-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PRjayTkM1JO3sqLhTJL+31R71YTh2wk/XxqLpdvH2Ojp0ccgwYbXMHhFJZg+8lIx 3/Bbxh+9i1+5ASowY5uQMQ== 0000914317-97-000114.txt : 19970329 0000914317-97-000114.hdr.sgml : 19970329 ACCESSION NUMBER: 0000914317-97-000114 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRCRAFT INCOME PARTNERS L P CENTRAL INDEX KEY: 0000826156 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 133430508 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17785 FILM NUMBER: 97567448 BUSINESS ADDRESS: STREET 1: 411 W PUTNAM CITY: GREECWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2038627000 MAIL ADDRESS: STREET 1: 411 WEST PUTNAM AVENUE CITY: GREENWICH STATE: CT ZIP: 06830 10-K 1 AIRCRAFT INCOME PARTNERS L.P. -- 10-K 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, 1996 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) 862-7000 --------------- 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. 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 transferred to Presidio Capital Corp. ("Presidio"). Presidio is managed by Presidio Management Company, LLC ("Presidio Management"), a company controlled by a director of Presidio. Presidio is also party to an administrative services agreement with Wexford Management LLC ("Wexford") pursuant to which Wexford is responsible for the day-to-day management of Presidio and, among other things, has authority to designate directors of the General Partner. Registrant is engaged in the business of acquiring and leasing aircraft. Commencing on 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. 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, 1996, 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, 1996, Registrant had sold or disposed of six aircraft with an original purchase price aggregating $42,070,000 (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 the acquisition and disposition of such aircraft.) Of the 18 aircraft originally purchased by Registrant, at December 31, 1996, Registrant had an interest in 12 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 $127,678,000 (net carrying value of approximately $27,529,000). In 1997, excluding rents from future renewals, Registrant anticipates receiving rentals of approximately $7,732,000 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. 11 of Registrant's remaining Aircraft are currently on lease. One Boeing 737-200 Advanced aircraft previously leased to Aloha Airlines Inc. ("Aloha"), came off lease on October 15, 1996, and is currently being actively remarketed. Of the 11 leased aircraft, 6 aircraft which generate aggregate gross rental revenues of approximately $4,399,000 per year, are scheduled to come off-lease during 1997. Registrant's other remaining aircraft are leased pursuant to leases which expire in 1998. Recent Developments A. Hawaiian Airlines, Inc. On September 21, 1993, Hawaiian Airlines, Inc. ("Hawaiian"), the lessee of a McDonnell Douglas DC-9-51 aircraft (the "Hawaiian Aircraft"), filed a voluntary petition for reorganization pursuant to the Provisions of Chapter 11 of the United States Bankruptcy Code (the "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 Registrant entered into a new lease with Hawaiian which commenced on the Effective Date (the "New Lease"). 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 Registrant and Hawaiian had entered into an agreement to settle both the Registrant'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 stock to the Registrant. In June 1995, Registrant received approximately 227,000 shares of Class A Common Stock in the reorganized Hawaiian in consideration of its general unsecured claims filed against Hawaiian. Through December 31, 1995, the Registrant sold all shares for sales proceeds aggregating approximately $1,046,000. On September 1, 1996, the Registrant and Hawaiian amended the lease agreement of the Hawaiian Aircraft. Under the terms of the agreement, Hawaiian paid the Registrant 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 Registrant 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 Registrant removed the associated cost of the equipment and the net carrying value from the books of the Registrant, and recognized a gain on the sale of approximately $1,655,000. B. Continental Airlines, Inc. The Registrant originally owned three McDonnell Douglas DC-9-32 aircraft and three Boeing 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 Bankruptcy Code. In April 1993, Continental's plan for reorganization was confirmed by the Bankruptcy court. In October 1991, the Registrant and Continental restructured the leases of the three DC-9-32 aircraft (the "Continental Restructured Leases"), under which such 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% (the "Continental Deferred Rents") and have been repaid over a 36 month period commencing July 1, 1992. The Continental Restructured Leases provided for monthly rentals of $64,500 per aircraft per month to December 31, 1997. Additionally, either Continental or the Registrant may fund certain improvements and modifications to such DC-9-32 aircraft, however, if such amounts are funded by Continental, the Registrant will allow Continental a rental credit with simple interest accruing at a rate of 12%. Continental is obligated to repay the aggregate rental credits taken as well as any modifications funded by the Registrant, over the remaining term of the Continental Restructured Leases accruing interest at a rate of 12%. To date, such credits and Registrant fundings have aggregated approximately $762,400, and the remaining amounts to be recovered are included in Deferred Rents and Modifications Advances Receivable on the balance sheets as of December 31, 1996 and December 31, 1995. In October 1992, the Registrant and Continental entered into an agreement to defer rentals due under the Continental Restructured Leases for a three month period effective 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%. Through March 31, 1997, Continental has repaid the second Continental Rent Deferral. In November 1991, Continental rejected the leases of the three Boeing 727-100 aircraft, which had been out of service since mid-1991. Due to the condition of such aircraft and the related market for such aircraft, the Registrant provided aggregate allowances for equipment impairment of approximately $6,483,000. During 1993, the Registrant sold all three Boeing 727-100 aircraft. The Registrant 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. Aloha Airlines, Inc. Aloha Airlines, Inc. ("Aloha") had leased a Boeing 737-200 Advanced aircraft (the "Aloha Aircraft") whose lease was originally schedule 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 three years remaining on the TBT Lease, until May 21, 2000. Prior to the expiration of the Aloha lease on February 1, 1996, the Registrant and Aloha agreed to a three month lease extension with rent based on $300 per flight hour. The 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 the Registrant at a facility in Marana, Arizona. At Marana, the Aloha Aircraft is undergoing significant repair and modification work required to bring it into compliance with certain current FAA standards and to make it more readily marketable. The Registrant is currently engaged in actively seeking a new lessee, or possibly a purchaser for the Aloha Aircraft. The Registrant anticipates a lengthy remarketing process for the Aloha Aircraft. Additionally, Aloha leases another Boeing 737-200 Advanced aircraft from the Registrant which was schedule 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. D. Tax assessment In September 1996, the 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 the Registrant with respect to rents received from Aloha Airlines, Inc. and Hawaiian Airlines, Inc. under the leases between the Registrant and each of the airlines. The leases with both Aloha and Hawaiian provide for full indemnification of the 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 the 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, the Registrant believes that the state's position on the applicability of GET in this instance is without merit. The Registrant has not recorded any liability as a result of the proposed notices of assessment. E. Southwest Airlines Co. On April 15, 1996, the Registrant sold to Southwest Airlines Co. ("Southwest") a Boeing 737-200 Advanced aircraft which has been leased to Southwest through May 1996 and early terminated such lease. The Registrant 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 Registrant in August 1996. The Southwest aircraft was originally purchased by the Registrant 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). The Registrant recognized a gain on the sale of approximately $3,568,000. 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, 1996, lease payments due from the following lessees were the source of 10% or more of Registrant's gross rental revenues: Continental (24%), Aloha (21%), American Trans Air, Inc. ("ATA") (18%), Ladeco S.A. ("Ladeco") (12%) and Southwest (11%). With respect to the Continental Aircraft, Registrant has $699,000 included in accounts receivable and deferred rents and modification advances receivable from Continental at December 31, 1996, approximately 36% of which represents the Continental Deferred Rents. (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 considerable 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 United States Federal Aviation Administration ("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. Employees Registrant does not have any employees. Wexford currently performs accounting, secretarial, transfer and administrative services for the Registrant. Wexford 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 the Registrant. Substantially all costs associated with the retention of Fieldstone are paid by the General Partner. (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 S.A. ("Ladeco"), a Chilean airline, and are operated primarily in South America. A third aircraft is leased to Continental Micronesia Inc. ("CMI"), 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 - Note 9".) Item 2. Properties The aircraft owned by Registrant as of March 1, 1997 (see "General" under Item 1 "Business" hereof) consist of the following:
Type of Ownership Type of Equipment Date of Purchase or Interest - ----------------- ---------------- ----------- One McDonnell April 20, 1988 Full ownership, not subject Douglas DC-9-32 to any lien. aircraft(1) Two McDonnell Douglas May 13, 1988 Full ownership, not subject DC-9-32 aircraft(1) to any lien. One Boeing 727-200 June 15, 1988 Full ownership, not subject Advanced aircraft(2) to any lien. One Boeing 737-200 August 23, 1988 Full ownership, not subject Advanced aircraft(2) to any lien. One Boeing 737-200 November 4, 1988 Full ownership, not subject Advanced aircraft(2) 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 737-200 March 31, 1989 Full ownership, subject to Advanced aircraft the TBT Lease. One Boeing 727-200 May 31, 1989 Full ownership of a Advanced aircraft 47.92231% undivided interest(3). - ------------------- (1) See Item 1, "Business"; Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"; and Note 5, to Registrant's Financial Statements included in Item 8, "Financial Statements and Supplementary Data" to this report, for further discussion of the Continental Aircraft. (2) Such aircraft are operated in foreign countries. See Item 1, "Business"; and Note 9 to Registrant's Financial Statements included in Item 8, "Financial Statements and Supplementary Data" to this report, for further discussion. (3) The remaining interest is owned by an affiliate of the General Partner.
Item 3. Legal Proceedings In December 1993, a class action complaint was filed by Carla Wright, Plato Kinias, Getrude E. Boland and Hilda Duarte, purportedly on behalf of the limited partners of Registrant, in the Supreme Court of the State of New York, County of New York (the "New York Action"). This action was substantially identical to a class action filed by certain of the same plaintiffs in March 1993 in the District of Columbia Superior Court, which action was dismissed in October 1993. The New York Action named as defendants Registrant, Integrated Aircraft Fund Management Corp., Dean Witter Reynolds, Inc., Integrated Resources Marketing, Inc., Integrated Resources Equity Corporation and Citicorp Aircraft Management, Inc. ("CAMI"). The complaint alleged, among other things, that the offering material used in connection with Registrant's 1988 public offering of Units contained false and misleading representations constituting common law fraud, breach of fiduciary duty and negligence on the part of the defendants. The complaint sought rescision of the plaintiffs' investment in Registrant including rescissionary and compensatory damages, plus interest and punitive damages. On February 8, 1994, the Registrant filed a motion to dismiss the New York Action. In response to such motion, Plaintiffs filed an Amended Complaint which, among other things, removed the Partnership and CAMI as defendants. Subsequent to the Amended Complaint, the defendants filed a motion to dismiss that pleading. In October 1995, the New York Action was dismissed in its entirety without leave to replead. Plaintiffs filed a Notice of Appeal of that decision on or about January 26, 1996. However, in a stipulation dated June 26, 1996, Plaintiffs agreed not to perfect their appeal, and their appeal expired as of October 26, 1996. The Registrant has reimbursed the General Partner approximately $62,000 during 1996 representing legal fees incurred by the General Partner arising from such litigation. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 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, 1997, there were approximately 15,000 record holders of Units, owning an aggregate of 385,805 Units. During the years ended December 31, 1996 and 1995, 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:
Distribution with Respect to Quarter Ended Amount of Distribution Per Unit(*) ----------------------------------- ----------------------------------------- 1996 1995 ----------------------------------- ----------------------------------------- March 31 $ 7.00 $ 7.00 ----------------------------------- --------------------- ------------------- June 30 $ 21.50 $ 7.00 ----------------------------------- --------------------- ------------------- September 30 $ 6.50 $ 10.00 ----------------------------------- --------------------- ------------------- December 31 $ 5.50 $ 8.00 ----------------------------------- --------------------- ------------------- (*) 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.)
Item 6. Selected Financial Data
Year ended December 31, 1996 1995 1994 1993 1992 ------------------ ------------------ --------------- ---------------- ----------- Revenues (1) $ 10,284,238 $ 12,372,475 $ 13,755,528 $ 16,227,532 $ 21,342,494 Net Income (Loss) (2) $ 5,988,174 $ 1,496,774 $ 564,907 $ (10,306,115) $ (1,053,373) Net income (Loss) Per $ 13.97 $ 3.49 $ 1.32 $ (24.04) $ (2.46) Unit (3) Distribution Per Unit $ 40.50 $ 32.00 $ 31.00 $ 34.50 $ 43.75 Total Assets $ 40,045,819 $ 52,365,622 $ 63,596,742 $ 76,239,996 $ 101,811,366 Total Partners' Equity $ 34,661,785 $ 46,034,837 $ 58,255,574 $ 70,979,506 $ 96,074,813 (1) Included in this amount is $582,674, $443,904, $259,805, $195,071 and $254,873 of interest income for the years ended December 31, 1996, 1995, 1994, 1993, and 1992, respectively. Additionally, revenues include $(32,767), $108,487, $184,033, $968,541 and $417,061 of other income or loss for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. (2) Registrant provided allowances for equipment impairment of $848,000, $13,460,000 (including $20,000 provided in respect to a 727-100 aircraft sold in August 1993) and $8,700,121 (including $800,000 provided in respect to a 727-100 aircraft sold in May 1992), for the years ended December 31, 1994, 1993 and 1992, respectively, to recognize the loss in value of certain aircraft. No allowance was considered necessary in the 1996 period. 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). (3) Calculated on a weighted average basis.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Registrant made a cash distribution of $5.50 per Unit with respect to the quarter ended December 31, 1996 (the "1996 Quarter"), which represented an annualized cash distribution rate of 4.4% (based on the initial offering price of $500 per Unit) as compared to $8.00 per Unit with respect to the quarter ended December 31, 1995. For the 1996 Period, cash distributions aggregated $40.50 per Unit (a 8.1% annualized rate) as compared to $32.00 per Unit (a 6.4% annualized rate) with respect to the year ended December 31, 1995 (the "1995 Period"). During the 1996 Period, Registrant generated cash from operations of approximately $10,555,000 (before rent credits), or approximately $24.62 per Unit, as compared to approximately $12,745,000 (before rent credits), or approximately $29.73 per Unit, during the 1995 Period. Additionally, during the 1996 Period, Registrant collected proceeds on the sale of one Boeing 737-200 leased to Southwest Airlines, Inc. of approximately $6,784,000. During the 1996 Period, 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 $101,000 (as discussed below), from approximately $4,296,000 at December 31, 1995 to approximately $4,397,000 at December 31, 1996. The aggregate cash reserves were comprised of approximately $301,000, 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 $2,167,000 of collected maintenance reserves. Such increase in aggregate cash reserves was the result of an increase of approximately $245,000 of collected maintenance reserves and approximately $56,000 of cash from operations in excess of cash distributions during the 1996 Period. 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 ex-USAir Aircraft leased to ATA. Further, if the transition to ATA's maintenance program requires that the aircraft undergo heavy maintenance checks during the initial lease term, Registrant will contribute an additional $150,000 per aircraft towards the completion of such heavy maintenance checks. Additionally, during the Basic Terms, ATA may request that Registrant retrofit the aircraft to comply with the Stage III noise emission standards pursuant to FAR Part 36. In the event that Registrant consents to retrofitting the aircraft, ATA will make Improvements as may be required to bring the aircraft into compliance with such standards. Upon completion of the improvements (the "Improvements"), Registrant will reimburse ATA for the cost of the Improvements. In consideration for Registrant's consenting to the Improvements, the ATA leases will be extended for a term of five years from the date the aircraft are returned to service. During this five year period, the lease rentals will be increased by an amount reflecting the enhanced value of the aircraft including the Improvements. As Registrant's aircraft come off-lease (one currently and six of which are scheduled to come off-lease in 1997), 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 may be impacted by its obligation to pay such costs. 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 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 1997 will be less than its gross cash flow generated in the 1996 Period (approximately 76% of 1996 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 1997 and the foreseeable future will be sufficient to pay its operating expenses and make distributions. Cash flow in 1997, as compared to the prior year, will be reduced as a result of the aircraft which come off lease in 1997, as well as the scheduled reduction in Continental's repayment of modification advances and previously deferred rentals. During the 1996 Period, lease payments due from the following lessees were the source of 10% or more of Registrant's gross rental revenues: Continental (24%), Aloha (21%), ATA (18%), Ladeco (12%) and Southwest (11%). Of the 18 aircraft originally purchased by Registrant, at December 31, 1996, Registrant had an interest in 12 of the aircraft (inclusive of an undivided 47.92231% joint venture interest in one aircraft) which had an original cost of approximately $127,678,000 (net book value of approximately $27,529,000). In 1997, excluding rents from renewals, Registrant anticipates receiving approximately $7,732,000 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 foregoing aggregate rentals are not sufficient to maintain previous distribution levels. Of the remaining 12 aircraft, six aircraft which generate aggregate gross rental revenues of approximately $4,399,000 per year are scheduled to come off-lease during 1997. Registrant's remaining aircraft are leased pursuant to leases which expire in 1998 (5 aircraft) and the Aloha Aircraft which is presently off lease and is being actively remarketed. (See Item 1, "Business-Recent Developments, Aloha Airlines"). On September 1, 1996, the Registrant and Hawaiian amended the lease agreement of the Hawaiian Aircraft. Under the terms of the agreement, Hawaiian has paid the Registrant 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 Registrant 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 Registrant removed the associated cost of the equipment and the net carrying value from the books of the Registrant, and recognized a gain on the sale of approximately $1,655,000. Aloha had leased a Boeing 737-200 Advance Aircraft (the "Aloha Aircraft") whose lease was schedule 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 three years remaining on the TBT Lease, through May 21, 2000. Prior to the scheduled expiration of the Aloha lease on February 1, 1996, the Registrant and Aloha agreed to a three month lease extension with rent based on $300 per flight hour. The 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 the Registrant at a facility in Marana, Arizona. At Marana, the Aloha Aircraft is undergoing significant repair and modification work required to bring it into compliance with certain current FAA standards and to make it more readily marketable. The Registrant is currently engaged in actively seeking a new lessee or, possibly a purchaser for the Aloha Aircraft. The Registrant anticipates a lengthy remarketing process for the Aloha Aircraft. Additionally, Aloha leases another Boeing 737-200 Advance Aircraft from the Registrant which was schedule 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. In September 1996, the 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 the Registrant with respect to rents received from Aloha Airlines, Inc. and Hawaiian Airlines, Inc. under the leases between the Registrant and each of the airlines. The leases with both Aloha and Hawaiian provide for full indemnification of the 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 the fact 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 the 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, the Registrant believes that the state's position on the applicability of GET in this instance is without merit. The Registrant has not recorded any liability as a result of the proposed notices of assessment. On April 15, 1996, the Registrant sold to Southwest a Boeing 737-200 Advanced aircraft leased to Southwest through May 1996 and early terminated such lease. The Registrant 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 Registrant in August 1996. The Southwest aircraft was originally purchased by the Registrant 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). The Registrant recognized a gain on the sale approximately $3,568,000. 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, $13,460,000 and $8,700,121 for the 1994 Period, the year ended December 31, 1993 and the year ended December 31, 1992 (the "1992 Period"), respectively. No allowance was considered necessary for the 1996 or 1995 Periods. Additionally, because of the financial troubles of certain airlines which are lessees of Registrant's aircraft, cash flow and, therefore, distributions have been reduced. In April 1995, the General Partner and certain affiliates entered into an agreement with Fieldstone pursuant to which Fieldstone performs certain management and administrative services relating to the Registrant. Substantially all costs associated with the retention of Fieldstone will be paid by the General Partner. Results of Operations - 1996 as Compared to 1995 Registrant's rental revenues decreased by approximately 18% for the 1996 Period as compared to the 1995 Period. The decrease was principally attributable to the following: i) a 59% 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 14% of the Registrant's 1996 Period rental revenue reduction as compared to the corresponding rental revenues recognized for the 1995 Period; 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 the Registrant's 1996 Period rental revenue reduction as compared to the corresponding rental revenues recognized for the 1995 Period; 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 schedule 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 still remains off lease at December 31, 1996. The other Aloha aircraft lease was originally schedule 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 the Registrant's 1996 Period rental revenue reduction as compared to the corresponding rental revenues recognized for the 1995 Period. Investment interest income increased by approximately 7% for the 1996 Period, as compared to the 1995 Period, primarily because of higher market interest rates during 1996 Period 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 the 1995 Period. Other income/loss decreased for the 1996 Period, as compared to 1995 Period, 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 the 1996 Period, as compared to the 1995 Period, primarily due to the Hawaiian Aircraft and the Southwest Aircraft being sold during the 1996 Period and reduction on the Ladeco Aircraft which has reached its salvage value during or prior to the 1996 Period. Operating expenses decreased significantly in the 1996 Period, as compared to the 1995 Period, primarily due to rental credits provided to ATA of $150,000 for the completion of "C" checks in the 1995 Period per the lease agreement on the ex-USAir Aircraft leased to ATA. Management fees decreased approximately 23% for the 1996 Period, as compared to the 1995 Period, due to lower rental income in the 1996 Period on which such fees are based, due to the aircraft sale, and lower renewal rates in 1996 Period. General and administrative expenses increased approximately 2% in the 1996 Period, as compared to the 1995 Period. Gain from the sale of aircraft was approximately $5,223,000 in the 1996 Period for the sale of the Southwest and Hawaiian Aircraft. No sales took place in the 1995 Period. Realized gain on sale of marketable securities was approximately $1,002,000 in the 1995 Period. No such gain was recognized for the 1996 Period. The gain represents the settlement of general unsecured claims the Registrant had with Hawaiian Airlines. Hawaiian issued the Registrant approximately 227,000 shares of Class A Common stock in the reorganized Hawaiian Airlines. Through December 31, 1995 the Registrant sold all shares aggregating approximately $1,046,000. Registrant's net income for the 1996 Period was $5,988,174 as compared to net income of $1,496,774 recognized in the 1995 Period. The principal reasons for the change in the Registrant's 1996 net income compared to 1995 are: i) Gain on sale of aircraft in the 1996 Period of approximately $5,223,000 compared with no such gain in the 1995 Period; and ii) reduction of depreciation expense, approximately $8,608,000 in the 1996 Period as compared to approximately $10,794,000 in the 1995 Period; and iii) reduction of management fee, $422,000 in the 1996 Period as compared with $548,000 in 1995; and iv) reduction in operating expense, approximately $85,000 in the 1996 Period as compared with $193,000 in 1995 Period; offset by v) reduction of rental revenue, approximately $9,734,000 in the 1996 Period compared with approximately $11,820,000 in the 1995 Period; and vi) reduction in other income (loss) of approximately $33,000 in the 1996 Period compared with a gain of approximately $108,000 in the 1995 Period; and vii) gain on sale of marketable securities of approximately $1,002,000 in the 1995 Period, compared with no such gain recognized in the 1996 Period. Results of Operations - 1995 as Compared to 1994 Registrant's rental revenues decreased by approximately 11% for the 1995 Period as compared to the 1994 Period. The decrease was principally attributable to the following: i) the reduction in rental revenues by approximately 22% attributable to a McDonnell Douglas DC-9-51 aircraft (the "Hawaiian Aircraft") leased to Hawaiian Airlines, Inc. ("Hawaiian"). In September 1994, the Registrant entered into a new lease agreement with Hawaiian which provide for monthly rentals of $60,000 per month through July 31, 1995, which then stepped up to $65,000 through November 1999. The reduction in rental revenues recognized under this new lease represented approximately 15% of the Registrant's 1995 Period rental revenue reduction as compared to the corresponding rental revenues recognized for the 1994 Period; ii) the reduction in rental revenue by approximately 67% with respect to the Southwest Aircraft extended to Southwest for one year beginning November 1994. The reduction in rental revenues recognized under this lease represented approximately 67% of the Registrant's 1995 Period rental revenue reduction as compared to the corresponding rental revenues recognized for the 1994 Period. The Registrant further extended the lease with Southwest for two years beginning November 1995 for 125% of the prior lease rental; and iii) the reduction in rental revenue by approximately 16% with respect to the ex-USAir Aircraft remarketed to ATA in November and December 1994 for a period of approximately 39 months. The reduction in rental revenues recognized under these leases represented approximately 18% of the Registrant's 1995 Period rental revenue reduction as compared to the corresponding rental revenues recognized for the 1994 Period. Investment interest income increased by approximately 71% for the 1995 Period, as compared to the 1994 Period, primarily because of higher market interest rates during 1995 Period as well as higher balances available for investment in 1995. Other income decreased by approximately 41% for the 1995 Period, as compared to 1994 Period, 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 3% for the 1995 Period, as compared to the 1994 Period, primarily due to the reduction on one of the Ladeco Aircraft which has reached its salvage value in the 1995 Period. Additionally, during the 1995 Period, Registrant did not incur a provision for equipment impairment as compared to $848,000 provided for the 1994 Period. No provision for doubtful accounts was considered necessary in the 1995 Period, as compared to the 1994 Period where an allowance of approximately $258,000 was set up relating to the lease of the Hawaiian Aircraft. Operating expenses increased significantly in the 1995 Period, as compared to the 1994 Period, primarily due to rental credits provided to ATA of $150,000 for the completion of "C" checks in the 1995 Period per the lease agreement on the ex-USAir Aircraft leased to ATA. Management fees increased approximately 5% for the 1995 Period, as compared to the 1994 Period, due to higher cash distributions in the 1995 Period on which such fees are based. General and administrative expenses increased approximately 6% in the 1995 Period, as compared to the 1994 Period, primarily due to increased investor relations expenses incurred in the 1995 Period. Realized gain on sale of marketable securities was approximately $1,002,000 in the 1995 Period. No such gain was recognized for the 1994 Period. The gain represents the settlement of general unsecured claims the Registrant had against Hawaiian Airlines. Hawaiian issued the Registrant approximately 227,000 shares of Class A Common stock in the reorganized Hawaiian Airlines. Through December 31, 1995 the Registrant sold all shares aggregating approximately $1,046,000. Registrant's net income for the 1995 Period was $1,496,774 as compared to net income of $564,907 recognized in the 1994 Period. The principal reasons for the change in the Registrant's 1995 net income compared to 1994 are: i) gain on sale of marketable securities of approximately $1,002,000 in the 1995 Period; no such gain in the 1994 Period; ii) no provision for equipment impairment required for the 1995 Period, compared to $848,000 provided for the 1994 Period; and iii) no provision for doubtful accounts required for the 1995 Period, compared to approximately $258,000 provided for the 1994 Period. These amounts were partially offset by the decrease in rental revenues of approximately $1,492,000 discussed above. Item 8. Financial Statements and Supplementary Data AIRCRAFT INCOME PARTNERS L.P. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 INDEX Independent Auditor's Report Independent Auditors' Report Financial statements - years ended December 31, 1996, 1995 and 1994 Balance sheets Statements of operations 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. 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, 1996 and 1995, and the related statements of operations, partners' equity and cash flows for the years then ended. 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, 1996 and 1995, and the results of its operations and its cash flows for the years then ended 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. Hays & Company February 21, 1997 New York, New York INDEPENDENT AUDITORS' REPORT To the Partners of Aircraft Income Partners L.P. We have audited the accompanying statements of operations, partners' equity and cash flows of Aircraft Income Partners L.P. for the year ended December 31, 1994. Our audit also included the financial statement schedule listed in the Index at Item 14(a)2 as it relates to the year ended December 31, 1994. 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 the financial statement schedule based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of operations and cash flows of Aircraft Income Partners L.P. for the year ended December 31, 1994 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. March 17, 1995 /s/Deloitte & Touche LLP - ------------------------ Deloitte & Touche LLP New York, New York
AIRCRAFT INCOME PARTNERS L.P. BALANCE SHEETS December 31, 1996 1995 ------------ ------------ ASSETS Leased aircraft - net ................................ $ 27,529,419 $ 41,868,907 Cash and cash equivalents ............................ 6,279,937 7,448,455 Note receivable - installment sale ................... 3,887,665 -- Accounts receivable .................................. 769,547 1,388,026 Deferred rents and modification advances receivable .. 254,432 641,745 Restricted cash - security deposits .................. 481,677 458,683 Deferred costs ....................................... 223,866 352,226 Other receivables .................................... 523,915 116,952 Prepaid expenses ..................................... 95,361 90,628 ------------ ------------ $ 40,045,819 $ 52,365,622 ============ ============ LIABILITIES AND PARTNERS' EQUITY Liabilities Distributions payable ................................ $ 2,357,697 $ 3,429,378 Maintenance reserves ................................. 2,167,329 1,922,478 Security deposits payable ............................ 481,677 458,683 Deferred income ...................................... 131,550 179,216 Management fee payable ............................... 94,000 137,000 Deferred costs payable ............................... 48,016 121,930 Accounts payable and accrued expenses ................ 103,765 82,100 ------------ ------------ Total liabilities ............................. 5,384,034 6,330,785 ------------ ------------ Commitments and contingencies (Notes 3, 4, 5, 6, 10 and 12) Partners' equity Limited partners' equity (385,805 units issued ....... 50,476,902 60,712,648 and outstanding) General partner's deficit ............................ (15,815,117) (14,677,811) ------------ ------------ Total partners' equity ........................ 34,661,785 46,034,837 ------------ ------------ $ 40,045,819 $ 52,365,622 ============ ============ See notes to financial statements.
AIRCRAFT INCOME PARTNERS L.P. STATEMENTS OF OPERATIONS Year ended December 31, 1996 1995 1994 ------------ ------------ ------------ Revenues Rental .................................... $ 9,734,331 $ 11,820,084 $ 13,311,690 Interest .................................. 476,659 443,904 259,805 Interest - installment note ............... 106,015 -- -- Other ..................................... (32,767) 108,487 184,033 ------------ ------------ ------------ 10,284,238 12,372,475 13,755,528 ------------ ------------ ------------ Costs and expenses Depreciation .............................. 8,608,539 10,794,471 11,149,440 Management fee ............................ 422,000 548,000 521,000 General and administrative ................ 336,248 328,439 308,765 Operating ................................. 84,522 192,553 56,452 Provision for bad debts ................... 66,133 -- 257,924 Interest .................................. 1,570 13,969 49,040 Provision for equipment impairment ........ -- -- 848,000 ------------ ------------ ------------ 9,519,012 11,877,432 13,190,621 ------------ ------------ ------------ 765,226 495,043 564,907 Gain on disposition of aircraft - net .......... 5,222,948 -- -- Realized gain from sale of marketable securities -- 1,001,731 -- ------------ ------------ ------------ Net income ..................................... $ 5,988,174 $ 1,496,774 $ 564,907 ============ ============ ============ AIRCRAFT INCOME PARTNERS L.P. STATEMENTS OF OPERATIONS (continued) Year ended December 31, 1996 1995 1994 ------------ ------------ ------------ Net income attributable to Limited partners .......................... $ 5,389,357 $ 1,347,097 $ 508,416 General partner ........................... 598,817 149,677 56,491 ------------ ------------ ------------ $ 5,988,174 $ 1,496,774 $ 564,907 ============ ============ ============ Net income per unit of limited partnership interest (385,805 units outstanding) ...... $ 13.97 $ 3.49 $ 1.32 =========== ============ ============ See notes to financial statements.
AIRCRAFT INCOME PARTNERS L.P. STATEMENT OF PARTNERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 Limited General Total Partners' Partner's Partners' Equity Deficit Equity ------------ ------------ ------------ Balance, January 1, 1994 .................... $ 83,162,850 $(12,183,344) $ 70,979,506 Net income - 1994 ........................... 508,416 56,491 564,907 Distributions to partners ($31.00 per limited partnership unit) ...................... (11,959,955) (1,328,884) (13,288,839) ------------ ------------ ------------ Balance, December 31, 1994 .................. 71,711,311 (13,455,737) 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 .................. 60,712,648 (14,677,811) 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 .................. $ 50,476,902 $(15,815,117) $ 34,661,785 ============ ============ ============ See notes to financial statements.
AIRCRAFT INCOME PARTNERS L.P. STATEMENTS OF CASH FLOWS Year ended December 31, ------------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities Net income ................................................. $ 5,988,174 $ 1,496,774 $ 564,907 Adjustments to reconcile net income to net cash provided by operating activities Depreciation ......................................... 8,608,539 10,794,471 11,149,440 Realized gain from sale of marketable securities ..... -- (1,001,731) -- Provision for equipment impairment ................... -- -- 848,000 Provision for bad debts .............................. 66,133 -- 257,924 Gain on disposition of aircraft - net ................ (5,222,948) -- -- Changes in assets and liabilities Accounts receivable ..................................... 552,346 281,186 (535,466) Deferred rents and modification advances receivable ..... 387,313 1,009,001 1,519,546 Deferred costs .......................................... 128,360 128,360 128,360 Other receivables ....................................... (406,963) 63,698 (27,946) Prepaid expenses ........................................ (4,733) 29,466 (48,340) Maintenance reserves .................................... 362,698 803,338 680,623 Deferred income ......................................... (47,666) -- 72,274 Management fee payable .................................. (43,000) 17,000 (24,000) Accounts payable and accrued expenses ................... 21,665 (112,900) (54,857) Restricted cash - security deposits .................... (22,994) (20,996) (124,187) Security deposits payable ............................... 22,994 20,996 124,187 ------------ ------------ ------------ Net cash provided by operating activities ......... 10,389,918 13,508,663 14,530,465 ------------ ------------ ------------ Cash flows from investing activities Proceeds from sale of marketable securities ................ -- 1,045,941 -- Proceeds from installment sale note receivable ............. 163,985 -- -- Additions and modifications to leased aircraft - net ....... (73,914) (167,487) (121,242) Proceeds from sale of aircraft - net ....................... 6,784,400 -- -- ------------ ------------ ------------ Net cash provided by (used in) investing activities 6,874,471 878,454 (121,242) ------------ ------------ ------------ AIRCRAFT INCOME PARTNERS L.P. STATEMENTS OF CASH FLOWS (continued) Year ended December 31, ------------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Cash flows from financing activities Distributions to partners .................................. (18,432,907) (13,288,839) (13,931,847) ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ........... (1,168,518) 1,098,278 477,376 Cash and cash equivalents, beginning of year ................... 7,448,455 6,350,177 5,872,801 ------------ ------------ ------------ Cash and cash equivalents, end of year ......................... $ 6,279,937 $ 7,448,455 $ 6,350,177 ============ ============ ============ Supplemental disclosure of cash flow information Interest paid .............................................. $ 1,570 $ 13,969 $ 49,040 ============ ============ ============ See notes to financial statements.
AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 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. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 2 SUMMARY OF- SIGNIFICANT ACCOUNTING POLICIES (continued) 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 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. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 2 SUMMARY OF- SIGNIFICANT ACCOUNTING POLICIES (continued) 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 years ended December 31, 1996, 1995 and 1994. 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 or losses, 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. 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. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES(continued) 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. Presidio is managed by Presidio Management Company, LLC ("Presidio Management"), a company controlled by a director of Presidio. Presidio is also party to an administrative services agreement with Wexford Management LLC ("Wexford") pursuant to which Wexford is responsible for the day-to-day management of Presidio and, among other things, has authority to designate directors of IAFM. During the year ended December 31, 1996, reimbursable expenses to Wexford by the Partnership amounted to $34,184. 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, 1996, 1995 and 1994, IAFM received or accrued distributions approximating $1,736,000, $1,372,000 and $1,329,000, 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 ("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) will be 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 $422,000, $548,000 and $521,000, for the years ended December 31, 1996, 1995 and 1994, respectively. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 3 CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES(continued) Upon ultimate liquidation of the Partnership, IAFM may be required to remit to the Partnership certain payments representing capital account deficit restoration based upon a formula provided within the Limited Partnership Agreement. Such restoration amount may be less than the recorded IAFM's deficit, which could result in distributions to the limited partners of less than their recorded equity. In April 1995, IAFM and certain affiliates entered into an agreement with Fieldstone Private Capital Group, L.P. ("Fieldstone") pursuant to which Fieldstone performs certain management and administrative services relating to the Partnership. Substantially all costs associated with the retention of Fieldstone will be paid by IAFM. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 4 DEFERRED RENTS AND MODIFICATION ADVANCES RECEIVABLE Deferred rents and modification advances receivable from Continental Airlines, Inc. are summarized as follows:
December 31, ----------------------------------- 1996 1995 --------------- --------------- 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 $ 16,468 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 19,274 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 $ 239,045 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. 144,982 286,055 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 80,903 --------------- --------------- $ 254,432 $ 641,745 =============== ===============
AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5 LEASED AIRCRAFT Leased aircraft and related equipment, is summarized as follows:
December 31, ----------------------------------- 1996 1995 --------------- --------------- Five Boeing 737-200 Advanced aircraft (net of accumulated depreciation of $33,689,105 and $30,771,499 and an allowance for equipment impairment of $16,468,000 at December 31, 1996 and 1995) $ 9,240,270 $ 12,157,876 Four Boeing 727-200 Advanced aircraft (net of accumulated depreciation of $27,805,929 and $24,286,739 and an allowance for equipment impairment of $9,414,000 at December 31, 1996 and 1995) 9,589,060 13,108,250 Three McDonnell Douglas DC9-32 aircraft (net of accumulated depreciation of $11,152,473 and $9,864,239 and an allowance for equipment impairment of $1,618,000 at December 31, 1996 and 1995) 8,700,089 9,988,323 One McDonnell Douglas DC9-51 aircraft (net of accumulated depreciation of $6,274,895 and an allowance for equipment impairment of $2,425,000 at December 31, 1995) - 3,104,855 One Boeing 737-200 Advance aircraft (net of accumulated depreciation of $7,321,024 and an allowance for equipment impairment of $2,300,000 at December 31, 1995) - 3,509,603 --------------- --------------- $ 27,529,419 $ 41,868,907 =============== ===============
Minimum future rentals receivable on noncancelable leases as of December 31, 1996 (except as described below) are due as follows:
Year ending December 31, 1997 $ 7,333,000 1998 1,586,000 ----------------- $ 8,919,000 =================
AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5 LEASED AIRCRAFT (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, 1996, 1995 and 1994 was $1,963, $163,772 and $24,022, respectively. 6 DISTRIBUTIONS TO PARTNERS Distributions payable to partners represent distributable cash from operations, as defined in the Limited Partnership Agreement, for the fourth quarter of 1996 and 1995. Distributions payable to limited partners were $5.50 and $8.00 per limited partnership unit and distributions payable to IAFM aggregated $235,770 and $342,938 at December 31, 1996 and 1995, respectively. 7 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, 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:
Year ended December 31, -------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Net income per financial statements .............. $ 5,988,174 $ 1,496,774 $ 564,907 Tax depreciation in (excess) of financial statement depreciation ......................... 869,343 (15,767) (1,449,977) Provision for equipment impairment provided for financial statement purposes ................... -- -- 848,000 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 .............................. 362,698 803,338 680,623
AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7 RECONCILIATION OF NET INCOME AND NET ASSETS PER FINANCIAL STATEMENTS TO TAX BASIS (continued)
Year ended December 31, ------------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Difference between tax basis and financial statement treatment of aircraft subject to Temporary Regulation Section 5c.168(f)(8)-2(a)(5) of the Internal Revenue Code .............................. (1,189,364) (1,006,685) (861,209) Financial statement recognition of advance rental payments recognized in prior periods for tax purposes .......................... (47,666) -- 72,274 ------------ ------------ ------------ Net income (loss) per tax basis ............. $ 10,249,832 $ 1,277,660 $ (145,382) ============ ============ ============
AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The differences between the Partnership's net assets per financial statements and tax basis of accounting are as follows:
December 31, 1996 1995 ------------ ------------ Net assets per financial statements ........ $ 34,661,785 $ 46,034,837 Net carrying value of aircraft ............. (10,631,459) (15,885,296) 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 7,373,338 Receipt of: - advanced rental payment ............. 131,550 179,216 - maintenance reserves ................ 2,167,329 1,922,478 Other ...................................... 65,238 65,238 ------------ ------------ Net assets per tax basis ................... $ 55,244,167 $ 62,355,561 ============ ============
AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 8 MAJOR LESSEES Revenues from aircraft leased by individual lessees, which generated 10% or more of leasing revenues, are as follows:
Year ended December 31, -------------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ---------------- Continental Airlines, Inc. $ 2,322,000 $ 2,322,000 $ 2,322,000 % of revenues 24% 20% 17% Aloha Airlines, Inc. $ 2,023,650 $ 3,095,216 $ 3,095,216 % of revenues 21% 26% 23% American Trans Air, Inc. $ 1,781,168 $ 1,781,168 $ - % of revenues 18% 15% - % Ladeco S.A. $ 1,140,000 $ 1,140,000 $ - % of revenues 12% 10% - % Southwest Airlines, Co. $ 1,087,667 $ 1,817,000 $ 2,812,613 % of revenues 11% 15% 21% USAir, Inc. $ - $ - $ 1,648,995 % of revenues -% -% 12%
9 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:
Year ended December 31, 1996 ------------------------------------------------------- United Western States Pacific Chile ---------------- --------------- --------------- 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
AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31,1996, 1995 AND 1994 9 BUSINESS SEGMENTS (continued)
Year ended December 31, 1995 ------------------------------------------------------- United Western States Pacific Chile ---------------- --------------- --------------- 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 Year ended December 31, 1994 ------------------------------------------------------- United Western States Pacific Chile ---------------- --------------- --------------- Rental revenues $ 11,276,634 $ 895,056 $ 1,140,000 Net income (loss) $ 1,606,904 $ (231,241) $ (810,756) Leased aircraft, net $ 42,904,076 $ 5,550,063 $ 4,209,239
10 COMMITMENTS AND CONTINGENCIES a Southwest Airlines Co. During May 1991, the Partnership entered into a 23-month lease with Southwest Airlines Co. ("Southwest"). In August 1992, Southwest agreed to extend the lease of one Boeing 737-200 Advanced aircraft for an additional three year period at a reduced rate. Additionally, the Partnership had agreed to contribute certain amounts towards the installation of a Traffic Collision Avoidance System and windshear detection, amongst other items, in the form of rent credits. To date, the Partnership has contributed approximately $304,000 as rent credits. In July 1995, Southwest agreed to a second lease extension on the lease scheduled to terminate in November 1995, for an additional two year period. During the second lease extension, the lease provides for increased rentals of approximately 125% of the prior lease rate. In July 1994, Southwest agreed to extend the lease of another Boeing 737-200 Advanced aircraft, originally scheduled to terminate in November 1994, for an additional one year period. During the extension period, the lease provided for reduced rentals equal to approximately 29% of the original lease rate. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10 COMMITMENTS AND CONTINGENCIES (continued) a Southwest Airlines Co. (continued) On April 15, 1996, the Partnership sold the Southwest the 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 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). b 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. Hawaiian had failed to make required monthly payments due November 1992 and December 1992, under a lease restructuring. In January 1993, IAFM along with a certain affiliated entities, entered into an interim settlement agreement with Hawaiian, pursuant to which Hawaiian consented to the issuance of a temporary restraining order with the First Circuit Court of Hawaii, requiring Hawaiian to cease operating the Hawaiian Aircraft without compensation to the Partnership. In March 1993, the Partnership agreed to forebear from filing a restraining order in consideration of Hawaiian's agreement to make four weekly rental payments aggregating $50,000; all four payments were made by Hawaiian. On May 18, 1993, Hawaiian proposed a revised restructuring plan under which Hawaiian established a fair market value rental for the Hawaiian Aircraft equal to approximately $55,000 per month. Under the revised restructuring plan, Hawaiian was scheduled to pay 80% of the fair market rental, on a weekly basis, through December 1993. In July 1993, Hawaiian indicated that due to its continuing cash flow problems, it would seek to further reduce its rental payments to approximately 50% of the fair market rental (approximately $27,500 per month). Hawaiian continued to operate the Hawaiian Aircraft and had paid monthly rentals equal to approximately $27,500 per month, on a weekly basis, through December 1993. In January 1994, Hawaiian commenced making weekly rental payments equal to approximately $60,000 per month. Hawaiian had continued to make its weekly payments at such rate through September 1, 1994. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10 COMMITMENTS AND CONTINGENCIES (continued) b Hawaiian Airlines, Inc. (continued) 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 of 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. c 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. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10 COMMITMENTS AND CONTINGENCIES (continued) c Continental Airlines, Inc. (continued) 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 operations and the related receivable is included in deferred rents and modification advances receivable on the balance sheets. The Continental Restructured Leases provide for monthly rental payments of $64,500 per aircraft per month to December 1, 1997. Additionally, either Continental or the Partnership may fund certain improvements and modifications to such Continental Aircraft, however, if such amounts are funded by Continental, the Partnership will allow Continental a rental credit with simple interest accruing at a rate of 12% per annum. Continental is 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 balance sheets as of December 31, 1996 and 1995. 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%. Through March 31, 1997, Continental has repaid the Second Continental Rent Defferal. 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 amount of recovery under such claims, if any, is impossible to predict at this time. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 d 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, 1996, the Partnership had provided financing of approximately $755,000. Such amounts, net of amounts repaid, are included within deferred costs on the balance sheet at December 31, 1996 and 1995. e 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 31, 1996, such maintenance reserves aggregated approximately $1,376,000. 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. f 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 AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10 COMMITMENTS AND CONTINGENCIES (continued) f American Trans Air, Inc. (continued) 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. g 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. As of December 31, 1996, the balance for such maintenance reserves is approximately $791,000, inclusive of a $391,000 return provision allowance. 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 three 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 at a facility in Marana, Arizona. At Marana, the Aloha Aircraft is undergoing significant repair and modification work required to bring it into compliance with certain current FAA standards and to make it more readily marketable. The Partnership is currently engaged in actively seeking a new lessee or, possibly a purchaser, for the Aloha Aircraft. The Partnership anticipates a lengthy remarketing process for the Aloha Aircraft. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10 COMMITMENTS AND CONTINGENCIES (continued) g Aloha Airlines, Inc. (continued) 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. h USAir, Inc. In October 1994, USAir, Inc. ("USAir"), the lessee of two Boeing 727-200 Advanced aircraft (the "USAir Aircraft"), notified the Partnership of its intention to terminate the leases relating to such aircraft effective December 31, 1994. In light of USAir's intention to terminate its leases, the Partnership entered into lease negotiations with ATA in an effort to remarket the USAir Aircraft to ATA. To meet certain ATA fleet scheduling needs, USAir agreed, pursuant to an early termination agreement, to return one aircraft in November 1994 and the second aircraft in December 1994. The Partnership consummated the lease of one of the USAir Aircraft to ATA in November 1994 and the lease of the second USAir Aircraft in December 1994 (collectively the "ATA Leases"). Each of the ATA Leases, with an initial term of approximately 39 months ("Basic Term"), 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 addition, if the transition to ATA's maintenance program requires that both USAir Aircraft undergo heavy maintenance checks during the Basic Term, an additional $150,000 per aircraft will be contributed by the Partnership towards the completion of such work. Additionally, during the Basic Term, ATA may request that the Partnership retrofit the ex-USAir Aircraft to comply with the Stage III noise emission standards pursuant to FAR Part 36 of the Federal Aviation Registry Act. In the event that the Partnership consents to the retrofitting of the USAir Aircraft, ATA will perform such work (the "Improvements") as may be required to bring such aircraft into compliance with such standards. Upon completion of the Improvements and the return of the USAir Aircraft to revenue service, the Partnership will reimburse ATA for the cost of the Improvements. In consideration for the Partnership's consenting to the Improvements, the ATA Leases will be extended for a term of five years from the date such aircraft are returned to service. During this five year period, the monthly rentals shall be increased by an amount reflecting the enhanced value of the USAir Aircraft including the Improvements. In addition, at lease inception, ATA paid security deposits of $59,000 per aircraft. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10 COMMITMENTS AND CONTINGENCIES (continued) i 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 Airlines, Inc. and Hawaiian Airlines, Inc. 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 liability as a result of the proposed notices of assessments. j Complaints In December 1993, a class action complaint was filed by Carla Wright, Plato Kinias, Gertrude E. Boland and Hilda Duarte purportedly on behalf of the limited partners of the Partnership in the Supreme Court of the State of New York, County of New York (the "New York Action"). This action was substantially identical to a class action filed by certain of the same plaintiffs in March 1993, in the District of Columbia Superior Court, which action was dismissed in October 1993. The New York Action also named as defendants the Partnership, IAFM, Dean Witter Reynolds, Inc., Integrated Resources Marketing, Inc., Integrated Resources Equity Corporation and CAMI. The complaint alleged, among other things, that the offering material used in connection with the Partnership's 1988 public offering of limited partnership units contained false and misleading representations constituting common law fraud, breach of fiduciary duty and negligence on the part of the AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 10 COMMITMENTS AND CONTINGENCIES (continued) j Complaints (continued) defendants. The complaint sought rescission of the plaintiffs' investment in the Partnership plus rescissionary and compensatory damages, plus interest and punitive damages. On February 8, 1994, the Partnership filed a motion to dismiss the New York Action. In response to such motion, Plaintiffs filed an Amended Complaint which, among other things, removed the Partnership and CAMI as defendants. Subsequent to the Amended Complaint, the defendants filed a motion to dismiss that pleading. In October 1995, the New York Action was dismissed in its entirety without leave to replead. Plaintiffs filed a Notice of Appeal of that decision on or about January 26, 1996. However, in a stipulation dated June 26, 1996, Plaintiffs agreed not to perfect their appeal, and their appeal expired as of October 26, 1996. The Partnership has reimbursed IAFM approximately $62,000 during 1996 representing legal fees incurred by IAFM arising from such litigation. 11 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 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). On September 1, 1996, the Partnership and Hawaiian amended the lease agreement of the Hawaiian Aircraft. Under the terms of the agreement, Hawaiian will pay 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 of 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. AIRCRAFT INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 12 STATUS OF INTEGRATED On February 13, 1990, Integrated, the former parent of IAFM, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. While the Integrated bankruptcy did not directly affect the Partnership's operations, it has resulted in certain changes. On August 8, 1994, the Bankruptcy Court confirmed a Plan of Reorganization (the "Steinhardt Plan") proposed by Steinhardt Management Company and the official Committee of Subordinated Bondholders, and on November 3, 1994, the Steinhardt Plan was consummated. Presidio purchased substantially all of the assets of Integrated, including its interest in IAFM. Presidio is a British Virgin Islands corporation owned 12% by IR Partners, a general partnership, and 88% by former creditors of Integrated. In March 1995, Presidio elected new directors for IAFM. However, some of its executive officers remain the same and certain of Integrated's former employees who performed services with respect to the Partnership have been hired by Wexford Management Corp., formerly Concurrency Management Corp., which provides management and administrative services to Presidio, its direct and indirect subsidiaries, as well as to the Partnership. Effective January 1, 1996, Wexford Management Corp. assigned its agreement to provide management and administrative services to Presidio and its subsidiaries to Wexford.
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 ----------- ------ -------- -------- ---------- ------ YEAR ENDED DECEMBER 31, 1996 Leased aircraft - valuation allowance for equipment impairment Six 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) -- Allowance for uncollectible accounts - accounts receivable -- -- -- -- -- ----------- -------- ----------- ----------- ----------- $32,225,000 $ -- $ -- $ 4,725,000 $27,500,000 =========== ======== =========== =========== =========== (A) Amounts reresent valuation allowances for equipment impirment relating to certain equipment sold during 1996. (continued)
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 ----------- ------ -------- -------- ---------- ------ 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 ============ ======== ========== ============ ============ (B) Represents allowance for uncollectable accounts written-off during 1995. (continued)
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 ----------- ------ -------- -------- ---------- ------ YEAR ENDED DECEMBER 31, 1994 Leased aircraft - valuation allowance for equipment impairment Six Boeing 737-200 Advanced aircraft .................. $18,336,000 $ 432,000 $ -- $ -- $18,768,000 Four Boeing 727-200 Advanced aircraft .................. 9,414,000 -- -- -- 9,414,000 Three McDonnell Douglas DC9-32 aircraft .................. 1,202,000 416,000 -- -- 1,618,000 One McDonnell Douglas DC9-51 aircraft .................. 2,425,000 -- -- -- 2,425,000 Allowance for uncollectible accounts - accounts receivable 918,141 257,924 -- -- 1,176,065 ----------- ----------- ----------- ----------- ----------- $32,295,141 $ 1,105,924 $ -- $ -- $33,401,065 =========== =========== =========== =========== ===========
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 the affairs of Registrant. The names and positions held by the officers and directors of the General Partner as of March 1, 1997 are as follows:
Name Position ---- -------- Robert Holtz Director and Vice President - ----------------------------- ----------------------------------------------------------- Mark Plaumann Director and Vice President - ----------------------------- ----------------------------------------------------------- Douglas J. Lambert President, Treasurer, Secretary and Chief Financial Officer - ----------------------------- ----------------------------------------------------------- Jay L. Maymudes Vice President - ----------------------------- ----------------------------------------------------------- Arthur H. Amron Vice President and Assistant Secretary - ----------------------------- -----------------------------------------------------------
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. Robert Holtz, age 29, has been a Vice President and Director of the General Partner since November 1994, a Vice President and Secretary of Presidio since its formation in August 1994 and a Vice President and Assistant Secretary of Resurgence Properties, Inc. ("Resurgence"), a company engaged in diversified real estate activities since its formation in March 1994. Mr. Holtz is also a Director and Vice President of XRC Corp., a holding company that holds certain former assets of Integrated, since its formation in October 1994. Mr. Holtz has been a Member and Senior Vice President of Wexford since January 1996. From May 1994 through December 1995, Mr. Holtz was employed as a Vice President of Wexford Management Corp., the advisor and manager of Presidio and Resurgence. From 1989 through May 1994, Mr. Holtz was employed by, and since 1993 was a Vice President of, Bear Stearns Real Estate, a firm engaged in all aspects of real estate, where he was responsible for analysis, acquisitions and management of the assets owned by Bear Stearns Real Estate and its clients. Mark Plaumann, age 41, has been a Director and Vice President of the General Partner since March 1995. Mr. Plaumann has been a Senior Vice President of Wexford since January 1996. From February 1995 through December 1995, Mr. Plaumann was employed by Wexford Management Corp. as a Vice President. Mr. Plaumann has been a director of Technology Service Group, Inc., a comany engaged in the design, development, manufacturing and sale of public communications products and services, since March 1997, and a director in Wahlco Environmental Systems, Inc., a company engaged in the sale of air pollution control and specialty engineered products, since June 1996. Mr. Plaumann was employed by Alvarez & Marsal, Inc., a crisis management consultant, as a Managing Director from February 1990 through January 1995, by American Healthcare Management, Inc., an owner operator of hospitals from February 1985 to January 1990, and by Ernst & Young from January 1973 to February 1985. Douglas J. Lambert, age 39, was elected President, Treasurer and Secretary of the General Partner in March 1995. Mr. Lambert has been a Vice President of Wexford since January 1996. From November 1994 through December 1995, Mr. Lambert was employed by Wexford Management Corp. as an officer of the various equipment leasing subsidiaries of Presidio. Mr. Lambert joined Integrated in 1983. Mr. Lambert has held various financial reporting positions for both public and private equipment leasing affiliates of Integrated. In 1992, Mr. Lambert became Senior Vice President in charge of finance in the Aircraft Group/Private Placement Division. Jay L. Maymudes, age 36, has been a Vice President of the General Partner since November 1994, the Chief Financial Officer, a Vice President and Treasurer of Presidio since its formation in August 1994, the Chief Financial Officer and a Vice President of Resurgence since July 1994. In addition, he served as Assistant Secretary of Resurgence until February 1995, when he became the Secretary. Mr. Maymudes is also a Vice President, Secretary and Treasurer of XRC Corp., since its formation in October 1994. Mr. Maymudes has been a Senior Vice President and Chief Financial Officer of Wexford since January 1996. From July 1994 through December 1995, Mr. Maymudes was employed by Wexford Management Corp. as the Chief Financial Officer and a Vice President. From December 1988 through June 1994, Mr. Maymudes was the Secretary and Treasurer, and since February 1990 was the Senior Vice President of Dusco, Inc., a real estate investment advisor. Arthur H. Amron, age 40, has been a Vice President and Assistant Secretary of the General Partner and certain other subsidiaries of Presidio since November 1994. Mr. Amron has been a Senior Vice President and General Counsel of Wexford since January 1996. From November 1994 through December 1995, Mr. Amron was employed by Wexford Management Corp. as Vice President and General Counsel. From 1992 through November 1994, Mr. Amron was an attorney with the law firm of Schulte, Roth & Zabel. From 1984 through 1992, Mr. Amron was an attorney with the law firm of Debevoise & Plimpton. Messrs. Holtz and Plaumann 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: the American Leasing Investors series of limited partnerships (Holtz and Plaumann), the National Lease Income Fund series of limited partnerships (Holtz and Plaumann), High Cash Partners, L.P. (Holtz and Plaumann), Resources Pension Shares 5, L.P. (Holtz) and Vista Properties (Plaumann). Each of the foregoing general partners is affiliated with the Managing General Partner. For information with respect to an agreement between the General Partner and ACG regarding the performance of certain supervisory and administrative services by ACG with respect to Registrant see Item 1, "Business Employees". Registrant believes, based on written representations received by it, that for the year ended December 31, 1996 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 partners and the officers and directors of such general partners, 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. See Item 13, "Certain Relationships and Related Transactions". Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 1, 1997, 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, 1997, none of the officers and directors of the General Partner was 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 of Presidio as of March 1, 1997, by each person who beneficially owns 5% or more of the Class A Shares, U.S. $.01 par value. The holders of Class A Shares are entitled to elect three out of the five members of Presidio's Board of Directors with the remaining two directors being elected by holders of the Class B Shares, U.S. $.01 par value of Presidio.
Beneficial Ownership Name of Beneficial Owner Number of Shares Percentage Outstanding - ----------------------------------------- ----------------- --------------------------- Thomas F. Steyer/Fleur A. Fairman 4,553,560(1) 51.8% - ----------------------------------------- ----------------- --------------------------- John M. Angelo/Michael L. Gordon 1,231,762(2) 14.0% - ----------------------------------------- ----------------- --------------------------- Intermarket Corp. 1,000,918(3) 11.4% - ----------------------------------------- ----------------- --------------------------- M.H. Davidson and Co. 474,205(4) 5.4% - ---------------------------------------------------------------------------------------- (1) As the managing partners of each of Farallon Capital Partners, L.P. ("FCP"), Farallon Capital Institutional Partners, L.P. ("FCIP"), Farallon Capital Institutional Partners II, L.P. ("FCIP II") and Tinicum Partners, L.P. ("Tinicum"), (collectively, the "Farallon Partnerships"), may each be deemed to own beneficially for purposes of Rule 13d-3 of the Exchange Act the 1,397,318, 1,610,730, 607,980 and 241,671 shares held, respectively, by each of such Farallon Partnerships. Farallon Capital Management, LLC ("FCMLLC"), the investment advisor to certain discretionary accounts which collectively hold 695,861 shares and Enrique H. Boilini, David I. Cohen, Joseph F. Downes, Jason M. Fish, Andrew B. Fremder, William F. Mellin, Steven L. Millham, Meridee A. Moore and Thomas F. Steyer, as a managing member of FCMLLC (collectively, the "Managing Members") may be deemed to be the beneficial owner of all of the shares owned by such discretionary accounts. FCMLLC and each Managing Member disclaims any beneficial ownership of such shares. Farallon Partners, LLC ("FPLLC") (the general partner of FCP, FCIP, FCIP II and Tinicum), and each of Fleur A. Fairman, Mr. Boilini, Mr. Cohen, Mr. Downes, Mr. Fish, Mr. Fremder, Mr. Mellin, Mr. Millham, Ms. Moore and Mr. Steyer, each as managing member of FPLLC (collectively, the "Managing Members"), may be deemed to be the beneficial owner of all of the shares owned by FCP, FCIP, FCIP II and Tinicum. FPLLC and each managing Member disclaims any beneficial ownership of such shares. (2) John M. Angelo and Michael L. Gordon, the general partners and controlling persons of AG Partners, L.P., which is the general partner of Angelo, Gordon & Co., L.P., may be deemed to have beneficial ownership under Section 13(d) of the Exchange Act of the securities beneficially owned by Angelo, Gordon & Co., L.P. and its affiliates. Angelo, Gordon & Co., L.P., a registered investment advisor, serves as general partner of various limited partnerships and as investment advisor of third party accounts with power to vote and direct the disposition of Class A Shares owned by such limited partnerships and third party accounts. (3) Intermarket Corp. serves as General Partner for certain limited partnerships and as investment advisor to certain corporations and foundations. As a result of such relationships, Intermarket Corp. may be deemed to have the power to vote and the power to dispose of Class A shares held by such partnerships, corporations and foundations. (4) Marvin H. Davidson, Thomas L. Kempner Jr., Stephen M. Dowicz, Scott E. Davidson and Michael J. Leffell, the general partners, members and stockholders of certain entities that are general partners or investment advisors of Davidson Kempner Endowment Partners, L.P., Davidson Kempner Partners, L.P., Davidson Kempner Institutional Partners, L.P., M.H. Davidson and Co., Davidson Kempner International Ltd. (collectively, the "Investment Funds"), may be deemed to be the beneficial owners under Section 13(d) of the Exchange Act of the securities beneficially owned by the Investment Funds and their affiliates. In addition, Mr. Kempner owns 800 shares and may be deemed to beneficially own certain securities held by certain foundations and trusts. Mr. Kempner disclaims beneficial ownership of such shares.
All of Presidio's Class B Shares are owned by IR Partners. Such Class B Shares are convertible in certain circumstances into 1,200,000 Class A Shares; however, such shares are not convertible at present. IR Partners is a general partnership whose general partners are Steinhardt Management, certain of its affiliates and accounts managed by it and Roundhill Associates. Roundhill Associates, is a limited partnership whose general partner is Charles E. Davidson, the principal of Presidio Management, the Chairman of the Board of Presidio and a Member of Wexford. Joseph M. Jacobs, the Chief Executive Officer and President of Presidio and a Member and the President of Wexford, has a limited partner's interest in Roundhill Associates. Pursuant to Rule 13d-3 under the Exchange Act, each of Michael H. Steinhardt, the controlling person of Steinhardt Management and its affiliates and Charles E. Davidson may be deemed to be beneficial owners of such 1,200,000 shares. Shares held by each Class A Director of Presidio were issued pursuant to a Memorandum of Understanding Regarding Compensation of Class A Directors of Presidio. (See "Executive Compensation - Compensation of Directors.") The address of Thomas F. Steyer and the other individuals mentioned in footnote 1 to the table above (other than Fleur A. Fairman) is c/o Farallon Capital Partners, L.P., One Maritime Plaza, San Francisco, California 94111 and the address of Fleur A. Fairman is c/o Farallon Capital Management, Inc., 800 Third Avenue, 40th Floor, New York, New York 10022. The address of Angelo, Gordon & Co., L.P. and its affiliates is 245 Park Avenue, 26th Floor, New York, New York 10167. The address for Intermarket Corp. Is 667 Madison Avenue, New York, New York 10021. The address for M.H. Davidson and Co. is 885 Third Avenue, New York, New York 10022. Item 13. Certain Relationships and Related Transactions The General Partner received $1,736,123 from Registrant as its share of distributions for the year ended December 31, 1996. No director or officer of the General Partner received any direct remuneration from Registrant during the year ended December 31, 1996. The General Partner also received a management fee of $422,000 for the performance of management services. 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. 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. 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 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")* 10.36 Lease Amendment, dated January 1, 1997, between First Security Bank of Utah N.A., as Trustee, and Hawaiian Airlines, Inc.* 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.* 10.38 Lease Amendment and Extension Agreement, dated July 29, 1996, between First Security Bank of Utah N.A., as Trustee, and Aloha Airlines, Inc.* 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. * Filed herewith. 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 29th day of March, 1997. AIRCRAFT INCOME PARTNERS L.P. By: INTEGRATED AIRCRAFT FUND MANAGEMENT CORP. General Partner Date ---- By: /s/Douglas J. Lambert March 29, 1997 --------------------- Douglas J. Lambert 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 and in their capacities (as to the General Partner) and on the dates indicated. Each of such persons is an officer and/or director. Signature Title Date --------- ----- ---- /s/Robert Holtz Director and March 29, 1997 - --------------- Vice President Robert Holtz /s/Mark Plaumann Director and March 29, 1997 - ---------------- Vice President Mark Plaumann /s/Douglas J. Lambert President, Secretary, March 29, 1997 - --------------------- Treasurer and Chief Douglas J. Lambert Financial Officer 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 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 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")* 10.36 Lease Amendment, dated January 1, 1997, between First Security Bank of Utah N.A., as Trustee, and Hawaiian Airlines, Inc.* 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.* 10.38 Lease Amendment and Extension Agreement, dated July 29, 1996, between First Security Bank of Utah N.A., as Trustee, and Aloha Airlines, Inc.* 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. 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. * Filed herewith. EX-10.35 2 AIRCRAFT PURCHASE AGREEMENT THIS AIRCRAFT PURCHASE AGREEMENT (the "Agreement"), made and entered into as of the 15th day of April 1996 between and among Aircraft Income Partners, L.P. , a Delaware limited partnership ("Beneficiary"), First Security Bank of Utah, National Association, not in its individual capacity but solely as trustee (the "Trustee") under a trust agreement dated as of December 20, 1987, as amended, for the sole benefit of Beneficiary, and Southwest Airlines Co., a Texas corporation ("Purchaser"), W I T N E S S E T H: WHEREAS, the Trustee is the registered owner, and Beneficiary is the beneficial owner, of all right, title and interest in and to one Boeing 737-2T4 aircraft, manufacturer's serial number 22054, U.S. Registration Number N702ML (the "Airframe"), and two (2) Pratt & Whitney JT8D-15 aircraft engines, manufacturer's serial numbers P702813B and P702859B (each, an "Engine"), as described on Exhibit A hereto, together with all appliances, parts, instruments, appurtenances, accessories, furnishings or other equipment or property installed on or attached to the aircraft and any documentation in Beneficiary's possession or control relating thereto (the Airframe, the Engines, and all of the foregoing being hereinafter referred to collectively as the "Aircraft"); and WHEREAS, the Aircraft is currently subject to that certain Lease Agreement dated as of May 1, 1991, as amended (the "Lease"), between the Trustee as lessor and Purchaser as lessee; and WHEREAS, the Trustee and Beneficiary desire to sell and Purchaser desires to purchase the Aircraft upon the terms and subject to the conditions hereinafter set forth; and WHEREAS, the Trustee and Beneficiary desire to assign to Purchaser and Purchaser desires to receive from the Trustee and Beneficiary all of Beneficiary's right, title and interest in and to any and all assignable warranties; and WHEREAS, simultaneously with the purchase and sale of the Aircraft between Purchaser and the Trustee, the Lease will terminate. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree hereby as follows: 1. PURCHASE PRICE: PAYMENT OF PURCHASE PRICE: LEASE TERMINATION. (a) Agreement; Purchase Price. The Trustee and Beneficiary agree to sell to Purchaser, and Purchaser agrees to purchase from the Trustee and Beneficiary, the Aircraft, on the terms and conditions set forth in this Agreement. The total purchase price (the "Purchase Price") payable for the Aircraft purchased hereunder shall be Five Million Seven Hundred Seventy One Thousand Four Hundred and no/100 U.S. Dollars ($5,771,400.00). (b) Payment of Purchase Price; Delivery Date. On or about April 15, 1996 (the "Delivery Date"), upon tender of the Aircraft by the Trustee and Beneficiary to Purchaser for acceptance, Purchaser shall pay the Purchase Price in full by wire transfer of immediately available funds to Beneficiary's account as follows: To: Chemical Bank 380 Madison Avenue, 14th floor, East Region New York, New York ABA #: 021-000128 Account #: 323-210430 Acct. Title: Aircraft Income Partners, L.P. (c) Taxes, Duties and Fees. The Purchase Price does not include any tax, assessment, duty or similar governmental charge or fee on the sale of the Aircraft ("Taxes"). Except for Taxes based on the net income, capital gains, net worth, franchise or gross receipts of the Trustee or Beneficiary, Purchaser agrees to assume and pay all Taxes of any nature, including fines, penalties or interest thereon, incurred in any jurisdiction in connection with the sale of the Aircraft to Purchaser and the use thereof from and after the Delivery Date. If Purchaser asserts that this transaction is exempt from Taxes, Purchaser shall deliver to the Trustee and Beneficiary, prior to the Delivery Date, such evidence of exemption as may be requested by the Trustee and Beneficiary or required pursuant to state law for Aircraft sold and delivered in such jurisdiction. Each of the parties will cooperate fully with one another to minimize the tax effect of the transaction contemplated hereunder. (d) Maintenance Reserve. Pursuant to Section 3.6 of the Lease, Purchaser as lesssee is required to pay to the Trustee as lessor a maintenance reserve payment as computed in accordance with such Section 3.6. The Trustee, Beneficiary and Purchaser agree that the aggregate amount of such maintenance reserve payment, as adjusted for certain deductions to which Purchaser as lessee is entitled in accordance with such Section 3.6, is $1,100,000.00 (the "Maintenance Reserve"). Purchaser shall pay the Maintenance Reserve to Beneficiary's account as shown above contemporaneously with the payment of the Purchase Price. (e) Lease Termination. Lessee has requested that the Delivery Date occur no later than April 15, 1996. To facilitate the sale of the Aircraft to Purchaser prior to the scheduled termination of the Base Lease Term, and in consideration of the payment by Purchaser to Beneficiary on the Delivery Date of the amount of all remaining basic rents due as of the Delivery Date for the balance of the Base Lease Term, amounting to $110,000 (the "Termination Payment"), the Trustee and Beneficiary have agreed to the early termination of the Lease. The Trustee and Purchaser shall execute and deliver a lease termination document (the "Lease Termination") in a form acceptable for filing with the Federal Aviation Administration ("FAA") to evidence the termination of the Lease and the release of the Aircraft from the terms and conditions thereof. Upon Beneficiary's receipt of the Maintenance Reserve, the Termination Payment and the Purchase Price, the filing of the Lease Termination, the Aircraft Bill of Sale (FAA Form 8050-2) and the passing of title to Purchaser, all obligations of the Trustee and Purchaser under the Lease (except those obligations which by their terms survive such termination) shall be deemed to have been fully satisfied. (f) Adjustment to Purchase Price. In the event that the Delivery Date occurs on any date after April 15, 1996, the Purchase Price shall be increased by Nine Hundred Fifty-Four and no/100 U.S. Dollars ($954.00) for each day subsequent to April 15, 1996. 2. DOCUMENT DELIVERIES: CLOSING: CONDITIONS. (a) Document Deliveries. On or prior to the Delivery Date, the parties shall have executed and delivered in escrow the following documents (in addition to the Lease Termination referred to above) to the law firm of Daugherty Fowler & Peregrin ("DF&P"), 204 North Robinson, 900 City Place, Oklahoma City, OK 73102, Attn: Susan H. Utecht, Esq.: (i) Purchaser Documents. Purchaser shall execute and deliver (x) three original counterparts of this Agreement and (y) one original Application for Aircraft Registration (FAA Form 8050-1). (ii) Trustee Documents. The Trustee shall execute and deliver (x) three original counterparts of this Agreement, (y) one original counterpart of the Warranty Bill of Sale in the form of Exhibit B hereto and (z) one original Aircraft Bill of Sale (FAA Form 8050-2). (iii) Beneficiary Documents. Beneficiary shall execute and deliver (x) three original counterparts of this Agreement and (y) one original counterpart of the Warranty Bill of Sale in the form of Exhibit B hereto. (b) Closing Procedures; Registration. On the Delivery Date, following Beneficiary's receipt of the Purchase Price, the Termination Payment and the Maintenance Reserve and Purchaser's acceptance of the Aircraft as evidenced by its delivery to the Trustee of the executed Acceptance Certificate (as described below), then upon telephonic instructions from the Trustee, Beneficiary and Purchaser, DF&P (i) shall file for recordation with the FAA: (x) any documents (including the Lease Termination) required to release any liens, claims or encumbrances pertaining to the Aircraft, including the Lease, (y) the Aircraft Bill of Sale and (z) the Application for Aircraft Registration and (ii) shall release to Purchaser the Aircraft Bill of Sale and the Warranty Bill of Sale. (c) Risk of Loss. Upon payment in full of the Purchase Price, the Termination Payment and the Maintenance Reserve to Beneficiary's account and release of the Aircraft Bill of Sale and the Warranty Bill of Sale to Purchaser, title to and all risk of loss of the Aircraft shall pass from the Trustee to Purchaser. (d) Opinion of Counsel. Purchaser shall receive a favorable opinion of DF&P dated the Delivery Date, in form and substance reasonably satisfactory to Purchaser, to the effect that title to the Aircraft is vested in Purchaser, free and clear of all liens and encumbrances, subject to such normal exceptions as are provided by counsel. 3. CONDITION OF AIRCRAFT: DELIVERY LOCATION. (a) Condition of Aircraft. The Trustee and Beneficiary will deliver the Aircraft and Purchaser hereby agrees to accept the same, "AS IS, WHERE IS" and "WITH ALL FAULTS". Since Purchaser is in sole possession and control of the Aircraft as lessee pursuant to the Lease, no inspection of the Aircraft or its records shall be required by Purchaser as a condition precedent to the transaction contemplated hereunder. (b) Delivery Location. On the Delivery Date, the Aircraft will be delivered to Purchaser at Purchaser's facilities in Dallas, Texas or such location as the parties may agree. Upon tender of the Aircraft by the Trustee and Beneficiary, Purchaser or its agent shall execute and deliver to the Trustee via facsimile transmission in care of DF&P at (405) 232-0865 (with hard copy to follow) an Acceptance Certificate in the form of Exhibit C hereto. 4. ADDITIONAL DELIVERIES. As lessee under the Lease, Purchaser is currently in possession and control of all logs, manuals and data and all inspection, modification and overhaul records which are required to be maintained with respect to the Aircraft under applicable rules and regulations of the Federal Aviation Administration or any other governmental body having jurisdiction, together with any other records maintained with respect to the Aircraft. On the Delivery Date, all of such documents and records shall be deemed to have been delivered to Purchaser by the Trustee and Beneficiary. 5. WARRANTY AS TO AIRCRAFT: ASSIGNMENT OF WARRANTIES. (a) Beneficiary represents and warrants to Purchaser, its successors and assigns that at the time of delivery of the Aircraft under this Agreement, (i) the Trustee and Beneficiary shall have good title to the Aircraft and the lawful right to sell the Aircraft in accordance with the terms hereof; and (ii) Purchaser shall receive from the Trustee good title to the Aircraft free of any liens, claims, encumbrances or rights of others. THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THE IMMEDIATELY PRECEDING SENTENCE AND IN SECTIONS 7 AND 8 HEREOF ARE MADE BY BENEFICIARY OR THE TRUSTEE (AS APPLICABLE) IN LIEU OF AND IN SUBSTITUTION FOR, AND PURCHASER HEREBY (AND BY ACCEPTING DELIVERY OF THE AIRCRAFT) WAIVES, RELEASES AND RENOUNCES, ALL OTHER WARRANTIES, OBLIGATIONS OR LIABILITIES, EXPRESS OR IMPLIED, OF THE TRUSTEE OR BENEFICIARY. PURCHASER ALSO HEREBY WAIVES, RELEASES AND RENOUNCES ANY AND ALL RIGHTS, CLAIMS AND REMEDIES, EXPRESS OR IMPLIED, OF PURCHASER AGAINST THE TRUSTEE OR BENEFICIARY, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY NONCONFORMANCE OR DEFECT IN THE AIRCRAFT OR ANY OTHER THING DELIVERED UNDER THIS AGREEMENT, WHETHER LATENT, HIDDEN OR OTHERWISE UNDISCOVERABLE, AND WITH RESPECT TO ANY OTHER MATTER ARISING UNDER OR BY VIRTUE OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO (i) ANY WARRANTY AS TO THE CONDITION OR DESCRIPTION OF THE AIRCRAFT OR AS TO THE STATE, QUALITY, AIRWORTHINESS OR FITNESS OF THE AIRCRAFT; (ii) ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE; (iii) ANY EXPRESS OR IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE; (iv) STRICT LIABILITY; (v) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM THE ACTUAL OR IMPUTED NEGLIGENCE OF THE TRUSTEE OR BENEFICIARY; (vi) ANY OBLIGATION OR LIABILITY WITH RESPECT TO ANY ACTUAL OR ALLEGED INFRINGEMENT OF PATENTS, LICENSES, OR THE LIKE; AND (vii) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO ANY TANGIBLE OR INTANGIBLE THING, FOR LOSS OF USE, REVENUE OR PROFIT, OR FOR ANY OTHER DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES; IT BEING AGREED THAT NEITHER THE TRUSTEE NOR BENEFICIARY SHALL HAVE ANY RESPONSIBILITY WITH RESPECT TO ANY OF THE FOREGOING MATTERS AND THAT ALL RISKS OF ANY NATURE INCIDENT THERETO ARE TO BE BORNE BY PURCHASER. PURCHASER SPECIFICALLY ASSUMES ALL LIABILITY OF ANY NATURE WHATSOEVER ARISING OUT OF THE USE OR POSSESSION OF THE AIRCRAFT FROM AND AFTER THE DELIVERY DATE. (b) The Trustee hereby assigns to Purchaser, effective as of the Delivery Date, any and all assignable warranties of manufacturers and maintenance and overhaul agencies. Upon the request of Purchaser or its successors and assigns from time to time, and at the expense of Purchaser or such successors or assigns, the Trustee and Beneficiary shall cooperate fully with Purchaser in the enforcement of any such warranties against any such manufacturer or maintenance and overhaul agencies. (c) The parties hereto specifically agree that (i) this Section 5 has been the subject of discussion and negotiation and is fully understood by the parties, (ii) the Aircraft and its records have been in the possession and control of Purchaser and Purchaser is fully aware of the condition of the Aircraft and its records and (iii) the Purchase Price and the other mutual agreements of the parties set forth in this Agreement were arrived at in consideration of the provisions of this Section 5, specifically including the waiver, release and renunciation by Purchaser as set forth above. 6. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to the Trustee and Beneficiary, as of the date hereof and as of the Delivery Date (except as otherwise set forth below), as follows: (a) Due Organization. Purchaser is a corporation duly organized and validly existing in good standing under the law of the State of Texas, has the power and authority to carry on its business as currently conducted and has full power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. (b) Authorized and Binding Obligations. This Agreement and the other documents contemplated herein constitute the duly authorized, legal, valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium and other laws affecting creditors' rights and remedies and by the application of equitable principles and remedies. (c) Litigation. Purchaser is not a party to any contract or agreement, nor are there any actions, suits or proceedings pending or to Purchaser's best knowledge, threatened against or affecting Purchaser, including but not limited to claims, litigation or proceedings brought before or by any court or governmental department, commission or agency, concerning or affecting the transactions contemplated hereby, which are likely to prevent Purchaser from consummating the transactions contemplated hereby. (d) No Breach or Violations. The execution and delivery of this Agreement and all other documents relating hereto and the performance of and compliance with the terms and provisions hereof and thereof will not (i) constitute a breach or violation of the terms, conditions or provisions of, nor constitute a default under or conflict with, the organizational documents of Purchaser or any terms, conditions or provisions of any promissory note, lease, indenture or other agreement or instrument, stay, injunction, award or decree of any governmental body, administrative agency or court to which Purchaser is a party or by which Purchaser or its property may be bound, or (ii) violate any provision of any law or administrative regulation applicable to, or any court decree issued with respect to, Purchaser. (e) No Government Approvals. No consent or approval of, giving of notice to, registration with or other action in respect of or by any federal, state or local authority is required with respect to Purchaser's execution and delivery of this Agreement, consummation of the transactions contemplated hereby or performance of its obligations hereunder, or if any such consent, approval, giving of notice or registration is required, it has been duly given or obtained or will be duly given or obtained on or prior to the Delivery Date. Purchaser shall take no action for the purpose of causing the representations and warranties set forth in this Section 6 to be untrue or incorrect as of the Delivery Date, nor shall Purchaser fail to take all reasonable actions necessary to make such representations and warranties true and correct as of the Delivery Date. 7. REPRESENTATIONS AND WARRANTIES OF BENEFICIARY. Beneficiary represents and warrants to Purchaser, as of the date hereof and as of the Delivery Date (except as otherwise indicated below), as follows: (a) Due Organization. Beneficiary is a limited partnership duly organized and validly existing in good standing under the laws of the State of Delaware, has the power and authority to carry on its business as currently conducted and has full power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. (b) Authorized and Binding Obligations. This Agreement and the other documents contemplated herein constitute the duly authorized, legal, valid and binding obligations of Beneficiary, enforceable against Beneficiary in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium and other laws affecting creditors' rights and remedies and by the application of equitable principles and remedies. (c) Litigation. Beneficiary is not a party to any contract or agreement, nor are there any actions, suits or proceedings pending or to Beneficiary's best knowledge, threatened against or affecting Beneficiary, including but not limited to claims, litigation or proceedings brought before or by any court or governmental department, commission or agency, concerning or affecting the transactions contemplated hereby, which are likely to prevent Beneficiary from consummating the transactions contemplated hereby. (d) No Breach or Violations. The execution and delivery of this Agreement and all other documents relating hereto and the performance of and compliance with the terms and provisions hereof and thereof will not (i) constitute a breach or violation of the terms, conditions or provisions of, nor constitute a default under or conflict with, the certificate of limited partnership or organizational documents of Beneficiary or any terms, conditions or provisions of any promissory note, lease, indenture or other agreement or instrument, stay, injunction, award or decree of any governmental body, administrative agency or court to which Beneficiary is a party or by which Beneficiary or its property may be bound, or (ii) violate any provision of any law or administrative regulation applicable to, or any court decree issued with respect to, Beneficiary. (e) No Government Approvals. No consent or approval of, giving of notice to, registration with or other action in respect of or by any federal, state or local authority is required with respect to Beneficiary's execution and delivery of this Agreement, consummation of the transactions contemplated hereby or performance of its obligations hereunder, or if any such consent, approval, giving of notice or registration is required, it has been duly given or obtained or will be duly given or obtained on or prior to the Delivery Date. Beneficiary shall take no action for the purpose of causing the representations and warranties set forth in this Section 7 to be untrue or incorrect on the Delivery Date, nor shall Beneficiary fail to take all reasonable actions necessary to make such representations and warranties true and correct as of the Delivery Date. 8. REPRESENTATIONS AND WARRANTIES OF THE TRUSTEE.. The Trustee represents and warrants to Purchaser, as of the date hereof and as of the Delivery Date, as follows: (a) Due Organization. The Trustee is a national banking association duly organized and validly existing in good standing under the federal laws of the United States of America, has the power and authority to carry on its business as currently conducted and has full power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. (b) Authorized and Binding Obligations. This Agreement and the other documents contemplated herein constitute the duly authorized, legal, valid and binding obligations of the Trustee, not in its individual capacity but solely as trustee under the Trust Agreement dated as of December 20, 1987, as amended, enforceable against the Trustee in such capacity in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium and other laws affecting creditors' rights and remedies and by the application of equitable principles and remedies. (c) Litigation. The Trustee is not a party to any contract or agreement, nor are there any actions, suits or proceedings pending or to the Trustee's best knowledge, threatened against or affecting the Trustee, including but not limited to claims, litigation or proceedings brought before or by any court or governmental department, commission or agency, concerning or affecting the transactions contemplated hereby, which are likely to prevent the Trustee from consummating the transactions contemplated hereby. (d) No Breach or Violations. The execution and delivery of this Agreement and all other documents relating hereto and the performance of and compliance with the terms and provisions hereof and thereof will not (i) constitute a breach or violation of the terms, conditions or provisions of, nor constitute a default under or conflict with, the certificate of incorporation or bylaws of the Trustee or any terms, conditions or provisions of any promissory note, lease, indenture or other agreement or instrument, stay, injunction, award or decree of any governmental body, administrative agency or court to which the Trustee is a party or by which the Trustee or its property may be bound, or (ii) violate any provision of any law or administrative regulation applicable to, or any court decree issued with respect to, the Trustee. (e) No Government Approvals. No consent or approval of, giving of notice to, registration with or other action in respect of or by any federal, state or local authority is required with respect to the Trustee's execution and delivery of this Agreement, consummation of the transactions contemplated hereby or performance of its obligations hereunder, or if any such consent, approval, giving of notice or registration is required, it has been duly given or obtained or will be duly given or obtained on or prior to the Delivery Date. The Trustee shall take no action for the purpose of causing the representations and warranties set forth in this Section 8 to be untrue or incorrect on the Delivery Date, nor shall the Trustee fail to take all reasonable actions necessary to make such representations and warranties true and correct as of the Delivery Date. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire, full and complete agreement between and among the Trustee, Beneficiary and Purchaser concerning the subject matter hereof, and supersedes all prior agreements and negotiations. 10. APPLICABLE LAW: VENUE. This Agreement shall be interpreted and construed in accordance with the laws of the State of New York, which laws shall prevail in the event of any conflict of law. Any action or other proceeding to enforce any rights arising under this Agreement shall be brought in the state or federal courts of New York, New York and the parties hereto hereby consent to jurisdiction and venue in such courts. 11. ATTORNEY'S FEES. In the event any party hereto institutes an action or other proceeding to enforce any rights arising under this Agreement, the party prevailing in such action or other proceeding shall be paid all reasonable costs and attorney's fees by the opposing party, such fees to be set by court and not by jury. 12. ADDITIONAL INSTRUMENTS. The parties shall execute any further or additional instruments and they will perform any acts which may become necessary in order to effectuate and carry out the purposes of this Agreement. 13. TERMINATION. This Agreement shall terminate and be of no further force and effect in the event that prior to delivery of the Aircraft to Purchaser hereunder, an Event of Loss (as defined in the Lease) shall have occurred with respect to the Aircraft. 14. BROKER'S FEES. Each of the Trustee and Beneficiary on the one hand and Purchaser on the other hand agrees to indemnify and hold the other party harmless from and against any and all claims, suits, damages, costs and expenses (including but not limited to reasonable attorney's fees) asserted by any agent, broker or other third party for any commission or compensation of any nature whatsoever, based upon the sale of the Aircraft, if such claim, damage, cost or expense arises out of any action or alleged action by the indemnifying party, its employees or agents. 15. COSTS. Each of the parties hereto shall bear its own expenses, including attorney's fees, relative to the closing of the transaction contemplated hereunder. 16. SEVERABILITY. In the event any term or provision of this Agreement is declared to be invalid or illegal for any reason, this Agreement shall remain in full force and effect and shall be interpreted as though such invalid or illegal provision were not a part hereof. 17. MODIFICATIONS AND AMENDMENTS. This Agreement shall not be altered or amended except by writing executed by the party sought to be charged with such alteration or amendment. 18. NO WAIVER BY FAILURE TO ACT. Neither any failure to act nor any delay on the part of any party hereto in exercising any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. 19. HEADINGS. The descriptive headings of the several articles and Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 20. NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed given when delivered by hand or sent by telecopier or overnight courier service to the addresses specified below (as the same may be changes from time to time in accordance with this Section 20) If to Purchaser: Southwest Airlines Co. 2702 Love Field Dr. P.O. Box 36611 Dallas, Texas 75235-1611 Attn: Treasurer Telecopy No: (214) 792-4022 If to the Trustee: First Security Bank of Utah, N.A. 79 South Main Street Salt Lake City, UT 84111 Attn: Dain Brown, Corporate Trust Department Telecopy No:(801) 246-5053 If to Beneficiary: Aircraft Income Partners, L.P. c/o Fieldstone Private Capital Group,. L.P. 245 Park Avenue, 44th floor New York, New York 10167 Attn: Portfolio Management Group Telecopy No: (212) 599-8277 21. COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Purchase Agreement to be executed by their duly authorized officers or agents as of the day and year first set forth above. PURCHASER: SOUTHWEST AIRLINES CO. By: /s/Laura Wright - ---------------------- Laura Wright Title: Assistant Treasurer TRUSTEE: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity, but solely as trustee under a trust agreement dated as of December 20, 1987, as amended By: __________________________________ Title: __________________________________ BENEFICIARY: AIRCRAFT INCOME PARTNERS, L.P. By: Integrated Aircraft Fund Management Corp., its General Partner By: __________________________________ Title: __________________________________ EXHIBIT A DESCRIPTION OF THE AIRCRAFT One (1) Boeing 737-2T4 Aircraft which consists of the following components: (a)airframe: one (1) Boeing 737-2T4 aircraft, manufacturer's serial number 22054, U.S. Registration Number N702ML; (b)installed engines: two (2) Pratt & Whitney JT8D-15 aircraft engines, manufacturer's serial numbers P702813B and P702859B; and (c)allappliances, parts, instruments, appurtenances, accessories, furnishings or other equipment or property installed on or attached to the aircraft and any documentation in Purchaser's possession or control relating thereto. EXHIBIT B BILL OF SALE First Security Bank of Utah, National Association, not in its individual capacity but solely as trustee ("Owner Trustee") under a trust agreement dated as of December 20, 1987, as amended, is the owner of full legal title to, and Aircraft Income Partners, L.P. ("Beneficiary") is the sole owner of full beneficial title to, one (1) Boeing 737-2T4 aircraft, manufacturer's serial number 22054, Federal Aviation Administration Registration Number N702ML (the "Airframe"), and two (2) Pratt & Whitney JT8D-15 aircraft engines, manufacturer's serial numbers P702813B and P702859B (each, an "Engine"), together with all appliances, parts, instruments, appurtenances, accessories, furnishings or other equipment or property installed on or attached to the aircraft (the "Parts") and any documentation in the possession or control of Southwest Airlines Co. ("Purchaser") relating thereto (the Airframe, the Engines, the Parts and all of the foregoing being hereinafter referred to collectively as the "Aircraft"). For and in consideration of the sum of $1.00 and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Owner Trustee does this ___ day of April , 1996, grant, convey, transfer, bargain and sell, deliver and set over, all of the Owner Trustee's right, title and interest in and to the above-desccribed Aircraft unto Purchaser. Owner Trustee hereby represents to Purchaser that it is the lawful owner of said Aircraft; that the same is free from all liens, encumbrances, rights and interest of others arising by, through or under Owner Trustee; and that it has good record title to the Aircraft. Beneficiary hereby represents to Purchaser that the Aircraft is free from all liens, encumbrances, rights and interest of others and that it will warrant and defend such title forever against all claims and demands whatsoever. Except for the preceding sentence, the Aircraft is sold "AS IS, WHERE IS" and "WITH ALL FAULTS" in accordance with the terms of a certain Aircraft Purchase Agreement dated as of April __, 1996 and Purchaser, by its acceptance of the Aircraft, acknowledges the same. The covenants and agreements herein contained shall inure to the benefit of and be binding upon the respective parties hereto and their successors and assigns. IN WITNESS WHEREOF, Owner Trustee and Beneficiary have caused this Warranty Bill of Sale to be executed by their duly authorized officers as of the day of April 1996. FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee By: Title: AIRCRAFT INCOME PARTNERS, L.P. By: Integrated Aircraft Fund Management Corp., its General Partner By: ______________________________ Title: ______________________________ EXHIBIT C ACCEPTANCE CERTIFICATE THIS ACCEPTANCE CERTIFICATE is delivered on and as of the date set forth below to First Security Bank of Utah, National Association, not in its individual capacity but solely as trustee ("Seller") under a trust agreement dated as of December 20, 1987 for the sole benefit of Aircraft Income Partners, L.P. ("Beneficiary"), by Southwest Airlines Co. ("Purchaser"). Details of Acceptance Purchaser hereby indicates and confirms to Seller and its successors and assigns, that Purchaser has at 9:41 A.M. o'clock, on this day of April 1996, accepted and purchased from Seller, and Seller has delivered, in accordance with the provisions of the Aircraft Purchase Agreement dated as of April 15, 1996 among Purchaser, Seller and Beneficiary, one (1) Boeing 737-2T4 aircraft, manufacturer's serial number 22054, U.S. Registration Number N702ML, and two (2) Pratt & Whitney JT8D-15 aircraft engines, manufacturer's serial numbers P702813B and P702859B, together with all appliances, parts, instruments, appurtenances, accessories, furnishings or other equipment or property installed on or attached to the aircraft and any documentation in Purchaser's possession or control relating thereto. IN WITNESS WHEREOF, Purchaser has caused this Acceptance Certificate to be duly executed by its authorized officer as of the date written above. SOUTHWEST AIRLINES CO., Purchaser By: ____________________________ Title: ____________________________ EX-10.36 3 AMENDMENT NO. 1 TO LEASE THIS AMENDMENT NO. 1 TO LEASE (herein called "Amendment No. 1"), dated January 1, 1997 between First Security Bank, National Association (successor in interest to First Security Bank of Utah, N.A.), not in its individual capacity but solely as Owner Trustee for the benefit of Aircraft Income Partners L.P. ("AIP") ("Lessor") and HAWAIIAN AIRLINES, INC., a Hawaii corporation ("Lessee"). WITNESSETH: WHEREAS, Lessor and Lessee have heretofore entered into that certain Aircraft Lease dated as of September 12, 1994 (as amended, the "Lease Agreement", defined terms used herein as therein defined), which provides for the execution of a Lease Amendment for the purpose of, among other things, amending the Lease Agreement and any prior Lease Supplements thereto; and WHEREAS, the Lease Agreement was supplemented by that certain Lease Supplement No. 1 dated as of September 12, 1994, and were recorded as one instrument by the Federal Aviation Administration (the "FAA") on October 14, 1994, as Conveyance No. MM009442; and WHEREAS, Lessor and Lessee have agreed to amend certain terms of the Lease Agreement as noted herein, among other things, to permit Lessee to acquire the Aircraft from Lessor pursuant to a lease intended as security. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and pursuant to the Lease Agreement, the Lessor and Lessee hereby amend the Lease Agreement as follows: A. AMENDMENTS TO THE LEASE AGREEMENT. 1. Section 1 is amended by replacing the following definitions in their entirety: Airframe Return Condition Percentage means 50% if this Lease terminates on or prior to November 30, 1999, 37.5% if this Lease terminates on or prior to November 30, 2000, and 25% if this Lease terminates after November 30, 2000. Basic Lease Term shall mean the period from and including September 12, 1994 until, through and including November 30. 2002. Daily Lease Rate shall mean the monthly Basic Rent then in effect divided by thirty. Expiration Date shall mean November 30, 2002. Lease Interest Rate shall mean 9.0%. 2. The definition of Basic Rent Date is amended by adding the following clause to the end thereof: "provided, that after the Tuesday prior to the date of this Amendment, and continuing throughout the remainder of the Basic Lease Term, the Basic Rent Dates shall be (i) the first Business Day of each calendar month, commencing with February, 1997 and (ii) and the last day of the Basic Lease Term." 3. The last grammatical paragraph of Section 10(b) and Sections 20 and 24 are deleted in their entirety. 4. Section 3(b) of the Lease Agreement is hereby amended in its entirety to read as follows: "(b) The Lessee shall pay to the Lessor as basic rent (herein referred to as Basic Rent) (i) in advance on the Delivery Date and on the Tuesday of the second calendar week next following the Delivery Date and on the Tuesday of each calendar week thereafter at the rate of United States Dollars $13,850 for each such week, until August 1, 1995 and at $15,000 for each such week until the Tuesday prior to the date of this Amendment No.1, (ii) a down payment in the amount of $450,000 on the date of this Amendment No. 1, (iii) in arrears on the Basic Rent Payment Date occurring in February, 1997 in an amount equal to $360,000 less the amount previously paid during the period from September 1, 1996 through the date of this Amendment No. 1, and (iv) in arrears on each Basic Rent Date in an amount equal to $72,000 for each month preceding such Basic Rent Date commencing with the Basic Rent Date occurring in March, 1997, until the Basic Rent Date occurring in December, 1999 and on each Basic Rent Date occurring thereafter in an amount equal to $50,000 for each month preceding such Basic Rent Date." 5. Section 21 is amended in its entirety to read as follows: "SECTION 21. Purchase of Aircraft. (a) If this Lease has not been terminated, (i) the Lessee shall have the option to purchase the Aircraft at any time on any Basic Rent Date before the expiration of the Basic Lease Term at a purchase price equal to the Casualty Value of the Aircraft on such Basic Rent Date (such Basic Rent Date, the Purchase Date) and (ii) the Lessee shall purchase the Aircraft on the Expiration Date for a purchase price equal to $1.00 plus, in each case, all applicable sales taxes, if any, with respect to such purchase. (b) Not less than 30 days prior to the Purchase Date, the Lessee may indicate, by written notice to the Lessor, the Lessee's intention to exercise the Lessee's purchase option described above. (c) On the Purchase Date or on the Expiration Date, as the case may be, the Lessee shall purchase from the Lessor and the Lessor shall sell to the Lessee, on an as is, where is basis with any and all faults, without representation or warranty (except as to the absence of Lessor Liens), the Aircraft for a cash consideration, payable in immediately available funds, equal to the applicable purchase price thereof plus all applicable sales taxes, if any, with respect to such purchase plus all accrued and unpaid Basic Rent and all Supplemental Rent then due. Upon payment of such cash consideration, the Lessor shall, upon the request of the Lessee, execute and deliver to the Lessee, or to the Lessee's assignee or nominee, a bill of sale, without representations or warranties (except as to Lessor Liens), for the Aircraft, together with such other documents as may be required to release the Aircraft from the terms and scope of this Lease and to transfer title thereto to the Lessee or such assignee or nominee, in such form as may reasonably be requested by the Lessee, all at the Lessee's expense. Such sale shall be closed in a jurisdiction reasonably designated by the Lessee and reasonably acceptable to the Lessor." 6. Section 17 (a) is amended by replacing the text beginning with the third sentence in clause (ii) and ending with the last sentence thereof in its entirety with the following: "The Lessee shall, without further demand, forthwith pay to the Lessor an amount equal to any unpaid Rent due and payable for all periods up to and including the Basic Rent Date following the date on which the Lessor has declared this Lease to be in default, plus, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the Casualty Value of the Aircraft on such Basic Rent Date, provided, that on payment of such amounts by Lessee, Lessor shall transfer title to the Aircraft to Lessee, without representation or warranty except for the absence of Lessor Liens. and adding a new clause (iii) thereto to read in its entirety as follows: "(iii) Lessor may exercise, in addition to all other rights and remedies granted to it in this Lease and in any other instrument or agreement securing, evidencing or relating to this Lease, all rights and remedies of a secured party under the New York Uniform Commercial Code." 7. Section 22(d) is amended in its entirety to read as follows: "This Lease represents the entire agreement of the parties with respect to the subject matter hereof and supersedes any and all prior understandings." 8. A new Section 28 is inserted to read in its entirety as follows: "SECTION 28. Grant of Security Interest. (a) As security for the due and punctual payment of all Rent and other liabilities of Lessee hereunder and the performance and observance by the Lessee of all of the covenants made by it in this Lease or in any agreement, document or certificate delivered in connection with this Lease, the Lessee hereby grants to the Lessor a first lien on and a security interest in all of the Lessee's right, title and interest in the following, in each case, as to each type of property below, whether now owned or hereafter acquired by the Lessee, wherever located and whether now or hereafter existing (the "Collateral"): (i) the Aircraft, including without limitation, the Engines and all Parts and other accessories thereto; (ii) each sublease of the Aircraft, whenever entered into, together with all renewals of any such sublease executed from time to time and all payments of rent and all other amounts due and to become due thereunder; (iii) all warranties (including without limitation warranties of title, merchantability, fitness for a particular purpose, quality and freedom from defects) and rights of recourse against manufacturers, assemblers, sellers and others in connection with the foregoing, if any; (iv) all documents, instruments, chattel paper and general intangibles held, issued or arising in connection with any of the foregoing; (v) all rents, issues, profits, products, revenues, earnings and other income of the foregoing and all the right, title and interest of every nature whatsoever of the Lessee in and to the same and every part thereof; and (vi) all proceeds (including without limitation insurance proceeds) of the foregoing. (b) This Lease shall constitute a security agreement under the New York Uniform Commercial Code. Without limiting the generality of the foregoing, it is the intent of the parties to this Lease that the security interest granted herein constitute a "purchase money equipment security interest" in the Collateral for the purposes of Title 11 U.S.C. Section 1110. It is the intent of the parties to this Lease, that, to the extent consistent with the provisions of Title 11 U.S.C. or any analogous section of the Federal bankruptcy laws as amended from time to time, title of the Lessor to the Collateral and the right of the Lessor to take possession of the Collateral in compliance with the provisions of this Lease shall not be affected by the provisions of the Federal bankruptcy laws as amended from time to time; including, without limitation, the provisions of Section 362 or 363 of such Title, or other analogous part of any superseding statutes, as amended from time to time. The Lessee agrees, to the extent permitted by law, in any bankruptcy proceeding that it will not challenge the exercise by the Lessor of its rights under Section 1110 of the Bankruptcy Code or any successor statute. (c) The security interest granted herein constitutes a perfected security interest in the Collateral in favor of the Lessor, as security for this Lease, and is prior to all other liens on the Collateral in existence on the date hereof. The Lessee shall maintain the security interest created herein as a perfected security interest having at least the priority described herein and shall defend such security interest against the claims and demands of any and all persons whomsoever. (d) The Lessee hereby authorizes the Lessor to take all action (including without limitation, the filing of any Uniform Commercial Code financing statements or amendments thereto with the signature of the Lessee) which the Lessor may reasonably deem necessary or desirable to perfect or otherwise obtain the benefits of the security interest. (e) At any time and from time to time, upon the written request of the Lessor and at the sole expense of the Lessee, the Lessee will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Lessor may reasonably request for the purpose of obtaining or preserving the full benefits of this security interest and of the rights and powers granted herein related to such interest, including without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interest created hereby. 9. Exhibit C to the Lease Agreement shall be amended in its entirety to read as set forth in Exhibit C attached hereto. 10. Exhibit E ("Termination Values") to the Lease Agreement shall be deleted in its entirety. B. MISCELLANEOUS. 1. Except as set forth herein, all terms and provisions contained in the Lease Agreement shall remain in full force and effect. 2. Lessee hereby confirms its agreement to pay to Lessor Basic Rent and Supplemental Rent for the Aircraft throughout the Basic Lease Term in accordance with Section 3 of the Lease Agreement. 3. This Amendment No. 1 is being delivered in the State of New York and shall in all respects be governed by, and construed in accordance with, the laws of the State of New York, including all matters of construction, validity and performance. 4. This Amendment No. 1 may be executed in several counterparts, each fully-executed counterparts all of which shall be deemed an original, and all such counterparts shall constitute one and the same instrument. To the extent that this Amendment No. 1 constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Amendment No. 1 may be created through the transfer or possession of any counterpart other than the counterpart marked as the "Original." IN WITNESS WHEREOF, Lessor and Lessee have caused Amendment No. 1 to be duly executed and delivered as of the date and year first above written. First Security Bank, National Association (successor in interest to Firs Security Bank of Utah, N.A.), not in its individual capacity but solely as Owner Trustee for the benefit of Aircraft Income Partners L.P. By:_______________________ HAWAIIAN AIRLINES, INC. By: /s/Clarence K. Lyman -------------------- Clarence K. Lyman Vice President-Finance, Treasurer and Assistant Corporate Secretary By: /s/Rae A. Capps --------------- Rae A. Capps Vice President, General Counsel and Corporate Secretary EX-10.37 4 LEASE AMENDMENT NO. 1 THIS LEASE AMENDMENT NO. 1 (this "Amendment") is made as of this 24th day of June 1996 by and between First Security Bank of Utah, National Association, not in its individual capacity but solely as trustee under a Trust Agreement dated as of March 1, 1989 ("Lessor"), and American Trans Air, Inc. ("Lessee"). WHEREAS, Lessor and Lessee are parties to a certain Lease Agreement dated as of November 5, 1993 and Lease Supplement No. 1 thereto dated November 8, 1993 (as more fully described in Annex I hereto, and together, the "Lease"), pursuant to which Lessor has leased to Lessee one (1) Boeing 727-290 aircraft, manufacturer's serial number 21510, U.S. Registration number N774AT, and three (3) Pratt & Whitney JT8D-17 aircraft engines, manufacturer's serial numbers P688306B, P688045B and P658122B (such aircraft and engines, the "Aircraft"); and WHEREAS, Section 3(d) of the Lease grants Lessee an option to extend the Term of the Lease at the expiration of the current Term of the Lease, upon notice to Lessor; and WHEREAS, Lessee has duly notified Lessor of Lessee's desire to exercise such option, and Lessor and Lessee have agreed to extend the Lease upon the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereto agree as follows: 1. All capitalized terms which are not otherwise defined herein shall have the meanings ascribed to them in the Lease. 2. Provided that no Event of Default shall have occurred and be continuing on the date such extension commences, the Term of the Lease shall be extended by a period of two (2) years and shall end on November 7, 1998, unless the Lease shall sooner terminate or be further extended in accordance with its terms. 3. Except as specifically modified by this Amendment, all of the terms and conditions of the Lease shall remain in full force and effect and are hereby ratified and confirmed. IN WITNESS WHEREOF, Lessor and Lessee have caused this Amendment No. 1 to be duly executed by their respective authorized officers as of the date first above set forth. AMERICAN TRANS AIR, INC., FIRST SECURITY BANK OF UTAH, as Lessee NATIONAL ASSOCIATION, not in its individual capacity, but solely as trustee, as Lessor By: /s/Kenneth K. Wolff By:_________________________ - ----------------------- Kenneth K. Wolff Title: Annex I To Lease Amendment No. 1 Description of Lease Lease Agreement dated as of November 5, 1993 between First Security Bank of Utah, National Association, as owner trustee under Trust Agreement dated as of March 1, 1989, as lessor, and American Trans Air, Inc., as lessee, which was recorded by the Federal Aviation Administration on November 29, 1993 and assigned Conveyance No. X122110, as supplemented by the following described instrument: Date of FAA FAA Instrument Instrument Recording Date Conveyance No. Lease Supplement No. 1 11/08/93 11/29/93 X122110 EX-10.38 5 LEASE AMENDMENT NO. 2 TO LEASE AGREEMENT I This Lease Amendment No. 2 dated as of July 29, 1996 (this "Amendment") to Lease Agreement I dated as of August 1, 1988, as amended, between First Security Bank, National Association (formerly known as First Security Bank of Utah, National Association), not in its individual capacity but solely as trustee under a Trust Agreement I dated as of August 1, 1988 ("Lessor"), and Aloha Airlines, Inc., as Lessee ("Lessee"). WHEREAS, Lessor and Lessee are parties to that certain Lease Agreement I dated as of August 1, 1988 (the "Agreement"), as supplemented by Lease Supplement No. 1 dated as of August 5, 1988 and Lease Supplement No. 2 dated as of March 5, 1993 (the "Supplements"), and amended by Lease Amendment dated as of August 15, 1988 (the "First Amendment" and together with the Agreement and the Supplements, the "Lease"), all as more fully described on Annex I hereto, pursuant to which Lessee is leasing from Lessor that certain commercial passenger aircraft and aircraft engines identified on Annex II hereto (the "Aircraft"); and WHEREAS, Section 17 of the Lease grants Lessee an option to renew the Lease on a year-to-year basis upon notice to Lessor; and WHEREAS, Lessee has given due notice to Lessor, requesting that the Lease be renewed for a Renewal Period of more than one year, and Lessor has agreed to such longer Renewal Period; and WHEREAS, Lessor and Lessee consequently desire to amend the Lease in the respects, and only in the respects, hereinafter set forth. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Unless otherwise defined herein, all capitalized terms used in this Amendment shall have the meanings ascribed to them in the Lease. 2. The Lease is hereby amended by deleting the definition of "Expiration Date" in its entirety and inserting the following in lieu thereof: "Expiration Date shall mean November 15, 1997." 3. Each of the parties hereto represents and warrants that it has obtained all consents and approvals, including those of third parties and governmental entities, required in connection with the execution, delivery and performance of this Amendment. 4. This Amendment, together with the Agreement, the Supplements, the First Amendment and all Annexes, Schedules and Exhibits hereto and thereto, embodies the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings relating to the subject matter hereof. On and after the date hereof, each reference in the Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of like import, and each reference in any other agreement entered into in connection with the Agreement to the "Lease" or "Lease Agreement", shall mean and be a reference to the Agreement as amended hereby. 5. The amendment set forth above shall be limited precisely as written and shall not be deemed to (i) be a consent to any waiver or modification of any other terms and condition of the Agreement, the Supplements or the First Amendment or any of the instruments or documents referred to therein or (ii) except as expressly provided herein, prejudice any right or rights which Lessor or Lessee may now have or may have in the future under or in connection with the Agreement, the Supplements or the First Amendment or any of the instruments or documents referred to in any of them. Except as hereby expressly amended, the Agreement, the Supplements and the First Amendment are in all respects ratified and confirmed and all terms and provisions thereof shall remain in full force and effect. 6. This Amendment may be executed in any number of counterparts, all of which together shall constitute one and the same agreement, and either of the parties hereto may enter into this Amendment by executing such counterpart. 7. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Amendment No. 2 to Lease Agreement I to be duly executed and delivered as of the day and year first set forth above. LESSOR: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as trustee under a Trust Agreement dated as of August 1, 1988 By: /s/Nancy M. Dahl - ----------------------- Name: Nancy M. Dahl Title: Vice President LESSEE: ALOHA AIRLINES, INC. By: /s/Brenda F. Cutwright - ----------------------------- Name: Brenda F. Cutwright Title: Sr. Vice President Finance & Planning and CFO By: /s/James M. King - ------------------------ Name: James M. King Title: Vice President Planning & Development Annex I to Lease Amendment No. 2 Description of the Lease Lease Agreement I dated as of August 1, 1988 between First Security Bank, National Association (formerly known as First Security Bank of Utah, National Association) trustee under Trust Agreement dated as of August 1, 1988, as lessor, and Aloha Airlines, Inc., as lessee, which was recorded by the Federal Aviation Administration on August 9, 1988 and assigned Conveyance No. S79079, as supplemented and amended by the following described instruments: Date of FAA FAA Instrument Instrument Recording Date Conveyance No. Lease Supplement No. 1 08/05/88 08/09/88 S79079 Amendment No. 1 to as of Lease Agreement 08/15/88 09/15/89 P87581 Lease Supplement No. 2 03/05/93 03/19/93 U65527 Annex II to Lease Amendment No. 2 Description of the Aircraft One Boeing Model 737-297 aircraft which consists of the following components: (a) Airframe: manufacturer's serial number 21739; FAA Registration No. N70723 (b) Engines: two (2) Pratt & Whitney Model JT8D-9A Engines; manufacturer's serial numbers P687825B and 707357*; and (c) Standard accessories and equipment and such other items fitted or installed on the aircraft. * Each engine listed has a horsepower rating of at lease 750 h.p. or the equivalent thereof. EX-27 6
5 The schedule contains summary information extracted from the Financial statements of the December 31, 1996 Form 10-K of Aircraft Income Partners L.P. and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1996 DEC-31-1996 6,761,614 0 4,657,212 0 0 12,516,400 100,176,927 72,647,508 40,045,819 5,384,034 0 0 0 0 34,661,785 40,045,819 0 15,507,186 0 842,770 8,608,539 66,133 1,570 5,988,174 0 5,988,174 0 0 0 5,988,174 0 0
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