UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 0-17785
AIRCRAFT INCOME PARTNERS L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3430508
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 West Putnam Avenue, Suite 270, Greenwich, CT 06830
(Address of principal executive offices)
(203) 862-7444
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
<PAGE>
AIRCRAFT INCOME PARTNERS L. P.
FORM 10-Q - SEPTEMBER 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS - September 30, 1998 and December 31, 1997
STATEMENTS OF OPERATIONS - For the three months ended September 30,
1998 and 1997 and for the nine months ended September 30, 1998
and 1997
STATEMENT OF PARTNERS' EQUITY - For the nine months ended September 30,
1998
STATEMENTS OF CASH FLOWS - For the nine months ended September 30, 1998
and 1997
NOTES TO FINANCIAL STATEMENTS
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Leased aircraft, net of accumulated depreciation of
$4,300,719 and $71,503,840 and allowance for
equipment impairment of $565,333 and $24,100,000 $ 2,035,010 $20,012,212
Aircraft held for lease or sale - net of accumulated
depreciation of $9,089,165 and allowance for
equipment impairment of $1,052,667 .............. 4,427,668 --
Cash and cash equivalents .......................... 21,934,031 6,432,713
Accounts receivable ................................ 523,750 505,730
Other receivables .................................. 97,668 89,891
Restricted cash - security deposits ................ -- 506,120
Deferred costs ..................................... -- 95,505
Prepaid expenses ................................... -- 13,170
Note receivable - installment sale ................. -- 2,911,906
----------- -----------
$29,018,127 $30,567,247
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Distributions payable .............................. $17,789,897 $ --
Accounts payable and accrued expenses .............. 225,017 168,561
Maintenance reserves ............................... 604,861 2,129,110
Security deposits payable .......................... -- 506,120
Deferred income .................................... -- 133,217
Deferred costs payable ............................. -- 50,000
----------- -----------
Total liabilities ............................... 18,619,775 2,987,008
----------- -----------
Commitments and contingencies
Partners' equity
Limited partners' equity (385,805 units
issued and outstanding) ..................... 9,349,562 24,813,260
General partner's equity ........................ 1,048,790 2,766,979
----------- -----------
Total partners' equity .......................... 10,398,352 27,580,239
----------- -----------
$29,018,127 $30,567,247
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Rental ............................ $ 710,335 $ 1,911,474 $ 3,606,979 $ 5,734,430
Interest .......................... 180,906 95,089 546,106 291,736
Interest - installment note ....... 18,974 69,473 141,009 218,091
----------- ----------- ----------- -----------
910,215 2,076,036 4,294,094 6,244,257
----------- ----------- ----------- -----------
Costs and expenses
Depreciation ...................... 364,180 1,417,406 2,048,239 4,809,903
Operating ......................... 100 22,325 497,569 94,585
Management fee .................... -- 80,000 180,200 268,000
General and administrative ........ 32,936 66,406 165,238 341,702
Other expenses .................... 6,361 20,090 48,936 56,909
----------- ----------- ----------- -----------
403,577 1,606,227 2,940,182 5,571,099
----------- ----------- ----------- -----------
506,638 469,809 1,353,912 673,158
Gain on sale of aircraft - net ......... 7,515,523 -- 11,128,319 632,368
----------- ----------- ----------- -----------
Net income ............................. $ 8,022,161 $ 469,809 $12,482,231 $ 1,305,526
=========== =========== =========== ===========
Net income attributable to
Limited partners .................. $ 7,219,945 $ 422,828 $11,234,008 $ 1,174,973
General partners .................. 802,216 46,981 1,248,223 130,553
----------- ----------- ----------- -----------
$ 8,022,161 $ 469,809 $12,482,231 $ 1,305,526
=========== =========== =========== ===========
Net income per unit of limited
partnership interest (385,805 units
outstanding) ...................... $ 18.71 $ 1.10 $ 29.11 $ 3.05
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENT OF PARTNERS' EQUITY
Limited General Total
Partners' Partner's Partners'
Equity Equity Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1998 ........................ $ 24,813,260 $ 2,766,979 $ 27,580,239
Net income for the nine months
ended September 30, 1998 ................... 11,234,008 1,248,223 12,482,231
Distributions to partners for the nine months
ended September 30, 1998 ($69.20 per limited
partnership unit) .......................... (26,697,706) (2,966,412) (29,664,118)
------------ ------------ ------------
Balance, September 30, 1998 ..................... $ 9,349,562 $ 1,048,790 $ 10,398,352
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
For the nine months ended
September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities
Net income ........................................... $ 12,482,231 $ 1,305,526
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation .................................. 2,048,239 4,809,903
Gain on disposition of aircraft, net .......... (11,128,319) (632,368)
Changes in assets and liabilities
Accounts receivable ............................... (18,020) 136,487
Other receivables ................................. (7,777) 420,161
Restricted cash - security deposits ............... 506,120 (18,076)
Deferred costs .................................... 95,505 96,271
Prepaid expenses .................................. 13,170 72,636
Deferred rents and modification advances receivable -- 254,432
Accounts payable and accrued expenses ............. 56,456 (3,477)
Maintenance reserves .............................. (1,524,249) (135,433)
Security deposits payable ......................... (506,120) 18,076
Deferred income ................................... (133,217) 193,500
Deferred costs payable ............................ (50,000) --
Management fee payable ............................ -- (14,000)
------------ ------------
Net cash provided by operating activities . 1,834,019 6,503,638
------------ ------------
Cash flows from investing activities
Proceeds from sale of aircraft, net .................. 22,629,614 1,922,266
Proceeds from installment sale note receivable ....... 2,911,906 825,910
Additions and modifications to leased aircraft, net .. -- 912
------------ ------------
Net cash provided by investing activities . 25,541,520 2,749,088
------------ ------------
Cash flows from financing activities
Distributions to partners ............................ (11,874,221) (9,216,453)
------------ ------------
Net increase in cash and cash equivalents ................. 15,501,318 36,273
Cash and cash equivalents, beginning of period ............ 6,432,713 6,279,937
------------ ------------
Cash and cash equivalents, end of period .................. $ 21,934,031 $ 6,316,210
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
1 INTERIM FINANCIAL INFORMATION
The summary financial information contained herein is unaudited;
however, in the opinion of management, all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of such
financial information have been included. The accompanying financial
statements, footnotes and discussions should be read in conjunction
with the financial statements, related footnotes and discussions
contained in the Aircraft Income Partners L.P. (the "Partnership")
annual report on Form 10-K for the year ended December 31, 1997. The
results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full
year.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leased aircraft and aircraft held for lease or sale
The cost of leased aircraft and aircraft held for lease or sale
represents the initial cost of the aircraft to the Partnership plus
miscellaneous acquisition and closing costs and is carried at the lower
of depreciated cost or net realizable value.
Depreciation is computed using the straight-line method, over the
estimated useful lives of such aircraft (15 years for McDonnell Douglas
DC9-32 aircraft, 12 to 12.5 years for Boeing 737-200 Advanced aircraft,
Boeing 727-200 Advanced aircraft and McDonnell Douglas DC9-51
aircraft). The Partnership capitalizes major additions to its aircraft
and depreciates such capital improvements over the remaining estimated
useful life of the aircraft.
When aircraft are sold or otherwise disposed of, the cost and
accumulated depreciation (and any related allowance for equipment
impairment) are removed from the accounts and any gain or loss on such
sale or disposal is reflected in operations. Normal maintenance and
repairs are charged to operations as incurred. The Partnership provides
allowances for equipment impairment based upon a quarterly review of
all aircraft in its portfolio, when management believes that, based
upon market analysis, appraisal reports and leases currently in place
with respect to specific aircraft, the investment in such aircraft may
not be recoverable.
The allowance is inherently subjective and is based upon management's
best estimate of current conditions and assumptions about expected
future conditions. The Partnership may provide for additional losses in
subsequent periods and such provisions could be material.
Maintenance reserves
Maintenance reserves represent cash received in accordance with the
terms of the leases of certain aircraft, which has been set aside for
certain required repairs or scheduled maintenance on the aircraft.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred costs
Deferred costs represent amounts paid, directly or through rent
credits, based upon the terms of certain leases, for maintenance which
enhanced the marketability of such aircraft. Deferred costs are
amortized over the terms of a remarketed lease.
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The general partner of the Partnership, Integrated Aircraft Fund
Management Corp. ("IAFM"), is a wholly owned subsidiary of Presidio
Capital Corp. ("Presidio"). Other limited partnerships and similar
investment programs have been formed by affiliates of IAFM to acquire
equipment and, accordingly, conflicts of interest may arise between the
Partnership and such other limited partnerships. Affiliates of IAFM
have also engaged in businesses related to the management of equipment
and the sale of various types of equipment and may transact business
with the Partnership.
Subject to the rights of the Limited Partners under the Limited
Partnership Agreement, Presidio controls the Partnership through its
indirect ownership of all of the shares of IAFM. . Effective July 31,
1998, Presidio is indirectly controlled by NorthStar Capital Investment
Corp., a Maryland corporation. Effective as of August 28, 1997,
Presidio entered into a management agreement with NorthStar Presidio
Management Company, LLC ("NorthStar Presidio") pursuant to which
NorthStar Presidio provides the day-to-day management of Presidio and
its direct and indirect subsidiaries and affiliates. For the nine
months ended September 30, 1998, reimbursable expenses paid to
NorthStar Presidio amounted to $18,750.
IAFM is entitled to a 10 percent interest in the net income, loss and
distributions from operations and cash from sales. For the nine months
ended September 30, 1998, IAFM received or accrued distributions
totaling $2,966,412.
As compensation for management services, IAFM receives the management
fee provided for in the Limited Partnership Agreement which is equal to
4% of Distributions of Cash from Operations from Operating Leases and
2% of Distributions of Cash from Operations from Full Payout Leases, as
such terms are defined in the Limited Partnership Agreement. In
conjunction with such services, IAFM earned management fees of $180,200
and $268,000 for the nine months ended September 30, 1998 and 1997,
respectively.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES (continued)
Upon the ultimate liquidation of the Partnership, IAFM may be required
to remit to the Partnership certain payments representing capital
account deficit restoration based upon a formula provided within the
Limited Partnership Agreement. Such restoration amount may be less than
the recorded IAFM deficit, which could result in distributions to the
limited partners of less than their recorded equity.
In April 1995, IAFM and certain affiliates entered into an agreement
with Fieldstone Private Capital Group, L.P. ("Fieldstone") pursuant to
which Fieldstone performed certain management and administrative
services relating to the Partnership. Fieldstone continued to perform
such services until July 31, 1998.
4 DISTRIBUTION TO PARTNERS
Distributions payable to the limited partners and general partners of
$16,010,907 (41.50 per unit) and $1,778,990, respectively, at September
30, 1998, were paid in November 1998.
5 AIRCRAFT SALES
(i) On May 22, 1997, a Boeing 737-297 Advanced aircraft owned by
the Partnership was sold to an unaffiliated third party for
proceeds of approximately $1,982,000 exclusive of selling
expenses of approximately $60,000. The aircraft, which was
formerly leased to Aloha Airlines, Inc. ("Aloha"), had been
off-lease since October 15, 1996. Associated with the aircraft
were approximately $639,000 (approximately $605,000 at
September 30, 1998) of net maintenance and return provision
reserves that Aloha had previously paid to the Partnership as
provided under the lease agreement. The reserves on the Aloha
aircraft will be held back until certain contingent
liabilities related to the aircraft are satisfied.
Specifically, the Aloha Aircraft is subject to a tax benefit
transfer lease ("TBT Lease") under which Allied Signal, the
TBT Lessor, retains the federal income tax benefits that
normally accrue from ownership of the aircraft, other than
lease rentals. There are approximately twenty months remaining
on the TBT Lease, until its expiration on May 21, 2000. At the
time of the sale, the aircraft had a net carrying value of
approximately $1,290,000.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
5 AIRCRAFT SALES (continued)
(ii) On March 31, 1998, a Boeing 737-2H4 aircraft owned by the
Partnership was sold to an unaffiliated third party for
proceeds of $3,500,000 exclusive of selling expenses of
approximately $106,000. The aircraft, which was formerly
leased to Southwest Airlines Co., had been off-lease since
January 1998. At the time of sale, the aircraft had a net
carrying value of approximately $1,141,000.
(iii) On May 19, 1998, a Boeing 737-297 Advanced aircraft owned by
the Partnership was sold to an unaffiliated third party for
proceeds of $4,100,000, exclusive of selling expenses of
approximately $124,000. The aircraft, which was formerly
leased to Aloha had a net carrying value of approximately
$2,617,000 at the time of sale.
(iv) Between August 17, 1998 and September 23, 1998, the
Partnership sold its interest in two Boeing 737-200 aircraft,
four Boeing 727-200 aircraft (inclusive of an undivided
47.92231% joint venture interest in one aircraft) and one
McDonnell Douglas DC9-51 aircraft. Aside from the DC9-51
aircraft, the six aircraft had an original cost of
approximately $71,235,500, represented 45.03% of the net
carrying value of Partnership's aircraft as of the end of June
30, 1998 and, at the time of sale, had a net carrying value of
approximately $7,744,000. The Partnership's interest in the
DC9-51 aircraft consisted of the right to receive deferred
payments of $2,529,900 related to a September 1, 1996
installment sale. The sales were made to an unaffiliated third
party for gross sales proceeds of $18,000,000, exclusive of
closing costs of approximately $339,000.
6 COMMITMENTS AND CONTINGENCIES
a. Hawaiian Airlines, Inc.
On September 1, 1996, the Partnership and Hawaiian Airlines, Inc.
("Hawaiian") amended the lease agreement of a McDonnell Douglas model
DC9-51 aircraft (the "Hawaiian Aircraft"). Under the terms of the
agreement, Hawaiian paid the Partnership a down payment of $450,000 and
the balance was to be paid in monthly installments (39 payments of
$72,000 and then 36 payments of $50,000) until November 30, 2002, at
which time Hawaiian has a bargain purchase option for the aircraft. The
Partnership treated this transaction as an installment sale and
classified the original net present value of the anticipated future
cash flows of approximately $4,052,000, less principal paid, on the
balance sheet as note receivable-installment sale. On September 1,
1996, the Partnership removed the associated cost of the equipment and
the net carrying value from the books of the Partnership, and
recognized a gain on the sale of approximately $1,655,000.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
a. Hawaiian Airlines, Inc. (continued)
As discussed in Note 5, the Partnership sold its rights under the
amended lease agreement to an unaffiliated third party during the third
quarter of 1998.
b. Continental Airlines, Inc.
In November 1991, in connection with its reorganization under the
United States Bankruptcy Code, Continental Airlines, Inc.
("Continental") rejected the leases of the three Boeing 727-100
aircraft owned by the Partnership, which had been out of service since
1991. Due to the condition and the related market for such aircraft,
the Partnership provided aggregate allowances for equipment impairment
of approximately $6,483,000. During 1993, the Partnership sold all
three Boeing 727-100 aircraft. The Partnership retains its rights
pursuant to a proof of claim and an administrative claim filed in the
Continental Bankruptcy case with respect to such aircraft. The amount
of recovery under such claims, if any, is impossible to predict at this
time.
c. Continental Air Micronesia
On January 20, 1993, the Partnership leased a Boeing 727-200 Advanced
aircraft to Continental for a term of approximately 71 months to be
used by Continental Air Micronesia (the "Air Mike Lease"). The Air Mike
Lease provided for a monthly base rent of $76,750, subject to
adjustments for rental credits relating to initial modifications.
Further, the Partnership agreed to provide up to $813,500 of financing
for certain new image modifications through credits ("Lessor
Financing") against base rental payments due from Continental.
Continental was repaying the Lessor Financing credits through monthly
installments which were amortized at the rate of 9.31% per annum over
the remaining lease term.
As discussed in Note 5, the Partnership sold this aircraft to an
unaffiliated third party during the third quarter of 1998.
d. Ladeco S.A.
During 1993, the Partnership consummated two leases with Ladeco S.A.
("Ladeco"), each for a Boeing 737-200 Advanced aircraft for terms of 48
and 60 months, respectively. Both leases provided 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. The Ladeco aircraft leases, originally scheduled to expire in
October 1997 and March 1998, were each renewed for a one year period at
the same lease rate beginning at the expiration of the original lease
terms.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
d. Ladeco S.A. (continued)
As discussed in Note 5, the Partnership sold these aircraft to an
unaffiliated third party during the third quarter of 1998.
e. Aloha Airlines, Inc.
Aloha Airlines, Inc. ("Aloha") leased a Boeing 737-297 Advanced
aircraft from the Partnership, the lease of which was scheduled to
expire in accordance with its lease terms on August 15, 1996. Aloha
agreed to a fifteen month lease extension at 50% of the prior lease
rate and the aircraft was scheduled to be returned following the
expiration of the term and the completion of certain repairs and
maintenance to bring the aircraft in compliance with the lease return
provisions. On November 15, 1997, the lease was scheduled to expire in
accordance with the terms of the lease. Aloha had indicated that
certain modifications to the aircraft as required by the Airworthiness
Directives issued by the FAA were not applicable under the return
conditions of the lease.
On November 14, 1997, First Security Bank, National Association, acting
not in its individual capacity, but solely as trustee under a trust
agreement in which the Partnership is beneficiary, filed a complaint
for declaratory judgment in the United States District Court, Southern
District of New York. The complaint sought interpretation of the
language under the lease regarding return conditions for the aircraft.
In December 1997, the foregoing action was settled and Aloha agreed to
satisfy certain return conditions of the lease.
On May 19, 1998, the aircraft was sold to an unaffiliated third party
for proceeds of $4,100,000, exclusive of selling expenses of
approximately $124,000. The aircraft had a net carrying value of
approximately $2,617,000 at the time of sale.
f. American Trans Air, Inc.
In May 1996, American Trans Air, Inc. ("ATA"), the lessee of a Boeing
727-200 Advanced aircraft (in which the Partnership owned an undivided
47.92231% joint venture interest) (the "JV Aircraft") exercised its
renewal option. The lease, originally scheduled to expire in November
1996, was renewed for an additional two years at the same lease rate.
In addition, ATA had leased two other Boeing 727-200 Advanced aircraft
(the "ATA Aircraft") pursuant to separate leases that commenced in
November and December 1994, respectively. Each of the leases had an
initial term of approximately 39 months and provided for monthly
rentals of $59,000. During early 1995, the Partnership contributed
$75,000 per aircraft, in the form of cash or rental credits, towards
bridging "C" check inspections.
<PAGE>
AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
f. American Trans Air, Inc. (continued)
In March 1998, the Partnership and ATA agreed to amend all three of the
leases, extending the term at the same lease rentals through December
31, 2000, at which time ATA will have a purchase obligation of
approximately $3.3 million per aircraft. During the term of the amended
leases, ATA may, at its expense, retrofit the aircraft to comply with
the Stage III noise emission standards pursuant to FAR Part 36.
As discussed in Note 5, the Partnership sold these aircraft (including
its undivided joint venture interest) to an unaffiliated third party
during the third quarter of 1998.
g. Tax assessment
In September 1996, the Partnership received proposed notices of
assessment from the State of Hawaii with respect to general excise tax
("GET") aggregating approximately $1,338,000 (including interest and
penalties) for the years 1991, 1992, 1993 and 1994. In July 1998, the
Partnership received additional proposed notices of assessment for GET
aggregating approximately $585,000 for the years 1995, 1996 and 1997.
The state is alleging that GET is owed by the Partnership with respect
to rents received from Aloha and Hawaiian under the leases between the
Partnership and each of the airlines.
The leases with both Aloha and Hawaiian provided for full
indemnification of the Partnership for such taxes, but the bankruptcy
of Hawaiian may relieve Hawaiian of its indemnification obligation for
any periods prior to September 21, 1993, when Hawaiian and its
affiliates sought bankruptcy protection. In any event, it is the
Partnership, as taxpayer, which is ultimately liable for the GET, if it
is applicable.
The State of Hawaii has never previously applied the GET to rentals
received by a lessor of aircraft where the lessor's only contact with
the State of Hawaii is that it has leased its aircraft to airlines
which are based in the state. Aloha and Hawaiian, as well as the
Partnership, have separately engaged tax counsel and both airlines are
cooperating with the Partnership in vigorously contesting the proposed
assessments.
Final notices of assessment have not yet been issued. Although there
can be no assurance that the contest of the assessments will be
successful, the Partnership believes that the state's position on the
applicability of GET in this instance is without merit. The Partnership
has not recorded any provision or liability as a result of the proposed
notices of assessment.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership declared a cash distribution of $41.50 per unit of
limited partnership interest totaling 17,789,897 which was paid in
November 1998. After giving effect to the foregoing distribution, the
Partnership had cash available of approximately $3,491,000, inclusive
of the original general working capital reserves of $1,929,000. In
addition, the Partnership had approximately $605,000 of collected
maintenance reserves at September 30, 1998.
The Partnership generated cash from operations of approximately
$3,803,000 for the nine months ended September 30, 1998 or
approximately $8.87 per Unit, as compared to $6,859,000 for the nine
months ended September 30, 1997 or approximately $16.00 per Unit.
Additionally, during the nine months ended September 30, 1998, the
Partnership collected proceeds of approximately $25,158,000 or $58.69
per Unit from the sale of aircraft as discussed in Note 5.
The Partnership's remaining aircraft portfolio consists of three
McDonnell Douglas DC9-30 aircraft, all of which had been leased to
Continental Airlines, Inc. Two of the aircraft were returned in
September 1998 and the lease of the third aircraft is scheduled to
expire in December 1998.
The Partnership intends to attempt to sell the three remaining aircraft
as promptly as possible with a view towards liquidating the
Partnership's entire portfolio and winding up the business of the
Partnership prior to the end of 1999.
As the Partnership's aircraft come off-lease, it may be necessary for
the Partnership to use a portion of its operating reserves and/or its
anticipated future cash flow, which would otherwise be available for
distribution, to upgrade or enhance these aircraft if the Partnership
determines that such expenditures are in its best interests in order to
maximize remarketing value. Furthermore, because of market conditions,
the Partnership may be required to bear some of the related costs of
compliance with recent mandatory federal regulations covering
maintenance and upgrading of aging aircraft.
The anticipated cash flow for the remainder of 1998, combined with
reserves, should be sufficient to pay the Partnership's operating
expenses. The Partnership's ability to make future distributions will
be impacted by its obligation to pay such costs.
Of the 18 aircraft originally purchased by the Partnership, at
September 30, 1998, the Partnership had an interest in 3 of the
aircraft, which had an original cost of approximately $21,471,000 (net
book value of approximately $6,463,000). During the remainder of 1998,
excluding rents from renewals and sales, the Partnership anticipates
receiving approximately $105,000 of rentals on one non-cancelable
lease (inclusive of amounts which may be set-off by lessees against
basic rent as reimbursement for certain modifications required under
the applicable leases).
<PAGE>
Liquidity and Capital Resources (continued)
Aloha had leased a Boeing 737-200 Advanced Aircraft (the "Aloha
Aircraft") whose lease was scheduled to expire in accordance with its
terms on February 1, 1996. The Aloha Aircraft is subject to a tax
benefit transfer lease ("TBT lease") under which 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 twenty months remaining on the TBT lease, through May 21,
2000.
On May 22, 1997, the Aloha Aircraft was sold to an unaffiliated third
party for proceeds of approximately $1,982,000 exclusive of selling
expenses of approximately $60,000. Associated with the aircraft were
approximately $639,000 (approximately $605,000 at September 30, 1998)
of net maintenance and return provision reserves that Aloha had
previously paid the Partnership as provided under the lease agreement.
The reserves on the Aloha Aircraft will be restricted until certain
contingent liabilities related to the aircraft are satisfied. At the
time of sale, the aircraft had a net carrying value of approximately
$1,290,000.
On November 15, 1997, the lease of a Boeing 737-200 Advanced aircraft
leased to Aloha was scheduled to expire in accordance with the terms of
the lease. Aloha had indicated that certain modifications to the
aircraft as required by the Airworthiness Directives issued by the FAA
were not applicable under the return conditions of the lease.
On November 14, 1997, First Security Bank, National Association, acting
not in its individual capacity, but solely as trustee under a trust
agreement in which the Partnership is beneficiary, filed a complaint
for declaratory judgment in the United States District Court, Southern
District of New York. The complaint sought interpretation of the
language under the lease regarding return conditions for the aircraft.
In December 1997, the foregoing action was settled and Aloha agreed to
satisfy certain return conditions of the lease. The Partnership sold
the aircraft on May 19, 1998 to an unaffiliated third party for gross
sale proceeds of $4,100,000.
In September 1996 and July 1998, the Partnership received proposed
notices of assessment from the State of Hawaii with respect to general
excise tax of approximately $1,923,000 (including interest and
penalties) for the years 1991 through 1997. The state is alleging that
GET is owed by the Partnership with respect to rents received from
Aloha and Hawaiian under the leases between the Partnership and each of
the airlines.
The leases with both Aloha and Hawaiian provide for full
indemnification of the Partnership for such taxes, but the bankruptcy
of Hawaiian may relieve Hawaiian of its indemnification obligation for
any periods prior to September 21, 1993, when Hawaiian and its
affiliates sought bankruptcy protection. In any event, it is the
Partnership, as taxpayer, which is ultimately liable for the GET, if it
is applicable.
<PAGE>
Liquidity and Capital Resources (continued)
The State of Hawaii has never previously applied the GET to rentals
received by a lessor of aircraft where the lessor's only contact with
the State of Hawaii is the fact that it has leased its aircraft to
airlines which are based in the state. Aloha and Hawaiian, as well as
the Partnership, have separately engaged tax counsel and both airlines
are cooperating with the Partnership in vigorously contesting the
proposed assessments.
Final notices of assessment have not yet been issued. Although there
can be no assurance that the contest of the assessments will be
successful, the Partnership believes that the state's position on the
applicability of GET in this instance is without merit. The Partnership
has not recorded any liability as a result of the proposed notices of
assessment.
Inflation has not had any material effect on the Partnership's revenues
since its inception nor does the Partnership anticipate any material
effect on its business from this factor. The prior softness in the
aircraft industry and resulting declines in the value of the types of
aircraft owned by the Partnership have resulted in the Partnership
providing allowances for equipment impairment. Additionally, because of
the financial troubles of certain airlines which are lessees of the
Partnership's aircraft, cash flow and distributions have been reduced.
Results of Operations
Net income increased for the three and nine month periods ended
September 30, 1998 as compared to the three and nine month periods
ended September 30, 1997, principally due to the gain on sale of
certain aircraft as discussed in Note 5, which aggregated approximately
$11,128,000, as compared to a gain on sale of aircraft of approximately
$632,000 during the nine months ended September 30, 1997.
Revenues decreased overall for the three and nine month periods ended
September 30, 1998 compared to the corresponding periods of the prior
year. Rental income decreased due to reduced rentals from the Aloha
lease, lower lease rates on certain aircraft leased to Continental (as
of December 1, 1997) and the expiration of a lease with Southwest
Airlines Co. as well as due to the sale of certain aircraft. Interest
income increased due to larger balances of undistributed cash available
for investment.
<PAGE>
Expenses decreased for the three and nine month periods ended September
30, 1998 as compared to the corresponding periods of the prior year as
follows: (i) decrease in depreciation due to two ATA Aircraft and one
Southwest aircraft having previously reached their salvage values, as
well as the sale of the aircraft, (ii) decrease in general and
administrative expenses, primarily due to lower legal costs, offset by
(iii) increase in operating expenses due to maintenance costs related
to a Boeing 737 aircraft to comply with certain airworthiness
directives and insurance and storage for a Boeing 737 aircraft which
went off lease in January 1998 and sold on March 31, 1998 and two
McDonnell Douglas DC-9 aircraftwhich went off-lease on September 17,
1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 29, 1998, Fieldstone Private Capital Group, L.P.
("Fieldstone") commenced an action in the Supreme Court of the State
of New York, County of New York, against Registrant, its General
Partner, Aircraft Income Partners II, L.P., Integrated Aircraft Fund
Management L.P., Integrated Aircraft Corp., NorthStar Presidio
Management Company LLC and Presidio Capital Corp. The complaint seeks,
among other things, damages against Registrant and its General Partner
and Aircraft Income Partners II, L.P. and its general partner
(Integrated Aircraft Fund Management L.P.) aggregating $1,645,453 for
the alleged failure to pay Fieldstone leasing and sales commissions.
Registrant has filed an answer denying liability and has also filed a
counterclaim alleging that Fieldstone was negligent in performing
services for Registrant and tbe General Partner.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: Current report on Form 8-K dated August 17, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRCRAFT INCOME PARTNERS L.P.
BY: Integrated Aircraft Fund Management Corp.,
General Partner
/s/Allan B. Rothschild
----------------------
Allan B. Rothschild
President
/s/Lawrence Schachter
---------------------
Lawrence Schachter
Senior Vice President and Chief Financial Officer
Date: November 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the financial
statements of the September 30, 1998 Form 10-Q of Aircraft Income Partners L.P.
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,934,031
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,555,449
<PP&E> 19,852,562
<DEPRECIATION> 13,389,884
<TOTAL-ASSETS> 29,018,127
<CURRENT-LIABILITIES> 18,619,775
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,398,352
<TOTAL-LIABILITY-AND-EQUITY> 29,018,127
<SALES> 0
<TOTAL-REVENUES> 15,422,413
<CGS> 0
<TOTAL-COSTS> 891,943
<OTHER-EXPENSES> 2,048,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,482,231
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,482,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,482,231
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
