<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) May 23, 1996
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Pegasus Aircraft Partners, L.P.
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(Exact Name of Registrant as Specified in Charter)
Delaware 0-17712 1099968
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(State or Other Juristiction (Commission (IRS Employer
of Incorporation) File Number) Identification No)
Four Embarcadero Center 35th Floor, San Fransisco, California 94111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 434-3900
-------------------------
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS
On May 23, 1996, the Partnership mailed its 1995 Annual Report to
holders of limited partnership interest {See Exhibit 7(c)(19)}.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
(19) Annual Report for the year ended December 31, 1995 provided to
owners of limited partnership interests.
<PAGE> 4
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 II, L.P. (Registrant)
By: Air Transport Leasing, Inc.
A General Partner
Date: May 23, 1996 By: /s/ Joseph P. Ciavarella
----------------------------
Joseph P. Ciavarella
Vice President, Treasurer and Chief
Financial and Accounting Officer
<PAGE> 5
EXHIBIT INDEX
Exhibit No. Description
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19 Annual Report for the year ended December 31, 1995
<PAGE> 1
PEGASUS AIRCRAFT PARTNERS, L.P.
1995
ANNUAL
REPORT
<PAGE> 2
PEGASUS AIRCRAFT PARTNERS, L.P.
CONTENTS
Presidents' Letter
THREE
Asset Activity
FIVE
Financial Highlights
SIX
Estimated Annual Valuations
SEVEN
Looking Ahead
NINE
Summary of Aircraft Portfolio
TEN
Answers to Frequently Asked Questions
TWELVE
Financial Statements
THIRTEEN
Management's Discussion and
Analysis of Financial Condition and
Results of Operations
TWENTY-EIGHT
Partnership Directory
THIRTY-TWO
<PAGE> 3
PEGASUS AIRCRAFT PARTNERS, L.P.
PRESIDENTS'
LETTER
April 30, 1996
Dear Limited Partners:
Enclosed is the Annual Report for the year ended December 31, 1995 for Pegasus
Aircraft Partners, L.P.
The Partnership's revenues for the year ended December 31, 1995 (consisting
primarily of rents and interest income) were approximately $6.6 million versus
$8.8 million for 1994. Net income for the year was $880,000 ($0.22 per $20.00
Unit) versus $426,000 ($0.11 per $20.00 Unit) for 1994. Revenues for 1995 were
down versus 1994 primarily due to the lack of lease revenue from the Boeing 747.
Net income was up despite the reduction in revenue due to the lack of
depreciation expense relating to the Boeing 747 and less of a provision for the
decline in the market value of the Partnership's aircraft in 1995 versus 1994.
The $3.9 million Boeing 747 lease termination payment received from Continental
was primarily accounted for as a partial recovery of the cost incurred in
acquiring the aircraft; therefore, it did not significantly impact revenues or
income.
The Partnership declared cash distributions of $1.85 per $20.00 Unit in 1995,
representing an annual distribution rate of 9.25% of contributed capital.
Cumulative cash distributions through year-end 1995 totaled $14.88 per $20.00
Unit for those investors admitted in the first closing. Under current market
conditions, the ultimate value received at the time of the sale of the aircraft
will generally be less than the original cost. Therefore, at least a portion of
each distribution during the life of the Partnership will constitute a return of
capital.
Using both the present value of lease payments under existing leases and
estimated aircraft residual values, the Partnership's aircraft portfolio was
independently appraised as of December 31, 1995 at a value of $38.2 million,
down from $45.5 million at year-end 1994. Based upon an assumed liquidation at
the appraised value of the Partnership's aircraft plus the remaining net assets
of the Partnership, the 1995 year-end estimated annual valuation is $9.34 per
$20.00 Unit, down from $10.76 per $20.00 Unit at year-end 1994. This decline is
primarily attributable to the collection of rents since the appraised residual
values of the aircraft remained relatively constant. As described in the
"Estimated Annual Valuations" section of this report (page seven), there can be
no assurance that the Partnership would receive the appraised values if the
portfolio of aircraft were liquidated today.
As discussed in the 1995 third quarter report, the Partnership completed the
early termination of the lease with Continental Airlines with respect to the
Boeing 747. The Partnership received cash proceeds of $3.9 million,
approximately $2.0 million of which was included in the third quarter
distribution. The Partnership is currently negotiating with a potential lessee
for the Boeing 747, however, there can be no assurance that such a lease will be
consummated and, if consummated, the lease rate would be substantially less than
the $269,000 per month previously paid by Continental. The Partnership will
incur an estimated $1.3 million in maintenance and integration costs in
preparing the aircraft for a new lessee and has commenced such work.
The number of used aircraft available for sale or lease at year-end 1995 fell to
473 from 534 last year. The number of used aircraft is representative of those
aircraft that are either currently parked or readily available but does not
include fleet retirements announced or known to the industry. The number of
narrow-bodies available for sale or lease declined by 12.8% in 1995 while the
number of wide-bodies available for sale or lease, such as the Partnership's
Boeing 747, declined by only 9.3%.
THREE
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PEGASUS AIRCRAFT PARTNERS, L.P.
In general, the U.S. airline industry enjoyed a continuing turnaround in 1995,
with net earnings exceeding $2.0 billion. This represents the first year of
positive earnings since 1989 and tops the previous record set in 1988. The
airlines benefited during 1995 from previously implemented cost cutting
programs, increases in passenger traffic, relatively stable fares and an
increasing load factor (the measure of passengers flying as compared to the
number of available seats).
In the context of strong industry performance, the Partnership's lessees
experienced varying results. Continental recovered from its failed Cal Lite low
fare initiative and reported earnings of $224 million in 1995 (including a $30
million gain relating to a joint venture transaction) versus a loss of $613
million in 1994 (including non-recurring charges of $447 million). Continental's
revenues remained relatively stable in 1995. TWA successfully emerged from its
prepackaged bankruptcy in August 1995 and reported a net loss of $227 million in
1995 (including a $58 million non-cash expense related to distribution of stock
to employees and a $144.4 million extraordinary gain) versus a net loss of $436
million in 1994 (including a $2 million extraordinary charge). TWA's revenues
were relatively unchanged in 1995. USAir reported 1995 net income of $119
million versus a net loss of $685 million in 1994 (including a charge of $254.5
million). USAir's revenues increased slightly in 1995 and the company continues
to struggle with one of the industry's higher cost structures. Both USAir and
TWA also continue to face significant competition from lower fare carriers. Kiwi
International Air Lines, an employee owned company, also was buoyed by the
industry fundamentals and is reported to have achieved a breakeven year in 1995.
However, Kiwi has to date been unable to attract additional outside capital.
The amount of future cash distributions will depend on the ability of the
Partnership's lessees to meet their obligations to the Partnership, particularly
Kiwi, and on the Partnership's ability to re-lease the Boeing 747 and the Boeing
727 leased to Continental, which lease is scheduled to expire in October 1996.
The Partnership distributed $0.40 per $20.00 Unit for the first quarter of 1996,
which was paid in April 1996. Including this distribution, cumulative
distributions to date for those investors admitted in the first closing total
$15.28 per $20.00 Unit.
If you have any questions, please call the Partnership at (800) 234-7342.
Sincerely,
/s/ Richard S. Wiley /s/ Clifford B. Wattley
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Richard S. Wiley Clifford B. Wattley
President President
Pegasus Aircraft Management Corporation Air Transport Leasing, Inc.
FOUR
<PAGE> 5
PEGASUS AIRCRAFT PARTNERS, L.P.
ASSET
ACTIVITY
As part of TWA's restructuring program announced in October 1994, the
Partnership agreed to a partial deferral of the scheduled monthly lease payments
of $185,000 with respect to the MD-82. The rent was reduced for November 1994
through April 1995. On May 1, 1995, TWA began repaying the deferred rents, over
an eighteen month period at an interest rate of 12%. The lease term has also
been extended by 72 months.
Kiwi did not pay to the Partnership its regularly scheduled January, February or
March 1995 rent. The Partnership and Kiwi agreed to defer February and half of
March's rent and Kiwi agreed to extend both leases to December 1999. Kiwi has
repaid all of the 1995 deferred rent with interest. Kiwi continues to struggle
with liquidity concerns and was late in making its February and March 1996 lease
and maintenance reserve payments. Kiwi, like all airlines, will be required to
have 50% of its fleet achieve Stage III noise standards by December 31, 1996. To
comply, it is likely that Kiwi will request that the Partnership hushkit one or
both of the aircraft the Partnership leases to Kiwi. If the Partnership elects
not to hushkit an aircraft, Kiwi could return it to the Partnership and the
Partnership would need to find a new lessee.
Continental had not paid rent on the Boeing 747 it leased from the Partnership
since February 1, 1995. The Partnership agreed to accept the early return of the
aircraft and subsequently negotiated a settlement with Continental, which
resulted in cash proceeds to the Partnership in October 1995 of $3.9 million
(the approximate present value of the remaining lease payments). The lease would
have otherwise expired in April 1996. The Partnership is currently negotiating
with a potential lessee for the Boeing 747. It is anticipated that the
Partnership will incur an estimated $1.3 million in maintenance costs prior to
delivering the Boeing 747 to a new lessee.
The Partnership's lease for the Boeing 727 leased to Continental will expire in
October 1996. If not renewed by Continental, the Partnership will need to find a
new lessee and might consider converting the aircraft to freighter.
FIVE
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PEGASUS AIRCRAFT PARTNERS, L.P.
FINANCIAL
HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31 OR FOR THE YEAR ENDED DECEMBER 31
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1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total Rental Revenues $ 6,076(4) $ 8,527 $ 9,062 $10,006 $10,253
Net Income 880 426 2,881 1,740 3,927
PER UNIT RESULTS
Net Income 0.22 0.11 0.71 0.43 0.97
Distributions(1) 1.85 1.80 1.90 2.30 2.16
Weighted Average
Cash Flow from
Operating Activities(2) 1.50 1.96 2.09 2.14 2.37
FINANCIAL CONDITION
Total Assets 36,611 42,619 46,727 51,875 59,926
Total Long-Term Debt 1,625 2,000 - - -
Total Partners' Equity(3) 31,176 37,770 44,616 49,411 56,964
</TABLE>
(1) Distribution amounts are reflected during the period in which the cash for
the distributions was generated and a portion of each distribution is a
return of capital. Distributions declared in a fourth quarter of a year are
reflected in that year, although actually paid in January of the following
year. Distribution amounts shown are applicable to limited partners
admitted in the initial closing.
(2) Cash generated from operating activities before the net effect of advances
and repayments of advances to lessees, capital improvements to aircraft,
debt service, the funding of the cash collateral account established with
respect to the tax benefit transfer lease with USAir, and distributions to
partners. The amounts for 1995 exclude the Boeing 747 lease settlement
proceeds, which were accounted for under the cost recovery method.
(3) Total Partners' Equity is reduced by the amount that distributions exceed
net income.
(4) Such amount excludes lease settlement proceeds accounted for under the cost
recovery method.
SIX
<PAGE> 7
PEGASUS AIRCRAFT PARTNERS, L.P.
ESTIMATED
ANNUAL VALUATIONS
At year-end 1995, the Partnership engaged an independent appraisal firm to
estimate at year-end 1995 the aircraft's value using existing lease rates and
forecasts of residual values for the aircraft at the end of the leases. The
appraiser assumed an inflation rate of 3.5% per annum and discounted future cash
flows at 10% to obtain the valuation at year-end 1995. Appraisals of aircraft
are only estimates of current values and involve many assumptions. There are no
assurances that the Partnership could receive an amount equal to these appraised
values now or when the Partnership ultimately sells the aircraft. The ultimate
residual values of the aircraft depend heavily on, among other factors, the
condition of the aircraft, the then cost of new aircraft as compared to used
aircraft, rates of inflation and supply and demand of used aircraft at the time
they are sold.
Once the appraised values were provided to the General Partners, the General
Partners calculated an estimated year-end value per Unit assuming a liquidation
at the appraised values and taking into account the allocation provisions of the
Partnership Agreement. Thus, the estimated year-end valuation represents the net
book value of the Partnership's assets, adjusted for the appraised values, net
of certain liquidation expenses. The General Partners then calculated the
estimated annual valuation allocable to each Partnership Unit, but did not take
into account any discount to reflect the fact that there is no public market for
the Units. As of December 31, 1995, the estimated annual valuation was $9.34 per
$20.00 Unit, which is a decline of $1.42 from the year-end 1994 estimated annual
valuation of $10.76 per $20.00 Unit. There can be no assurance that the
Partnership would receive the appraised values for the aircraft if liquidated
today. Also, the estimated annual valuation does not necessarily represent the
amount of benefits an investor will realize if an investor continues to hold
Units through the life of the program.
The 1995 estimated annual valuation of $9.34 is comprised of two components:
$4.13 per Unit is the estimated residual value of the aircraft and $5.21 per
Unit is the present value of the scheduled lease payments due under the various
leases, net of the liquidation of the Partnership's liabilities. The reduction
in the estimated annual valuation from 1994 is primarily attributable to the
distribution to limited partners of cash generated in 1995 (which was part of
the 1994 estimated annual valuation).
As you are aware, the Partnership Units were designed for long-term investment.
While the values for most other securities are generally obtained by looking at
market trading prices as quoted on the stock exchanges, the Units are not traded
on any organized stock exchange and only a limited number of shares change hands
during the year. As a result, prices obtained from isolated secondary market
transactions may not be a reliable indicator of the value of a Unit in the
Partnership.
The General Partners are aware that, pursuant to the regulations of the Internal
Revenue Service (the "IRS"), custodians of Individual Retirement Accounts
("IRAs") annually provide to the IRS and IRA holders year-end estimated values
for securities held in their clients' IRA accounts. Some custodians may choose
to meet this obligation by obtaining estimated values of limited partnership
interests from a third party valuation firm, which estimates may differ from the
estimated annual valuation reported in this Annual Report due to, among other
things, differences in methodology. Further, independent valuation firms may
discount their values to account for a lack of marketability, lack of control
and other relevant factors to arrive at their third party estimated values.
Investors should discuss with their custodian any questions they have about
estimates of value communicated by that custodian.
SEVEN
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PEGASUS AIRCRAFT PARTNERS, L.P.
SUMMARY OF APPRAISED VALUES OF AIRCRAFT PORTFOLIO
AS OF DECEMBER 31, 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED + PRESENT VALUE = TOTAL
CURRENT ACQUISITION RESIDUAL OF LEASE APPRAISED
AIRCRAFT LESSEE COSTS(1) VALUE(3) PAYMENTS(3) VALUE
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<S> <C> <C> <C> <C> <C>
McDONNELL
DOUGLAS MD-81(2) USAir, Inc. $10.0 $ 3.7 $ 2.6 $ 6.3
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MCDONNELL Trans World
DOUGLAS MD-82 Airlines, Inc. 21.3 4.1 12.9 17.0
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BOEING 727 Continental
ADVANCED Airlines, Inc. 8.0 2.4 0.8 3.2
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BOEING 727 Kiwi International
NON-ADVANCED Air Lines, Inc. 7.6 0.5 2.2 2.7
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BOEING 727 Kiwi International
NON-ADVANCED Air Lines, Inc. 7.5 0.5 2.2 2.7
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BOEING 747(4) currently
off lease 17.8 6.2 - 6.2
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JT8D-9A Kiwi International
ENGINE Air Lines, Inc. 0.2 0.1 - 0.1
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1995 TOTAL $72.4 $17.5 $20.7 $38.2
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1994 TOTAL $72.3 $17.7 $27.8 $45.5
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</TABLE>
(1) Acquisition costs do not include total acquisition-related fees of $2.0
million paid to the General Partners. The amounts shown include
additional investments in the respective aircraft, which aggregate
approximately $3.0 million.
(2) The aircraft is owned 50% by the Partnership. The remaining 50% is held
by an affiliated partnership, Pegasus Aircraft Partners II, L.P.
(3) To calculate the present value, a 10% discount rate was applied to the
future lease payments and to the estimated residual value at the end of
the current lease term.
(4) Aircraft is currently off lease and is being re-marketed. Appraised
value reflected for the Boeing 747 aircraft represents its approximate
current market value unencumbered by a lease. The Partnership estimates
that it will spend approximately $1.3 million for maintenance and other
modifications in connection with the re-leasing of the aircraft.
(5) The engine was not appraised. Value is based upon life remaining until
overhaul and current market rental value.
EIGHT
<PAGE> 9
PEGASUS AIRCRAFT PARTNERS, L.P.
LOOKING
AHEAD
As previously discussed, the Partnership's Boeing 747 was off lease for most of
1995 and the Partnership is currently in negotiations with a potential lessee.
It is estimated that certain scheduled maintenance and integration costs,
estimated at approximately $1.3 million, will be necessary to complete a
re-marketing of this aircraft. Of the remaining five aircraft owned by the
Partnership, four have leases scheduled to expire between 1998 and 2004. One
aircraft, the Boeing 727 (advanced), has a lease with Continental that is
scheduled to expire in October 1996. The Partnership is currently exploring
renewal and other opportunities with respect to this aircraft.
Because of the need to have 50% of its fleet meet Stage III aircraft noise
levels by year-end, Kiwi may request that the Partnership hushkit (upgrade to
Stage III) one or both of the Boeing 727 aircraft leased to Kiwi. If requested
by Kiwi and agreed to by the Partnership, the hushkitting is expected to cost
the Partnership approximately $1.9 million per aircraft. If the Partnership
elects not to hushkit the aircraft, Kiwi can return the aircraft and the
Partnership would need to find a new lessee.
The timing and expenses associated with the re-marketing of the Partnership's
Boeing 747 and Boeing 727, the potential hushkitting of the Kiwi aircraft and
Kiwi's continued liquidity concerns could all impact the Partnership's future
cash flow. As a result, future cash distributions to partners, which are
primarily paid out of cash flow from operations, will continue to be determined
on a quarter by quarter basis. The distribution for the first quarter of 1996,
paid on April 25, 1996, was $0.40 per Unit, or an annualized rate of 8% of
contributed capital.
NINE
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PEGASUS AIRCRAFT PARTNERS, L.P.
SUMMARY OF
AIRCRAFT PORTFOLIO
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1995 CURRENT
PARTNERSHIP ACQUISITION APPRAISED LEASE
MANUFACTURE ACQUISITION COST(1) VALUE(2) ORIGINATION
CURRENT LESSEE AIRCRAFT TYPE DATE DATE ($ MILLIONS) ($ MILLIONS) DATE(8)
<S> <C> <C> <C> <C> <C> <C>
KIWI INTERNATIONAL Boeing 727-200
AIR LINES, INC. (Non-Advanced) 1969 1988 $ 7.6 $ 2.7 1994
KIWI INTERNATIONAL Boeing 727-200
AIR LINES, INC. (Non-Advanced) 1969 1988 7.5 2.7 1994
CONTINENTAL Boeing 727-200
AIRLINES, INC. (Advanced) 1974 1988 8.0 3.2 1988
Currently Boeing
off lease 747-100 1970 1988 17.8 6.2 (9)
TRANS WORLD McDonnell
AIRLINES, INC. Douglas MD-82 1983 1989 21.3 17.0 1989
USAIR, INC. McDonnell
Douglas MD-81(5) 1982 1989 10.0 6.3 1989
KIWI INTERNATIONAL JT8D-9A
AIR LINES, INC. Engine(10) 1969 1994 0.2 0.1 1994
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$72.4 $38.2
</TABLE>
(1) Acquisition costs do not include total acquisition-related fees of $2.0
million paid to the General Partners. The amounts shown include
additional investments in the respective aircraft, which aggregate
approximately $3.0 million.
(2) The December 1995 appraised values were determined by an independent
aircraft appraisal firm. It should be noted that appraisals are only
estimates of value and may not be reliable as measures of current or
future realizable value.
(3) Lease expiration dates do not include renewal options.
(4) Cumulative flight cycles and cumulative flight hours are current as of
December 1995, except for the USAir MD-81, which is as of February 2,
1996. This information as well as the anticipated prospective
utilization of the aircraft under its lease and the age of the aircraft
are significant in determining the status of the aircraft vis a vis
compliance with aging aircraft Airworthiness Directives issued by the
FAA. The cumulative flight cycle thresholds are as follows: Boeing
727-60,000; Boeing 737-75,000; Boeing 747-20,000; McDonnell Douglas
DC9-100,000; McDonnell Douglas MD80-75,000 and the McDonnell Douglas
DC10-42,000. The cycle aging modifications are not expected to be due
to be performed until approximately the end or beyond the end of each
of the leases. The aircraft age threshold is 20 years.
(5) The aircraft is owned 50% by the Partnership. The remaining 50% is held
by an affiliated partnership, Pegasus Aircraft Partners II, L.P.
Acquisition cost, 1995 appraised value and current annual lease payment
reflect 50% interest.
(6) The Boeing 747 will currently comply with Stage III requirements if it
is flown with certain operating restrictions.
(7) Such amounts reflect all rents received in respect to the referenced
aircraft.
TEN
<PAGE> 11
PEGASUS AIRCRAFT PARTNERS, L.P.
<TABLE>
<CAPTION>
CURRENT TOTAL LEASE MAINTENANCE
ANNUAL CURRENT PAYMENTS COST INCURRED STAGE OF
LEASE LEASE RECEIVED BY THE PARTNERSHIP NOISE CUMULATIVE CUMULATIVE
PAYMENTS EXPIRATION FROM INCEPTION FROM INCEPTION ABATEMENT FLIGHT FLIGHT
CURRENT LESSEE ($ MILLIONS) DATE(3) THROUGH 12/31/95(7) THROUGH 12/31/95 COMPLIANCE HOURS(4) CYCLES(4)
<S> <C> <C> <C> <C> <C> <C> <C>
KIWI INTERNATIONAL
AIR LINES, INC. $ 0.6 1999 $ 6.4 $ 0(16) Stage II 60,158 48,404
KIWI INTERNATIONAL
AIR LINES, INC. 0.6 1999 6.2 0(16) Stage II 61,530 49,513
CONTINENTAL
AIRLINES, INC. 1.0 1996 7.8 0 Stage II 62,650 42,033
Currently
off lease -- -- 19.7(11) 0(12) Stage II(6) 81,704 16,146
TRANS WORLD
AIRLINES, INC. 2.2 2004 16.0 0 Stage III 39,559 20,704
USAIR, INC. 1.2 1998(15) 8.2 0 Stage III 38,405 35,312
KIWI INTERNATIONAL
AIR LINES, INC. (13) 1999 0.1(14) N/A Stage II 40,368 36,805
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(8) The current lease origination date represents either the date that the
aircraft was delivered to the current lessee or the date that the
Partnership assumed the lease from the prior owner.
(9) Aircraft is currently off lease and is being re-marketed. Appraised
value reflected for the Boeing 747 aircraft represents its approximate
current market value unencumbered by a lease.
(10) The engine was not appraised. Value is based upon life remaining until
overhaul and current market rental value.
(11) Excludes $3.9 million received in connection with the Boeing 747 lease
settlement which was accounted for under the cost recovery method.
(12) Excludes work estimated at a cost of $1.3 million with respect to the
Boeing 747 aircraft. Such work is expected to be completed in 1996.
(13) $105 per flight hour of use, approximately 50% of which is reserved for
maintenance and the balance of which is recorded as rental revenue.
(14) This amount was recorded as rental revenue with respect to the engine.
(15) If USAir does not renew the lease for an initial three year renewal
period, the Partnership is entitled to a lease termination payment.
(16) The Partnership incurred aggregate maintenance costs of $339,000 and
$241,000, respectively, with respect to such aircraft. These expenses
were funded by payments received from Northwest aggregating $758,000
upon the return of such aircraft and in lieu of Northwest completing
certain maintenance obligations required by the leases.
ELEVEN
<PAGE> 12
PEGASUS AIRCRAFT PARTNERS, L.P.
ANSWERS TO FREQUENTLY
ASKED QUESTIONS
1. Why is the estimated annual valuation of my investment in the Partnership
lower than last year?
The primary reason for lower estimated valuations at year-end 1995 is that
during the year, investors received distributions, part of which were deemed to
be a return of capital.
2. How is an investor's original capital returned?
Because aircraft are depreciating assets in the current market and are expected
to be in the foreseeable future, at least a portion of the cash distributions to
a limited partner paid from lease revenues reflects a return of capital. Thus,
original capital is returned gradually over time as part of each quarterly cash
distribution. The total return to an investor will depend on lease renewal
rates, lease terms, aircraft sales proceeds and other factors and cannot be
determined until the dissolution of the Partnership.
3. Why are the prices that I could receive on the secondary market below the
estimated value of my investment in this Partnership?
The secondary market is not an organized market or exchange, but a way that
investors might sell their investment if they have to prior to the liquidation
of the Partnership. Limited Partnership units do not trade in the same manner or
to the same extent as other equity securities, and secondary market prices
generally are not a reliable indicator of the value of an investment in a
limited partnership. The lack of an organized market for limited partnership
interests complicates efforts to report valuation information for these
investments. Thus, these estimates are often based on estimates of the future
performance of the aircraft leases and the liquidation value of the aircraft,
which can be difficult to assess. In addition, there are currently more
potential sellers than buyers, so prices have remained low. Because of this
imbalance, the resale process is not considered to be an efficient marketplace.
That is, the prices paid typically do not reflect the estimated value of the
underlying assets if held to maturity, but are instead the result of sellers who
are willing to accept low prices because of their immediate need for liquidity.
4. How much longer do you anticipate the Partnership to be in existence?
The portfolio of aircraft or individual aircraft will be sold when the General
Partners feel it is in the best interest of the Partnership to do so, subject to
the existing lease and resale market. Depending on the creditworthiness of a
lessee, an aircraft with a lease in place may be more valuable than one without.
The General Partners still believe 1997-2001 to be a good estimate although,
with current market conditions, the latter part of that time frame is more
likely. The Partnership will be liquidated when all aircraft are sold, either
individually or as a portfolio, the business is concluded and final
distributions have been made.
TWELVE
<PAGE> 13
PEGASUS AIRCRAFT PARTNERS, L.P.
FINANCIAL
STATEMENTS
Balance Sheets
FOURTEEN
Statements of Income
FIFTEEN
Statements of Partners' Equity
SIXTEEN
Statements of Cash Flows
SEVENTEEN
Notes to Financial Statements
EIGHTEEN
Report of Independent Accountants
TWENTY-SEVEN
THIRTEEN
<PAGE> 14
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------
1995 1994
ASSETS
<S> <C> <C>
Cash and cash equivalents (Note 4) $ 4,081 $ 1,763
Restricted cash (Note 5) 1,135 907
Rent and other receivables (Note 5) 1,534 1,953
Aircraft, net (Note 5) 29,814 37,961
Prepaid expenses 47 35
- -----------------------------------------------------------------------------------------------------
Total Assets $36,611 $42,619
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Note 7) $ 1,625 $ 2,000
Accounts payable and accrued expenses 98 76
Payable to affiliates (Note 6) 628 280
Distributions payable to partners 1,616 1,818
Maintenance reserves payable 1,235 522
Deferred rental income 218 137
Accrued interest payable 15 16
- -----------------------------------------------------------------------------------------------------
Total Liabilities 5,435 4,849
- -----------------------------------------------------------------------------------------------------
CONTINGENCIES (Notes 5, 7 and 9)
PARTNERS' EQUITY:
General Partners (485) (420)
Limited Partners (4,000,005 units outstanding
in 1995 and 1994) 31,661 38,190
- -----------------------------------------------------------------------------------------------------
Total Partners' Equity 31,176 37,770
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Partners' Equity $36,611 $42,619
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
FOURTEEN
<PAGE> 15
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT UNIT DATA AND PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
REVENUE:
Rentals from operating leases $ 6,076 $ 8,527 $ 9,062
Interest 293 230 218
Other income 233 - -
- -----------------------------------------------------------------------------------------------------
6,602 8,757 9,280
- -----------------------------------------------------------------------------------------------------
EXPENSES:
Depreciation and amortization 4,105 5,312 5,094
Provision for decline in market value of aircraft
(Note 5) 400 2,000 434
Management and re-lease fees (Note 6) 698 601 602
General and administrative (Note 6) 210 180 166
Direct lease 107 115 97
Interest expense 202 123 -
Aircraft maintenance and storage - - 6
- -----------------------------------------------------------------------------------------------------
5,722 8,331 6,399
- -----------------------------------------------------------------------------------------------------
NET INCOME $ 880 $ 426 $ 2,881
- -----------------------------------------------------------------------------------------------------
NET INCOME ALLOCATED:
To the General Partners 9 4 29
To the Limited Partners $ 871 $ 422 $ 2,852
- -----------------------------------------------------------------------------------------------------
$ 880 $ 426 $ 2,881
- -----------------------------------------------------------------------------------------------------
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .22 $ .11 $ .71
- -----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005 4,000,005
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
FIFTEEN
<PAGE> 16
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31 1995, 1994 AND 1993
------------------------------------------------------
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
<S> <C> <C> <C>
Balance, December 31, 1992 $(305) $49,716 $49,411
Net income 29 2,852 2,881
Distributions to partners declared (76) (7,600) (7,676)
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1993 (352) 44,968 44,616
Net income 4 422 426
Distribution to partners declared (72) (7,200) (7,272)
- -----------------------------------------------------------------------------------------------------
Balance December 31, 1994 (420) 38,190 37,770
Net income 9 871 880
Distributions to partners declared (74) (7,400) (7,474)
- -----------------------------------------------------------------------------------------------------
Balance December 31, 1995 $(485) $31,661 $31,176
- -----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
SIXTEEN
<PAGE> 17
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 880 $ 426 $2,881
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,105 5,312 5,094
Provision for decline in market value of aircraft 400 2,000 434
Unrestricted maintenance reserves received from
lessee 100 325 433
Utilization of maintenance reserve provided for - (580) -
Change in assets and liabilities:
Rent and other receivables 128 231 (261)
Prepaid expenses (12) (7) 33
Accounts payable and accrued expenses 22 28 (34)
Payable to affiliates 348 217 20
Deferred rental income 81 (45) (137)
Accrued interest payable (1) 16 -
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,051 7,923 8,463
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Continental settlement, net 3,673 - -
Capitalized aircraft improvements (31) (2,723) (225)
Advances to lessees - (100) (1,089)
Repayment of advances by lessees 291 332 176
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,933 (2,491) (1,138)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 2,150 -
Repayment of notes payable (375) (150) -
Transfers from (to) restricted cash 385 (140) (140)
Cash distributions paid to partners (7,676) (7,272) (7,878)
- -----------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,666) (5,412) (8,018)
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,318 20 (693)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,763 1,743 2,436
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 4,081 1,763 $1,743
- -----------------------------------------------------------------------------------------------------
Supplemental Schedule of Cash Flow Information:
Interest Paid $ 203 $ 107 $ -
- -----------------------------------------------------------------------------------------------------
Restricted maintenance reserves collected net of
maintenance drawdowns $ 613 $ 522 $ -
- -----------------------------------------------------------------------------------------------------
NONCASH TRANSACTIONS
Distributions to partners declared but unpaid $1,616 $1,818 $1,818
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
SEVENTEEN
<PAGE> 18
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL
STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Pegasus Aircraft Partners, L.P. (the "Partnership"), a
Delaware limited partnership, maintains its accounting records and prepares
financial statements on the accrual basis of accounting. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. The most significant
assumptions and estimates relate to useful life and recoverability of the
aircraft and tax indemnity provisions described below. Actual results could
differ from these estimates.
CASH AND CASH EQUIVALENTS The Partnership invests funds not immediately required
for operations or distributions in short term, highly liquid investments until
such time as the funds are required to meet its obligations. The short term,
highly liquid investments are recorded at cost, which approximates fair market
value. For purposes of the balance sheets and the statements of cash flows, the
Partnership considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
RESTRICTED CASH Restricted cash represents maintenance reserves (also described
below) collected from Kiwi International Air Lines, Inc. ("Kiwi") with respect
to the two aircraft leased to Kiwi. (See also Note 5 "Aircraft Under Operating
Leases.") In prior years, restricted cash included cash in a collateral account
that secured the Partnership's obligation under a letter of credit agreement
(see Note 5 "Aircraft Under Operating Leases" and Note 7 "Notes Payable," for
further discussion).
AIRCRAFT AND DEPRECIATION The aircraft are recorded at cost, which includes
acquisition costs and the acquisition fee and the financial management advisory
fee paid to the General Partners. Depreciation is computed using the
straight-line method over an estimated economic life of twelve years (five years
for the aircraft engine separately leased to Kiwi). Improvements to aircraft are
capitalized when incurred and depreciated, generally over the remaining useful
life of the improvement. The Partnership evaluates these estimates based upon
changes in market conditions in accordance with generally accepted accounting
principles. Accordingly, the Partnership records a provision for decline in
market value of aircraft to recognize a loss in the value of an aircraft when
the General Partners believe that the recoverability of the Partnership's
investment in an aircraft has been impaired. Proceeds received in lease
settlements or terminations are accounted for under the cost recovery method
when and to the extent that, based upon third party appraisals and market
conditions, there has been a diminution to the carrying value of the aircraft.
IMPACT OF FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS The Financial
Accounting Standards Board recently issued FASB 121, "Accounting for the
impairment of long lived assets and long lived assets to be disposed of" ("FAS
121"). FAS 121 requires companies to review their long lived assets, such as the
Partnership's aircraft, and certain identifiable intangibles for impairment
whenever events and changes in circumstances indicate that the carrying value of
a long lived asset may not be recoverable. The Partnership will be required to
adopt the provision of FAS 121 as of January 1996. The Partnership believes that
based upon current operations and current methods used to evaluate declines in
market value, the future adoption of FAS 121 will not have a material impact on
the Partnership's financial condition or results of operations.
TAX BENEFIT TRANSFER LEASE The McDonnell Douglas MD-81 aircraft under lease to
USAir, Inc. ("USAir") was purchased subject to a tax benefit transfer lease that
provided for the transfer of the investment tax credits and depreciation
deductions with respect to the aircraft to a tax lessor. The transfer was
accomplished by the sale, for income tax purposes only, of the aircraft to the
tax lessor for cash and a note and a leaseback of the aircraft for rental
payments that match the payments on the note. Under the terms of the tax benefit
transfer lease, the Partnership's required rental payments are contingent upon
and may, by agreement, be offset by the tax lessor's required note payments.
Accordingly, no asset or liability for the tax benefit transfer lease has been
recorded.
MAINTENANCE RESERVE FUNDS Two of the Partnership's leases require the lessee to
make monthly payments to maintenance reserve funds administered by the
Partnership. The Partnership is obligated to reimburse the lessee for specified
maintenance costs out of the reserve funds, upon submission of appropriate
evidence documenting the maintenance costs incurred by the lessee. Interest
earned on the reserve funds is deposited into the funds and utilized in the same
manner as other payments to the funds. These reserve funds are included in
restricted cash on the balance sheets.
OPERATING LEASES The aircraft leases, which are structured principally as triple
net leases, are accounted for as operating leases. Lease revenues are recognized
ratably over the terms of the related leases.
DEFERRED RENTAL INCOME Deferred rental income represents rental payments
received in advance that have not been earned.
EIGHTEEN
<PAGE> 19
PEGASUS AIRCRAFT PARTNERS, L.P.
INCOME TAXES No provision for income taxes has been made in the financial
statements since such taxes are the responsibility of the individual partners
rather than the Partnership.
NET INCOME PER LIMITED PARTNERSHIP UNIT The net income per limited partnership
unit is computed by dividing the net income allocated to the limited partners by
the weighted average number of Units outstanding for the period.
2. ORGANIZATION OF THE PARTNERSHIP
The Partnership was formed on June 23, 1988 for the purpose of acquiring,
leasing and ultimately selling used commercial aircraft principally to U.S.
airlines. The Managing General Partner of the Partnership is Pegasus Aircraft
Management Corporation, a wholly-owned subsidiary of Pegasus Capital
Corporation, and the Administrative General Partner is Air Transport Leasing,
Inc., a wholly-owned subsidiary of PaineWebber Group Inc. (collectively, the
"General Partners").
The Partnership is required to dissolve and distribute all of its assets no
later than December 31, 2012. The Partnership may reinvest the proceeds from
sales of aircraft occurring prior to March 22, 1997 provided that, prior to any
such reinvestment, the Partnership distributes to the limited partners cash in
an amount sufficient to pay any federal and state income taxes to be incurred by
the limited partners as a result of the aircraft sale. Thereafter, the net
proceeds of any sales of aircraft will be distributed to the partners.
Upon formation of the Partnership, the General Partners each contributed $500 to
the capital of the Partnership, and the initial limited partner contributed $100
for five limited partnership depositary units ("Units"). An additional 4,000,000
Units were then sold at a price of $20.00 per Unit, with the Partnership
receiving gross offering proceeds of $80,000,000.
Title to the aircraft owned by the Partnership is held by non-affiliated
trustees of trusts of which the Partnership is the beneficiary or one of two
beneficiaries. The purpose of this method of holding title is to satisfy certain
registration requirements of the Federal Aviation Administration.
3. PARTNERSHIP ALLOCATIONS
The Partnership Agreement provides that cash flow from operations be distributed
on a quarterly basis at the General Partners' discretion, 99% to the limited
partners and 1% to the General Partners. Cash flow is defined in the Partnership
Agreement as including cash receipts from operations and interest income earned,
less expenses incurred and paid in connection with the ownership and lease of
the aircraft. Depreciation and amortization expenses are not deducted from cash
receipts in determining cash flow. Distributable proceeds from sales of aircraft
upon liquidation of the Partnership will be distributed in accordance with the
partners' capital accounts after all allocations of income and losses.
Income and losses generally will be allocated 99% to the limited partners and 1%
to the General Partners. Upon the sale of aircraft, gain generally will be
allocated, first, to the General Partners in an amount equal to the difference
between their capital contributions and 1.01% of the aggregate capital
contributions of the limited partners, and, then, 99% to the limited partners,
and 1% to the General Partners.
4. CASH EQUIVALENTS
The Partnership invests funds not immediately required for operations or
distributions in short-term, highly liquid investments. These investments are
primarily short-term commercial paper issued by large domestic corporations. At
December 31, 1995, the Partnership held short-term commercial paper issued by
Ford Motor Credit Company (with various maturities) with par values aggregating
$3,826,000, which were acquired at cost aggregating $3,806,985, and short term
commercial paper issued by John Deere, Inc. with a par value of $150,000, which
was purchased for a cost of $148,974.
5. AIRCRAFT UNDER OPERATING LEASES
NET INVESTMENT IN AIRCRAFT
The Partnership's net investment in aircraft as of December 31, 1995 and 1994
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Aircraft on operating leases $ 56,095 $ 74,415
Less: Accumulated depreciation (26,995) (31,507)
Reserve for decline in
market value of aircraft (5,169) (4,769)
Provision for maintenance cost (178) (178)
- --------------------------------------------------------------------------------
23,753 37,961
Aircraft held for lease $ 18,351 $ --
Less: Accumulated depreciation (8,617) --
Net lease settlement proceeds
accounted for as cost recovery (3,673) --
- --------------------------------------------------------------------------------
6,061 --
- --------------------------------------------------------------------------------
$ 29,814 $ 37,961
- --------------------------------------------------------------------------------
</TABLE>
Net investment in aircraft includes depreciated cost of approximately $127,000
for a spare engine leased to Kiwi at December 31, 1995.
NINETEEN
<PAGE> 20
PEGASUS AIRCRAFT PARTNERS, L.P.
Financial Terms of Leases
KIWI INTERNATIONAL AIR LINES LEASES The Partnership owns two Boeing 727-200
non-advanced aircraft, originally acquired in December 1988 for $6,308,000 per
aircraft. The aircraft were originally leased to Northwest Aircraft, Inc.
("Northwest") subject to operating leases, one of which expired in August 1993
and the other expired in April 1994, both after short extensions at lower lease
rates. Upon the expiration of the leases, Northwest paid the Partnership
$433,000 and $325,000 representing economic settlements in lieu of completing
certain maintenance procedures required for the respective leases. On February
1994 and April 1994, the Partnership entered into the leases with Kiwi
International Air Lines, Inc. ("Kiwi"), each for terms of approximately five
years with rents payable monthly in advance $55,000 per aircraft. The leases
also required Kiwi to pay maintenance reserves, which can be drawn down by Kiwi
for specific maintenance procedures, of $250 per flight hour. The aircraft were
delivered in April and July 1994. In connection with the first Kiwi lease, the
Partnership also acquired an additional aircraft engine at a cost of $195,000,
which is used as a spare by Kiwi on a utilization basis at $105 per flight hour
of use.
In connection with the Kiwi leases, the Partnership completed certain
maintenance procedures, aircraft-aging related modifications, the purchase of
the spare engine for Kiwi's fleet discussed above 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 and the balance of which
was capitalized as part of the Partnership's basis in the aircraft.
During the terms of the leases, Kiwi can request that the aircraft be hushkitted
to obtain Stage III noise abatement for which the lease term will be reset to
five years with lease payments increasing to amortize the cost of hushkitting at
the rate of 2% per month. Alternatively, the Partnership can deem the
hushkitting economically unfeasible at which point Kiwi can terminate the lease
and return the aircraft. Based upon the composition of its fleet and the FAA
mandated deadlines for compliance with Stage III Noise Regulation, management
believes that Kiwi will request that the Partnership hushkit one or both of the
Boeing 727 aircraft by December 1996. Such upgrade is estimated to cost $1.9
million per aircraft and the Partnership would need to acquire additional
financing to complete such work.
During 1995, Kiwi encountered continued liquidity and operating problems. The
Partnership and Kiwi agreed to a deferral of February 1995 and half of March
1995 rent ($165,000 in the aggregate) plus an accommodation to permit Kiwi to
not fund the maintenance reserves in February, March and April 1995. The
deferred rent is payable with interest of 12% over a nine month period, which
began July 1, 1995. All 1995 payments have been made as scheduled and the
outstanding balance was approximately $56,000 at December 31, 1995.
Additionally, at December 31, 1995, the Partnership held maintenance deposits
aggregating $1,135,000 with respect to the Kiwi aircraft. Kiwi requested
additional time to make February rental, deferred rental and maintenance
payments and made such payments in late February 1996 and early March 1996.
Kiwi's ability to make future payments on a timely basis is uncertain due to
continued liquidity and capital concerns.
The Partnership recorded provisions for decline in market value of $1,943,000
and $2,335,000 during the years ended December 31, 1994 and 1992, respectively,
with respect to these aircraft. These provisions are reflected in the carrying
value of the Partnership's investments in these two aircraft as of December 31,
1995.
CONTINENTAL AIRLINES LEASES During December 1988, the Partnership acquired a
Boeing 727-200 advanced aircraft for a total purchase price of $8,025,000. The
aircraft was originally subject to an operating lease with Continental Airlines,
Inc. ("Continental"), the term of which ends on October 31, 1996. Rental
payments are payable monthly, in advance at the rate of $81,000.
During December 1988, the Partnership acquired a Boeing 747-100 aircraft for a
total purchase price of $17,847,000. The aircraft was originally subject to an
operating lease with Continental, the term of which was scheduled to expire on
April 30, 1996 with rental payable monthly, in advance, at the rate of $269,000.
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 returned the aircraft to the Partner-ship. 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. Continental returned the
aircraft and engines in the return condition required by the lease. On
TWENTY
<PAGE> 21
PEGASUS AIRCRAFT PARTNERS, L.P.
October 16, 1995 the Partnership received the Lease Settlement proceeds totaling
$3,906,491.
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
December 31, 1995, the Partnership had a carrying value of $6,061,000 in the
747-100 aircraft, which approximated its estimated market value at such date.
The remaining gain on the lease settlement was offset by the related management
fees accrued and thus no net gain or loss was recognized on the settlement.
The Partnership has entered into various lease modifications and financing
arrangements with Continental as a result of the bankruptcy, which are
summarized below. Continental filed for Chapter 11 bankruptcy protection on
December 3, 1990 and stopped making lease payments.
On July 3, 1991, the Bankruptcy Court approved an agreement amending the
Partnership's lease agreements with Continental with respect to the
Partnership's Boeing 727-200 advanced and Boeing 747-100, aircraft. Pursuant to
the agreement, Continental paid 50% of the rentals due each month, effective
June 1, 1991. Continental resumed paying 100% of the rentals due each month
beginning October 1, 1991, issued promissory notes for the unpaid rents for
December 1990 through May 1991 and the remaining 50% of the rentals due for the
months of June 1991 through September 1991 (which totaled $2,798,000 and which
were sold to an unaffiliated third party) and reduced the rentals with respect
to the Boeing 727-200 advanced aircraft from $118,000 to $81,000 per month,
effective December 1, 1990. The amount of the rent payable with respect to the
Boeing 747-100 aircraft was not changed.
Additionally, the Partnership also agreed to and advanced $500,000 for certain
qualifying capital expenditures incurred by Continental with respect to the
Boeing 747-100 aircraft and $250,000 for the Boeing 727-200 advanced aircraft.
Continental agreed to repay the amounts advanced by the Partnership pursuant to
this financing arrangement, with interest at 12% per annum, over the lesser of
36 months or the then remaining lease term. The advances for these qualifying
capital expenditures, were funded from operating reserves. The balance of the
related receivables aggregated $199,000 at December 31, 1995. All first quarter
1996 repayments of advances have been made by Continental when due.
On December 30, 1992, the Bankruptcy Court approved an agreement to further
amend the Partnership's lease agreements with Continental with respect to the
Partnership's Boeing 727-200 advanced, and Boeing 747-100, aircraft. Pursuant to
the agreement, rentals attributable to the period from November 1, 1992 through
February 15, 1993 were deferred. Continental resumed paying rentals on a current
basis beginning February 15, 1993. The deferred rentals are payable, along with
interest at the rate of 8.70% per annum, in 36 equal monthly installments which
began May 1, 1993. At December 31, 1995, the balance of the deferred rentals was
$152,000. All first quarter 1996 repayments of deferred rentals have been made
by Continental when due.
The Partnership recorded a provision for decline in market value of $400,000 and
$57,000 during the years ended December 31, 1995 and 1994, respectively, to
reflect an estimate of recoverability of the Partnership's investment in the
Boeing 727-200 aircraft.
TRANS WORLD AIRLINES LEASE During February 1989, the Partnership acquired a
McDonnell Douglas MD-82 aircraft for a total purchase price of $21,017,000. The
aircraft is subject to an operating lease with Trans World Airlines, Inc.
("TWA"). The lease, which was originally scheduled to expire on April 23, 1993,
was modified and, under the terms of the lease amendment, was extended until
October 1, 1998 with rentals payable monthly, in advance, at the rate of
$185,000 per month.
Pursuant to the lease amendment, the Partnership reimbursed TWA for $225,000 of
capital improvements and advanced $750,000 to TWA to finance certain major
maintenance procedures. TWA is repaying the $750,000 to the Partnership over the
remaining lease term, in equal monthly installments, with interest at a fixed
rate of 9.68%. At December 31, 1995, the balance of the receivable was $428,000
($557,000 at December 31, 1994). All first quarter 1996 payments have been made
by TWA.
In mid-October 1994, because of operating and financial problems, TWA announced
that it would seek a global restructuring of its capital by offering common
stock for its debt securities preferred stock obligation and lease deferrals
negotiated with aircraft lessors, such as the Partnership, ("Exchange Offer").
TWA and the Partnership agreed to a deferral of 50% of the original rent
scheduled for November 1994 and 75% of the original schedule from December 1994
to April 1995, with originally scheduled payments resuming in May 1995.
Additionally, TWA and the Partnership reached an agreement to extend the lease
of the MD-82 aircraft by six years beyond the then scheduled expiration date to
October 1, 2004 at the current lease rate at $185,000 per month. All rents
deferred during the November 1994 to April 1995 period are scheduled to be
repaid with interest at 12% from the date of the deferral over an 18 month
period commencing May 1, 1995. On June 30, 1995, TWA filed its prepackaged
reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On
TWENTY ONE
<PAGE> 22
PEGASUS AIRCRAFT PARTNERS, L.P.
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. At December 31, 1995 and 1994, the
Partnership had $465,000 and $231,000, respectively, of deferred rent
receivables relating to the TWA aircraft which were included in rents and other
receivables on the balance sheets.
USAIR LEASE During March 1989, the Partnership acquired one-half of the
beneficial interest in a trust ("Trust"), which is the owner/lessor of a
McDonnell Douglas MD-81 aircraft for a total purchase price of $9,999,000. The
remaining one-half interest in the Trust is owned by Pegasus Aircraft Partners
II, L.P., an affiliated partnership. The aircraft is subject to an operating
lease with USAir, the term of which ends on June 1, 1998. The lease may be
terminated subject to the lessee's guarantee that the Partnership will receive
contractually defined minimum termination values upon re-marketing of the
aircraft. Rental payments are payable quarterly, in arrears, at a rate of
$304,000 (for the Partnership's one-half interest in the aircraft). The lease
provides for one three-year renewal option, at the same quarterly rental rate.
If the lease is not renewed for the first renewal period, the lessee must make a
termination payment of $1,113,000 to the Partnership. The lessee also has three
additional one-year renewal options at fair market rental rates. The lessee may
elect to purchase the aircraft at its fair market value at the end of any
renewal term.
The McDonnell Douglas MD-81 aircraft was purchased subject to a tax benefit
transfer lease ("TBT lease"), which provided for the transfer of the investment
tax credits and depreciation deductions with respect to the aircraft to a tax
lessor. Under the TBT lease, the Trust, as the owner of the aircraft and the tax
lessee under the TBT lease, has agreed to indemnify the tax lessor if certain
anticipated tax benefits are lost by the tax lessor as a result of, among other
things, acts or omissions by the Trust, breach of covenants by the Trust under
the TBT lease, loss or damage to the aircraft or use of the aircraft outside the
United States. The TBT lease requires that a letter of credit be posted to
secure this obligation. The Partnership shares in the annual cost of the letter
of credit and is obligated for one-half of any calls on the letter of credit.
The letter of credit has a current face amount of approximately $2.3 million.
Through June 1995 the letter of credit agreement obligated the Partnership to
deposit $35,000 per quarter (beginning on June 1, 1992 and originally scheduled
to terminate on June 1, 1997) into a restricted account at the bank ("Lender")
that issued the current letter of credit. The funds in this restricted account,
which totaled $385,000 at December 31, 1994, served as cash collateral to
collateralize the Partnership's obligations under the letter of credit
agreement. In July 1995, the Partnership restructured its borrowing arrangement
with the Lender, extending the $4,000,000 commitment to May 1997. The Lender,
which also separately held the cash collateral account, released its security
interest in the cash collateral account and eliminated the requirement for
future deposits to such account.
Under the operating lease, the lessee, USAir, Inc., has assumed all liabilities,
indemnities and obligations of the Trust to the tax lessor under the TBT lease
and has agreed to indemnify the Trust for any liability, indemnity or obligation
to the tax lessor under the TBT lease except for liability resulting from
breaches by the Trust of covenants under the operating lease. It has not posted
a letter of credit to secure this obligation. As a result of the foregoing, if
the tax lessor draws on the letter of credit as a result of action by the
lessee, the Partnership and Pegasus Aircraft Partners II, L.P., through the
Trust, will be responsible for the loss to the tax lessor until they can obtain
indemnification from the lessee.
The tax lessor is entitled to call on the letter of credit whether its loss of
tax benefits is caused by Pegasus Aircraft Partners II, L.P. or the Partnership,
and Pegasus Aircraft Partners II, L.P. and the Partnership have agreed to
indemnify each other for any loss occasioned by the acts of the other. To date,
there have been no calls against the letter of credit.
GENERAL The aircraft leases are principally triple net leases. As such, during
the terms of leases, the lessees are required to pay substantially all expenses
associated with the aircraft and, in the case of Kiwi, also fund certain
maintenance expenses through hourly maintenance reserves paid monthly.
SIGNIFICANT LESSEES
The Partnership leased its aircraft to four different airlines during 1995.
Revenues from airlines which accounted for greater than 10% of the Partnership's
total rental revenues during 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF RENTAL REVENUES
AIRLINES 1995 1994 1993
<S> <C> <C> <C>
Trans World Airlines, Inc. 36.5% 26.0% 25.1%
Kiwi International Air Lines, Inc. 23.2 -- --
Continental Airlines, Inc. 20.3 49.2 45.8
USAir, Inc. 20.0 14.2 13.4
Northwest Aircraft, Inc. -- -- 15.7
</TABLE>
TWENTY TWO
<PAGE> 23
PEGASUS AIRCRAFT PARTNERS, L.P.
Such percentages excluded the lease settlement payment received from Continental
in 1995 with respect to the 747-100 previously leased to them. Such proceeds
were substantially accounted for under the cost recovery method. Future Minimum
Rental Income The following is a schedule by year of future minimum rental
income under the leases as of December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1996 $ 5,561
1997 4,754
1998 4,754
1999 4,754
2000 3,434
Thereafter 8,802
- --------------------------------------
Total $32,059
- --------------------------------------
</TABLE>
The above schedule of future minimum rental income does not include the rental
income that would result from the renewal of existing leases or the re-leasing
of aircraft, except for the initial three-year renewal period (June 1998 to June
2001) for the McDonnell Douglas MD-81 aircraft under lease to USAir, Inc. This
renewal is included since USAir must make a termination payment $1,113,000 if
the renewal is not exercised.
The Partnership operates in one industry, the leasing of used aircraft to
commercial airlines.
6. TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEES The General Partners receive a quarterly subordinated base
management fee in an amount generally equal to 1.5% of gross aircraft rentals,
net of re-lease fees paid. Of this amount, 1.0% is payable to the Managing
General Partner and 0.5% is payable to the Administrative General Partner.
During the years ended December 31, 1995, 1994 and 1993, the General Partners
earned base management fees of $148,000, $126,000 and $135,000, respectively.
The General Partners also 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 which 2.5% is payable to the Managing General Partner and 2.0%
is payable to the Administrative General Partner. During the years ended
December 31, 1995, 1994 and 1993, the General Partners earned incentive
management fees of $426,000, $365,000 and $396,000, respectively.
RE-LEASE FEES The General Partners 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
received. Of this amount, 2.5% is payable to the Managing General Partner and
1.0% is payable to the Administrative General Partner. During the years ended
December 31, 1995, 1994 and 1993, the General Partners earned $124,000, $110,000
and $71,000, respectively, of re-lease fees.
ACCOUNTABLE EXPENSES The General Partners are entitled to reimbursement of
certain expenses paid on behalf of the Partnership that are incurred in
connection with the administration and management of the Partnership. Such
reimbursable expenses amounted to $50,000, $50,000 and $51,000 during 1995, 1994
and 1993, respectively, all of which were paid or accrued to the Administrative
General Partner.
OTHER In 1994, the Partnership acquired an aircraft engine from Pacific Aviation
Holding Company, an affiliate of the Managing General Partner, at a purchase
price of $195,000. The purchase price paid by the Partnership was equal to
Pacific Aviation Holding Company's actual cost of the engine. The depreciated
cost of the engine is included in Aircraft, net on the balance sheet on December
31, 1995.
During 1995, the Administrative General Partner voluntarily deferred the receipt
of management fees and re-lease fees earned beginning January 1995. Such amount
aggregated $273,000.
7. 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. and the Partnership's Boeing 747-100 aircraft leased to
Continental. 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 0.5% 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 0.5%. The Lender
released the Boeing 747-
TWENTY THREE
<PAGE> 24
PEGASUS AIRCRAFT PARTNERS, L.P.
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.
Through December 31, 1995, the Partnership had borrowed an aggregate of
$2,150,000 pursuant to the loan agreement, of which $1,625,000 and $2,000,000
were outstanding at December 31, 1995 and December 31, 1994, respectively.
Based upon the outstanding borrowings at December 31, 1995, the required
repayment schedule is as follows(in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1996 $ 407
1997 442
1998 481
1999 295
- --------------------------------------
$1,625
- --------------------------------------
</TABLE>
8. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
The following is a reconciliation of the net income as shown in the accompanying
financial statements to the taxable income (loss) reported for federal income
tax purposes (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net income per
financial statements $ 880 $ 426 $ 2,881
Increase (decrease)
resulting from:
Depreciation (2,037) (613) (428)
Reserves for
maintenance costs
and decline in market
value of aircraft 500 1,745 867
Continental lease
settlement proceeds
accounted for as
cost recovery 3,673 -- --
TBT interest income less
TBT rental expense (591) (470) (375)
Deferred rental income 218 (182) (136)
Other 43 53 56
Maintenance reserves
collected and related
interest net of expense 613 522 --
- ------------------------------------------------------------------------
Taxable income per federal
income tax return $ 3,299 $ 1,481 $ 2,865
- ------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the amount of the Partnership's total
Partnership equity as shown in the accompanying financial statements to the tax
bases of the Partnership's net assets (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Total Partnership equity
per financial statements $ 31,176 $ 37,770 $ 44,616
Increase (decrease)
resulting from:
Commissions and
expenses paid in
connection with the
sale of limited
partnership units 8,441 8,441 8,441
Reserves for maintenance
costs and decline in
market value of aircraft
including Continental
lease settlement,
accounted for as
cost recovery 9,020 4,947 3,202
Distributions payable
to partners 1,616 1,818 1,818
Deferred rental income 218 -- 182
Accumulated depreciation (21,067) (19,030) (18,417)
TBT interest income
less TBT rental expense (2,281) (1,690) (1,220)
Maintenance reserves
payable 1,255 522 --
Other (8) (31) (83)
- --------------------------------------------------------------------------
Tax bases of net assets $ 28,370 $ 32,747 $ 38,539
- --------------------------------------------------------------------------
</TABLE>
9. LITIGATION
In November 1994, a series of purported class actions (the "New York Limited
Partnership Actions") were filed in the United States District Court for the
Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and PaineWebber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Air Transport Leasing, Inc., an affiliate
of PaineWebber and the Administrative General Partner in the Partnership
("Administrative General Partner").
The amended complaint in the New York Limited Partner-ship Actions alleged,
among other things, that, in connection
TWENTY FOUR
<PAGE> 25
PEGASUS AIRCRAFT PARTNERS, L.P.
with the sale of interests in the Partnership, PaineWebber and the
Administrative General Partner (1) failed to provide adequate disclosure of the
risks involved with the Partnership; (2) made false and misleading
representations about the safety of the investments and the Partnership's
anticipated performance; and (3) marketed the Partnership to investors for whom
such investments were not suitable. The plaintiffs also alleged that following
the sale of the Partnership PaineWebber and the Administrative General Partner
misrepresented financial information about the Partnership's value and
performance. The amended complaint alleged that PaineWebber and the
Administrative General Partner violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the Partnership, as well as disgorgement of all fees and other income
derived by PaineWebber from the Partnership. In addition, the plaintiffs also
sought treble damages under RICO.
On May 30, 1995, the U.S. District Court certified class action treatment of the
plaintiffs' claims in the New York Limited Partnership Actions.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and plan of allocation that the parties expect to submit to
the court for its consideration and approval within the next several months.
Until a definitive settlement and plan of allocation is approved by the court,
there can be no assurance what, if any, payment or non-monetary benefits will be
made available to unitholders in the Partnership.
In April 1995, two investors in the Pegasus limited partnerships filed a
purported class action in the Circuit Court of the State of Illinois for Cook
County entitled Robert M. Jacobson, et al. v. PaineWebber, Inc., et al., making
allegations substantially similar to those in the New York Limited Partnership
Actions, but limited in subject matter to the sale of the Pegasus partnerships,
and without a RICO claim. The plaintiffs in the Jacobson case simultaneously
remained as participants in the New York Limited Partnership Actions, and
subsequently sought to intervene in that action and to be named class
representatives for a separate subclass that they asked the Court to establish
consisting of investors in the Pegasus partnerships. The court in the New York
Limited Partnership Actions has not yet ruled on their request.
Three actions were filed in the District Court for Brazoria County, Texas,
relating to the sale and sponsorship of interests in the Partnership and an
affiliated partnership. The complaints make state law claims, specifically,
common law fraud, conspiracy, violations of section 27.01 of the Texas Business
and Commerce Code, fraud in the inducement, negligent misrepresentation,
negligence, breach of fiduciary duty, violations of the Texas Securities Act,
and violations of the Texas Deceptive Trade Practices Act. The plaintiffs seek
unspecified damages, including attorneys' fees, reimbursement for all sums
invested by them in the partnerships, exemplary damages, and treble damages
under the Texas Deceptive Trade Practices Act. All three actions have been
removed to federal court and two have been transferred to the United States
District Court for the Southern District of New York. The third action has been
dismissed with the consent of the parties on the grounds that it is duplicative
of the two actions now before the federal court in New York.
In February 1996, approximately 150 plaintiffs filed an action entitled Abbate
v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber
Incorporated and various affiliated entities concerning the plaintiff's
purchases of various limited partnership interests. The complaint alleges, among
other things, that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs
by selling or promoting limited partnership investments that were unsuitable for
the plaintiffs and by overstating the benefits, understating the risks and
failing to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement and
other contractual obligations, PaineWebber and its affiliates, including the
Administrative General Partner, could be entitled to indemnification from the
Partnership for expenses and liabilities in connection with this litigation. The
General Partners are unable to determine the effect, if any, of such action on
the Partnership's financial statements, taken as a whole.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value of certain financial instruments, whether or not
reported on the balance sheet. Where quoted market prices are available the
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used including
the discount rate and estimates of future cash flows. In addition, SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements includ-
TWENTY FIVE
<PAGE> 26
PEGASUS AIRCRAFT PARTNERS, L.P.
ing leased aircraft owned by the Partnership.
Therefore, the aggregate fair value amounts presented do not purport to
represent and should not be considered representative of the underlying market
value of the Partnership.
The methods and assumptions used to estimate the fair value of each class of the
financial instruments are described below.
CASH EQUIVALENTS. For cash equivalents, carrying value approximates fair value.
RESTRICTED CASH. For Restricted cash, carrying value approximates fair value.
RENTS AND OTHER RECEIVABLES. For rents and other receivables, carrying value
approximates fair value.
PREPAID EXPENSES. For prepaid expenses, carrying value approximates fair value.
NOTES PAYABLE. For notes payable, carrying value approximates fair value.
DISTRIBUTION TO PARTNERS. For distribution to partners, carrying value
approximates fair value.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES PAYABLE TO AFFILIATES, AND ACCRUED
INTEREST PAYABLE. For accounts payable and accrued expenses payable to
affiliates, and accrued interest payable, carrying value approximates fair
value.
MAINTENANCE RESERVES PAYABLE. For maintenance reserves payable, carrying value
approximates fair value.
DEFERRED RENTAL INCOME. For deferred rental income, carrying value approximates
fair value.
TWENTY SIX
<PAGE> 27
PEGASUS AIRCRAFT PARTNERS, L.P.
REPORT OF INDEPENDENT
ACCOUNTANTS
February 15, 1996*
To the Limited Partners of Pegasus Aircraft Partners, L.P.
We have audited the accompanying financial statements as listed on page 13 of
this report. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pegasus Aircraft Partners, L.P.
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years ended December 31, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.
As discussed in Note 9 to the Financial Statements, there is litigation pending
against, among others, the Administrative General Partner and affiliates of the
Administrative General Partner. The ultimate outcome of this litigation and its
effects, if any, on the Partnership cannot presently be determined.
COOPERS & LYBRAND L.L.P.
New York, New York
*except as to Note 9 for which the date is March 19, 1996.
TWENTY-SEVEN
<PAGE> 28
PEGASUS AIRCRAFT PARTNERS, L.P.
MANAGEMENT'S DISCUSSION ANDANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership owns and manages a diversified portfolio of leased commercial
aircraft and makes quarterly distributions to the partners of net cash flow
generated by operations. In certain situations, the Partnership may retain cash
flow from operations to finance authorized capital expenditures.
Cash distributions declared by the Partnership were approximately $7.4 million
in 1995 ($1.85 per Unit), $7.3 million in 1994 ($1.80 per Unit) and $7.7 million
in 1993 ($1.90 per Unit). Net cash provided by operating activities was $6.1
million for 1995, $7.9 million for 1994 and $8.5 million for 1993. In 1995, the
Partnership received the Continental Lease Settlement proceeds of $3.9 million
which was substantially accounted for under the cost recovery method and thus,
was not included in cash from operations. In the aggregate, for this three year
period, net cash provided by operating activities totaled $22.5 million and cash
distributions declared by the Partnership totaled $22.4 million. Further, during
1995, 1994 and 1993 the Partnership paid cash distributions of $7.7 million,
$7.3 million and $7.9 million, respectively, totaling $22.9 million for the
three year period.
Partnership equity declined by approximately $6.6 million from December 31, 1994
to December 31, 1995 as a result of the declaration of cash distributions to the
partners in excess of the Partnership's net income. This resulted from the fact
that, unlike net income, cash flow generated by operations, which is the source
of the cash utilized to make the distributions, is not reduced by depreciation
expense and provisions for decline in market value of aircraft attributable to
the Partnership's aircraft. Additionally, a significant portion of the Lease
Settlement proceeds received from Continental were accounted for under the cost
recovery method and thus did not flow through the Statement of Income for 1995.
(See Footnote 1, "Significant Accounting Policies" and Footnote 5, "Aircraft
Under Operating Leases.")
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 that 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 88%, 94% and 62% of the
cash distributions declared for the years ended December 31, 1995, 1994 and
1993, respectively, constituted a return of capital. Also, based on the amount
of net income reported by the Partnership for accounting purposes, approximately
68% of the cash distributions paid to the partners from inception of the
Partnership through December 31, 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.
In April 1994, the Partnership established a loan facility with a third party
lender that expired in May 1995. In July 1995, the Partnership and the Lender
completed an extension of the commitment. Under the new agreement, the aggregate
commitment remained 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 0.5%. The Lender
released the Boeing 747-100 aircraft as collateral under the loan and received a
perfected security interest in the Partnership's MD-82 aircraft leased to TWA.
Through December 31, 1995, the Partnership had borrowed an aggregate of
$2,150,000 pursuant to the loan agreement, of which $1,625,000 and $2,000,000
were outstanding at December 31, 1995 and December 31, 1994, respectively. In
connection with the extension of the loan commitment the Lender released its
interest in a cash collateral account established to secure the Partnership's
obligation under the letter of credit agreement relating to the TBT lease.
The Partnership may require additional financing to fund future maintenance work
on aircraft, hushkitting the aircraft, or other capital improvements such as
cargo conversion. For example, because of FAA mandated compliance with Stage III
aircraft noise regulation, Kiwi may request the Partnership to hushkit one or
both of the 727 aircraft leased to Kiwi. If the Partnership were to elect to
hushkit these aircraft, the Partnership would need to utilize its current loan
facility or complete a new financing. The Partnership can borrow up to 35% of
the original offering proceeds. Any such borrowings will only be made if the
General Partners believe such borrowings will be in the best interests of the
Partnership and enhance portfolio value. The Partnership cannot utilize
borrowings to purchase aircraft. However, there can be no assurance that the
Partnership would be able to obtain any additional borrowings, if required.
At December 31, 1995, the Partnership's unrestricted cash and cash equivalents
exceeded declared but unpaid distributions to partners by $2,465,000. At
December 31, 1994, the Partnership's declared, but unpaid, distributions to the
partners exceeded unrestricted cash and cash equivalents by $55,000. The
principal reasons for the increase in cash is the retention of approximately
half of the proceeds from the Continental Lease Settlement plus the release of
the cash that was in the cash collateral account that previously collateralized
the Partnership's obligation under a letter of credit. It is anticipated that
such proceeds will be utilized for any modification needed to enhance the
leasability of the 747 (or any other aircraft as deemed necessary) and for
distribution to partners.
Rent and other receivables decreased by $419,000 from $1,953,000 at December 31,
1994 to $1,534,000 at December 31, 1995. This decrease is primarily the result
of the continued repayments of advances and deferrals to various lessees, net of
deferrals granted to lessees in 1995.
Prepaid expenses increased by $12,000 from $35,000 at December 31, 1994 to
$47,000 at December 31, 1995, due primarily to amounts associated with the
extended loan commitment (See Item 8, "Financial Statements" Note 7, "Notes
Payable.")
Payable to affiliates increased by $348,000 from $280,000 at December 31, 1994
to $628,000 at December 31, 1995. The increase was attributable to the
management fees associated with the Continental Lease Settlement that were
accrued at December 31, 1995 and the voluntary deferral by the
TWENTY EIGHT
<PAGE> 29
PEGASUS AIRCRAFT PARTNERS, L.P.
Administrative General Partner of management fees and re-lease fees otherwise
payable with respect to the period commencing January 1, 1995.
Deferred rental income increased $81,000 from $137,000 at December 31, 1994 to
$218,000 at December 31, 1995 due to the receipt in December 1995, of certain
rents due January 1, 1996 with respect to the January period.
Management and re-lease fees payable to the General Partners for the 1995
Period increased $97,000 or 16% as compared to the 1994 Period. Management fees
(base management fees and incentive management fees) increased by $83,000 for
the 1995 Period as compared to the 1994 Period. This was principally because of
the fees recorded associated with the Continental Lease Settlement, which
included a settlement of future rentals (through April 1996), substantially all
of which was accounted for under the cost recovery method, which resulted in a
greater base on which fees were recorded in 1995 as compared to 1994. Re-lease
fees incurred during the 1995 Period increased by $14,000 as compared to the
1994 Period due principally to the fees associated with the re-lease of the two
Boeing aircraft to Kiwi during 1994 and thus was subject to re-lease fees for
only a portion of the 1994 Period.
During 1995, TWA completed its financial restructuring and made all payments
due. Additionally, during 1995, Kiwi continued to make rental and maintenance
payments subject to the leases as amended, although it continues to have
liquidity and capital concerns. Kiwi requested an extension of time to make
related rental, deferred rent and maintenance reserve payments for February 1996
and made such payments in late February 1996. Finally, the Partnership settled
the Continental 747 lease in 1995 and accepted redelivery of the aircraft. The
Partnership has entered into discussions with potential users of the aircraft.
It is anticipated that certain scheduled maintenance and integration costs,
which are estimated to aggregate $1,300,000, will be necessary to complete a
re-marketing. The Partnership intends to finance such costs as necessary through
its cash reserves and loan facility. Additionally, because of the need to meet
Stage III aircraft thresholds required by FAA mandated noise regulation, Kiwi
may require that the Partnership hushkit (upgrade to Stage III) one or both of
the 727 aircraft leased to Kiwi. If the Partnership determines to perform such
work, which is estimated to cost $1.9 million per aircraft, it will need to
finance substantially all of such cost through its loan facility or other new
borrowings that may or may not be obtainable. If the Partnership elects not to
do such work, Kiwi may terminate the lease and the Partnership may encounter
delays and costs of redeployment. The Partnership's future cash flow will be
impacted by the timing and the lease rate achieved with respect to a re-market
of the 747 aircraft, which was available for lease at December 31, 1995, as
well as any changes in the status of the Kiwi leases as the result of Kiwi's
continued liquidity concerns or because of Stage III implementation.
Additionally, the lease of the 727 aircraft to Continental is scheduled to
expire in October 1996, unless renewed. The Partnership is investigating
opportunities with respect to that aircraft.
LITIGATION
In November 1994, a series of purported class actions (the "New York Limited
Partnership Actions") were filed in the United States District Court for the
Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and PaineWebber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Air Transport Leasing, Inc., an affiliate
of PaineWebber and the Administrative General Partner in the Partnership
("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions alleged, among
other things, that, in connection with the sale of interests in the Partnership,
PaineWebber and the Administrative General Partner (1) failed to provide
adequate disclosure of the risks involved with the Partnership; (2) made false
and misleading representations about the safety of the investments and the
Partnership's anticipated performance; and (3) marketed the Partnership to
investors for whom such investments were not suitable. The plaintiffs also
alleged that following the sale of the Partnership PaineWebber and the
Administrative General Partner misrepresented financial information about the
Partnership's value and performance. The amended complaint alleged that
PaineWebber and the Administrative General Partner violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the Partnership, as well as disgorgement of all fees
and other income derived by PaineWebber from the Partnership. In addition, the
plaintiffs also sought treble damages under RICO.
On May 30, 1995, the U.S. District Court certified class action treatment of the
plaintiffs' claims in the New York Limited Partnership Actions.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and plan of allocation that the parties expect to submit to
the court for its consideration and approval within the next several months.
Until a definitive settlement and plan of allocation is approved by the court,
there can be no assurance what, if any, payment or non-monetary benefits will be
made available to unitholders in the Partnership. In April 1995, two investors
in the Pegasus limited partnerships filed a purported class action in the
Circuit Court of the State of Illinois for Cook County entitled
TWENTY NINE
<PAGE> 30
PEGASUS AIRCRAFT PARTNERS, L.P.
Robert M. Jacobson, et al. v. PaineWebber, Inc., et al., making allegations
substantially similar to those in the New York Limited Partnership Actions, but
limited in subject matter to the sale of the Pegasus partnerships, and without a
RICO claim. The plaintiffs in the Jacobson case simultaneously remained as
participants in the New York Limited Partnership Actions, and subsequently
sought to intervene in that action and to be named class representatives for a
separate subclass that they asked the Court to establish consisting of investors
in the Pegasus partnerships. The court in the New York Limited Partnership
Actions has not yet ruled on their request.
Three actions were filed in the District Court for Brazoria County, Texas,
relating to the sale and sponsorship of interests in the Partnership and an
affiliated partnership. The complaints make state law claims, specifically,
common law fraud, conspiracy, violations of section 27.01 of the Texas Business
and Commerce Code, fraud in the inducement, negligent misrepresentation,
negligence, breach of fiduciary duty, violations of the Texas Securities Act,
and violations of the Texas Deceptive Trade Practices Act. The plaintiffs seek
unspecified damages, including attorneys' fees, reimbursement for all sums
invested by them in the partnerships, exemplary damages, and treble damages
under the Texas Deceptive Trade Practices Act. All three actions have been
removed to federal court and two have been transferred to the United States
District Court for the Southern District of New York. The third action has been
dismissed with the consent of the parties on the grounds that it is duplicative
of the two actions now before the federal court in New York.
In February 1996, approximately 150 plaintiffs filed an action entitled Abbate
v. PaineWebber Inc. in Sacramento, California Superior Court against PaineWebber
Incorporated and various affiliated entities concerning the plaintiff's
purchases of various limited partnership interests. The complaint alleges, among
other things, that PaineWebber and its related entities committed fraud and
misrepresentation and breached fiduciary duties allegedly owed to the plaintiffs
by selling or promoting limited partnership investments that were unsuitable for
the plaintiffs and by overstating the benefits, understating the risks and
failing to state material facts concerning the investments. The complaint seeks
compensatory damages of $15 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement and
other contractual obligations, PaineWebber and its affiliates, including the
Administrative General Partner could be entitled to indemnification from the
Partnership for expenses and liabilities in connection with this litigation. The
General Partners are unable to determine the effect, if any, of such actions on
the Partnership's financial statements taken as a whole.
RESULTS OF OPERATIONS
Substantially all of the Partnership's revenue was generated from the leasing of
the Partnership's aircraft to commercial air carriers under triple net operating
leases. The balance of the Partnership's revenue consisted of interest income
earned with respect to certain advances made to lessees as well as certain
deferred rental arrangements with Continental, TWA and Kiwi.
Under the terms of the triple net leases, substantially all of the expenses
related to the operation and maintenance of the aircraft during 1995 were paid
for by the lessees or, in the case of Kiwi, funded to a certain extent through
hourly maintenance reserves paid by Kiwi. The direct lease expenses incurred by
the Partnership represent the costs of providing insurance coverage for the
Partnership's aircraft in excess of the amounts required to be carried by the
lessees, trustee fees related to the ownership of the aircraft and the cost of
the letter of credit required under the terms of the TBT lease on the McDonnell
Douglas MD-81 leased to USAir.
The Partnership also records depreciation expense pertaining to the aircraft and
incurs certain general and administrative expenses in connection with operations
of the Partnership. General and administrative expenses consist primarily of
investor reporting expenses, transfer agent and audit fees and the cost of
accounting services.
IMPACT OF FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued FASB 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"
("FAS 121"). FAS 121 requires companies to review their long-lived assets, such
as the Partnership's aircraft, and certain identifiable intangibles for
impairment whenever events and changes in circumstances indicate that the
carrying value of a long-lived asset may not be recoverable. The Partnership
will be required to adopt the provisions of FAS 121 as of January 1996. The
Partnership believes that based upon its operations and current methods used to
evaluate declines in market value, the future adoption of FAS 121 will not have
a material impact on the Partnership's financial condition or results of
operations.
1995 as compared to 1994
The Partnership's net income was $880,000 for the year ended December 31, 1995
("1995 Period"), as compared to $426,000 for the year ended December 31, 1994
("1994 Period").
The increase in the Partnership's net income for the 1995 Period as compared to
the 1994 Period resulted primarily from the reduced requirement for provision
for decline in market value of aircraft in the 1995 Period as compared to the
1994 Period ($400,000 as compared to $2,000,000) offset by a decrease in rental
revenue, as a result of the return of the 747-100 aircraft leased to
Continental. (See above discussion regarding Continental and the related Lease
Settlement.) The decrease in rental revenue was partially offset by a decrease
in depreciation due primarily to the non-recognition of depreciation expense in
the 1995 Period with respect to the 747-100 aircraft that was off lease for
substantially all of 1995 as well as a reduction in depreciable base of certain
aircraft due to the provisions for declines in market value provided in 1994.
THIRTY
<PAGE> 31
PEGASUS AIRCRAFT PARTNERS, L.P.
Rental revenue decreased $2,451,000 or 28% for the 1995 Period principally due
to the non-accrual of rent with respect to the 747-100 aircraft that was
returned early in 1995 by Continental (see discussion of Continental Lease
Settlement), which was partially offset by rents generated by the two 727-200
aircraft leased to Kiwi that were off-lease for a portion of the 1994 Period.
Interest income for the 1995 Period increased by $63,000, or 27% in comparison
to the 1994 Period. The 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 and the
undistributed proceeds from the Continental settlement, partially offset by the
continued repayment of advances pursuant to various repayment schedules.
The Partnership recognized other income in 1995 of $233,000 that represented the
difference between the Continental Lease Settlements proceeds and the amount of
such proceeds accounted for under the cost recovery method. The other income was
offset by related management fees.
Depreciation and amortization decreased by $1,207,000 or 23% for the 1995 Period
in comparison to the 1994 Period. This was due primarily to the fact that the
Partnership did not recognize depreciation after the first quarter 1995 with
respect to the 747-100 aircraft, which was taken out of service by Continental
during the first quarter of 1995, as well as the decrease in depreciable basis
of certain aircraft due to the provision for decline in market value of aircraft
provided in the 1994 Period.
The Partnership provided an allowance for decline in market value of $400,000 in
the 1995 Period as compared to the $2,000,000 in the 1994 Period to reflect the
General Partner's estimate of recoverability of the Partnership investment in
certain aircraft, based upon estimated cash flow, third party appraisal and
market conditions.
General and administrative expenses for the 1995 Period increased by $30,000 or
17% in comparison to the 1994 Period, principally due to an increase in
professional fees, including transfer agent servicing expenses.
Interest expense for the 1995 Period increased by $79,000 or 64% in comparison
to the 1994 Period due to the fact that the related borrowings were made in
April and July 1994 and thus were not outstanding for the entire 1994 Period,
partially offset by principal installments paid during 1995 reducing the balance
outstanding.
Direct lease expenses for the 1995 Period decreased by $8,000 or 7% as compared
to the 1994 Period due principally to a reduction in the letter of credit fee in
1995 as compared to 1994.
1994 Compared to 1993
The Partnership's net income was $426,000 for the year ended December 31, 1994
compared to $2,881,000 for the year ended December 31, 1993.
The decrease in the Partnership's net income for 1994 resulted primarily from
(i) an increase in the provision for decline in market value of aircraft, (ii) a
decrease in rental revenue, (iii) an increase in depreciation and (iv) the
interest expense incurred in 1994 relating to amounts borrowed in 1994.
Rental revenue decreased $535,000 or 6% for 1994 compared to 1993. This decrease
was principally because the Northwest aircraft leases, which were scheduled to
expire in April 1993, were extended at lower lease rates. (The first Northwest
aircraft was extended until August 1993 and the second Northwest aircraft was
extended until April 1994.) Additionally, the lease term for the McDonnell
Douglas MD-82 leased to TWA was extended in April 1993 at a slightly lower lease
rate. Interest income increased by $12,000 or 6% in 1994 as compared to 1993.
This increase was attributable to the interest income earned with respect to the
advances that were made to TWA during April 1993 (and, therefore, were not
outstanding for all of 1993). Depreciation and amortization increased $218,000
or 4% for 1994 in comparison to 1993, principally due to depreciation relating
to $2,723,000 of capitalized costs expended in connection with the two aircraft
re-marketed to Kiwi. The increase was partially offset by the reduced
depreciation expense during 1994 with respect to the Boeing 727-200 advanced
aircraft leased to Continental as a result of the reserve for decline in market
value of the aircraft, which the Partnership recorded at December 31, 1993. The
Partnership provided a decline in market value of aircraft in the amount of
$2,000,000 in 1994 as compared to $434,000 in 1993 to reflect the General
Partners' estimate of the recoverability of the Partnership's investments in
certain aircraft. Aggregate subordinated management and re-lease fees paid to
the General Partners were similar for 1994 as compared to 1993. Management fees
decreased because of the decreases in the Partnership's rental revenue and net
income (without regard to depreciation) that serve as the basis with respect to
which the management fees are calculated. However, the decrease in such
management fees was substantially offset by an increase in re-lease fees during
1994. There were no re-lease fees prior to the second quarter of 1993. The
Partnership incurred interest expense of $123,000 in 1994, with respect to the
borrowings made in April 1994 and July 1994. The Partnership had no such
borrowings outstanding in 1993. (See Item 8, Financial Statements, Note 7,
"Notes Payable.")
INFLATION AND CHANGING PRICES
Inflation has had no material impact on the operations or financial condition of
the Partnership during 1995. However, market and worldwide economic conditions
and changes in federal regulations have in the past, and may in the future,
impact the airline industry and thus lease rates and aircraft values.
Additionally, inflation and changing prices, may affect future leasing rates and
the eventual selling price of the aircraft.
THIRTY ONE
<PAGE> 32
PEGASUS AIRCRAFT PARTNERS, L.P.
PARTNERSHIP
DIRECTORY
Pegasus Aircraft Partners, L.P.
2424 SOUTH 130TH CIRCLE
OMAHA, NEBRASKA 68144-2596
(800) 234-7342
Managing General Partner
PEGASUS AIRCRAFT MANAGEMENT CORPORATION
Administrative General Partner
AIR TRANSPORT LEASING, INC.
Auditors
COOPERS & LYBRAND L.L.P.
NEW YORK, NEW YORK
Legal Counsel
DERENTHAL & DANNHAUSER
SAN FRANCISCO, CALIFORNIA
Transfer Agent
SERVICE DATA CORPORATION
OMAHA, NEBRASKA
A copy of the Annual Report on Form 10-K,
as filed with the Securities and Exchange
Commission, will be furnished without charge to
limited partners upon request.
THIRTY-TWO
