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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from -------------------- to --------------------
Commission file number 0-17712
Pegasus Aircraft Partners, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1099968
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(State of organization) (I.R.S. Employer
Identification No.)
Four Embarcadero Center, Suite 3540
San Francisco, California 94111
------------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Pegasus Aircraft Partners, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1995
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 1
Balance Sheets - September 30, 1995
and December 31, 1994 2
Statements of Income for the three months
ended September 30, 1995 and 1994 3
Statements of Income for the nine months
ended September 30, 1995 and 1994 4
Statements of Partners' Equity for the nine
months ended September 30, 1995 and 1994 5
Statements of Cash Flows for the nine
months ended September 30, 1995 and 1994 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS -- SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(unaudited)
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Cash and cash equivalents $ 2,045 $ 1,763
Restricted cash (Note 5) 1,011 907
Rent and other receivables 1,851 1,953
Lease settlement due from Continental (Note 4) 3,906 -
Aircraft, net (Notes 2 and 4) 31,139 37,961
Other assets 59 35
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Total Assets $40,011 $42,619
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LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Distributions payable to partners $ 3,636 $ 1,818
Notes payable (Note 5) 1,722 2,000
Payable to affiliates (Note 3) 615 280
Deferred rental income 137 137
Accounts payable and accrued expenses 127 76
Maintenance reserve payable 988 522
Accrued interest payable 15 16
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Total Liabilities 7,240 4,849
======= =======
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
PARTNERS' EQUITY:
General Partners (470) (420)
Limited Partners (4,000,005 units outstanding) 33,241 38,190
-------- -------
Total Partners' Equity 32,771 37,770
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Total Liabilities and Partners' Equity $40,011 $42,619
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands, except unit data and per unit amounts)
<S> <C> <C>
REVENUE:
Rentals from operating lease $ 1,443 $ 2,202
Interest 70 59
Gain on lease settlement (Note 4) 233 -
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1,746 2,261
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EXPENSES:
Depreciation and amortization 946 1,323
Management and re-lease fees (Note 3) 342 155
General and administrative (Note 3) 44 50
Interest expense 49 45
Direct lease 28 37
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1,409 1,610
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NET INCOME $ 337 $ 651
========== ==========
NET INCOME ALLOCATED:
To the General Partners 3 6
To the Limited Partners 334 645
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$ 337 $ 651
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT .08 .16
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands, except unit data and per unit amounts)
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 4,565 $ 6,301
Interest 208 172
Gain on lease settlement (Note 4) 233 -
---------- ----------
5,006 6,473
---------- ----------
EXPENSES:
Depreciation and amortization 3,180 3,887
Management and re-lease fees (Note 3) 580 443
General and administrative (Note 3) 149 138
Interest expense 154 70
Direct lease 83 88
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4,146 4,626
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NET INCOME $ 860 $ 1,847
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NET INCOME ALLOCATED:
To the General Partners 9 18
To the Limited Partners 851 1,829
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$ 860 $ 1,847
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .21 $ .46
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
<TABLE>
<CAPTION>
General Limited Total
Partners Partners Partners
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1995 $(420) $38,190 $37,770
Net income 9 851 860
Distributions declared to partners (59) (5,800) (5,859)
----- ------ ------
Balance, September 30, 1995 $(470) $33,241 $32,771
===== ======= =======
Balance, January 1, 1994 $(352) $44,968 $44,616
Net income 18 1,829 1,847
Distributions declared to partners (54) (5,400) (5,454)
----- ------ ------
Balance, September 30, 1994 $(388) $41,397 $41,009
===== ======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(unaudited)
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 860 $ 1,847
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,180 3,887
Incurrence of maintenance costs
previously provided for - (580)
Provision for maintenance cost payable - 325
Gain on lease settlement (233) -
Change in assets and liabilities:
Rent and other receivables (114) 310
Other assets (24) (27)
Accounts payable and accrued expenses 51 (2)
Payable to affiliates 335 167
Accrued interest payable (1) 21
Deferred rental income - (45)
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Net cash provided by operating activities 4,054 5,903
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (31) (2,705)
Accounts payable - aircraft - 80
Advances to lessees - -
Repayment of advances by lessees 216 246
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Net cash used for investing activities 185 (2,379)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers from (to) restricted cash, net 362 (105)
Proceeds from notes payable - 2,150
Repayment of notes payable (278) (61)
Cash distributions paid to partners (4,041) (5,454)
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Net cash used for financing activities (3,957) (3,470)
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 282 54
------- -------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,763 1,743
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,045 $ 1,797
======= =======
Supplementary schedule of cash flow information:
Interest paid $ 155 $ 48
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(unaudited)
1. GENERAL
The accompanying unaudited interim financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of the General Partners, necessary to fairly present the financial
position of the Partnership as of September 30, 1995 and the results of its
operations, changes in partners' equity, and cash flows for the three months
then ended.
These financial statements should be read in conjuction with the
Significant Accounting Policies and other Notes to Financial Statements included
in the Partnership's annual audited financial statements for the year ended
December 31, 1994. Certain reclassifications of the 1994 comparative information
have been made in order to conform such information to the 1995 presentation.
2. AIRCRAFT UNDER OPERATING LEASES
The Partnership's net investment in aircraft as of September 30, 1995
and December 31, 1994 consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
Aircraft on operating leases $ 74,446 $ 74,415
Less: Accumulated depreciation (34,687) (31,507)
Lease settlement accounted for under
cost recovery method (3,673) -
Reserve for decline in market
value of aircraft and provision for
maintenance costs (4,947) (4,947)
-------- --------
$ 31,139 $ 37,961
======== ========
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Management Fees The General Partners are entitled to receive a
quarterly subordinated base management fee in an amount generally equal to 1.5%
of gross aircraft rentals, net of re-
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leased fees paid. Of this amount, 1.0% is payable to the Managing General
Partner and 0.5% is payable to the Administrative General Partner. The General
Partners earned $125,000 of subordinated base management fees during the nine
months ended September 30, 1995, $79,000 of which was earned during the quarter
ended September 30, 1995. $59,000 of such fee was earned with respect to the
lease settlement with Continental. (See Note 4, "Aircraft") The General Partners
earned subordinated base management fees of $33,000 and $93,000 during the
quarter and nine months ended September 30, 1994.
The General Partners also are entitled to receive a quarterly
subordinated incentive management fee in an amount equal to 4.5% of quarterly
cash flow and sales proceeds (net of resale fees). Of this amount, 2.5% is
payable to the Managing General Partner and 2.0% is payable to the
Administrative General Partner. The General Partners earned $362,000 of
subordinated incentive management fees during the nine months ended September
30, 1995, of which $232,000 was earned during the quarter ended September 30,
1995. Of such fee, $174,000 was earned with respect to the lease settlement with
Continental. (See Note 4, "Aircraft") The General Partners earned $93,000 and
$271,000 of subordinated incentive management fees during the quarter and nine
months ended September 30, 1994.
Re-lease Fee The General Partners are entitled to receive a quarterly
subordinated fee for re-leasing aircraft or renewing a lease in an amount equal
to 3.5% of the gross rentals from such re-lease or renewal for each quarter for
which such payment is made. Of this amount, 2.5% is payable to the Managing
General Partner and 1.0% is payable to the Administrative General Partner. The
General Partners earned $93,000 of re-lease fees during the nine months ended
September 30, 1995 of which $31,000 was earned during the quarter ended
September 30, 1995. The General Partners earned $29,000 and $79,000 of re-lease
fees during the quarter and nine months ended September 30, 1994, respectively.
All such fees are subordinated to the limited partners receiving a cumulative,
non-compounded 8% annual return on unreturned capital contributions, as defined
in the Partnership Agreement.
Accountable General and Administrative Expenses The General Partners
are entitled to reimbursement of certain expenses paid on behalf of the
Partnership which are incurred in connection with the administration and
management of the Partnership. Such reimbursable expenses amounted to $37,000
during the nine-month periods ended September 30, 1995 and 1994 ($12,000 with
respect to each of the quarters ended September 30, 1995 and 1994), all of which
was paid or payable to the Administrative General Partner. Such amounts are
reflected in general and administrative expenses on the statement of income for
the three and nine-month periods ended September 30, 1995 and 1994.
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4. AIRCRAFT
a. Continental Airlines
The Partnership owns a Boeing 727-200 aircraft, originally purchased at
a purchase price of $8,025,000 and a Boeing 747-100 aircraft, originally
purchased for a purchase price of $17,847,000 each of which was originally
subject to an operating lease with Continental Airlines, Inc. ("Continental").
The leases were modified during the Continental bankruptcy case. Under
the modification, the lease rate with respect to the 727-200 aircraft was
reduced from $118,000 to $81,000 effective October 1, 1990. The Partnership
advanced a total of $750,000 for certain expenditures on both aircraft which are
being repaid by Continental over 36 months with interest of 12% per annum. The
balance of the advances outstanding at September 30, 1995 aggregated $236,000.
All advance repayments through November 1995 have been paid as scheduled.
In December 1992, the lease agreements were further amended to provide
for the deferral of rent otherwise due for November 1, 1992 through February 15,
1993. The deferred rentals are payable in 36 equal monthly installments which
began May 1, 1993. At September 30, 1995, the balance of the deferred rents
receivable from Continental was $263,000. All payments of deferred rents
through November 1995 have been paid as scheduled.
In January 1995, Continental announced that it was grounding its Airbus
Industrie manufactured aircraft and taking certain Boeing 747 aircraft out of
service, including the Boeing 747 Aircraft owned by the Partnership. Continental
discontinued utilizing the Aircraft, did not make any rental payments after
January 1995 and notified the Partnership of its intention to return the
Aircraft to the Partnership. The Partnership sent Continental a default notice
with respect to the unpaid rent and preserved all of its rights against
Continental. During the quarter ended September 30, 1995 the Partnership and
Continental completed the negotiation of a lease settlement agreement ("Lease
Settlement"). Under the terms of the Lease Settlement, Continental agreed to pay
the Partnership the amount otherwise due under the Lease as rent for the period
February 1995 to August 1995 plus a discounted amount representing the amount of
rent that would have been due under the Lease for the period September 1, 1995
to April 30, 1996, the scheduled expiration date of the Lease. Additionally,
Continental agreed to return the Aircraft and engines in the return condition
required by the Lease. On October 16, 1995 the Partnership received the Lease
Settlement proceeds totaling $3,906,491. Approximately $2,000,000 of such amount
was included in the cash distribution to the partners completed October 20,
1995.
The gain on the lease settlement was offset by the related management
fees accrued and thus no net gain or loss was recognized. A substantial portion
of the proceeds were accounted for under the cost recovery method reducing the
Partnership's net carrying value of the aircraft. At September 30, 1995, after
accruing the Lease Settlement proceeds, the Partnership had a carrying value of
$6,062,000 in the 747-100 aircraft which approximated its estimated market
value at such date.
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b. Trans World Airlines, Inc.
During 1989 the Partnership acquired a McDonnell Douglas MD-82 aircraft
for a total purchase price of $21,017,000, subject to a lease with Trans World
Airlines, Inc. ("TWA"). During its term, the lease was amended and extended to
October 1, 1998.
In connection with the lease amendment, the Partnership reimbursed TWA
for $225,000 of capital improvements which were made to the aircraft. The
Partnership also advanced $750,000 to TWA to finance certain major maintenance
procedures which TWA agreed to repay to the Partnership over the remaining lease
term, in equal monthly installments, with interest at a fixed rate of 9.68%. At
September 30, 1995, the balance of the related receivable was $461,000. All
advance repayments through November 1995 have been made by TWA as scheduled.
In mid-October 1994, because of continued operating and financial
problems, TWA announced that it would seek a global restructuring of its capital
by offering common stock for its debt securities, lease deferrals negotiated
with aircraft lessors such as the Partnership and preferred stock obligations
("Exchange Offer"), with the objective being an orderly financial reorganization
through a prepackaged bankruptcy. TWA and the Partnership agreed to a temporary
reduction of the current rent due to 50% of the original schedule for November
1994 and 25% of the original schedule from December 1994 to April 1995. All
rents deferred during the November 1994 to April 1995 period are scheduled to be
repaid with interest at 12% and accruing from the date of deferral over an
eighteen-month period which began May 1, 1995. TWA has made all of its payments
due pursuant to this schedule. At September 30, 1995 and December 31, 1994, the
Partnership had $582,000 and $231,000, respectively of deferred rent receivables
relating to the TWA aircraft which were included in rent and other receivables
on the balance sheets at such dates. Additionally, TWA and the Partnership
reached an agreement to extend the lease of the MD-82 aircraft six years beyond
the current expiration date to October 1, 2004 at the current lease rate. On
June 30, 1995, TWA filed its prepackaged reorganization plan under Chapter 11 of
the U.S. Bankruptcy Code. On August 23, 1995 the reorganization plan which
included the foregoing lease modifications was confirmed by the Bankruptcy
Courts and TWA emerged from bankruptcy. TWA has made all rental payments,
advance repayments and payments of deferred rent when due. However, there can be
no assurance that TWA will be able to meet its obligations in the future.
c. Kiwi International Airlines, Inc.
During 1994, the Partnership leased two Boeing 727-200 non-advanced
aircraft to Kiwi International Airlines, Inc. ("Kiwi") each for a term of
approximately five years. Each of the leases provides for monthly rents of
$55,000 per month. The Partnership also purchased an aircraft engine for a
purchase price of $195,000 which is used by Kiwi as a spare. The aircraft had
originally been acquired for purchase prices aggregating $12,616,000. The
aircraft had been leased to Northwest Aircraft, Inc. ("Northwest") subject to
operating leases, one of which expired in August 1993 and the second of which
expired in April 1994 (each after short extensions).
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In connection with the Kiwi leases, the Partnership completed certain
maintenance procedures, aircraft-aging related modifications, the purchase of a
spare engine for Kiwi's fleet and other lessee-required modifications prior to
delivery of the aircraft to Kiwi at an aggregate cost of $3,303,000 of which
$580,000 represented maintenance-related work funded by the maintenance-related
payments received from Northwest upon the expiration of each of the leases with
Northwest.
During the term of each of the leases, Kiwi can request that the
aircraft be hushkitted to attain Stage III noise abatement for which the lease
term will be reset to five years with the lease payments increasing to amortize
the costs of hushkitting at the rate of 2% per month. Alternatively, the
Partnership can deem the hushkitting economically infeasible at which point Kiwi
can terminate the lease and return the aircraft.
Kiwi, as a start-up airline, has had liquidity concerns which were
worsened by operating problems in late 1994. Kiwi has made significant
management changes and is moving to rationalize costs and raise capital. Kiwi
did not make the rental payments and maintenance reserve deposits due in
February and March 1995. Kiwi and the Partnership executed amendments to the
leases which modified lease terms and enabled Kiwi to defer February's and half
of March's rent. The deferred rent is scheduled to be repaid over a nine-month
period with 12% interest which began in July 1995. Kiwi also did not make
maintenance deposits in February, March and April but will be obligated to fund
related work when due. Additionally, pursuant to the lease amendments, Kiwi also
agreed to extend each of the leases until December 1999. Kiwi has made all
payments pursuant to the lease amendments through November 1, 1995. However,
there can be no assurance that Kiwi will be able to meet its obligations in the
future. At September 30, 1995, the Partnership held maintenance deposits
aggregating $988,000 with respect to the Kiwi aircraft.
5. NOTES PAYABLE
During April 1994, the Partnership established a loan facility with an
unaffiliated third-party lender ("Lender") which was collateralized by the
Partnership's one-half interest in the McDonnell Douglas MD-81 aircraft leased
to USAir, Inc. ("USAir") and the Partnership's Boeing 747-100 aircraft leased to
Continental Airlines, Inc. Under the terms of the loan agreement, the
Partnership was entitled to borrow up to $4,000,000, the commitment for which
expired on May 1, 1995. The loan agreement required a commitment fee on the
unborrowed funds of .5% per annum payable quarterly. There are no compensating
balance requirements. The Partnership had an option for a fixed (market interest
rate on the U.S. Treasury bond with a similar maturity plus 2.75%) or floating
(the Lender's prime rate plus 1.5%) rate of interest.
In July 1995, the Partnership and the Lender completed an extension of
the commitment. Under the new agreement, the aggregate commitment will remain at
$4,000,000, the Partnership's ability to borrow under the facility will be
extended until May 1, 1997 and the floating interest rate charged under the
facility will be reduced to the Lender's prime rate plus .5%. The Lender
released the Boeing 747-100 aircraft as collateral under the loan and received
as substitute collateral, a perfected security interest in the Partnership's
MD-82 aircraft leased to
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TWA. Through September 30, 1995, the Partnership had borrowed an aggregate of
$2,150,000 pursuant to the loan agreement of which $1,722,000 and $2,000,000
were outstanding at September 30, 1995 and December 31, 1994, respectively.
The Partnership through a trust, ("Trust") owns a 50% interest in a
McDonnell Douglas MD-81 aircraft leased to USAir which was purchased subject to
a tax benefit transfer lease ("TBT lease"). Under the TBT lease, the Trust as
owner of the aircraft and tax lessee under the TBT lease agreed to indemnify, in
certain circumstances, the tax lessor with respect to certain tax benefits. A
letter of credit, with a face amount of approximately $3.5 million has been
posted with the Lender, as required by the TBT lease.
Under the terms of the letter of credit agreement, the Partnership was
required to deposit with the Lender $35,000 per quarter as cash collateral to
secure the obligation. In conjunction with the extension of the loan agreement,
the Lender released its interest in substantially all of the cash in the
collateral account. The balance in the cash collateral account was $455,000 at
the time of the release. The Partnership remains obligated under the letter of
credit arrangement.
6. LITIGATION
On May 30, 1995, a class action lawsuit, entitled In re PaineWebber
Limited Partnerships Litigation, in which the Administrative General Partner and
affiliates of the Administrative General Partner, among others, are defendants,
was certified by the United States District Court for the Southern District of
New York for class action treatment of the plaintiffs' claim. The lawsuit
alleges the Administrative General Partners and its affiliates violated the
Racketeer Influenced and Corrupt Organizations Act and the federal securities
laws. Additionally, another action was filed by a group of about 35 investors in
the Partnership in the state court of Brazoria County, Texas. The case was
removed to the U.S. District Court in Texas, and was ordered by that court to be
transferred to the U.S. District Court for the Southern District of New York for
coordination with the In re PaineWebber Limited Partnerships Litigation. The
Texas complaint named PaineWebber, the Partnership, the Managing General Partner
and the Administrative General Partner, among others, as defendants. The Texas
action alleged fraud and misrepresentation in the sale of investments in the
Partnership. The plaintiffs in each action seek unspecified damages. Another
legal action has been filed in Illinois State Court concerning investment in the
Partnership in which an affiliate of the Administrative General Partner is the
defendant. The Partnership is not a defendant in the Illinois action. The
General Partners believe these actions will be resolved without material adverse
effect on the Partnership's financial statements, taken as a whole.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Partnership invests working capital and cash flow from operations
prior to its distribution to the partners in short-term, highly liquid
investments. At September 30, 1995, the Partnership's unrestricted cash and cash
equivalents of $2,045,000 was primarily invested in commercial paper. This cash
amount was $282,000 more than the Partnership's cash at December 31, 1994 of
$1,763,000. This increase in unrestricted cash resulted primarily from (1) the
release by the lender of substantially all of the cash in a collateral account
securing the Partnership's obligation under a letter of credit and (2) the
continued collections of advances made to lessees in prior periods reduced by
deferrals in 1995 of Kiwi and TWA rents. The non-payments of rent by Continental
relating to the 747-100 aircraft resulted in a reduction in distributions to
partners in the first six months of 1995 (See discussion below and discussion of
Continental Lease Settlement in Footnote 4, "Aircraft").
During the third quarter of 1995 (1995 Quarter), the Partnership
completed the Lease Settlement with Continental regarding the 747-100 aircraft.
In October 1995 the Partnership received $3,906,491 of proceeds which were
accrued on the balance sheet as of September 30, 1995. Additionally,
approximately $2,000,000 of such proceeds was included in the distribution to
partners declared as of September 30, 1995. The Partnership declared
distributions to the Limited Partners equal to $.90 per Unit for the quarter
ended September 30, 1995.
Restricted cash increased $104,000 from $907,000 at December 31, 1994
to $1,011,000 at September 30, 1995. This increase represents the receipt of
maintenance reserve payments and interest on the balances (net of drawdowns)
aggregating approximately $466,000 from Kiwi offset by the release by the lender
of $362,000 (net) of cash in a collateral account securing the Partnership's
obligations under a letter of credit (See Note 5, "Notes Payable"). The letter
of credit secures the Partnership's obligation to indemnify the tax lessor under
certain circumstances under a tax benefit transfer lease relating to the USAir,
Inc. aircraft in which the Partnership, through a trust, owns a 50% interest. In
late July 1995, the Partnership consummated an agreement with the Lender who
held a security interest in the cash in the collateral account under which the
issuer released its security interest in substantially all of the cash in the
collateral account and eliminated the obligation to fund the cash collateral
account. (See discussion of Kiwi regarding the deferral of certain rents and
maintenance reserve payments, and further discussion regarding the cash
collateral account).
In mid-October 1994, because of continued operating and financial
problems, TWA announced that it would seek a global restructuring of its capital
by offering common stock for its debt securities, lease deferrals negotiated
with aircraft lessors such as the Partnership and preferred stock obligations
("Exchange Offer") with the objective being an orderly financial reorganization
through a prepackaged bankruptcy. TWA and the Partnership agreed to a temporary
reduction of the current rent due to 50% of the original schedule for November
1994
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and 25% of the original schedule from December 1994 to April 1995. The TWA lease
accounted for approximately 25% of the Partnership's rental revenue for the year
ended December 31, 1994. At September 30, 1995 and December 31, 1994, the
Partnership had $706,000 and $231,000, respectively of deferred rent receivables
relating to the TWA aircraft which were included in rent and other receivables
on the balance sheets at such dates. All rents deferred during the November 1994
to April 1995 period are scheduled to be repaid with interest at 12% and
accruing from the date of deferral over an eighteen month period which began May
1, 1995. TWA has made all of its payments due pursuant to this schedule.
Additionally, TWA and the Partnership reached an agreement to extend the lease
of the MD-82 aircraft six years beyond the current expiration date to October 1,
2004 at the current lease rate. On June 30, 1995, TWA filed its prepackaged
reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On August 23,
1995 the reorganization plan which included the foregoing lease modifications
was confirmed by the Bankruptcy Court and TWA emerged from bankruptcy. TWA has
made all rental payments, advance repayments and payments of deferred rent when
due. However, there can be no assurance that TWA will be able to meet its
obligations in the future.
In January 1995, Continental announced that it was grounding its Airbus
Industrie manufactured aircraft and taking certain Boeing 747 aircraft out of
service, including the Aircraft owned by the Partnership. Continental
discontinued utilizing the Boeing Aircraft, did not make any rental payments
after January 1995 and notified the Partnership of its intention to return the
Aircraft to the Partnership. The Partnership sent Continental a default notice
with respect to the unpaid rent and preserved all of its rights against
Continental. During the quarter ended September 30, 1995 the Partnership and
Continental completed the negotiation of a lease settlement agreement ("Lease
Settlement"). Under the terms of the Lease Settlement, Continental agreed to pay
the Partnership the amount otherwise due under the Lease as rent for the period
February 1995 to August 1995 plus a discounted amount representing the amount of
rent that would have been due under the Lease for the period September 1, 1995
to April 30, 1996, the scheduled expiration date of the Lease. Additionally,
Continental agreed to return the Aircraft and engines in the return condition
required by the Lease. On October 16, 1995 the Partnership received the Lease
Settlement proceeds totaling $3,906,491. Approximately $2,000,000 of such amount
was included in the cash distribution to the partners completed October 20,
1995.
The gain on the Lease Settlement was offset by the related management
fees accrued and thus no net gain or loss was recognized. A substantial portion
of the proceeds were accounted for under the cost recovery method reducing the
Partnership's net carrying value of the aircraft. At September 30, 1995, after
accruing the Lease Settlement proceeds, the Partnership had a carrying value of
$6,062,000 in the 747-100 aircraft which approximated its current market value.
Kiwi, an employee-owned airline, initiated service in September 1992 as
a low cost, high quality service carrier. Expansion of service in mid-1994 was
unprofitable, which when combined with other operating problems caused a severe
liquidity crisis. Kiwi has made significant management changes and is moving to
rationalize costs and raise capital. Kiwi did not make the rental payments due
in February and March of 1995 and did not make the
14
<PAGE> 16
maintenance reserve payments for those months. The Partnership sent Kiwi a
formal notice of default with respect to the leases. Kiwi and the Partnership
executed amendments to the leases which modified lease terms and enabled Kiwi to
defer February and half of March's rent. Kiwi did not make payments towards the
maintenance reserve for the months of February, March and April, but is required
under the lease amendments to make up any shortfalls. Kiwi also agreed to extend
the leases until December 1999. The deferred rents are being repaid, with
interest at 12%, over a 9-month period which began on July 1, 1995. Through
October 1995, all payments have been made as scheduled pursuant to the lease
amendments. However, if there are further defaults by Kiwi, the Partnership may
have to recover the aircraft and attempt to re-lease or sell them. The
Partnership may incur significant costs and delays in recovering the aircraft
and redeploying them. On September 30, 1995, the Partnership held maintenance
reserves aggregating $988,000 with respect to the Kiwi aircraft.
During April 1994, the Partnership established a loan facility with an
unaffiliated third-party Lender ("Lender") which was collateralized by the
Partnership's one-half interest in the McDonnell Douglas MD-81 aircraft leased
to USAir, Inc. and the Partnership's Boeing 747-100 aircraft leased to
Continental Airlines, Inc. Under the terms of the loan agreement, the
Partnership was entitled to borrow up to $4,000,000, the commitment for which
expired on May 1, 1995. Through September 30, 1995, the Partnership had borrowed
an aggregate of $2,150,000 pursuant to the loan agreement of which $1,722,000
and $2,000,000 were outstanding at September 30, 1995 and December 31, 1994,
respectively. The loan agreement requires a commitment fee on the unborrowed
funds of .5% per annum payable quarterly. There are no compensating balance
requirements. The Partnership had an option for a fixed (market interest rate of
U.S. Treasury bond with a similar maturity plus 2.75%) or floating (prime plus
1.5%) rate of interest.
In July 1995 the Partnership and the Lender completed an extension of
the commitment. Under the new commitment, the aggregate commitment will remain
at $4,000,000, the Partnership's ability to borrow under the facility was
extended until May 1, 1997 and the floating interest rate charged under the
facility was reduced to the Lender's prime rate plus .5%. The Lender released
the Boeing 747-100 aircraft as collateral and received a perfected security
interest in the Partnership's MD-82 aircraft leased to TWA. Additionally, the
Lender released its security interest in substantially all of the cash in a
collateral account securing the Partnership's performance under the letter of
credit agreement relating to the USAir tax benefit transfer lease and eliminated
the requirement for future deposits. The cash collateral account had a balance
of $455,000 at the time of the release, $70,000 of which had been funded during
1995.
Other assets increased $24,000 from $35,000 at December 31, 1994 to
$59,000 at September 30, 1995. This increase resulted primarily from an increase
in prepaid expenses.
The payable to affiliates was $615,000 at September 30, 1995 as
compared to $280,000 at December 31, 1994. Of the $615,000, $233,000 represents
fees earned with respect to the Lease Settlement with Continental, which was
accrued at September 30, 1995. The Administrative General Partner of the
Partnership has voluntarily deferred the receipt of its share of base management
fees, re- lease fees and incentive management fees earned during the nine months
15
<PAGE> 17
ended September 30, 1995. Any decision with respect to the collection of these
fees or fees earned in future periods will be made on a period by period basis.
The fees earned by the Administrative General Partner aggregated $228,000 during
the nine months ended September 30, 1995.
Deferred rental income was $137,000 at December 31, 1994 and September
30, 1995 and represented the portion of rents billed to TWA and due as of
September 30, 1995 and December 31, 1994, respectively, that were unearned at
such dates.
During the three months ended September 30, 1995, the Partnership paid
cash distributions pertaining to the second quarter of 1995 in the amount of
$1,212,000 or $.30 per Unit. The distribution for the quarter ended September
30, 1995, which included approximately $2,000,000 of the proceeds from the Lease
Settlement, was paid on October 20, 1995 in the amount of $3,636,000 or at an
annualized rate equal to 18% of contributed capital $.90 per Unit.
The amount of each distribution will be determined on a quarterly basis
after an evaluation of the Partnership's operating results and its current and
expected financial position. Distribution rates for the remainder of 1995 depend
on, among other things, (i) the timeliness of the remarketing of the 747-100
aircraft, (ii) the continued stability of Kiwi and the continued timely payments
of rentals and maintenance reserves, (iii) the continuation of TWA's payments of
lease rent currently due plus the repayment of amounts previously deferred and
the availability of the undistributed proceeds derived from the Lease
Settlement.
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the amount of net
income reported by the Partnership for accounting purposes, approximately 91% of
the cash distributions paid to the partners for the three months ended September
30, 1995 constituted a return of capital (85% for the nine months then ended).
Also, based on the amount of net income reported by the Partnership for
accounting purposes, approximately 67% of the cash distributions paid to the
partners from inception of the Partnership through September 30, 1995
constituted a return of capital. However, the total actual return on capital
over the Partnership's life can only be determined at the termination of the
Partnership after all cash flows, including proceeds from the sale of the
aircraft, have been realized.
Litigation
Information on a class action lawsuit, entitled In re PaineWebber
Limited Partnerships Litigation, filed in the United States District Court
("U.S. District Court") for the Southern District of New York and information
regarding another action (Texas Action) filed in the state court of Brazoria
County, Texas was contained in the Partnership's prior reports. On May 30, 1995,
the U.S. District Court certified class action treatment of the plaintiffs'
claims in the class action entitled, In re PaineWebber Limited Partnerships
Litigation. The Texas Action has been ordered to be transferred to the U.S.
District Court for the Southern District of New York for coordination with the
In re PaineWebber Limited Partnerships Litigation. Another legal action
16
<PAGE> 18
has been filed in Illinois State Court concerning investments in the Partnership
in which an affiliate of the Administrative General Partner is the defendant.
The Partnership is not a defendant in the Illinois action.
RESULTS OF OPERATIONS
The Partnership's net income was $337,000 and $860,000, respectively,
for the 1995 Quarter and nine months ended September 30, 1995 ("1995 Period")
as compared to $651,000 and $1,847,000, respectively for the quarter and nine
months ended September 30, 1994 ("1994 Quarter and 1994 Period, respectively").
The decrease in the Partnership's net income for the 1995 Quarter and
1995 Period resulted primarily a decrease in rental revenue, resulting from the
non-accrual of the rents otherwise due with respect to the 747-100 aircraft
leased to Continental for February through September 1995. (See above discussion
regarding Continental and the related Lease Settlement.) This was partially
offset by a decrease in depreciation due primarily to the non-recognition of
depreciation expense in the 1995 Quarter and for a substantial portion of the
1995 Period with respect to the Boeing 747-100 discussed below.
Rental revenue decreased $759,000 and $1,736,000 or 34% and 28%,
respectively for the 1995 Quarter and 1995 Period, principally due to the
non-accrual of rent with respect to the 747-100 aircraft leased to Continental
for February through September 1995 which was partially offset by rents
generated by the 727-200 aircraft leased to Kiwi which was off-lease for a
portion of the 1994 Quarter and the 1994 Period.
Interest income for the 1995 Quarter and 1995 Period increased by
$11,000 and $36,000, or 19% and 21%, respectively, in comparison to the 1994
Quarter and 1994 Period. This increase was primarily attributable to the
interest income earned with respect to the TWA rent deferrals, the Kiwi rent
deferrals and the advance made to Continental in the fourth quarter of 1994,
partially offset by the continued repayment of advances pursuant to various
repayment schedules.
Depreciation and amortization decreased by $377,000 and $707,000, or
28% and 18%, respectively, for the 1995 Quarter and 1995 Period in comparison to
the 1994 Quarter and the 1994 Period. This was due primarily to the fact that
the Partnership did not recognize depreciation in the 1995 Quarter with respect
to the 747-100 aircraft which was taken out of service by Continental during the
first quarter of 1995.
Management and re-lease fees payable to the General Partners for the
1995 Quarter and 1995 Period increased $187,000 and $137,000 or 121% and 31%,
respectively in comparison to the 1994 Quarter and the 1994 Period. Management
fees increased by $185,000 and $123,000 for the 1995 Quarter and 1995 Period as
compared to 1994 Quarter and 1994 Period because of the fees incurred with
respect to the Continental settlement. Re-lease fees incurred during the 1995
Quarter and 1995 Period increased by $2,000 and $14,000 as compared to the 1994
Quarter
17
<PAGE> 19
and 1994 Period due principally to the fees associated with the re-lease of the
second Boeing 727-200 aircraft to Kiwi during 1994.
General and administrative expenses for the 1995 Quarter and 1995
Period decreased by $6,000 but increased by $11,000 or 12% and 8% in comparison
to the 1994 Quarter and 1994 Period in the preceding year.
Interest expense for the 1995 Quarter and 1995 Period increased by
$4,000 and $84,000 or 9% and 120% in comparison to the 1994 Quarter and 1994
Period, respectively, due to the fact that the related borrowings were completed
in April and July 1994 and thus were not outstanding for the entire 1994 Period.
Direct lease expenses for the 1995 Quarter and 1995 Period decreased by
$9,000 and $5,000 or 24% and 6% as compared to the corresponding periods in the
preceding year, due principally to a reduction in the letter of credit fee in
1995 as compared to 1994.
18
<PAGE> 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information on a class action lawsuit, entitled In re PaineWebber
Limited Partnerships Litigation, filed in the United States District Court
("U.S. District Court") for the Southern District of New York and information
regarding another action (Texas Action) filed in the state court of Brazoria
County, Texas was contained in the Partnership's prior reports. On May 30, 1995,
the U.S. District Court certified class action treatment of the plaintiffs'
claims in the class action entitled, In re PaineWebber Limited Partnerships
Litigation. The Texas Action has been ordered to be transferred to the U.S.
District Court for the Southern District of New York for coordination with the
In re PaineWebber Limited Partnerships Litigation. Another legal action has been
filed in Illinois State Court concerning investments in the Partnership in which
an affiliate of the Administrative General Partner is the defendant. The
Partnership is not a defendant in the Illinois action.
19
<PAGE> 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and reports to be filed: none
(b) The Partnership filed a report on Form 8-K dated July 1995
during the third quarter of the fiscal year ended December 31,
1995.
20
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
A General Partner
Date: November 10, 1995
By: /s/ Joseph P. Ciavarella
-------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
21
<PAGE> 23
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,045,000
<SECURITIES> 0
<RECEIVABLES> 1,851,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 74,446,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,139,000
<CURRENT-LIABILITIES> 5,918,000
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,011,000
<SALES> 4,565,000
<TOTAL-REVENUES> 5,006,000
<CGS> 0
<TOTAL-COSTS> 3,843,000
<OTHER-EXPENSES> 149,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,000
<INCOME-PRETAX> 860,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 860,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 860,000
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
