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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, 1999
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.)
Cambridge Center, 9th Floor, Cambridge, Massachusetts 02142
-----------------------------------------------------------
(Address of principal executive offices)
(617) 234-3000
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(Registrant's telephone number, including area code)
411 West Putnam Avenue, Suite 270, Greenwich, CT 06830
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(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
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AIRCRAFT INCOME PARTNERS L. P.
FORM 10-Q - SEPTEMBER 30, 1999
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BALANCE SHEETS - September 30, 1999 and December 31, 1998 ..................................... 1
STATEMENTS OF OPERATIONS - For the three months ended September 30, 1999
and 1998 and for the nine months ended September 30, 1999 and 1998....................... 2
STATEMENT OF PARTNERS' EQUITY - For the nine months
ended September 30, 1999 ................................................................ 3
STATEMENTS OF CASH FLOWS - For the nine months ended
September 30, 1999 and 1998 ............................................................. 4
NOTES TO FINANCIAL STATEMENTS ................................................................. 5-9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................................................... 10-12
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS ......................................................................... 13
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K .......................................................... 13
SIGNATURES ......................................................................................... 14
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AIRCRAFT INCOME PARTNERS L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $6,172,187 $4,199,804
Equipment held for sale, net 1,162,810 5,058,237
Marketable securities 1,213,052 -
Accounts receivable 26,250 471,250
Deferred costs 14,568 19,700
Prepaid expenses 9,978 -
Other receivables 9,169 38,886
---------- ----------
$8,608,014 $9,787,877
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Accounts payable and accrued expenses $ 139,702 $ 540,437
---------- ----------
Commitments and contingencies
Partners' equity
Limited partners' equity (385,805 units
issued and outstanding) 7,612,526 8,313,741
General partner's equity 855,786 933,699
---------- ----------
Total partners' equity 8,468,312 9,247,440
---------- ----------
$8,608,014 $9,787,877
========== ==========
</TABLE>
See notes to financial statements.
1
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Settlement income $ 1,638,913 $ - $ 1,638,913 $ -
Interest 68,142 180,906 152,966 546,106
Other income - - 98,672 -
Rental - 710,335 - 3,606,979
Interest - installment note - 18,974 - 141,009
------------ ------------ ------------ ------------
1,707,055 910,215 1,890,551 4,294,094
------------ ------------ ------------ ------------
Costs and expenses
General and administrative 136,195 32,936 470,832 165,238
Operating 10,310 100 201,397 497,569
Provision for equipment impairment - - 2,071,000 -
Other expenses - 6,361 38,000 48,936
Depreciation - 364,180 - 2,048,239
Management fee - - - 180,200
------------ ------------ ------------ ------------
146,505 403,577 2,781,229 2,940,182
------------ ------------ ------------ ------------
1,560,550 506,638 (890,678) 1,353,912
Gain on sale of aircraft - net 111,550 7,515,523 111,550 11,128,319
------------ ------------ ------------ ------------
Net income (loss) $ 1,672,100 $ 8,022,161 $ (779,128) $ 12,482,231
============ ============ ============ ============
Net income (loss) attributable to
Limited partners $ 1,504,890 $ 7,219,945 $ (701,215) $ 11,234,008
General partner 167,210 802,216 (77,913) 1,248,223
------------ ------------ ------------ ------------
$ 1,672,100 $ 8,022,161 $ (779,128) $ 12,482,231
============ ============ ============ ============
Net income (loss) per unit of limited
partnership interest (385,805 units
outstanding) $ 3.90 $ 18.71 $ (1.82) $ 29.11
============ ============ ============ ============
</TABLE>
See notes to financial statements.
2
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENT OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
Limited General Total
Partners' Partner's Partners'
Equity Equity Equity
----------- --------- -----------
<S> <C> <C> <C>
Balance, January 1, 1999 $ 8,313,741 $ 933,699 $ 9,247,440
Net loss for the nine months
ended September 30, 1999 (701,215) (77,913) (779,128)
----------- --------- -----------
Balance, September 30, 1999 $ 7,612,526 $ 855,786 $ 8,468,312
=========== ========= ===========
</TABLE>
See notes to financial statements.
3
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AIRCRAFT INCOME PARTNERS L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended
September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities
Net (loss) income $ (779,128) $ 12,482,231
Adjustments to reconcile net (loss) income to net
cash provided by operating activities
Provision for equipment impairment 2,071,000 -
Depreciation - 2,048,239
Gain on disposition of aircraft, net (111,550) (11,128,319)
Value of marketable securities received
in settlement of bankruptcy claims (1,213,052) -
Changes in assets and liabilities
Accounts receivable 445,000 (18,020)
Other receivables 29,717 (7,777)
Restricted cash - security deposits - 506,120
Deferred costs 5,132 95,505
Prepaid expenses (9,978) 13,170
Accounts payable and accrued expenses (400,735) 56,456
Maintenance reserves - (1,524,249)
Security deposits payable - (506,120)
Deferred income - (133,217)
Deferred costs payable - (50,000)
------------ ------------
Net cash provided by operating activities 36,406 1,834,019
------------ ------------
Cash flows from investing activities
Proceeds from sale of aircraft, net 1,935,977 22,629,614
Proceeds from installment sale note receivable - 2,911,906
------------ ------------
Net cash provided by investing activities 1,935,977 25,541,520
------------ ------------
Cash flows from financing activities
Distributions to partners - (11,874,221)
------------ ------------
Net increase in cash and cash equivalents 1,972,383 15,501,318
Cash and cash equivalents, beginning of period 4,199,804 6,432,713
------------ ------------
Cash and cash equivalents, end of period $ 6,172,187 $ 21,934,031
============ ============
</TABLE>
See notes to financial statements.
4
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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, 1998. The
results of operations for the nine months ended September 30, 1999 are
not necessarily indicative of the results to be expected for the full
year.
When used in this quarterly report on Form 10-Q, the words "believes,"
"anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. Statements looking forward in time
are included in this quarterly report on Form 10-Q pursuant to the
"safe harbor" provision on the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially, including, but
not limited to, those set forth in "management's discussion and
analysis of financial condition and results of operations." Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Partnership
undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leased aircraft and aircraft held for lease or sale
The cost of leased aircraft and aircraft held for 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 fair 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). The Partnership capitalizes major additions to its
aircraft and depreciates such capital improvements over the remaining
estimated useful life of the aircraft. No depreciation is taken on
equipment held for sale.
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 periodic 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 Partnership may provide for additional losses in
subsequent periods and such provisions could be material.
Marketable securities
Marketable securities represents certain shares of Class A and Class B
common stock of Continental Airlines, Inc. ("Continental") received by
the Partnership in settlement of a claim filed in Continental's
reorganization proceedings under the United States Bankruptcy Code. See
Note 6a, Commitments and Contingencies - Continental Airlines, Inc.
These securities are measured at fair value in accordance with the
Financial Accounting Standards Board Statement #115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS #115"). This
statement requires that investments in debt and equity securities
classified as available for sale be carried at fair value. Unrealized
appreciation and depreciation are reflected as a separate component of
partners' equity.
5
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AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
The general partner of the Partnership, Integrated Aircraft Fund
Management Corp. ("IAFM"), is a wholly owned subsidiary of Presidio
Capital Corp. ("Presidio"). Other limited partnerships and similar
investment programs have been formed by affiliates of IAFM to acquire
equipment and, accordingly, conflicts of interest may arise between the
Partnership and such other limited partnerships. Affiliates of IAFM
have also engaged in businesses related to the management of equipment
and the sale of various types of equipment and may transact business
with the Partnership.
Subject to the rights of the Limited Partners under the Limited
Partnership Agreement, Presidio controls the Partnership through its
indirect ownership of all of the shares of IAFM. On August 28, 1997, an
affiliate of NorthStar Capital Partners acquired all of the Class B
shares of Presidio, the corporate parent of IAFM. This acquisition,
when aggregated with previous acquisitions, caused NorthStar Capital
Partners to acquire indirect control of IAFM. Effective July 31, 1998,
Presidio is indirectly owned by NorthStar Capital Investment Corp.
("NorthStar"), a Maryland corporation.
Presidio entered into a management agreement with NorthStar Presidio
Management Company, LLC ("NorthStar Presidio"), an affiliate of
NorthStar. Under the terms of the management agreement, NorthStar
Presidio provides the day-to-day management of Presidio and its direct
and indirect subsidiaries and affiliates. For the nine months ended
September 30, 1999 and 1998, reimbursable expense paid to NorthStar
Presidio amounted to $32,421 and $18,750.
On October 21, 1999, Presidio entered into a new Services Agreement
with AP-PCC III, L.P. (the "Agent") pursuant to which the Agent was
retained to provide asset management and investor relation services to
the Partnership and other entities affiliated with the Partnership.
As a result of this agreement, the Agent has the duty to direct the day
to day affairs of the Partnership, including, without limitation,
reviewing and analyzing potential sale, financing or restructuring
proposals regarding the Partnership's assets, preparation of all
Partnership reports, maintaining Partnership records and maintaining
bank accounts of the Partnership. The Agent is not permitted, however,
without the consent of Presidio, or as otherwise required under the
terms of the Partnership's Agreement of Limited Partnership (the
"Partnership Agreement") to, among other things, cause the Partnership
to sell or acquire an asset or file for bankruptcy.
In order to facilitate the provision by the Agent of the asset
management services and the investor relation services, effective
October 25,1999, the officers and directors of the General Partner
resigned and nominees of the Agent were elected as the officers and
directors of the General Partner. The Agent is an affiliate of Winthrop
Financial Associates, a Boston based company that provides asset
management services, investor relation services and property management
services to over 150 limited partnerships which own commercial property
and other assets. The General Partner does not believe that this
transaction will have a material effect on the operations of the
Partnership.IAFM is entitled to a 10 percent interest in the net
income, loss and distributions from operations and cash from sales. No
distributions were paid with respect to the nine months ended September
30, 1999. For the nine months ended September 30, 1998, IAFM received
distributions totaling $2,966,412.
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 did not earn any management
fees for the nine months ended September 30, 1999. For the nine months
ended September 30, 1998, management fees amounted to $180,200.
6
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AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
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.
4 EQUIPMENT HELD FOR SALE
Equipment held for sale consists of one McDonnell Douglas DC9-32
aircraft with an aggregate net carrying value of $1,162,810 (net of
accumulated depreciation of $4,683,731 and an allowance for equipment
impairment of $1,695,334) at September 30, 1999. Based upon current
information with respect to a potential sale of the aircraft,
management believed that the equipment had been impaired and recorded
an impairment of $960,000 for the six months ended June 30, 1999. See
note 6a, Commitments and Contingencies, Continental Airlines, Inc.
5 AIRCRAFT SALES
(i) 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.
(ii) 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.
(iii) 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, inclusive of the DC9-51 aircraft, were made to an
unaffiliated third party for gross sales proceeds, exclusive of
closing costs, of $18,000,000.
(iv) On June 1, 1999, the Partnership sold two McDonnell Douglas DC9-32
aircraft to an unaffiliated third party for gross sale proceeds of
$1,910,000, exclusive of selling expenses of approximately
$86,000. At the time of sale, the aircraft had a net carrying
value of approximately $1,824,000. In the quarter ended September
30, 1999, the Partnership received an additional $111,550 relating
to the sale of the aircraft as a result of the Partnership
providing the records for the engines.
7
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AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES
a. Continental Airlines, Inc.
In November 1991, in connection with its reorganization under the
United States Bankruptcy Code, 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 had
retained its rights pursuant to a proof of claim and an administrative
claim filed in the Continental Bankruptcy case with respect to such
aircraft.
In June 1999, the Partnership and Continental agreed to settle the
foregoing claims. Pursuant to the settlement, the Partnership received
$780,000 on August 24, 1999 as well as 8,684 shares of Continental's
Class A stock and 24,179 shares of Continental's Class B stock and an
additional $90,861 on September 24, 1999. On October 6, 1999, the
Partnership sold all shares of stock for net proceeds aggregating
approximately $1,213,000, which equaled the Partnership's cost basis in
the stock. Subject to the resolution of third party claims against
additional stock reserved under Continental's Plan of Reorganization,
the Partnership may receive additional shares of Class A and Class B
stock.
During 1997, the lease to Continental of three McDonnell Douglas Model
DC9-32 aircraft owned by the Partnership was extended to September 1998
(2 aircraft) and December 1998 (one aircraft) at a rental of $52,500
per month, per aircraft. Two of the aircraft were returned in September
1998 and the third aircraft was returned in December 1998.
Upon return, the Partnership conducted inspections of the aircraft to
ascertain whether the return conditions of the lease were satisfied. On
May 5, 1999, First Security Bank, N.A., acting not in its individual
capacity, but solely as trustee under a trust agreement in which the
Partnership is beneficiary, filed a complaint in the United States
District Court, Southern District of New York. The complaint seeks
damages in an amount to be determined at trial, but believed to be in
excess of $3,000,000, arising out of Continental's i) failure to return
the three DC9-32 aircraft in the return condition required by the lease
and ii) failure to make a rent payment provided for in the lease.
Continental has filed an answer denying the allegations in the
complaint.
b. 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
8
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AIRCRAFT INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
6 COMMITMENTS AND CONTINGENCIES (continued)
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.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of September 30, 1999, the Partnership had operating reserves of
approximately $7,272,000, inclusive of the original general working
capital reserves of approximately $1,929,000.
The Partnership's remaining aircraft consists of one McDonnell Douglas
DC9-30 aircraft, which had been leased to Continental Airlines, Inc.
and returned in September 1998.
The Partnership has encountered competition in attempting to market its
aircraft due to a surplus in the market of aircraft similar to the
types owned by the Partnership. In addition, the Partnership will have
to compete with newer, more fuel-efficient aircraft, which will comply
with FAA noise requirements. The Partnership believes that as a result
of the factors listed above there has been a significant decline in the
re-sale value of the aircraft owned by the Partnership.
On June 1, 1999, the Partnership sold two aircraft to an unaffiliated
third party for sale proceeds of $1,910,000, exclusive of selling
expenses of approximately $86,000. At the time of sale, the aircraft
had a net carrying value of approximately $1,824,000. In the quarter
ended September 30, 1999, the Partnership received an additional
$111,550 relating to the sale of the aircraft as a result of the
Partnership providing the records for the engines.
At September 30, 1999, the Partnership had an interest in one aircraft,
which had an original cost of approximately $7,542,000 (net book value
of approximately $1,163,000).
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 had retained its rights
pursuant to a proof of claim and an administrative claim filed in the
Continental Bankruptcy case with respect to such aircraft.
In June 1999, the Partnership and Continental agreed to settle the
foregoing claims. Pursuant to the settlement, the Partnership received
$780,000 on August 24, 1999 as well as 8,684 shares of Continental's
Class A stock and 24,179 shares of Continental's Class B stock and an
additional $90,861 on September 22, 1999. On October 6, 1999, the
Partnership sold all shares of stock for net proceeds aggregating
approximately $1,213,000, which equaled the Partnership's cost basis in
the stock. Subject to the resolution of third party claims against
additional stock reserved under Continental's Plan of Reorganization,
the Partnership may receive additional shares of Class A and Class B
stock.
During 1997, the lease of three McDonnell Douglas Model DC9-32 aircraft
owned by the Partnership was extended to September 1998 (2 aircraft)
and December 1998 (one aircraft) at a rental of $52,500 per month, per
aircraft. Two of the aircraft were returned in September 1998 and the
third aircraft was returned in December 1998.
10
<PAGE>
Liquidity and Capital Resources (continued)
Upon return, the Partnership conducted inspections of the aircraft to
ascertain whether the return conditions of the lease were satisfied. On
May 5, 1999, First Security Bank, N.A., acting not in its individual
capacity, but solely as trustee under a trust agreement in which the
Partnership is beneficiary, filed a complaint in the United States
District Court, Southern District of New York.
The complaint seeks damages in an amount to be determined at trial, but
believed to be in excess of $3,000,000 arising out of Continental's i)
failure to return the three DC9-32 aircraft in the return condition
required by the lease and ii) failure to make a rent payment provided
for in the lease. Continental has filed an answer denying the
allegations in the complaint.
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.
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 softness in the aircraft
industry and resulting decline in the value of the types of aircraft
owned by the Partnership have resulted in the Partnership providing
allowances for equipment impairment.
Year 2000 compliance
The Year 2000 compliance issue concerns the inability of computerized
information systems and programs to accurately calculate, store or use
a date after December 31, 1999, as a result of the year being stored as
a two digit number. The Partnership is dependent upon the General
Partner and its affiliates for management and administrative services.
This could result in system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activities.
During the third quarter of 1999, the General Partner and its
affiliates completed their assessment of computer systems used in
connection with the management of the Partnership. The General Partner
and its affiliates have completed upgrading those systems where
required. The Partnership has to date not borne, nor is it expected
that the Partnership will bear, any significant costs in connection
with the upgrade of those systems requiring remediation.
11
<PAGE>
Year 2000 compliance (compliance)
To date, the General Partner is not aware of any external agent or
service provider with a Year 2000 issue that would materially impact
the Partnership's results of operations, liquidity or capital
resources. However, the General Partner has no means of ensuring that
external agents and service providers will be Year 2000 compliant. The
General Partner does not believe that the inability of external agents
or servive providers to complete their Year 2000 resolution process in
a timely manner will have a material impact on the financial position
or results of operations of the Partnership. However, the effect of
non-compliance by external agents is not readily determinable.
Results of Operations
Net income decreased for the three and nine month periods ended
September 30, 1999 compared to the three and nine month periods ended
September 30, 1998, principally due to a decrease in gain on sale of
aircraft partially offset by the settlement income recorded in 1999 and
the decrease in costs and expenses.
Revenues increased for the three months and decreased for the nine
months ended September 30, 1999 compared to the corresponding periods
in the prior year. Rental income decreased due to the fact that certain
aircraft came off-lease in 1998 and remained off-lease in 1999, as well
as due to the sale of certain aircraft in 1998. Interest decreased for
the three and nine month periods ended September 30, 1999 compared to
the corresponding periods in the prior year due to lower cash balances
available for short-term investment. The Partnership recorded
settlement income during the three and nine month periods ended
September 30, 1999 due to the settlement of certain claims in the
Continental Bankruptcy case compared to no settlement income recorded
during the corresponding periods in the prior year.
Expenses decreased for the three and nine months ended September 30,
1999 compared to the corresponding periods of the prior year as
follows: (i) the elimination of depreciation expense; (ii) the decrease
in operating expenses for the nine months ended September 30, 1999, due
primarily to lower costs related to the Partnership's off lease
aircraft; (iii) the reduction in management fees offset by the (iv)
recording of provisions for equipment impairment in 1999 and (v) the
increase in general and administrative expenses, primarily due to legal
costs related to the Continental Bankruptcy claims and the complaint
filed against Continental.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During 1997, the lease of three McDonnell Douglas Model DC9-32 aircraft
owned by the Partnership was extended to September 1998 (2 aircraft)
and December 1998 (one aircraft) at a rental of $52,500 per month, per
aircraft. Two of the aircraft were returned in September 1998 and the
third aircraft was returned in December 1998.
Upon return, the Partnership conducted inspections of the aircraft to
ascertain whether the return conditions of the lease were satisfied. On
May 5, 1999, First Security Bank, N.A., acting not in its individual
capacity, but solely as trustee under a trust agreement in which the
Partnership is beneficiary, filed a complaint in the United States
District Court, Southern District of New York. The complaint seeks
damages in an amount to be determined at trial, but believed to be in
excess of $3,000,000 arising out of Continental's i) failure to return
the three DC9-32 aircraft in the return condition required by the lease
and ii) failure to make a rent payment provided for in the lease.
Continental has filed an answer denying the allegations in the
complaint.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None
13
<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 Rothschild
----------------------------------------------------
Allan Rothschild
Duly Authorized Officer
/s/ Lawrence Schachter
----------------------------------------------------
Lawrence Schachter
Principal Financial and Accounting Officer
14
Date: November 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the Financial
Statements of the September 30, 1999 Form 10-Q of Aircraft Income Partners and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,172,187
<SECURITIES> 1,213,052
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,445,204
<PP&E> 5,846,541
<DEPRECIATION> 4,683,731
<TOTAL-ASSETS> 8,608,014
<CURRENT-LIABILITIES> 139,702
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 8,468,312
<TOTAL-LIABILITY-AND-EQUITY> 8,608,014
<SALES> 0
<TOTAL-REVENUES> 1,890,551
<CGS> 0
<TOTAL-COSTS> 710,229
<OTHER-EXPENSES> 2,071,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (779,128)
<INCOME-TAX> 0
<INCOME-CONTINUING> (779,128)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (779,128)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
