<PAGE> 1
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 June 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.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1099968
(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 .
----- -----
<PAGE> 2
Pegasus Aircraft Partners, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1995
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 1
Balance Sheets - June 30, 1995
and December 31, 1994 2
Statements of Income for the three months
ended June 30, 1995 and 1994 3
Statements of Income for the six months
ended June 30, 1995 and 1994 4
Statements of Partners' Equity for the six
months ended June 30, 1995 and 1994 5
Statements of Cash Flows for the six
months ended June 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>
1
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS -- JUNE 30, 1995 AND DECEMBER 31, 1994
(unaudited)
ASSETS
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands, except unit data)
<S> <C> <C>
Cash and cash equivalents $ 1,187 $ 1,763
Restricted cash (Note 6) 1,131 907
Rent and other receivables 2,226 1,953
Aircraft, net (Notes 2 and 4) 35,758 37,961
Other assets 69 35
------- -------
Total Assets $40,371 $42,619
======= =======
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes Payable $ 1,816 $ 2,000
Accounts payable and accrued expenses 135 92
Payable to affiliates (Note 3) 324 280
Deferred rental income 137 137
Distributions payable to partners 1,212 1,818
Maintenance reserves payable 676 522
------- -------
Total Liabilities 4,300 4,849
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, 5 and 6)
PARTNERS' EQUITY:
General Partners (437) (420)
Limited Partners (4,000,005 units outstanding) 36,508 38,190
------- -------
Total Partners' Equity 36,071 37,770
------- -------
Total Liabilities and Partners' Equity $40,371 $42,619
======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
2
<PAGE> 4
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 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 (Note 5) $ 1,434 $ 2,055
Interest 73 54
-------- --------
1,507 2,109
-------- --------
EXPENSES:
Depreciation and amortization 945 1,306
Management and re-lease fees (Note 3) 112 144
General and administrative (Note 3) 50 46
Interest expense 52 25
Direct lease 29 25
-------- --------
1,188 1,546
-------- --------
NET INCOME $ 319 $ 563
======== ========
NET INCOME ALLOCATED:
To the General Partners $ 3 $ 6
To the Limited Partners 316 557
-------- --------
$ 319 $ 563
======== ========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .08 $ .14
======== ========
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.
3
<PAGE> 5
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 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 (Note 5) $ 3,122 $ 4,099
Interest 138 113
------- -------
3,260 4,212
------- -------
EXPENSES:
Depreciation and amortization 2,234 2,564
Management and re-lease fees (Note 3) 238 288
General and administrative (Note 3) 105 88
Interest expense 105 25
Direct lease 55 51
------- -------
2,737 3,016
------- -------
NET INCOME $ 523 $ 1,196
======= =======
NET INCOME ALLOCATED:
To the General Partners $ 5 $ 12
To the Limited Partners 518 1,184
------- -------
$ 523 $ 1,196
======= =======
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .13 $ .30
======= =======
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.
4
<PAGE> 6
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1995 $ (420) $ 38,190 $ 37,770
Net income 5 518 523
Distributions declared to partners (22) (2,200) (2,222)
-------- -------- --------
Balance, June 30, 1995 $ (437) $ 36,508 $ 36,071
======== ======== ========
Balance, January 1, 1994 $ (352) $ 44,968 $ 44,616
Net income 12 1,184 1,196
Distributions declared to partners (36) (3,600) (3,636)
-------- -------- --------
Balance, June 30, 1994 $ (376) $ 42,552 $ 42,176
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE> 7
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,1995 AND 1994
(unaudited)
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 523 $ 1,196
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,234 2,564
Incurrence of maintenance costs
previously provided for -- (449)
Provision for maintenance costs previously
provided for -- 325
Change in assets and liabilities:
Rent and other receivables (420) 193
Other assets (34) (36)
Accounts payable and accrued expenses 43 24
Payable to affiliates 44 135
Deferred rental income -- (45)
------- -------
Net cash provided by operating activities 2,390 3,907
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (31) (2,658)
Accounts payable - aircraft -- 600
Repayment of advances by lessees 147 162
------- -------
Net cash provided by (used in) investing activities 116 (1,896)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers to restricted cash (70) (70)
Cash distributions paid to partners (2,828) (3,636)
Proceeds from notes payable -- 1,500
Repayments of notes payable (184) --
------- -------
Net cash used in financing activities (3,082) (2,206)
------- -------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (576) (195)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,763 1,743
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,187 $ 1,548
======= =======
SUPPLEMENTAL INFORMATION:
Interest paid $ 103 --
======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE> 8
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 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 June 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 conjunction 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 June 30, 1995 and
December 31, 1994 consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Aircraft on operating leases $ 74,446 $ 74,415
Less: Accumulated depreciation (33,741) (31,507)
Reserve for decline in market
value of aircraft and provision for
maintenance costs (4,947) (4,947)
-------- --------
$ 35,758 $ 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-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 $46,000 of base
management fees during the six months ended June 30, 1995, $21,000 of which
was earned during the quarter ended June 30, 1995.
7
<PAGE> 9
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 $130,000 of
incentive management fees during the six months ended June 30, 1995, $60,000 of
which was earned during the quarter ended June 30, 1995.
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 $62,000 of re-lease fees during the six months ended
June 30, 1995 of which $31,000 was earned during the quarter ended June 30,
1995.
All of the above fees are subordinated to the limited partners receiving an 8%
annual non-cumulative return based upon unreturned capital contributions.
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 $25,000
during the six months ended June 30, 1995, of which $12,000 was earned during
the quarter ended June 30, 1995. All such amounts are payable to the
Administrative General Partner.
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 is subject to an
operating lease with Continental Airlines, Inc. ("Continental").
In December 1990, Continental discontinued making rental payments under
the leases and filed for protection under Chapter 11 of the U.S. Bankruptcy
Code. The Lease for the 727-200 aircraft was amended by a July 1991 agreement
pursuant to which amongst other things the monthly rental was reduced from
$118,000 to $81,000 effective October 1, 1990; the rent with respect to the
747-100 aircraft was unchanged. Additionally under the agreements the
Partnership agreed to advance and has advanced an aggregate of $750,000 for
certain qualifying expenditures incurred with respect to the two aircraft.
Additionally the Partnership agreed to advance an additional $1,400,000 for
aging aircraft modifications with respect to the 747-100 aircraft if Continental
agreed to extend the related lease. (See further discussion below.) The advances
were to be repaid with interest at 12% per annum generally over 36 months. The
8
<PAGE> 10
balance of the advances outstanding at June 30, 1995 aggregated $276,000. All
advance repayments through August 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 June 30, 1995, the balance of the deferred rents
receivable from Continental was $371,000. All payments of deferred rents through
August 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 and Boeing 727
aircraft out of service, including the Boeing 747-100 aircraft owned by the
Partnership. Continental discontinued utilizing the aircraft and did not make
the February through June 1995 rental payments with respect to the Partnership's
747-100 aircraft 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 has preserved all of its rights against
Continental. The Partnership is currently reviewing a proposal submitted by
Continental to settle the lease terms and return the aircraft. Under the
proposal, Continental would make a settlement payment which would represent
payments that had been due under the lease through the settlement date plus a
discounted amount representing the balance of payments due under the lease
through its scheduled expiration in April 1996. It is impossible to predict
whether such proposal, if accepted, will result in a consummated agreement. The
Partnership did not accrue the amount due with respect to February through June
1995 rentals on the balance sheet as of June 30, 1995 and statement of income
for the quarter and six months ended June 30, 1995. To the extent that the
747-100 aircraft is returned to the Partnership, it is anticipated that the
Partnership will attempt to re-lease or sell the aircraft. The lease of the
747-100 aircraft accounted for approximately 38% of the Partnership's rental
revenue for the year ended December 31, 1994. The General Partners believe that
based upon current market lease values (which are less than what Continental is
required to pay under the lease), projected residual values, and the value
associated with settlement proposal received from Continental, the Partnership's
investment in the 747-100 has not been impaired.
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
June 30, 1995, the balance of the related receivable was $494,000. All scheduled
advance repayments through August 1995 have been made by TWA.
9
<PAGE> 11
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. The TWA
lease accounted for approximately 25% of the Partnership's rental revenue for
the year ended December 31, 1994. At June 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. TWA has stated
that it expected to emerge from bankruptcy within 60 days and in early August
1995 received its confirmation order. Subject to various conditions set forth
in the confirmation order, TWA anticipated an effective date of confirmation in
late August. TWA has made all rental payments, advance repayments and payments
of deferred rent when due. However, even if TWA's reorganization plan is
confirmed, there can be no assurance that it will be able to meet its
obligations in the future.
c. Kiwi International Airlines, Inc.
---------------------------------
During 1994, the Partnership leased two 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).
In connection with the Kiwi lease, 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 expirations of the leases with
Northwest.
During the terms 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.
10
<PAGE> 12
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 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 the leases to December 1999. Kiwi has made all payments pursuant to the
lease amendments through August 1, 1995. At June 30, 1995, the Partnership held
maintenance deposits aggregating $676,000 with respect to the Kiwi aircraft.
5. LITIGATION
On May 30, 1995, a class action lawsuit entitled, "In re PaineWebber
Partnership Litigation," in which the Administrative General Partner and
affiliates of the Administrative General Partner amongst 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 purported class action was filed on behalf of
investors in the Partnership in the state court of Brazoria County, Texas. The
complaint names PaineWebber, the Partnership, the Managing General Partner and
the Administrative General Partner, amongst others, as defendants. The Texas
action alleges fraud and misrepresentation in the sale of investments in the
Partnership. The Plaintiffs in each action seek unspecified damages. The General
Partners believe these actions will be resolved without material adverse effect
on the Partnership's financial statements, taken as a whole.
6. SUBSEQUENT EVENT - NOTES PAYABLE
During April 1994, the Partnership established a loan facility with an
unaffiliated third-party lender ("Lender") which is 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
was scheduled to expire on May 1, 1995. This commitment has been extended to
July 31, 1995. Through June 30, 1995, the Partnership had borrowed an aggregate
of $2,150,000 pursuant to the loan agreement of which $1,816,000 and $2,000,000
were outstanding at June 30, 1995 and December 31, 1994, respectively. 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.
11
<PAGE> 13
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 TWA.
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 ($455,000 and $385,000
at June 30, 1995 and December 31, 1994, respectively, which was included in
restricted cash on the respective balance sheets) 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 Partnership remains obligated under the letter of credit
arrangement.
12
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
In the fourth quarter of 1994, Trans World Airlines, Inc. ("TWA")
announced a global restructuring of its debts, which included deferring certain
rents due to the Partnership. Continental Airlines, Inc. ("Continental")
announced its decision in the late January 1995 to remove certain aircraft from
its fleet, including the 747-100 aircraft leased to it by the Partnership, and
did not make the scheduled rental payments from February 1995 to June 1995 for
the 747-100 aircraft. Kiwi International Airlines, Inc., ("Kiwi") had liquidity
problems and entered into an agreement with the Partnership to defer certain
rents and maintenance reserve payments.
As a result of these events, which are discussed in detail below, the
Partnership's cashflow from operations was reduced below levels experienced in
1994. The Partnership declared distributions to the Limited Partners equal to
$.30 per Unit for the quarter ended June 30, 1995 and $.25 per Unit for the
quarter ended March 31, 1995 as compared to $.45 per Unit for each of the
quarters ended June 30, 1994 and March 31, 1994. Cash flow increased in the
quarter ended June 30, 1995 as compared to the quarter ended March 31, 1995 due
principally to the following:
(1) TWA returned to the original payment schedule in May 1995 and
began repaying the deferred rent.
(2) Kiwi returned to the original payment schedules for
the entire second quarter. Kiwi paid the January
1995 rent, but had deferred 75% of the remaining rents due in
the quarter ended March 31, 1995.
This was partially offset by the collection of one month's rent in the
first quarter with respect to the 747-100 aircraft leased to Continental. No
amounts were received after January 1995. (See further discussion below and
Footnote 5 to the Financial Statements, "Aircraft".)
The Partnership invests working capital and cash flow from operations
prior to its distribution to the partners in short-term, highly liquid
investments. At June 30, 1995, the Partnership's unrestricted cash and cash
equivalents of $1,187,000 was primarily invested in commercial paper. This cash
amount was $576,000 less than the Partnership's cash at December 31, 1994 of
$1,763,000. This decrease in unrestricted cash resulted primarily from the
deferral of certain rents by TWA and Kiwi and the non-payment of rent by
Continental with respect to the 747-100 aircraft for February through June 1995.
Rent and other receivables increased $273,000 from $1,953,000 at December 31,
1994 to $2,226,000 at June 30, 1995. The Partnership did not accrue rents due
with respect to the Continental 747 aircraft for February through June 1995.
(See discussion below regarding Continental.)
13
<PAGE> 15
Restricted cash increased $224,000 from $907,000 at December 31, 1994
to $1,131,000 at June 30, 1995. This increase represents an aggregate of
$70,000 transferred to a cash collateral account as required by the
Partnership's letter of credit agreement securing the Partnership's performance
under the tax benefit transfer lease agreement (total balance of $455,000 at
June 30, 1995) as well as the receipt of maintenance reserve payments and
interest on the balances (net of drawdowns) aggregating approximately $154,000
from Kiwi. 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 issuer of the letter of credit who held the
security interest in the cash in the collateral account under which the issuer
released it's security interest in substantially all of the cash in the
collateral account and eliminated the obligation to fund, in the future,
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.)
At June 30, 1995, the Partnership's declared but unpaid distributions
to partners exceed unrestricted cash and cash equivalents by $25,000. At
December 31, 1994, the Partnership's declared but unpaid distribution to the
Partners exceeded unrestricted cash and cash equivalents by $55,000.
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. The TWA
lease accounted for approximately 25% of the Partnership's rental revenue for
the year ended December 31, 1994. At June 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. TWA stated
that it expected to emerge from bankruptcy within 60 days and in August 1995,
TWA received its confirmation order. Subject to satisfaction of various
conditions set forth in the confirmation order, TWA anticipates an effective
date of confirmation in late August 1995. TWA has made all rental payments,
advance repayments and payments of deferred rent when due. However, even if
TWA's reorganization plan is confirmed, there can be no assurance that it 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 aircraft out of
service, including the Boeing 747-
14
<PAGE> 16
100 owned by the Partnership. Continental discontinued utilizing the aircraft
and did not make the February through June 1995 rental payments with respect
to the Partnership's Boeing 747-100 aircraft and notified the Partnership of its
intention to return the aircraft to the Partnership. The Partnership is
currently negotiating the return of the aircraft and the settlement of the lease
terms. The Partnership sent Continental a default notice with respect to the
unpaid rent and has preserved all of its rights against Continental. The
Partnership is currently reviewing a proposal submitted by Continental to settle
the lease terms and return the aircraft. Under the proposal, Continental would
make a settlement payment which would represent payments due under the lease
through the settlement date plus a discounted amount representing the balance of
payments due under the lease through its scheduled expiration in April 1996. It
is impossible to predict whether the proposal, if accepted, will result in a
consummated agreement. The Partnership did not accrue the amount due with
respect to February to June 1995 rentals on the balance sheet as of June 30,
1995 and the statement of incomes for the quarter and six months ended June 30,
1995 with respect to the Boeing 747-100 aircraft. To the extent that the Boeing
747-100 aircraft is returned to the Partnership, it is anticipated that the
Partnership will attempt to re-lease or sell the aircraft. The lease of the
Boeing 747-100 aircraft accounted for approximately 38% of the Partnership's
rental revenue in 1994. The General Partners believe that based upon current
market lease values (which are less than what Continental is required to pay
under the lease), projected residual values, and the value associated with the
proposed settlement by Continental, the Partnership's carrying value
(depreciated cost) in the Boeing 747-100 has not been impaired.
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 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 to
December 1999. The deferred rents are being repaid, with interest at 12%, over
a 9-month period which began on July 1, 1995. Through July, all payments have
been made 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 June 30, 1995, the
Partnership held maintenance reserves aggregating $676,000 with respect to the
Kiwi aircraft.
During April 1994, the Partnership established a loan facility with an
unaffiliated third-party Lender ("Lender") which is collateralized by the
Partnership's one-half interests in the McDonnell Douglas MD-81 aircraft leased
to USAir, Inc. and the Partnership's Boeing 747-100 aircraft leased to
Continental. Under the terms of the loan agreement, the
15
<PAGE> 17
Partnership was entitled to borrow up to $4,000,000 the commitment for which was
scheduled to expire on May 1, 1995. This commitment has been extended to July
31, 1995. Through June 30, 1995, the Partnership had borrowed an aggregate of
$2,150,000 pursuant to the loan agreement of which $1,816,000 and $2,000,000
were outstanding at June 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 Partnerships 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 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
leases and eliminated the requirement for future deposits. The cash collateral
account had a balance of $455,000 at June 30, 1995 which was included in
restricted cash on the balance sheet at such date.
Other assets increased $34,000 from $35,000 at December 31, 1994 to
$69,000 at June 30, 1995. This increase resulted primarily from an increase in
prepaid expenses.
The payable to affiliates was $324,000 at June 30, 1995 as compared to
$280,000 at December 31, 1994. 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 six months ended June 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 Administrators aggregated
$91,000 during the six months ended June 30, 1995.
Deferred rental income was $137,000 at December 31, 1994 and June 30,
1995 and represented the portion of rents billed to TWA and due as of June 30,
1995 and December 31, 1994, respectively, that were unearned at such dates.
During the three months ended June 30, 1995, the Partnership paid cash
distributions pertaining to the first quarter of 1995 in the amount of
$1,010,000. This quarterly distribution represented an annualized rate equal to
5% of contributed capital ($.25 per Unit). The distribution for the quarter
ended June 30, 1995 was paid on July 29, 1995 in the amount of $1,212,000 which
represented an annualized rate equal to 6% of contributed capital ($.30 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 successful conclusion of the negotiations with
Continental regarding the 747-100 aircraft, (ii) the timeliness of the
remarketing of the 747-100, (iii) the continued stability of Kiwi and the
continued timely payments of rentals and maintenance reserves, (iv) the
continuation of TWA's payments of lease rent currently due plus the repayment
of amounts previously deferred.
16
<PAGE> 18
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 74% of
the cash distributions paid to the partners for the three months ended June 30,
1995 constituted a return of capital (76% for the six months then ended). Also,
based on the amount of net income reported by the Partnership for accounting
purposes, approximately 66% of the cash distributions paid to the partners from
inception of the Partnership through June 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
On May 30, 1995, a class action lawsuit entitled, "In re PaineWebber
Partnership Litigation," in which the Administrative General Partner and
affiliates of the Administrative General Partner amongst 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 purported class action was filed on behalf of
investors in the Partnership in the state court of Brazoria County, Texas. The
complaint names PaineWebber, the Partnership, the Managing General Partner and
the Administrative General Partner, amongst others, as defendants. The Texas
action alleges fraud and misrepresentation in the sale of investments in the
Partnership. The Plaintiffs in each action seek unspecified damages. The General
Partners believe these actions will be resolved without material adverse effect
on the Partnership's financial statements, taken as a whole.
RESULTS OF OPERATIONS
The Partnership's net income was $319,000 and $523,000, respectively,
for the quarter and six months ended June 30, 1995 (1995 Quarter and 1995
Period, respectively) as compared to $563,000 and $1,196,000, respectively for
the quarter and six months ended June 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 from 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 June 1995. (See above
discussion regarding Continental.) This was partially offset by a decrease in
depreciation due primarily to the non-recognition of depreciation expense in
the 1995 Quarter with respect to the Boeing 747-100 discussed below.
Rental revenue decreased $621,000 and $977,000 or 30% and 24%,
respectively for the 1995 Quarter and 1995 Period, principally due to the
non-accrual of rent with respect to the 747-
17
<PAGE> 19
100 aircraft leased to Continental for February through June 1995 which was
partially offset by rents generated by the 727-200 aircraft leased to Kiwi which
was off lease in the 1994 Quarter and thus a portion of the 1994 Period.
Interest income for the 1995 Quarter and 1995 Period increased by
$19,000 and $25,000, or 35% and 22%, 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 $361,000 and $330,000, or
28% and 13%, 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 747-200 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 decreased $32,000 and $50,000 or 22% and 17%,
respectively in comparison to the 1994 Quarter and the 1994 Period. Management
fees decreased by $38,000 and $62,000 for the 1995 Quarter and 1995 Period as
compared to 1994 Quarter and 1994 Period because of the decreases in the
Partnership's rental revenue and net income which serve as the bases on which
the management fees are calculated. Such decreases were principally caused by
the non-accrual of rents for February and through June 1995 with respect to the
747-100 aircraft discussed above. However, re-lease fees incurred during the
1995 Quarter and 1995 Period increased by $6,000 and $12,000 as compared to the
1994 Quarter and 1994 Period due principally to the fees associated with the
re-lease of the second 727 aircraft to Kiwi during 1994.
18
<PAGE> 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information on a class action entitled, "In re PaineWebber Partnership
Litigation," filed in the United States District Court ("U.S. District Court")
for the Southern District of New York and information regarding a purported
class action (Texas Class Action) filed in the state court of Brazoria County,
Texas was contained in the Partnerships' 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 Partnership Litigation".
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 did not file any reports on Form 8-K during
the second quarter of the fiscal year ending 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
By: /s/ Joseph P. Ciavarella
-------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
21
<PAGE> 23
EXHIBIT INDEX
27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The amount reflected as common stock (5-02(30)) represents total partners'
equity. The amount reflected in EPS-PRIMARY represents net income per weighted
average number of limited partnership units outstanding.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,187,000
<SECURITIES> 0
<RECEIVABLES> 2,226,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 74,446,000
<DEPRECIATION> 38,688,000
<TOTAL-ASSETS> 40,371,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 36,964,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,371,000
<SALES> 3,122,000
<TOTAL-REVENUES> 3,260,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,000
<INCOME-PRETAX> 523,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 523,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 523,000
<EPS-PRIMARY> .13
<EPS-DILUTED> 0
</TABLE>
