, cash
distributions aggregated $20.50 per Unit (a 4.1% annualized rate) as compared to
$40.50 per Unit (a 8.1% annualized rate) with respect to the year ended December
31, 1996.
During 1997, Registrant generated cash from operations of approximately
$8,892,000 (before rent credits), or approximately $20.74 per Unit, as compared
to approximately $10,550,000 (before rent credits), or approximately $24.62 per
Unit, during 1996. Additionally, during 1997, Registrant collected proceeds from
the sale of one Boeing 737-200 aircraft leased to Aloha of approximately
$1,922,000.
<PAGE>
During 1997, Registrant 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 $1,989,000 (as discussed
below), from approximately $4,397,000 at December 31, 1996 to approximately
$6,386,000 at December 31, 1997. The aggregate cash reserves were comprised of
approximately $2,328,000, 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 $2,129,000 of collected
maintenance reserves.
Such increase in aggregate cash reserves was the result of an increase of
approximately $2,027,000 of cash from operations in excess of cash distributions
during 1997 offset by a decrease of approximately $38,000 of collected
maintenance reserves.
During the first quarter of 1995, Registrant provided ATA with $150,000 of
aggregate rent credits representing Registrant's obligation to contribute
$75,000 per aircraft towards bridging "C" check inspections with respect to the
two Boeing 727 aircraft leased to ATA.
In December 1997, Registrant and Continental Airlines, Inc. ("Continental")
agreed to amend the leases for three McDonnell Douglas DC-9-32 aircraft to
extend the term of the leases to September 10, 1998 with respect to two aircraft
and December 1, 1998 with respect to one aircraft for rentals of $52,500 per
month per aircraft.
As Registrant's aircraft come off-lease (six of which are scheduled to come
off-lease in 1998, one in 1999 and three in 2000), it may be necessary for
Registrant 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 Registrant determines
that such expenditures are in its best interests in order to maximize
remarketing value. Registrant 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,
Registrant may be required to bear some of the related costs of compliance with
recent mandatory federal regulations covering maintenance and upgrading of aging
aircraft. Registrant's ability to make distributions will be impacted by its
obligation to pay such costs.
Registrant 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 Registrant. 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, Registrant will also have
to compete with newer, more fuel-efficient aircraft, which comply with recently
adopted FAA noise requirements. Registrant 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 Registrant.
Although Registrant believes that its anticipated gross cash flow in 1998 will
be less than its gross cash flow generated during 1997 (approximately 46% of
1997 cash flow based upon gross firm term leases plus the net amounts due under
notes issued by Continental as repayment for deferred rent and modification
advances), its anticipated cash flow in 1998 and the foreseeable future will be
sufficient to pay its operating expenses.
<PAGE>
During 1997, lease payments due from the following lessees were the source of
10% or more of Registrant's gross rental revenues: Continental (30%), Aloha
(11%), ATA (24%), Ladeco (15%) and Air Micronesia (12%).
Of the 18 aircraft originally purchased by Registrant, at December 31, 1997,
Registrant 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 $20,012,000). In
1998, excluding rents from renewals, Registrant anticipates receiving
approximately $5,176,000 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 aggregate rentals are not sufficient to maintain
previous distribution levels.
Aloha had leased a Boeing 737-200 Advance 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 Allied Signal, the TBT Lessor, retains the federal income tax
benefits that normally accrue from ownership of the aircraft other than lease
rentals. There are approximately 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 was approximately $639,000
of net maintenance and return provision reserves that Aloha had previously paid
Registrant 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 expired 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 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
Registrant is the beneficiary, filed a complaint for declaratory judgment in the
United States District Court, Southern District of New York. The complaint
requested 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 aircraft
is scheduled to be returned by April 30, 1998 and Registrant is actively
remarketing the aircraft for sale or lease.
In September 1996, Registrant 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 Registrant with respect to rents received
from Aloha and Hawaiian Airlines, Inc. under the leases between Registrant and
each of the airlines.
<PAGE>
The leases with both Aloha and Hawaiian provide for full indemnification of
Registrant 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 Registrant, 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 Registrant, have separately engaged tax
counsel and both airlines are cooperating with Registrant to vigorously contest
the proposed assessments.
Final notices of assessment have not yet been issued. Although there can be no
assurance that the contest of the assessments will be successful, Registrant
believes that the state's position on the applicability of GET in this instance
is without merit. Registrant has not recorded any liability as a result of the
proposed notices of assessment.
Inflation has not had any material effect on Registrant's revenues since its
inception nor does Registrant 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 Registrant have resulted
in Registrant providing allowances for equipment impairment of $848,000 and
$13,460,000 for the years ended December 31, 1994 and 1993 . No allowance was
considered necessary subsequent to December 31, 1994. Additionally, because of
the financial troubles of certain airlines which are lessees of Registrant's
aircraft, cash flow and, therefore, distributions have been reduced.
Year 2000
Costs associated with the Year 2000 conversion are not expected to have any
impact on Registrant's operations.
Results of Operations - 1997 as Compared to 1996
Registrant's rental revenues decreased by approximately 22% for the year ended
December 31, 1997 as compared to the year ended December 31, 1996. The decrease
was principally due to the following:
i) a 100% reduction in rental revenues on a McDonnell Douglas DC-9-51
aircraft (the "Hawaiian Aircraft") leased to Hawaiian. The Aircraft was
sold on an installment basis on September 1, 1996. The reduction in rental
revenues recognized represented approximately 24% of Registrant's 1997
rental revenue reduction as compared to the corresponding rental revenues
recognized during 1996;
ii) a 100% reduction in rental revenue on a Boeing 737-200 advance aircraft
sold to Southwest on April 15, 1996. The reduction in rental revenues
represented approximately 7% of Registrant's 1997 rental revenue reduction
as compared to the corresponding rental revenues recognized during1996;
and
<PAGE>
iii) a 57% reduction in rental revenue on the two Boeing 737-200 Advanced
Aircraft leased to Aloha. One of the Aloha Aircraft was originally
scheduled to come off lease on February 1, 1996 and was renewed on a
utilization basis at $300 per flight hour until the aircraft was returned
on October 15, 1996, and was sold on May 22, 1997. The other Aloha
aircraft lease was originally scheduled to expire on August 15, 1996, and
was renewed at 50% of its prior lease rate through November 15, 1997. The
reduction in rental revenues recognized under these leases represented
approximately 53% of Registrant's 1997 rental revenue reduction as
compared to the corresponding rental revenues recognized during 1996.
Investment interest income decreased by approximately 21% for 1997, as compared
to 1996, primarily because of lower balances available for investment in 1997.
In 1997, there was interest on installment sale of the Hawaiian aircraft of
approximately $284,000 as compared to approximately $106,000 in 1996.
Other income/loss decreased for 1997, as compared to 1996, primarily due to the
reduction of interest payments by Continental associated with the repayments of
rent deferrals and modification advances.
Depreciation expense decreased by approximately 28% for 1997, as compared to
1996, primarily due to the Hawaiian Aircraft and the Southwest Aircraft being
sold during 1996 and reduction on the Ladeco aircraft which has reached its
salvage value during or prior to 1996.
Operating expenses increased in 1997, as compared to 1996, primarily due to
increased costs associated with certain aircraft that came off lease.
Management fees decreased approximately 37% for 1997, as compared to 1996, due
to lower rental income in 1997 on which such fees are based, due to the aircraft
sale in 1997, and lower renewal rates in 1997.
General and administrative expenses increased approximately 35% in 1997, as
compared to 1996.
Gain from the sale of aircraft was approximately $632,000 in 1997 represented by
the sale of the Aloha Aircraft compared to a gain of approximately $5,223,000 in
1996 represented by the sale of the Southwest and Hawaiian Aircraft.
Registrant's net income for 1997 was $1,706,235 as compared to net income of
$5,988,174 recognized in 1996. The principal reasons for the change in
Registrant's 1997 net income compared to 1996 are:
i) Gain on sale of aircraft in 1997 of approximately $632,000 compared with a
gain on sale of aircraft in 1996 of approximately $5,223,000; and
ii) reduction of depreciation expense, approximately $6,227,000 in 1997 as
compared to approximately $8,608,000 in 1996; and
iii) reduction of management fee, $265,000 in 1997 as compared with $422,000 in
1996; and
iv) increase in operating expenses, approximately $136,000 in 1997 as compared
with $85,000 in 1996; offset by
v) reduction of rental revenue, approximately $7,572,000 in 1997 compared
with approximately $9,734,000 in 1996; and
vi) increase in other loss of approximately $77,000 in 1997 compared with
approximately $33,000 in 1996.
<PAGE>
Results of Operations - 1996 as Compared to 1995
Registrant's rental revenues decreased by approximately 18% for the year ended
December 31, 1996 as compared to the year ended December 31, 1995. The decrease
was principally attributable to the following:
i) a 59% reduction in rental revenues on a McDonnell Douglas DC-9-51 aircraft
leased to Hawaiian. The Aircraft was sold on an installment basis on
September 1, 1996. The reduction in rental revenues recognized represented
approximately 14% of Registrant's 1996 rental revenue reduction as
compared to the corresponding rental revenues recognized for 1995;
ii) a reduction in rental revenue on the Southwest aircraft sold to Southwest
on April 15, 1996 offset by an increase in rental revenue as a result of
the extension of the lease with Southwest for another Boeing 737-200
Advanced Aircraft for two years beginning November 1995 for 125% of the
prior lease rental. The net reduction in rental revenues represented
approximately 35% of Registrant's 1996 rental revenue reduction as
compared to the corresponding rental revenues recognized for 1995; and
iii) a 53% reduction in rental revenue on the two Boeing 737-200 Advanced
Aircraft leased to Aloha. One of the Aloha Aircraft was originally
scheduled to come off lease on February 1, 1996 and was renewed on a
utilization basis at $300 per flight hour until the aircraft was returned
on October 15, 1996, and remained off lease at December 31, 1996. The
other Aloha aircraft lease was originally scheduled to expire on August
15, 1996, and was renewed at 50% of its prior lease rate. The reduction in
rental revenues recognized under these leases represented approximately
51% of Registrant's 1996 rental revenue reduction as compared to the
corresponding rental revenues recognized for 1995.
Investment interest income increased by approximately 7% for 1996, as compared
to 1995, primarily because of higher market interest rates during 1996 as well
as higher balances available for investment in 1996.
In 1996, there was interest on installment sale of the Hawaiian Aircraft of
approximately $106,000; no such interest was recorded in 1995.
Other income/loss decreased for 1996, as compared to 1995, primarily due to the
reduction of interest payments by Continental associated with the repayments of
rent deferrals and modification advances.
Depreciation expense decreased by approximately 20% for 1996, as compared to
1995, primarily due to the Hawaiian Aircraft and the Southwest Aircraft being
sold during 1996 and reduction on the Ladeco Aircraft which had reached its
salvage value during or prior to 1996 .
Operating expenses decreased significantly in 1996, as compared to 1995,
primarily due to rental credits provided to ATA of $150,000 for the completion
of "C" checks in 1995 per the lease agreement on the ex-USAir Aircraft leased to
ATA.
Management fees decreased approximately 23% for 1996, as compared to 1995, due
to lower rental income in 1996 on which such fees are based, due to the aircraft
sale, and lower renewal rates in 1996.
General and administrative expenses increased approximately 2% in 1996, as
compared to 1995 .
<PAGE>
Gain from the sale of aircraft was approximately $5,223,000 in 1996 from the
sale of the Southwest and Hawaiian Aircraft. No sales took place in 1995.
Realized gain on sale of marketable securities was approximately $1,002,000 in
1995. No such gain was recognized for 1996. The gain represents the settlement
of general unsecured claims Registrant had with Hawaiian Airlines. Hawaiian
issued Registrant approximately 227,000 shares of Class A Common stock in the
reorganized Hawaiian Airlines. Through December 31, 1995, Registrant sold all
shares aggregating approximately $1,046,000.
Registrant's net income for 1996 was $5,988,174 as compared to net income of
$1,496,774 recognized in 1995. The principal reasons for the changes in
Registrant's 1996 net income compared to 1995 are:
i) Gain on sale of aircraft in 1996 of approximately $5,223,000 compared with
no such gain in 1995; and
ii) reduction of depreciation expense, approximately $8,608,000 in 1996 as
compared to approximately $10,794,000 in 1995; and
iii) reduction of management fee, $422,000 in 1996 as compared with $548,000 in
1995; and
iv) reduction in operating expense, approximately $85,000 in 1996 as compared
with $193,000 in 1995 ; offset by
v) reduction of rental revenue, approximately $9,734,000 in 1996 compared
with approximately $11,820,000 in 1995 ; and
vi) reduction in other income (loss) of approximately $33,000 in 1996 compared
with a gain of approximately $108,000 in 1995; and
vii) gain on sale of marketable securities of approximately $1,002,000 in 1995,
compared with no such gain recognized in 1996.
<PAGE>
Item 8. Financial Statements and Supplementary Data
AIRCRAFT INCOME PARTNERS L.P.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INDEX
Independent Auditor's Report
Financial statements - years ended
December 31, 1997, 1996 and 1995
Balance sheets
Statements of income
Statement of partners' equity
Statements of cash flows
Notes to financial statements
Schedule:
II -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are inapplicable or the
information is included in the financial statements or notes thereto.
<PAGE>
To the Partners of
Aircraft Income Partners L.P.
Greenwich, Connecticut
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of Aircraft Income Partners L.P.
(a limited partnership) as of December 31, 1997 and 1996, and the related
statements of income, partners' equity and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)2. These financial
statements and the financial statement schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aircraft Income Partners L.P.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/Hays & Company
- -----------------
Hays & Company
February 13, 1998
New York, New York
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Leased aircraft - net ...................................... $20,012,212 $27,529,419
Cash and cash equivalents .................................. 6,432,713 6,279,937
Note receivable - installment sale ......................... 2,911,906 3,887,665
Restricted cash - security deposits ........................ 506,120 481,677
Accounts receivable ........................................ 505,730 769,547
Deferred costs ............................................. 95,505 223,866
Other receivables .......................................... 89,891 523,915
Prepaid expenses ........................................... 13,170 95,361
Deferred rents and modification advances receivable ........ -- 254,432
----------- -----------
$30,567,247 $40,045,819
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Maintenance reserves ....................................... $ 2,129,110 $ 2,167,329
Security deposits payable .................................. 506,120 481,677
Accounts payable and accrued expenses ...................... 168,561 103,765
Deferred income ............................................ 133,217 131,550
Deferred costs payable ..................................... 50,000 48,016
Distributions payable ...................................... -- 2,357,697
Management fee payable ..................................... -- 94,000
----------- -----------
Total liabilities ................................... 2,987,008 5,384,034
----------- -----------
Commitments and contingencies (Notes 3, 4, 5, 6, 9 and 11)
Partners' equity
Limited partners' equity (as restated) (385,805 units issued 24,813,260 31,186,652
and outstanding)
General partner's equity (as restated) ..................... 2,766,979 3,475,133
----------- -----------
Total partners' equity .............................. 27,580,239 34,661,785
----------- -----------
$30,567,247 $40,045,819
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF INCOME
Year ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Rental .................................... $ 7,572,100 $ 9,734,331 $ 11,820,084
Interest .................................. 375,609 476,659 443,904
Interest - installment note ............... 284,242 106,015 --
Other ..................................... (76,999) (32,767) 108,487
------------ ------------ ------------
8,154,952 10,284,238 12,372,475
------------ ------------ ------------
Costs and expenses
Depreciation .............................. 6,227,309 8,608,539 10,794,471
General and administrative ................ 452,956 336,248 328,439
Management fee ............................ 265,161 422,000 548,000
Operating ................................. 135,658 84,522 192,553
Provision for bad debts ................... -- 66,133 --
Interest .................................. -- 1,570 13,969
------------ ------------ ------------
7,081,084 9,519,012 11,877,432
------------ ------------ ------------
1,073,868 765,226 495,043
Gain on disposition of aircraft - net .......... 632,367 5,222,948 --
Realized gain from sale of marketable securities -- -- 1,001,731
------------ ------------ ------------
Net income ..................................... $ 1,706,235 $ 5,988,174 $ 1,496,774
============ ============ ============
Net income attributable to
Limited partners .......................... $ 1,535,611 $ 5,389,357 $ 1,347,097
General partner ........................... 170,624 598,817 149,677
------------ ------------ ------------
$ 1,706,235 $ 5,988,174 $ 1,496,774
============ ============ ============
Net income per unit of limited partnership
interest (385,805 units outstanding) ...... $ 3.98 $ 13.97 $ 3.49
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENT OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Limited General Total
Partners' Partner's Partners'
Equity Equity Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1995 .................... $ 71,711,311 $(13,455,737) $ 58,255,574
Reallocation of partners' equity (Note 7) ... (19,290,250) 19,290,250 --
------------ ------------ ------------
Balance, January 1, 1995 (as restated) ...... 52,421,061 5,834,513 58,255,574
Net income - 1995 ........................... 1,347,097 149,677 1,496,774
Distributions to partners ($32.00 per limited
partnership unit) ...................... (12,345,760) (1,371,751) (13,717,511)
------------ ------------ ------------
Balance, December 31, 1995 (as restated) .... 41,422,398 4,612,439 46,034,837
Net income - 1996 ........................... 5,389,357 598,817 5,988,174
Distributions to partners ($40.50 per limited
partnership unit) ...................... (15,625,103) (1,736,123) (17,361,226)
------------ ------------ ------------
Balance, December 31, 1996 (as restated) .... 31,186,652 3,475,133 34,661,785
Net income - 1997 ........................... 1,535,611 170,624 1,706,235
Distributions to partners ($20.50 per limited
partnership unit) ...................... (7,909,003) (878,778) (8,787,781)
------------ ------------ ------------
Balance, December 31, 1997 .................. $ 24,813,260 $ 2,766,979 $ 27,580,239
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities
Net income ........................................... $ 1,706,235 $ 5,988,174 $ 1,496,774
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation ................................... 6,227,309 8,608,539 10,794,471
Realized gain from sale of marketable securities -- -- (1,001,731)
Provision for bad debts ........................ -- 66,133 --
Gain on disposition of aircraft - net .......... (632,367) (5,222,948) --
Changes in assets and liabilities
Restricted cash - security deposits .............. (24,443) (22,994) (20,996)
Accounts receivable ............................... 263,817 552,346 281,186
Deferred costs .................................... 128,361 128,360 128,360
Other receivables ................................. 434,024 (406,963) 63,698
Prepaid expenses .................................. 82,191 (4,733) 29,466
Deferred rents and modification advances receivable 254,432 387,313 1,009,001
Security deposits payable ......................... 24,443 22,994 20,996
Accounts payable and accrued expenses ............. 64,796 21,665 (112,900)
Deferred income ................................... 1,667 (47,666) --
Maintenance reserves .............................. (38,219) 362,698 803,338
Management fee payable ............................ (94,000) (43,000) 17,000
------------ ------------ ------------
Net cash provided by operating activities ... 8,398,246 10,389,918 13,508,663
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities
Proceeds from sale of aircraft - net ................. 1,922,265 6,784,400 --
Proceeds from installment sale note receivable ....... 975,759 163,985 --
Additions and modifications to leased aircraft - net . 1,984 (73,914) (167,487)
Proceeds from sale of marketable securities .......... -- -- 1,045,941
------------ ------------ ------------
Net cash provided by investing activities ... 2,900,008 6,874,471 878,454
------------ ------------ ------------
Cash flows from financing activities
Distributions to partners ............................ (11,145,478) (18,432,907) (13,288,839)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ..... 152,776 (1,168,518) 1,098,278
Cash and cash equivalents, beginning of year ............. 6,279,937 7,448,455 6,350,177
------------ ------------ ------------
Cash and cash equivalents, end of year ................... $ 6,432,713 $ 6,279,937 $ 7,448,455
============ ============ ============
Supplemental disclosure of cash flow information
Interest paid ........................................ $ -- $ 1,570 $ 13,969
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1 ORGANIZATION
Aircraft Income Partners L.P. (the "Partnership"), was formed in
October 1987, under the Delaware Revised Uniform Limited Partnership
Act for the purpose of engaging in the business of acquiring and
leasing aircraft. The Partnership will terminate on December 31, 2010,
or sooner, in accordance with the terms of the Agreement of Limited
Partnership (the "Limited Partnership Agreement").
Limited partners' units were originally issued at a price value of $500
per unit. Five limited partner units were issued to the original
limited partner for a capital contribution of $2,500. In addition, the
General Partner contributed a total of $9,950 to the capital of the
Partnership. Through the final admission of limited partners on May 1,
1989, the Partnership had 14 admissions of limited partners
representing an additional 385,800 limited partner units aggregating
$192,900,000.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leases
The Partnership accounts for all of its leases in accordance with the
operating method. Under the operating method, revenue is recognized on
a straight-line basis and expenses (including depreciation) are charged
to operations as incurred. When the Partnership enters into a
utilization arrangement, rents are recorded as earned based upon actual
use of the related aircraft.
Leased aircraft
The cost of leased aircraft represents the initial cost of the aircraft
to the Partnership plus miscellaneous acquisition and closing costs and
are 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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 years and such provisions could be material.
Financial statements
The financial statements include only those assets, liabilities, and
results of operations which relate to the business of the Partnership.
Cash and cash equivalents
For the purpose of the statements of cash flows, the Partnership
considers all short-term investments which have original maturities of
three months or less to be cash equivalents.
Substantially all of the Partnership's cash and cash equivalents are
held at one financial institution.
Fair value of financial instruments
The fair value of financial instruments is determined by reference to
market data and other valuation techniques as appropriate. The
Partnership's financial instruments include cash and cash equivalents
and a note receivable. Unless otherwise disclosed, the fair value of
financial instruments approximates their recorded values.
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 the remarketed lease.
Maintenance reserves
Maintenance reserves represent cash received in accordance with the
terms of the leases of certain aircraft, which has been set aside for
certain required repairs or scheduled maintenance on the aircraft.
Deferred income
Deferred income is comprised of the unearned portion of advance rentals
received with respect to the leases of the aircraft.
Net income and distributions per unit of limited partnership interest
Net income and distributions per unit of limited partnership interest
are computed based upon the number of units outstanding (385,805)
during the year.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
No provisions have been made for federal, state and local income taxes,
since they are the personal responsibility of the partners.
The income tax returns of the Partnership are subject to examination by
federal, state and local taxing authorities. Such examinations could
result in adjustments to Partnership income, which changes could affect
the income tax liability of the individual partners.
Reclassifications
Certain reclassifications have been made to the financial statements
shown for the prior years in order to conform to the current year's
classifications.
Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Recently issued accounting pronouncements
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements. Statement No. 128, "Earnings Per Share"
established standards for computing and presenting earnings per share,
and became effective for financial statements for both interim and
annual periods ending after December 15, 1997. Statement No. 129,
"Disclosure of Information about Capital Structure" established
standards for disclosing information about an entity's capital
structure, and became 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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management of the Partnership does not believe that these new standards
have, or will have a material effect on the Partnership's reported
operating results, per unit 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.
Subject to the rights of the Limited Partners under the Limited
Partnership Agreement, Presidio will control the Partnership through
its direct or 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.
Presidio was also a party to an Administrative Services Agreement with
Wexford Management LLC ("Wexford") pursuant to which Wexford was
responsible for the day-to-day management of Presidio and, among other
things, had authority to designate directors of IAFM.
On November 2, 1997, the Administrative Services Agreement between
Presidio and Wexford expired. Effective November 3, 1997, Wexford and
Presidio entered into a new Administrative Services Agreement (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. Presidio also
entered into a management agreement with NorthStar Presidio Management
Company, LLC ("NorthStar Presidio"). Under the terms of the management
agreement, NorthStar Presidio will provide the day-to-day management of
Presidio and its direct and indirect subsidiaries and affiliates.
Reimbursable expenses to Wexford under the terms of the Administrative
Services Agreement amounted to $29,898 and $34,184 for the years ended
December 31, 1997 and 1996, respectively.
Effective November 3, 1997, the 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.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (continued)
Presidio is a liquidating company. Although Presidio has no immediate
plans to do so, it will ultimately seek to dispose of the interests it
acquired from Integrated Resources, Inc. through liquidation; however,
there can be no assurance of the timing of such transaction or the
effect it may have on the Partnership.
IAFM is entitled to a 10 percent interest in the net income, loss and
distributions from operations and cash from sales. For the years ended
December 31, 1997, 1996 and 1995, IAFM received or accrued
distributions approximating $879,000, $1,736,000 and $1,372,000,
respectively.
In June 1992, IAFM assumed responsibilities to provide certain
management services previously provided by Citicorp Aircraft Management
Inc. ("CAMI"). IAFM has also retained the aviation consulting firm of
Simat, Helliesen & Eichner, Inc. ("SH&E") to provide consulting
services with respect to the Partnership. Services to be provided by
SH&E include advice as to commercial aviation market conditions,
long-term marketing and financial strategies, as well as technical and
financial advice on the sale or re-lease of the Partnership's aircraft.
IAFM has also entered into an agreement with Aviation Capital Group,
L.P. ("ACG"), an entity comprised primarily of former management of
IAFM, pursuant to which ACG will perform remarketing services with
respect to the sale or re-lease of certain of the Partnership's
aircraft. ACG has previously performed certain administrative services
for IAFM.
All costs associated with the retention of SH&E and ACG (other than
normal competitive aircraft sales commissions, if any) 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
$265,161, $422,000 and $548,000, for the years ended December 31, 1997,
1996 and 1995, respectively.
Upon ultimate liquidation of the Partnership, IAFM may be required to
remit to the Partnership certain payments representing capital account
deficit restoration based upon a formula provided within the Limited
Partnership Agreement.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
(continued)
In April 1995, IAFM and certain affiliates entered into an agreement
with Fieldstone Private Capital Group, L.P. ("Fieldstone") pursuant to
which Fieldstone performs certain management and administrative
services relating to the Partnership. Substantially all costs
associated with the retention of Fieldstone are paid by IAFM. The
agreement with Fieldstone was scheduled to expire on 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 DEFERRED RENTS AND MODIFICATION ADVANCES RECEIVABLE
Deferred rents and modification advances receivable from Continental
Airlines, Inc. are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
12% note due in 66 monthly installments of $805
commencing June 1, 1992, to and including
November 1, 1997, the date of expiration. All
installments are of interest and principal .......... $ -- $ 8,346
12% note due in 56 monthly installments of $907
commencing May 1, 1993, to and including
December 1, 1997, the date of expiration. All
installments are of interest and principal .......... -- 10,211
8.64% note due in 42 monthly installments of $16,870
commencing October 1, 1993, to and including
March 1, 1997, the date of expiration
All installments are of interest and principal ...... -- 49,889
12% note due in 1 monthly installment of $11,286 on
November 1, 1993, followed by 48 monthly installments
of $13,984 commencing December 1, 1993, to and
including November 1, 1997, the date of expiration
All installments are of interest and principal ...... -- 144,982
12% note due in 46 monthly installments of $3,955
commencing February 1, 1994, to and including
November 1, 1997, the date of expiration. All
installments are of interest and principal .......... -- 41,004
-------- --------
$ -- $254,432
======== ========
</TABLE>
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5 LEASED AIRCRAFT - NET
Leased aircraft and related equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Four(five at December 31, 1996) Boeing 737-200 Advanced aircraft
(net of accumulated depreciation of $27,738,015 and
$33,689,105 and an allowance for equipment impairment of
$13,068,000 and $16,468,000 at December 31, 1997 and 1996) $ 6,530,485 $ 9,240,270
Four Boeing 727-200 Advanced aircraft (net of accumulated
depreciation of $31,325,119 and $27,805,929 and an allowance
for equipment impairment of $9,414,000 at December 31, 1997
and 1996) 6,069,871 9,589,060
Three McDonnell Douglas DC9-32 aircraft (net of accumulated
depreciation of $12,440,706 and $11,152,473 and an allowance
for equipment impairment of $1,618,000 at December 31,
1997 and 1996) 7,411,856 8,700,089
--------------- ---------------
$ 20,012,212 $ 27,529,419
=============== ===============
</TABLE>
Minimum future rentals receivable on noncancelable leases as of
December 31, 1997 are as follows:
Year ending December 31,
1998 $ 4,043,000
1999 95,000
-----------
$ 4,138,000
===========
The amounts included in the above table do not reflect the results of
the lease extension to America Trans Air, Inc. as discussed in Note
11e.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5 LEASED AIRCRAFT - NET (continued)
The amounts in the above table do not reflect potential rent credits,
as provided for under certain leases, to fund the Partnership's
obligations under such leases.
Maintenance and repairs expense for the years ended December 31, 1997,
1996 and 1995 was $1,963, $1,963 and $163,772, respectively.
6 DISTRIBUTIONS PAYABLE
Distributions payable to partners represent distributable cash from
operations, as defined in the Limited Partnership Agreement, for the
fourth quarter of 1996. Distributions payable to limited partners were
$5.50 per limited partnership unit and distributions payable to IAFM
aggregated $235,770 at December 31, 1996. There were no distributions
declared during the fourth quarter of 1997
7 PARTNERS' EQUITY
The General Partner holds a 10% equity interest in the Partnership. At
the inception of the Partnership, the General Partner's equity account
was credited with only the actual capital contributed in cash, $9,950.
The Partnership's management determined that this accounting does not
appropriately reflect the limited partners' and the General Partner's
relative participations in the Partnership's net assets, since it does
not reflect the General Partner's 10% equity interest in the
Partnership. Thus, the Partnership has restated its financial
statements to reallocate $19,290,250 (10% of the gross proceeds raised
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 this 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.
8 RECONCILIATION OF NET INCOME AND NET ASSETS PER FINANCIAL STATEMENTS
TO TAX BASIS
The principal differences between the financial statements and the tax
basis of accounting are accelerated depreciation taken for tax
purposes, the tax treatment of an aircraft purchased subject to a tax
benefit transfer lease, and the write-off for tax purposes of certain
bad debts provided for financial statement purposes in previous periods
offset by provisions for equipment impairment recognized for financial
statement purposes. A reconciliation of net income per financial
statements to the tax basis of accounting is as follows:
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8 RECONCILIATION OF NET INCOME AND NET ASSETS PER FINANCIAL STATEMENTS
TO TAX BASIS (continued)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income per financial statements ................... $ 1,706,235 $ 5,988,174 $ 1,496,774
Difference between financial statements and tax
basis depreciation .................................. 241,038 869,343 (15,767)
Difference between financial statements and tax
basis in aircraft sold or disposed of ............... -- 4,266,647 --
Difference between financial statements and tax
basis in reserves ................................... (53,457) 362,698 803,338
Difference between tax basis and financial statement
treatment of aircraft subject to Temporary Regulation
Section5c.168(f)(8)-2(a)(5) of the Internal Revenue
Code ................................................ (6,183,974) (1,189,364) (1,006,685)
Financial statement recognition of advance rental
payments recognized in prior periods for tax
purposes ............................................ 1,668 (47,666) --
------------ ------------ ------------
Net (loss) income per tax basis ....................... $ (4,288,490) $ 10,249,832 $ 1,277,660
============ ============ ============
</TABLE>
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8 RECONCILIATION OF NET INCOME AND NET ASSETS PER FINANCIAL STATEMENTS
TO TAX BASIS (continued)
The differences between the Partnership's net assets per financial
statements and tax basis of accounting are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Net assets per financial statements ........ $ 27,580,239 $ 34,661,785
Net carrying value of aircraft ............. (10,390,421) (10,631,459)
Syndication costs .......................... 22,665,750 22,665,750
Tax basis of aircraft purchased subject to
Temporary Regulation Section
5c.168(f)(8)-2(a)(5) of the
Internal Revenue Code .................. -- 6,183,974
Receipt of:
- advanced rental payment ............. 133,218 131,550
- maintenance reserves ................ 2,129,110 2,167,329
Other ...................................... 50,000 65,238
------------ ------------
Net assets per tax basis ................... $ 42,167,896 $ 55,244,167
============ ============
</TABLE>
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
9 MAJOR LESSEES
Revenues from aircraft leased by individual lessees, which generated
10% or more of rental revenues, are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Continental Airlines, Inc. ..... $2,286,000 $2,322,000 $2,322,000
% of revenues .................. 30% 24% 20%
American Trans Air, Inc. ....... $1,781,168 $1,781,168 $1,781,168
% of revenues .................. 24% 18% 15%
Ladeco S.A ..................... $1,140,000 $1,140,000 $1,140,000
% of revenues .................. 15% 12% 10%
Air Micronesia, Inc............. $ 895,056 $ -- $ --
% of revenues .................. 12% -% -%
Aloha Airlines, Inc. ........... $ 869,872 $2,023,650 $3,095,216
% of revenues .................. 11% 21% 26%
Southwest Airlines, Co. ........ $ -- $1,087,667 $1,817,000
% of revenues .................. -% 11% 15%
</TABLE>
10 BUSINESS SEGMENTS
The Partnership leases aircraft domestically and in foreign countries.
Below is a breakdown of the Partnership's aircraft and operating
results by geographic location:
<TABLE>
<CAPTION>
Year ended December 31, 1997
-------------------------------------------------------
United Western
States Pacific Chile
---------------- --------------- ---------------
<S> <C> <C> <C>
Rental revenues $ 5,537,044 $ 895,056 $ 1,140,000
Net income (loss) $ 874,923 $ (213,558) $ 1,044,870
Leased aircraft - net $ 14,997,468 $ 2,572,094 $ 2,442,650
<CAPTION>
Year ended December 31, 1996
-------------------------------------------------------
United Western
States Pacific Chile
---------------- --------------- ---------------
<S> <C> <C> <C>
Rental revenues $ 7,699,275 $ 895,056 $ 1,140,000
Net income (loss) $ 5,453,602 $ (201,373) $ 735,945
Leased aircraft - net $ 21,522,018 $ 3,564,751 $ 2,442,650
</TABLE>
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10 BUSINESS SEGMENTS (continued)
<TABLE>
<CAPTION>
Year ended December 31, 1995
--------------------------------------------
United Western
States Pacific Chile
--------------------------------------------
<S> <C> <C> <C>
Rental revenues $ 9,785,028 $ 895,056 $ 1,140,000
Net income (loss) $ 2,130,886 $ (194,220) $ (439,892)
Leased aircraft - net $ 34,574,058 $ 4,557,407 $ 2,737,442
</TABLE>
11 COMMITMENTS AND CONTINGENCIES
a Hawaiian Airlines, Inc.
On September 21, 1993, Hawaiian Airlines, Inc. ("Hawaiian"), the lessee
of a McDonnell Douglas Model DC9-51 aircraft (the "Hawaiian Aircraft"),
filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the United States Bankruptcy Code. On
August 30, 1994 the United States Bankruptcy Court entered an order
confirming Hawaiian's plan of reorganization. On September 12, 1994
(the "Effective Date"), Hawaiian's plan of reorganization became
effective.
In September 1994, the Partnership entered into a new lease (the "New
Lease") with Hawaiian, which commenced on the Effective Date. The New
Lease provided for monthly rentals of $60,000, payable on a weekly
basis, which stepped up to $65,000 per month effective August 1, 1995
through November 1999.
The Partnership and Hawaiian had entered into an agreement to settle
both the Partnership's proof of claim and its administrative claim
filed in the Hawaiian bankruptcy case with respect to the Hawaiian
Aircraft. Hawaiian has since settled such claims through the issuance
of Hawaiian Class A Common stock to the Partnership. During 1995, the
Partnership sold all shares for net proceeds aggregating $1,045,941.
On September 1, 1996, the Partnership and Hawaiian amended the lease
agreement of 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 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 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
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
11 COMMITMENTS AND CONTINGENCIES (continued)
b Continental Airlines, Inc.
The Partnership originally owned three McDonnell Douglas Model DC9-32
aircraft and three Boeing Model 727-100 aircraft (collectively, the
"Continental Aircraft") which were leased to Continental Airlines, Inc.
("Continental") for terms originally scheduled to expire in November
1993. On December 3, 1990, Continental Airlines Holdings, Inc. and its
subsidiary companies, including Continental, filed a petition for
reorganization under the United States Bankruptcy Code. In April 1993,
Continental's plan of reorganization was confirmed by the Bankruptcy
Court.
In October 1991, the Partnership and Continental restructured the
leases of the three McDonnell Douglas Model DC9-32 aircraft (the
"Continental Restructured Leases"), under which the leases were
extended to December 1, 1997. Pursuant to the restructuring, rents
accrued at a rate of $76,500 per aircraft per month effective September
1, 1990 for 13 months, with simple interest accruing at a rate of 12%
per annum (the "Continental Deferred Rents") and were to be repaid over
a 36 month period commencing July 1, 1992. The accrual of such interest
is included in other revenue on the statements of income and the
related receivable is included in deferred rents and modification
advances receivable on the accompanying balance sheets.
The Continental Restructured Leases provided for monthly rental
payments of $64,500 per aircraft per month to December 1, 1997.
Additionally, either Continental or the Partnership may have funded
certain improvements and modifications to such Continental Aircraft,
however, if such amounts were funded by Continental, the Partnership
would allow Continental a rental credit with simple interest accruing
at a rate of 12% per annum.
Continental was obligated to repay the aggregate rental credits taken,
as well as any modifications funded by the Partnership, over the
remaining term of the Continental Restructured Leases accruing interest
at a rate of 12% per annum. To date, such credits and Partnership
fundings have aggregated approximately $762,400 and the remaining
amounts to be recovered are included in deferred rents and modification
advances receivable on the accompanying balance sheets.
In October 1992, the Partnership and Continental entered into an
agreement to defer rentals due under the Continental Restructured
Leases for a three month period beginning January 1, 1993 (the "Second
Continental Rent Deferral"). Pursuant to the terms of the Second
Continental Rent Deferral, the deferred rents (aggregating $580,500),
plus interest accruing at a rate equal to 8.64% per annum, were to be
repaid over a 42 month period commencing October 1, 1993.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
11 COMMITMENTS AND CONTINGENCIES (continued)
b Continental Airlines, Inc. (continued)
During 1997, the leases of the three McDonnell Douglas Model DC9-32
aircraft to Continental were extended to September 1998 (2 aircraft)
and December 1998 (1 aircraft) at a rental of $52,500 per month, per
aircraft.
In November 1991, Continental rejected the leases of the three Boeing
727-100 aircraft, which had been out of service since 1991. Due to the
condition and the related market for such aircraft, the Partnership
provided aggregate allowances for equipment impairment of approximately
$6,483,000. During 1993, the Partnership sold all three Boeing 727-100
aircraft. The Partnership retains its rights pursuant to a proof of
claim and an administrative claim filed in the Continental Bankruptcy
case with respect to such aircraft. The Partnership has recorded
$445,000 as accounts receivable with respect to such claims.
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 has been contributed in cash
and the balance will be contributed in the form of rental credits
provided to Continental. Continental will be allowed to take such
rental credits ($13,741 per month through May 1996) such that they will
recoup their aggregate cost of the initial modifications over a 36
month period with interest at 9.31% per annum. Further, the Partnership
has 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 will then repay any Lessor
Financing credits through monthly installments which will be amortized
at the rate of 9.31% per annum over the then remaining lease term.
Through December 31, 1997, the Partnership had provided financing of
approximately $755,000. Such amounts, net of amounts repaid, are
included in deferred costs on the accompanying balance sheets at
December 31, 1997 and 1996.
d Ladeco S.A.
During 1993, the Partnership consummated two leases with Ladeco S.A.
("Ladeco"), each for a Boeing 737-200 Advanced aircraft for terms of 48
and 60 months. Both leases provide for, among other things, monthly
rentals of $47,500 each, plus certain maintenance reserves for engines
and landing gear, based upon the number of hours flown. As of December
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
11 COMMITMENTS AND CONTINGENCIES (continued)
d Ladeco S.A. (continued)
31, 1997, such maintenance reserves aggregated approximately
$1,490,000. 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 American Trans Air, Inc.
In November 1993, Alaska Airlines, Inc. ("Alaska"), the lessee of a
Boeing 727-200 Advanced aircraft (in which the Partnership owns an
undivided 47.92231% joint venture interest) (the "JV Aircraft") and the
Partnership agreed to terminate the lease which was to have originally
terminated on May 1, 1994 (the "Alaska JV Lease"). In conjunction with
the early termination of the Alaska JV Lease, the Partnership leased
the JV Aircraft to American Trans Air, Inc. ("ATA") for a term of
approximately 36 months (the "ATA Lease"). The ATA Lease provides for
monthly rentals of $63,500 of which approximately $30,400 is
attributable to the Partnership's undivided interest in the JV
Aircraft. Additionally, Alaska made a termination payment based on the
difference between the remaining Alaska JV Lease rentals due and the
ATA Lease rate discounted at 8% for the period from the delivery date
of the ATA Lease through May 1, 1994.
In May 1996, ATA exercised its renewal option for the JV Aircraft. The
lease, originally scheduled to expire in November 1996, was renewed for
an additional two years at the same lease rate.
In addition, ATA leases two Boeing 727-200 Advanced aircraft (the "ATA
Aircraft"), since November and December 1994, each with an initial term
of approximately 39 months ("Basic Term"), which provides for monthly
rentals of $59,000. The Partnership has contributed in the form of cash
or rental credits during early 1995, $75,000 per aircraft towards
bridging "C" check inspections.
In March 1998, the Partnership and ATA agreed to amend the leases
extending the term through December 31, 2000 at the current lease
rental at which time ATA will have a purchase obligation of
approximately $3.3 million per aircraft. During the term of the amended
lease, ATA may, at its expense, retrofit the aircraft to comply with
the Stage III noise emission standards pursuant to FAR Part 36.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
11 COMMITMENTS AND CONTINGENCIES (continued)
f Aloha Airlines, Inc.
In December 1993, Aloha Airlines, Inc. ("Aloha"), the lessee of a
Boeing 737-200 Advanced aircraft (the "Aloha Aircraft") and the
Partnership agreed to amend the terms of its lease which was originally
scheduled to terminate on September 1, 1994. Pursuant to the lease
amendment, Aloha agreed to extend the term of the lease to February 1,
1996, providing for rentals of approximately 66% of the original lease
rate plus maintenance reserves, both payable quarterly in arrears.
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 two years
remaining on the TBT Lease, until May 21, 2000.
Prior to the originally scheduled expiration of the Aloha lease on
February 1, 1996 the Partnership and Aloha agreed to a three month
lease extension with rent based on $300 per flight hour. The
Partnership and Aloha subsequently agreed on a further short-term lease
extension, to October 15, 1996, on the same terms, and on October 15,
1996, the Aloha Aircraft was returned by Aloha to the Partnership and
is now maintained at a storage facility.
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 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 restricted
until certain contingent liabilities relating to the aircraft are
satisfied. At the time of 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 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 expired in accordance with its terms. Aloha has indicated that
certain modifications to the aircraft as required by the Airworthiness
Directives issued by the 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
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
11 COMMITMENTS AND CONTINGENCIES (continued)
f Aloha Airlines, Inc. (continued)
District of New York. The complaint requested 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 aircraft is
scheduled to be returned by April 30, 1998 and the Partnership is
actively remarketing the aircraft for sale or lease.
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") 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, who 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 Hawaiian is the fact that it has leased its aircraft to
airlines which are based in the state. Aloha and Hawaiian, as well as
the Partnership, have separately engaged tax counsel and, both airlines
are cooperating with the Partnership to vigorously contest the proposed
assessments.
Final notices of assessments 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 assessments.
12 AIRCRAFT SALES
On April 15, 1996, the Partnership sold to Southwest a Boeing 737-200
Advanced aircraft leased to Southwest. The Partnership received
proceeds of approximately $6,784,000, net of an associated aircraft
sales commission and other related costs. The net proceeds from the
sale were distributed to the partners of the Partnership in August
1996. The Southwest aircraft was originally purchased by the
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12 AIRCRAFT SALES (continued)
Partnership in July, 1988 for approximately $12,804,000 inclusive of
associated acquisition costs. As of April 15, 1996, when it was sold,
the net carrying value of the aircraft was approximately $3,216,000
(net of allowance for equipment impairment of $2,300,000).
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
Schedule II
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
-------------------------
Balance at Charged to Charged Balance at
Beginning of Costs and to Other End of
Description Period Expenses Accounts Deductions Period
----------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Leased aircraft - valuation
allowance for equipment
impairment
Four Boeing 737-200 Advanced
aircraft .................. $16,468,000 $ -- $ -- $ (3,400,000)(A) $13,068,000
Four Boeing 727-200 Advanced
aircraft .................. 9,414,000 -- -- -- 9,414,000
Three McDonnell Douglas DC9-32
aircraft .................. 1,618,000 -- -- -- 1,618,000
----------- ----- ----------- ------------- -----------
$27,500,000 $ -- $ -- $ (3,400,000) $24,100,000
=========== ===== =========== ================= ===========
</TABLE>
(A)Represents valuation allowances for equipment impairment relating to certain
equipment sold during 1997.
(continued)
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
Schedule II
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (continued)
Additions
--------------------------
Balance at Charged to Charged Balance at
Beginning of Costs and to Other End of
Description Period Expenses Accounts Deductions Period
----------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Leased aircraft - valuation
allowance for equipment
impairment
Five Boeing 737-200 Advanced
aircraft .................. $18,768,000 $ -- $ -- $(2,300,000) (A) $16,468,000
Four Boeing 727-200 Advanced
aircraft .................. 9,414,000 -- -- -- 9,414,000
Three McDonnell Douglas DC9-32
aircraft .................. 1,618,000 -- -- -- 1,618,000
One McDonnell Douglas DC9-51
aircraft .................. 2,425,000 -- -- (2,425,000) (A) --
----------- ----------- ----------- ----------- -----------
$32,225,000 $ -- $ -- $(4,725,000) $27,500,000
=========== =========== =========== =========== ===========
</TABLE>
(A) Represents valuation allowances for equipment impairment relating to certain
equipment sold during 1996.
<PAGE>
<TABLE>
<CAPTION>
Schedule II
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (continued)
AIRCRAFT INCOME PARTNERS L.P.
Additions
------------------------
Balance at Charged to Charged Balance at
Beginning of Costs and to Other End of
Description Period Expenses Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Leased aircraft - valuation
allowance for equipment
impairment
Six Boeing 737-200 Advanced
aircraft .................. $18,768,000 $ -- $ -- $ -- $18,768,000
Four Boeing 727-200 Advanced
aircraft .................. 9,414,000 -- -- -- 9,414,000
Three McDonnell Douglas DC9-32
aircraft .................. 1,618,000 -- -- -- 1,618,000
One McDonnell Douglas DC9-51
aircraft .................. 2,425,000 -- -- -- 2,425,000
Allowance for uncollectible
accounts - accounts receivable 1,176,065 -- -- (1,176,065)(B) --
----------- ------ ----------- --------------- -----------
$33,401,065 $ -- $ -- $(1,176,065) $32,225,000
=========== ====== =========== =============== ===========
</TABLE>
(B) Represents allowance for uncollectable accounts written-off during 1995.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
Registrant has no officers or directors. The General Partner manages and
controls substantially all of Registrant's affairs and has general
responsibility and ultimate authority in all matters affecting its business. The
names and positions held by the officers and directors of the General Partner
are described below.
<TABLE>
<CAPTION>
Has served as a
Director and/or
Officer of the
General Partner
Name Age Position Held since
---- --- ------------- -----
<S> <C> <C> <C>
W. Edward Scheetz 33 Director November 1997
David Hamamoto 38 Director November 1997
Richard Sabella 42 President, Director November 1997
David King 35 Executive VP, Director, Assistant November 1997
Treasurer
Lawrence R. Schachter 41 Senior VP, Chief Financial Officer January 1998
Kevin Reardon 39 VP, Secretary, Treasurer, Director November 1997
Allan B. Rothschild 36 Executive VP December 1997
Marc Gordon 33 VP November 1997
Charles Humber 24 VP November 1997
Adam Anhang 24 VP November 1997
Gregory Peck 23 Assistant Secretary November 1997
</TABLE>
Each director and officer of the General Partner will hold office until the next
annual meeting of stockholders of the General Partner and until his successor is
elected and qualified.
There are no family relationships between or among any of the directors and/or
executive officers of the General Partner.
W. Edward Scheetz co-founded NorthStar Capital Partners with David Hamamoto in
July 1997, having previously been a partner at Apollo Real Estate Advisors L.P.
since 1993. From 1988 to 1993, Mr. Scheetz was a principal with Trammell Crow
Ventures.
David Hamamoto co-founded NorthStar Capital Partners with W. Edward Scheetz in
July 1997, having previously been a partner and a co-head of the Real Estate
Principal Investment Area at Goldman, Sachs & Co., where he initiated the effort
to build a real estate principal investment business in 1988 under the auspices
of the Whitehall Funds.
Richard Sabella joined NorthStar Capital Partners in November 1997, having
previously been the head of real estate and a partner at the law firm of Cahill,
Gordon & Reindel since 1989. Mr. Sabella has also been associated with the law
firms of Milgrim, Thomajian, Jacobs & Lee, P.C. and Cravath, Swaine & Moore.
David King joined NorthStar Capital Partners in November 1997, having previously
been a Senior Vice President of Finance at Olympia & York Companies (USA). Prior
to joining Olympia & York in 1990, Mr. King worked for Bankers Trust in its real
estate finance group.
<PAGE>
Lawrence R. Schachter joined NorthStar Presidio in January 1998, having
previously held the position as Controller at CB Commercial/Hampshire, LLC from
1996 to 1997. Prior to joining CB, Mr. Schachter held the position of Controller
at Goodrich Associates in 1996 and at Greenthal/Harlan Realty Services Co. from
1992 to 1995. Mr. Schachter, who holds a CPA, graduated from Miami University
(Ohio).
Kevin Reardon joined NorthStar Capital Partners in October 1997, having
previously held the position of Controller at Lazard Freres Real Estate
Investors from 1996 to 1997. Prior to joining Lazard Freres, Mr. Reardon was the
Director of Finance in charge of European expansion at the law firm of Dewey
Ballantine from 1993 to 1996. Prior to 1993, Mr. Reardon held a financial
position at Hearst - ABC - Viacom Entertainment Services. Mr. Reardon, who holds
a CPA, graduated from Fordham University with a B.S. in Accounting.
Allan B. Rothschild joined NorthStar Presidio in December 1997, having
previously been the Senior Vice President and General Counsel of Newkirk Limited
Partnership where he managed a large portfolio of net-leased real estate assets.
Prior to joining Newkirk in September 1995, Mr. Rothschild was associated with
the law firm of Proskauer, Rose LLP in its real estate group.
Marc Gordon joined NorthStar Capital Partners in October 1997, having previously
been a Vice President in the Real Estate Investment Banking Group at Merrill
Lynch where he executed corporate finance and strategic transactions for public
and private real estate ownership companies, including REITs, real estate
service companies, and real estate intensive operating companies. Prior to
joining Merrill Lynch in 1993, Mr. Gordon was in the Real Estate and Banking
Group at the law firm of Irell & Manella. Mr. Gordon graduated from Dartmouth
College with an A.B. in economics and also holds a J.D. from the UCLA School of
Law.
Charles Humber joined NorthStar Capital Partners in September 1997, having
previously worked for Merrill Lynch's Real Estate Investment Banking Group from
1996 to 1997. Mr. Humber graduated from Brown University with a B.A. in
international relations and organizational behavior and management which is
where he was prior to 1996.
Adam Anhang joined NorthStar Capital Partners in August 1997, having previously
worked for The Athena Group's Russia and Former Soviet Union development team
from 1996 to 1997. Mr. Anhang graduated from the Wharton School of the
University of Pennsylvania with a B.S. in economics with concentrations in
finance and real estate, which is where he was prior to 1996.
Gregory Peck joined NorthStar Capital Partners in July 1997, having previously
worked for the Morgan Stanley Realty Real Estate Funds (MSREF) and Morgan
Stanley's Real Estate Investment Banking Group from 1996 to 1997. Prior to
joining Morgan Stanley, Mr. Peck worked for Lazard Freres & Co. LLC in the Real
Estate Investment Banking Group from 1994 to 1996. Mr. Peck graduated from
Columbia College with an A.B. in mathematics and an A.B. in economics.
Messrs. Scheetz, Hamamoto, Sabella, King and Reardon also serve as directors of
the General Partners of the following limited partnerships whose limited
partnership units are registered under Section 12 of the Exchange Act: American
Leasing Investors VIII-B, L.P., National Lease Income Fund 6, L.P., Resources
Pension Shares 5, L.P., Vista Properties, Resources Accrued Mortgage Investors
2, L.P., Resources Accrued Mortgage Investors - Series 86, L.P., Integrated
Resources High Equity Partners - Series 85, L.P., High Equity Partners, L.P. -
Series 86, and High Equity Partners, L.P. - Series 88. Each of the foregoing
general partners is affiliated with the General Partner.
<PAGE>
Registrant believes, based on written representations received by it, that for
1997 all filing requirements under Section 16(a) of the Securities Exchange Act
of 1934 applicable to beneficial owners of Registrant's securities, Registrant's
General Partner and the officers and directors of such General Partner, were
complied with.
Item 11. Executive Compensation
Registrant is not required to pay any compensation to the officers or directors
of the General Partner. The General Partner does not currently pay any
compensation to any of its officers or directors.
Certain officers and directors of the General Partner receive compensation from
affiliates of the General Partner (but not from Registrant) for services
performed for various affiliated entities, which may include services performed
for Registrant; however, the General Partner believes that any compensation
attributable to such services performed for Registrant is immaterial. See Item
13 "Certain Relationships and Related Transactions".
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 1, 1998, no person owned of record or was known by Registrant to own
beneficially more than 5% of the Units of Registrant.
As of March 1, 1998, neither the General Partner nor its officers and directors
were known by Registrant to beneficially own Units or shares of Presidio, the
parent of the General Partner.
The following table sets forth certain information known to Registrant with
respect to beneficial ownership of the Class A Shares as of March 11, 1998
(based on 37 Class A Shares outstanding on such date) by: (i) each person who
beneficially owns 5% or more of the Class A Shares, (ii) the executive officers
of Presidio, (iii) each of Presidio's directors, and (iv) all directors and
executive officers as a group:
<PAGE>
<TABLE>
<CAPTION>
Amount and nature Percentage
Name of Beneficial Owner Of Beneficial Ownership Outstanding
------------------------ ----------------------- -----------
<S> <C> <C>
W. Edward Scheetz 27(1) 72.97%
David Hamamot
Presidio Holding Company LLC
c/o Presidio Capital Corp.
411 West Putnam Avenue, Suite 270
Greenwich, CT 06830
John M. Angelo 5(2) 13.51%
Michael L. Gordon
AG Presidio Investors, LLC
c/o Angelo, Gordon & Co., LP
245 Park Avenue, 26th Floor
New York, NY 10167
M.H. Davidson & Co. 3(3) 8.11%
DK Presidio Investors, LLC
c/o M.H. Davidson & Company
885 Third Avenue
New York, NY 10022
John A. Motulsky 2(4) 5.41%
c/o Stonehill Partners, LP
Stonehill Offshore Partners Limited
Stonehill Institutional Partners, LP
110 East 59th Street
New York, NY 10022
Richard Sabella --(1)
Presidio Holding Company, LLC
c/o Presidio Capital Corp.
411 West Putnam Avenue, Suite 270
Greenwich, CT 06830
David King --(1)
Presidio Holding Company, LLC
c/o Presidio Capital Corp.
411 West Putnam Avenue, Suite 270
Greenwich, CT 06830
Kevin Reardon -- (1)
Presidio Holding Company, LLC
c/o Presidio Capital Corp.
411 West Putnam Avenue, Suite 270
Greenwich, CT 06830
</TABLE>
<PAGE>
Directors and executive officers as a group (5 persons)
(1) As the managing member of Presidio Capital Investment Company, LLC
("PCIC"), Presidio Holding Company, LLC ("PHC") may be deemed to own
beneficially for purposes of Rule 13d-3 of the Exchange Act, shares
held by PCIC. In addition, as controlling parties of PHC, NorthStar
Capital Partners ("NCP") and NorthStar Capital Holdingss I, LLC
("NCHI") may be deemed to own beneficially for purposes of Rule 13d-3
of the Exchange Act shares held by PCIC. Each of PHC, NCP and NCHI
disclaims any beneficial ownership of such shares.
Pursuant to that certain Amended and Restated Pledge and Security
Agreement (the "Pledge Agreement") dated March 5, 1998 made by PHC in
favor of Credit Suisse First Boston Mortgage Capital LLC ("CSFB"), PHC
pledged all of its membership interests in PCIC to CSFB as security for
loans issued under the Loan Agreement dated as of February 20, 1998 by
and among PHC and CSFB and the First amendment thereto dated March 5,
1998 (together, the "Loan Agreement"). The Pledge Agreement and Loan
Agreement contain standard default and event of default provisions
which may at a subsequent date result in a change of control of PCIC.
(2) John M. Angelo and Michael L. Gordon, members of AG Presidio Investors
LLC, may be deemed to be the beneficial owners under Section 13d-3 of
the Exchange Act of the securities held by PCIC.
(3) M.H. Davidson & Company, as the managing member of DK Presidio
Investors, LLC, may be deemed to be the beneficial owners under Section
13d-3 of the Exchange Act of the securities held by PCIC.
(4) John A. Motulsky is a managing general partner of Stonehill Partners,
L.P., a general partner of Stonehill Institutional Partners, L.P. and a
managing member of Stonehill Advisers LLC, a New York limited liability
company that is the investment advisor to Stonehill Offshore Partners.
Stonehill Partners, L.P., Stonehill Offshore Partners, Stonehill
Institutional Partners L.P. and Motulsky are sometimes collectively
referred to herein as "Stonehill." The principal business of Stonehill
is investing.
Item 13. Certain Relationships and Related Transactions
The General Partner received $878,778 from Registrant as its share of
distributions for the year ended December 31, 1997. No director or officer of
the General Partner received any direct remuneration from Registrant during the
year ended December 31, 1997.
The General Partner also received a management fee of $265,161 for the
performance of management services.
The General Partner's share of Registrant's tax loss for the year ended December
31, 1997 amounted to $430,440.
For a description of the interest of the General Partner in cash from operations
and cash from sales, reference is made to the material contained in the
Prospectus under the heading MANAGEMENT COMPENSATION, which is incorporated
herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements
See Index to Financial Statements and Supplementary Data in Part II,
Item 8.
2. Financial Schedules
Schedule II. Valuation and Qualifying Accounts (See Index to Financial
Statements and Supplementary Data in Part II, Item 8).
3. Exhibits
3 Certificate of Limited Partnership.1
4 Limited Partnership Agreement.1
10.1 Agreement between Registrant and Integrated Aircraft Fund
Management Corp.1
10.2 Form of Trust Agreement between Integrated Aircraft Fund
Management Corp., as beneficiary, and First Security Bank of
Utah, N.A., as trustee.1
10.3 Form of Aircraft Purchase Agreement between Integrated
Aircraft Fund Management Corp. and Continental Airlines, Inc.1
10.4 Form of Lease Agreement between First Security Bank of Utah,
N.A., as trustee, Integrated Aircraft Fund Management Corp.
and Continental Airlines, Inc.1
Note: substantially identical leases in all material respects
except for the dates of term and rental amounts cover the
equipment described under "Properties" as purchased on April
20, 1988 and the McDonnell Douglas DC-9-32 aircraft purchased
on May 13, 1988.1
10.5 Form of Lease Agreement between First Security Bank of Utah,
N.A., as trustee and Midway Airlines, Inc.1
10.6 Form of Lease Agreement between First Security Bank of Utah,
N.A., as trustee, and Braathens South-American and Far East
Airtransport A/S.2
10.7 Form of Lease Agreement between First Security Bank of Utah,
N.A., as trustee, and U.S. Air, Inc.2
Note: substantially identical leases in all material respects
except for dates of term and rental amounts cover the
equipment described in "Properties" as purchased on December
15, 1988 and in "Business - General" as purchased on January
18, 1989.
<PAGE>
10.8 Form of Lease Agreement between First Security Bank of Utah,
N.A., as trustee, and Southwest Airlines Co.2
10.9 Form of Lease Agreement between First Security Bank of Utah,
N.A., as trustee, and Alaska Airlines.3
10.10 Form of Lease Agreement I between First Security Bank of Utah,
N.A., as trustee, and Aloha Airlines, Inc.3
10.11 Form of Lease Agreement II between First Security Bank of
Utah, N.A., as trustee, and Aloha Airlines, Inc.3
10.12 Form of Lease Agreement between First Security Bank of Utah,
N.A., as trustee, and Hawaiian Airlines, Inc.4
10.13 Form of Lease Agreement dated as of May 1, 1991, between First
Security Bank of Utah, N.A., as trustee, and Southwest
Airlines Co. to be supplemented by Lease Agreement No. 1 dated
June 14, 1991 and Amendment No. 2 to Lease Agreement dated as
of May 1, 1991.5
10.14 Form 11 of Lease Amendment No. 2 dated as of February 27, 1992
between First Security Bank of Utah, N.A., as trustee and
Braathens South-American and Far East Airtransport A/S.5
10.15 Form of Lease Agreement No. 3 dated as of March 23, 1992
between First Security Bank of Utah, N.A., as trustee and
Braathens South-American and Far East Airtransport A/S.5
10.16 Form of Purchase Agreement dated as of May 19, 1992 between
Alaska Airlines, Inc. and First Security Bank of Utah, N.A.,
as trustee and lessor.5
10.17 Termination Agreement dated July 28, 1992 by and among
Integrated Aircraft Fund Management Corp., Registrant and
Citicorp Aircraft Management, Inc.5
10.18 Lease Amendment No. 2 dated as of July 7, 1992 between First
Security Bank of Utah, N.A., as trustee and Braathens
South-American and Far East Airtransport A/S.5
10.19 Remarketing Agreement between Integrated Aircraft Fund
Management Corp. and Aviation Capital Group, L.P., dated
August 1, 1992.6
10.20 Amendment No. 3 dated as of August 1, 1992 to the Lease
Agreement dated as of May 1, 1991 between First Security Bank
of Utah, N.A., as trustee and Southwest Airlines Co.6
10.21 Amendment No. 1 dated as of November 1, 1992 to the Lease
Agreement dated as of December 1, 1988 between First Security
Bank of Utah, N.A., as trustee and USAir, Inc.6
10.22 Amendment No. 2 dated as of December 1, 1992 to the Lease
Agreement dated as of December 1, 1988 between First Security
Bank of Utah, N.A., as trustee and USAir, Inc.6
10.23 Amendment No. 1 dated as of November 1, 1992 to the Lease
Agreement dated as of January 1, 1989 between First Security
Bank of Utah, N.A., as trustee and USAir, Inc.6
<PAGE>
10.24 Lease Agreement dated January 5, 1993 between First Security
Bank of Utah, N.A., as trustee, and Continental Airlines,
Inc.6
10.25 Participation Agreement dated January 5, 1993 between First
Security Bank of Utah, N.A., as trustee, Registrant and
Continental Airlines, Inc.6
10.26 Amendment No. 2 dated as of December 1, 1993 to the Lease
Agreement dated as of January 1, 1989 between First Security
Bank of Utah, N.A., as trustee and USAir, Inc.7
10.27 Amendment No. 3 dated as of December 1, 1993 to the Lease
Agreement dated as of December 1, 1988 between First Security
Bank of Utah, N.A., as trustee and USAir, Inc.7
10.28 Amendment dated as of December 1, 1993 to Lease Agreement II
between First Security Bank of Utah, N.A., as trustee, and
Aloha Airlines, Inc.7
10.29 Form of Lease Agreement between First Security Bank of Utah,
N.A., as trustee, Registrant, as lessor, and Ladeco S.A.7
Note: a substantially identical lease in all material respects
except for dates of term and rental amounts covers the Second
Alaska Aircraft. See "Business - Recent Developments, Alaska
Airlines".
10.30 Lease Agreement dated as of November 5, 1993 between First
Security Bank of Utah, N.A., as trustee, and American Trans
Air, Inc.7
10.31 Lease Agreement dated as of November 1, 1994 between First
Security Bank of Utah, N.A., as trustee, and American Trans
Air, Inc.8
10.32 Lease Agreement dated as of November 10, 1994 between First
Security Bank of Utah, N.A., as trustee, and American Trans
Air, Inc. 8
10.33 Lease Amendment and Extension Agreement, dated as of July 20,
1994, between First Security Bank of Utah N.A., as trustee,
and Southwest Airlines Co. 8
10.34 Second Lease Extension Agreement, dated as of July 5, 1995,
between First Security Bank of Utah, N.A., as trustee, and
Southwest Airlines Co.
10.35 Form of Purchase Agreement, dated April 15, 1996, between
Southwest Airlines Co. ("Purchaser"), First Security Bank of
Utah N.A. ("Trustee") and Aircraft Income Partners L.P.
("Beneficiary") 10
10.36 Lease Amendment, dated January 1, 1997, between First Security
Bank of Utah N.A., as Trustee, and Hawaiian Airlines, Inc. 10
<PAGE>
10.37 Lease Amendment and Extension Agreement, dated June 24, 1996,
between First Security Bank of Utah N.A., as Trustee, and
American Trans Air, Inc. 10
10.38 Lease Amendment and Extension Agreement, dated July 29, 1996,
between First Security Bank of Utah N.A., as Trustee, and
Aloha Airlines, Inc. 10
28 Prospectus of Registrant dated February 29, 1988, as
supplemented by Supplements dated May 20, 1988, August 16,
1988, November 4, 1988, January 6, 1989 and February 28, 1989
filed pursuant to Rules 424(b) and 424(c) under the Securities
Act of 1933.1
(b) Current reports on Form 8-K filed during the last quarter of
Registrant's fiscal year
None.
- -------------------------
1 Filed as an exhibit to Registrant's Registration Statement on
Form S-1 (33-18891), and incorporated herein by reference.
2 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988, and incorporated
herein by reference.
3 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989, and incorporated
herein by reference.
4 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990, and incorporated
herein by reference.
5 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 and incorporated
herein by reference.
6 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 and incorporated
herein by reference.
7 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated
herein by reference.
8 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated
herein by reference.
9 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 and incorporated
herein by reference.
10 Filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 and incorporated
herein by reference.
* Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 27th day of March 1998.
AIRCRAFT INCOME PARTNERS L.P.
By: INTEGRATED AIRCRAFT FUND MANAGEMENT CORP.
General Partner
Date
By: /s/ Richard Sabella March 27, 1998
-------------------
Richard Sabella
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant in their
capacities as directors and/or officers (as to the Managing General Partner) on
the date indicated below.
Signature Title Date
--------- ----- ----
/s/ Lawrence Schachter Senior Vice President and March 27, 1998
- ------------------------
Lawrence Schachter Chief Financial Officer
/s/ Richard Sabella Director and President March 27, 1998
- ------------------------
Richard Sabella
/s/ David King Director and Executive March 27, 1998
- ------------------------
David King Vice President
/s/ Kevin Reardon Director and Vice President, March 27, 1998
- ------------------------
Kevin Reardon Treasurer and Secretary
<PAGE>
EXHIBIT INDEX
Exhibits
3 Certificate of Limited Partnership.1
4 Limited Partnership Agreement.1
10.1 Agreement between Registrant and Integrated Aircraft Fund Management
Corp.1
10.2 Form of Trust Agreement between Integrated Aircraft Fund Management
Corp., as beneficiary, and First Security Bank of Utah, N.A., as
trustee.1
10.3 Form of Aircraft Purchase Agreement between Integrated Aircraft Fund
Management Corp. and Continental Airlines, Inc.1
10.4 Form of Lease Agreement between First Security Bank of Utah, N.A., as
trustee, Integrated Aircraft Fund Management Corp. and Continental
Airlines, Inc.1
Note: substantially identical leases in all material respects except
for the dates of term and rental amounts cover the equipment described
under "Properties" as purchased on April 20, 1988 and the McDonnell
Douglas DC-9-32 aircraft purchased on May 13, 1988.1
10.5 Form of Lease Agreement between First Security Bank of Utah, N.A., as
trustee and Midway Airlines, Inc.1
10.6 Form of Lease Agreement between First Security Bank of Utah, N.A., as
trustee, and Braathens South-American and Far East Airtransport A/S.2
10.7 Form of Lease Agreement between First Security Bank of Utah, N.A., as
trustee, and U.S. Air, Inc.2
Note: substantially identical leases in all material respects except
for dates of term and rental amounts cover the equipment described in
"Properties" as purchased on December 15, 1988 and in "Business -
General" as purchased on January 18, 1989.
10.8 Form of Lease Agreement between First Security Bank of Utah, N.A., as
trustee, and Southwest Airlines Co.2
10.9 Form of Lease Agreement between First Security Bank of Utah, N.A., as
trustee, and Alaska Airlines.3
10.10 Form of Lease Agreement I between First Security Bank of Utah, N.A., as
trustee, and Aloha Airlines, Inc.3
10.11 Form of Lease Agreement II between First Security Bank of Utah, N.A.,
as trustee, and Aloha Airlines, Inc.3
10.12 Form of Lease Agreement between First Security Bank of Utah, N.A., as
trustee, and Hawaiian Airlines, Inc.4
<PAGE>
10.13 Form of Lease Agreement dated as of May 1, 1991, between First Security
Bank of Utah, N.A., as trustee, and Southwest Airlines Co. to be
supplemented by Lease Agreement No. 1 dated June 14, 1991 and Amendment
No. 2 to Lease Agreement dated as of May 1, 1991.5
10.14 Form 11 of Lease Amendment No. 2 dated as of February 27, 1992 between
First Security Bank of Utah, N.A., as trustee and Braathens
South-American and Far East Airtransport A/S.5
10.15 Form of Lease Agreement No. 3 dated as of March 23, 1992 between First
Security Bank of Utah, N.A., as trustee and Braathens South-American
and Far East Airtransport A/S.5
10.16 Form of Purchase Agreement dated as of May 19, 1992 between Alaska
Airlines, Inc. and First Security Bank of Utah, N.A., as trustee and
lessor.5
10.17 Termination Agreement dated July 28, 1992 by and among Integrated
Aircraft Fund Management Corp., Registrant and Citicorp Aircraft
Management, Inc.5
10.18 Lease Amendment No. 2 dated as of July 7, 1992 between First Security
Bank of Utah, N.A., as trustee and Braathens South-American and Far
East Airtransport A/S.5
10.19 Remarketing Agreement between Integrated Aircraft Fund Management Corp.
and Aviation Capital Group, L.P., dated August 1, 1992.6
10.20 Amendment No. 3 dated as of August 1, 1992 to the Lease Agreement dated
as of May 1, 1991 between First Security Bank of Utah, N.A., as trustee
and Southwest Airlines Co.6
10.21 Amendment No. 1 dated as of November 1, 1992 to the Lease Agreement
dated as of December 1, 1988 between First Security Bank of Utah, N.A.,
as trustee and USAir, Inc.6
10.22 Amendment No. 2 dated as of December 1, 1992 to the Lease Agreement
dated as of December 1, 1988 between First Security Bank of Utah, N.A.,
as trustee and USAir, Inc.6
10.23 Amendment No. 1 dated as of November 1, 1992 to the Lease Agreement
dated as of January 1, 1989 between First Security Bank of Utah, N.A.,
as trustee and USAir, Inc.6
10.24 Lease Agreement dated January 5, 1993 between First Security Bank of
Utah, N.A., as trustee, and Continental Airlines, Inc.6
10.25 Participation Agreement dated January 5, 1993 between First Security
Bank of Utah, N.A., as trustee, Registrant and Continental Airlines,
Inc.6
10.26 Amendment No. 2 dated as of December 1, 1993 to the Lease Agreement
dated as of January 1, 1989 between First Security Bank of Utah, N.A.,
as trustee and USAir, Inc.7
10.27 Amendment No. 3 dated as of December 1, 1993 to the Lease Agreement
dated as of December 1, 1988 between First Security Bank of Utah, N.A.,
as trustee and USAir, Inc.7
<PAGE>
10.28 Amendment dated as of December 1, 1993 to Lease Agreement II between
First Security Bank of Utah, N.A., as trustee, and Aloha Airlines,
Inc.7
10.29 Form of Lease Agreement between First Security Bank of Utah, N.A., as
trustee, Registrant, as lessor, and Ladeco S.A.7
Note: a substantially identical lease in all material respects except for
dates of term and rental amounts covers the Second Alaska Aircraft. See
"Business - Recent Developments, Alaska Airlines".
10.30 Lease Agreement dated as of November 5, 1993 between First Security
Bank of Utah, N.A., as trustee, and American Trans Air, Inc.7
10.31 Lease Agreement dated as of November 1, 1994 between First Security
Bank of Utah, N.A., as trustee, and American Trans Air, Inc.8
10.32 Lease Agreement dated as of November 10, 1994 between First Security
Bank of Utah, N.A., as trustee, and American Trans Air, Inc. 8
10.33 Lease Amendment and Extension Agreement, dated as of July 20, 1994,
between First Security Bank of Utah N.A., as trustee, and Southwest
Airlines Co. 8
10.34 Second Lease Extension Agreement, dated as of July 5, 1995, between
First Security Bank of Utah, N.A., as trustee, and Southwest Airlines
Co. 8
10.35 Form of Purchase Agreement, dated April 15, 1996, between Southwest
Airlines Co. ("Purchaser"), First Security Bank of Utah N.A.
("Trustee") and Aircraft Income Partners L.P. ("Beneficiary") 10
10.36 Lease Amendment, dated January 1, 1997, between First Security Bank of
Utah N.A., as Trustee, and Hawaiian Airlines, Inc. 10
10.37 Lease Amendment and Extension Agreement, dated June 24, 1996, between
First Security Bank of Utah N.A., as Trustee, and American Trans Air,
Inc. 10
10.38 Lease Amendment and Extension Agreement, dated July 29, 1996, between
First Security Bank of Utah N.A., as Trustee, and Aloha Airlines, Inc.
10
28 Prospectus of Registrant dated February 29, 1988, as supplemented by
Supplements dated May 20, 1988, August 16, 1988, November 4, 1988,
January 6, 1989 and February 28, 1989 filed pursuant to Rules 424(b)
and 424(c) under the Securities Act of 1933.1
- -------------------------
1 Filed as an exhibit to Registrant's Registration
Statement on Form S-1 (33-18891), and incorporated herein by reference.
2 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988, and incorporated herein by
reference.
<PAGE>
3 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, and incorporated herein by
reference.
4 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990, and incorporated herein by
reference.
5 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 and incorporated herein by
reference.
6 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 and incorporated herein by
reference.
7 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 and incorporated herein by
reference.
8 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 and incorporated herein by
reference.
9 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by
reference.
10 Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 and incorporated herein by
reference
* Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the Financial
statements of the December 31, 1997 Form 10-K of Aircraft Income Partners L.P.
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,432,713
<SECURITIES> 0
<RECEIVABLES> 3,417,636
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,555,035
<PP&E> 91,516,052
<DEPRECIATION> 71,503,840
<TOTAL-ASSETS> 30,567,247
<CURRENT-LIABILITIES> 2,987,008
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 27,580,239
<TOTAL-LIABILITY-AND-EQUITY> 30,567,247
<SALES> 0
<TOTAL-REVENUES> 8,787,319
<CGS> 0
<TOTAL-COSTS> 853,775
<OTHER-EXPENSES> 6,227,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,706,235
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,706,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,706,235
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
