<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________to ______________________
Commission file number 0-17712
-----------------------------------------------------
Pegasus Aircraft Partners, L.P.
(Exact name of registrant as specified in its charter)
Delaware 84-1099968
(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___.
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Pegasus Aircraft Partners, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1996
Table of Contents
Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - June 30, 1996
and December 31, 1995 2
Statements of Operations for the three months
ended June 30, 1996 and 1995 3
Statements of Income for the six months
ended June 30, 1996 and 1995 4
Statements of Partners' Equity for the six
months ended June 30, 1996 and 1995 5
Statements of Cash Flows for the six
months ended June 30, 1996 and 1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Part II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 20
1
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS -- JUNE 30, 1996 AND DECEMBER 31, 1995
(unaudited)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands except unit data)
<S> <C> <C>
Cash and cash equivalents $ 3,086 $ 4,081
Restricted cash 1,435 1,135
Rent and other receivables 889 1,534
Aircraft, net (Notes 2, 6 and 7) 28,585 29,814
Prepaid expenses 49 47
-------- --------
Total Assets $ 34,044 $ 36,611
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Note 4) $ 1,426 $ 1,625
Accounts payable and accrued expenses 75 98
Payable to affiliates (Note 3) 583 628
Deferred rental income 137 218
Distributions payable to partners 1,632 1,616
Maintenance reserve payable 1,602 1,235
Maintenance expense payable (Note 7) 574 --
Accrued interest payable 12 15
-------- --------
Total Liabilities 6,041 5,435
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6)
PARTNERS' EQUITY:
General Partners (516) (485)
Limited Partners (4,000,005 units outstanding) 28,519 31,661
-------- --------
Total Partners' Equity 28,003 31,176
-------- --------
Total Liabilities and Partners' Equity $ 34,044 $ 36,611
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
2
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- -----
(in thousands, except unit data and per unit amounts)
REVENUE:
<S> <C> <C>
Rentals from operating leases (Note 5) $ 1,447 $ 1,434
Interest 63 73
----------- ----------
1,510 1,507
EXPENSES:
Depreciation and amortization 920 945
Management and re-lease fees (Note 3) 94 112
General and administrative (Note 3) 49 50
Interest expense 36 52
Direct lease 50 29
Maintenance and aircraft expense 382 --
----------- ----------
1,531 1,188
NET (LOSS) INCOME $ (21) $ 319
=========== ==========
NET (LOSS) INCOME ALLOCATED:
To the General Partners $ (--) $ 3
To the Limited Partners (21) 316
----------- ----------
$ (21) $ 319
=========== ==========
NET (LOSS) INCOME PER LIMITED PARTNERSHIP
UNIT$ (.01) $ .08
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands, except unit data and per unit amounts)
REVENUE:
<S> <C> <C>
Rentals from operating leases (Note 5) $ 2,898 $ 3,122
Interest 138 138
---------- ----------
3,036 3,260
EXPENSES:
Depreciation and amortization 1,840 2,234
Management and re-lease fees (Note 3) 192 238
General and administrative (Note 3) 106 105
Interest expense 79 105
Direct lease 91 55
Maintenance and aircraft expense 669 --
---------- ----------
2,977 2,737
NET INCOME $ 59 $ 523
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 1 $ 5
To the Limited Partners 58 518
---------- ----------
$ 59 $ 523
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .01 $ .13
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
========== ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
4
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- -----
(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1996 $(485) $ 31,661 $ 31,176
Net income 1 58 59
Distributions declared to partners (32) (3,200) (3,232)
----- -------- --------
Balance, June 30, 1996 $(516) $ 28,519 $ 28,003
===== ======== ========
Balance, January 1, 1995 $(420) $ 38,190 $ 37,770
Net income 5 518 523
Distributions declared to partners (22) (2,200) (2,222)
----- -------- -------
Balance, June 30, 1995 $(437) $ 36,508 $ 36,071
===== ======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 59 $ 523
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,840 2,234
Change in assets and liabilities:
Rent and other receivables 498 (420)
Prepaid expenses (2) (34)
Accounts payable and accrued expenses (23) 43
Payable to affiliates (45) 44
Accrued interest payable (3) --
Accounts payable arising from maintenance
related items 200 --
Deferred income (81) --
Unrestricted maintenance reserves payable 67 --
------- -------
Net cash provided by operating activities 2,510 2,390
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (611) (31)
Accounts payable-aircraft 374 --
Repayment of advances by lessees 147 147
------- -------
Net cash (used in) provided by investing
activities (90) 116
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers to restricted cash -- (70)
Cash distributions paid to partners (3,216) (2,828)
Repayments of notes payable (199) (184)
------- -------
Net cash used in financing activities (3,415) (3,082)
------- -------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (995) (576)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,081 1,763
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,086 $ 1,187
======= =======
SUPPLEMENTAL INFORMATION:
Interest paid $ 80 $ 103
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(unaudited)
1. GENERAL
The accompanying unaudited interim financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of the General Partners, necessary to fairly present the financial
position of the Partnership as of June 30, 1996 and the results of its
operations, changes in partners' equity, and cash flows for the six months then
ended.
These financial statements should be read in conjunction with the
Significant Accounting Policies and other Notes to Financial Statements included
in the Partnership's annual audited financial statements for the year ended
December 31, 1995.
2. AIRCRAFT UNDER OPERATING LEASES
The Partnership's net investment in aircraft as of June 30, 1996 and
December 31, 1995 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Aircraft on operating leases $ 56,095 $ 56,095
Less: Accumulated depreciation (28,835) (26,995)
Reserve for decline in market
value of aircraft (5,169) (5,169)
Provision for maintenance cost (178) (178)
-------- --------
$ 21,913 $ 23,753
-------- --------
Aircraft held for lease(A) $ 18,962 $ 18,351
Less: Accumulated depreciation (8,617) (8,617)
Net Lease Settlement proceeds
accounted for as cost recovery (3,673) (3,673)
-------- --------
6,672 6,061
-------- --------
$ 28,585 $ 29,814
======== ========
</TABLE>
(A) Represents 747 aircraft. The Partnership entered into an agreement in
principle to lease the aircraft to TWA for a term of approximately 48 months at
a rental rate of $180,000 per month.
3. TRANSACTIONS WITH AFFILIATES
Management Fees The General Partners are entitled to receive a quarterly
subordinated base management fee in an amount generally equal to 1.5% of gross
aircraft rentals, net of re-lease fees paid. Of this amount, 1.0% is payable to
the Managing General Partner and 0.5% is
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payable to the Administrative General Partner. The General Partners earned
$22,000 and $43,000 of base management fees during the quarter and six months
ended June 30, 1996, respectively.
The General Partners also are entitled to receive a quarterly subordinated
incentive management fee in an amount equal to 4.5% of quarterly cash flow and
sales proceeds (net of resale fees). Of this amount, 2.5% is payable to the
Managing General Partner and 2.0% is payable to the Administrative General
Partner. The General Partners earned $41,000 and $87,000 of incentive management
fees during the quarter and six months ended June 30, 1996, respectively.
Re-lease Fee The General Partners are entitled to receive a quarterly
subordinated fee for re-leasing aircraft or renewing a lease in an amount equal
to 3.5% of the gross rentals from such re-lease or renewal for each quarter for
which such payment is made. Of this amount, 2.5% is payable to the Managing
General Partner and 1.0% is payable to the Administrative General Partner. The
General Partners earned $31,000 and $62,000 of re-lease fees during the quarter
and six months ended June 30, 1996, respectively. All of the above fees are
subordinated to the limited partners receiving an 8% annual non-cumulative
return based upon original contributed capital.
Accountable General and Administrative Expenses The General Partners are
entitled to reimbursement of certain expenses paid on behalf of the Partnership
which are incurred in connection with the administration and management of the
Partnership. Such reimbursable expenses amounted to $12,000 and $25,000 during
the quarter and six months ended June 30, 1996, respectively, all of which were
payable to the Administrative General Partner.
Other In the six months ended June 30, 1996, the Partnership purchased
certain equipment and parts relating to the 747 aircraft from a company owned by
three directors of the Managing General Partner in the amount of $120,000.
During the six months ended June 30, 1996 and the year ended December 31,
1995, the Administrative General Partner deferred the receipt of management fees
and re-lease fees earned beginning January 1, 1995. Such fees aggregated $71,000
and $273,000 for the six months ended June 30, 1996 and the year ended December
31, 1995, respectively. As part of the proposed class action settlement (See
Note 5, "Litigation" these management and re-lease fees as well as all future
fees earned by the Administrative General Partner have been assigned by an
affiliate to an escrow account for the benefit of class members.
4. NOTES PAYABLE
During April 1994, the Partnership established a loan facility with an
unaffiliated, third-party lender ("Lender"), which was collateralized by the
Partnership's one-half interest in the McDonnell Douglas MD-81 aircraft leased
to USAir, Inc. ("USAir") and the Partnership's Boeing 747-100 aircraft then
under lease 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 .5% per annum payable quarterly. There are no compensating
balance requirements. The Partnership had an option for a fixed (market interest
rate on the US Treasury bond with a similar maturity plus 2.75%) or floating
(the Lender's prime rate plus 1.5%) rate of interest.
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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 was extended
until May 1, 1997 and the floating interest rate charged under the facility was
reduced to the Lender's prime rate plus .5%. The Lender released the Boeing
747-100 aircraft as collateral under the loan and received as substitute
collateral, a perfected security interest in the Partnership's MD-82 aircraft
leased to TWA. Through June 30, 1996, the Partnership had borrowed an aggregate
of $2,150,000 pursuant to the loan agreement, of which $1,426,000 and $1,625,000
were outstanding at June 30, 1996 and December 31, 1995, respectively.
5. 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 sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber 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 each 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 investments 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 partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
On May 30, 1995, the US 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 ("District Court") to be used to resolve the litigation. On July 17, 1996,
the District Court granted preliminary approval of the proposed settlement of
the class action
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litigation. As part of the class action settlement, PaineWebber agreed to pay
$125 million and additional consideration to class members. The order entered by
the District Court provides for notice to be mailed to class members and
schedules a final hearing on the proposed settlement for October 25, 1996.
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 denied their request, and the plaintiffs have taken
an appeal to the United States Court of Appeals for the Second Circuit. The
Illinois case has been dismissed.
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 and consolidated under the
title, Mallia vs. PaineWebber, Inc. 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 the Mallia and
Abbate litigations. The General Partners are unable to determine the effect, if
any, of such action on the Partnership's financial statements, taken as a whole.
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6. AIRCRAFT
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 Partnership. 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 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.
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. See
footnote 7, "Aircraft Remarket," for a further description of the 747-100
aircraft.
Continental filed for Chapter 11 bankruptcy protection on December 3, 1990
and stopped making lease payments. The Partnership entered into various lease
modifications and financing arrangements with Continental as a result of the
bankruptcy. At June 30, 1996, the Partnership had advances to Continental
aggregating $122,000 with respect to aircraft modifications, which were being
repaid monthly with interest.
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
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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 June 30, 1996, the balance of the receivable was $358,000 ($428,000 at
December 31, 1995). All 1996 payments have been made by TWA when due.
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 obligations 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 rent scheduled 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 of $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 US Bankruptcy Code. On August 23,
1995, the reorganization plan, which included the foregoing lease modifications,
was confirmed by the Bankruptcy Court, and TWA emerged from bankruptcy. TWA has
made all rental payments, advance repayments and payments of deferred rent when
due. However, there can be no assurance that TWA will be able to meet its
obligations in the future. At June 30, 1996 and December 31, 1995, the
Partnership had $187,000 and $465,000, respectively, of deferred rent
receivables relating to the TWA lease which were included in rents and other
receivables on the balance sheet.
Kiwi International Air Lines Leases The Partnership owns two Boeing 727-200
non-advanced aircraft, originally acquired on 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 of which 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. In
February 1994 and April 1994, the Partnership entered into the leases with Kiwi,
each for terms of approximately five years with rents payable monthly in advance
at $55,000 per aircraft. The leases also require 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.
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During the terms of the leases Kiwi can request that the aircraft be
hushkitted to obtain Stage 3 noise abatement for which the lease term will be
reset additional with lease payments increasing to amortize the cost of
hushkitting at the rate of approximately 2% per month. Alternatively, the
Partnership can deem the hushkitting economically unfeasible at which point Kiwi
can terminate the lease and return the aircraft. In July 1996, Kiwi and the
Partnership entered into discussions that may result in the Partnership
hushkitting one or both of the 727 aircraft leased to Kiwi in 1996. Such upgrade
is estimated to cost $1.9 million per aircraft. The Partnership would utilize
its existing loan facility to finance the hushkitting of one aircraft but would
need to obtain additional financing to complete such work if both aircraft were
hushkitted.
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 was repaid with interest at 12% over a 9-month period which began
July 1, 1995. At June 30, 1996, the Partnership held maintenance deposits
aggregating $1,435,000 with respect to the Kiwi aircraft which is included as
restricted cash on the balance sheets. Kiwi made its February and May 1996 lease
payments late and has requested deferral of its July rental and maintenance
payments. Kiwi is to repay the deferred rent over nine months with interest at
12% commencing October 1996 and make up the deficiency in maintenance reserve
payments at the next scheduled maintenance check.
In June 1996, Kiwi agreed with the FAA to ground 25% of its fleet due to
certain pilot training manual deficiencies. Kiwi is working towards satisfying
the FAA and has returned two of four aircraft grounded to active status.
Additionally, in July 1996, an outside institutional investor contributed,
$4,000,000 in return for a convertible note due in March 1997, for up to 32% of
Kiwi's common stock and two seats on Kiwi's Board of Directors. The investor has
options to invest an additional $6,000,000 in convertible preferred stock which
expires in March 1997. Existing shareholders (including directors and employees)
are also making or will be given the opportunity to make additional investments.
Kiwi's ability to make timely lease and reserve payments is uncertain due to its
long-term liquidity, capital and market concerns.
7. AIRCRAFT REMARKET
In April 1996, the Partnership entered into an agreement in principle with
TWA for the lease of the 747 aircraft for a term of approximately 48 months at a
lease rate of $180,000 per month. The Partnership commenced a scheduled
maintenance check on the aircraft to prepare the aircraft for delivery. The
Partnership incurred costs of $1,280,000 in connection with the redelivery
integration and maintenance of the 747 aircraft, of which $669,000 represented
maintenance expense and $611,000 were capitalized expenditures. The aircraft was
delivered to TWA on July 12, 1996. The Partnership received a security deposit
of $360,000 from TWA with respect to the lease.
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Item 2. Management's Discussion and Analysis 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.
At June 30, 1996, the Partnership's unrestricted cash and cash equivalents
exceeded declared but unpaid distributions to partners by $1,454,000. At
December 31, 1995, the Partnership's unrestricted cash and cash equivalents
exceeded declared, but unpaid, distributions to the partners by $2,456,000.
Rent and other receivables decreased by $645,000 from $1,534,000 at
December 31, 1995 to $889,000 at June 30, 1996. This decrease is primarily the
result of the continued repayments of advances and deferrals by Continental, TWA
and Kiwi.
Prepaid expenses increased by $2,000 from $47,000 at December 31, 1995 to
$49,000 at June 30, 1996.
Deferred rental income decreased $81,000 from $218,000 at December 31, 1995
to $137,000 at June 30, 1996 due to the recognition of income during 1996 of an
amount received in December 1995.
Payable to affiliates decreased by $45,000, from $628,000 at December 31,
1995 to $583,000 at June 30, 1996. The decrease was attributable to the payment
in the first quarter of fees associated with the 747 Lease Settlement which were
accrued at December 31, 1995, offset by the continued deferral of management
fees otherwise due the Administrative General Partner.
During the three months ended June 30, 1996 the Partnership paid cash
distributions pertaining to the first quarter (except the amount due to the
Administrative General Partner which remains unpaid). The quarterly distribution
represented an annualized rate equal to 8% of contributed capital ($.40 per
Unit).
The amount of each distribution will be determined on a quarterly basis
after an evaluation of the Partnership's operating results and its current and
expected financial position. The distribution for the second quarter of 1996 was
paid on July 25, 1996 at an annualized rate of 8% of contributed capital ($.40
per Unit).
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital, or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the amount of net
income (loss) reported by the Partnership for accounting purposes 100% of the
cash distributions declared for the quarter ended June 30, 1996 (99% for the six
months then ended), constituted a return of capital. Also, based on the amount
of net income reported by the Partnership for accounting purposes, approximately
69% of the cash distributions paid to the
14
<PAGE> 16
partners from inception of the Partnership through June 30, 1996 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 which 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 .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 $1,426,000 and
$1,625,000 were outstanding at June 30, 1996 and December 31, 1995,
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 to comply with Stage 3 aircraft noise
regulation, or other capital improvements such as cargo conversion. In July 1996
Kiwi and the Partnership entered into discussions that may result in the
Partnership hushkitting one or both of the 727 aircraft leased to Kiwi. If the
Partnership were to elect to hushkit both of these aircraft, the Partnership
would need to increase its current loan facility or complete a new financing
arrangement. The Partnership is permitted to borrow up to 35% of the original
offering proceeds for improvements, enhancement or maintenance of aircraft. Any
such borrowings will only be made if the General Partners believe such
borrowings will be in the best interests of the Partnership and will enhance or
protect portfolio value. However, there can be no assurance that the Partnership
would be able to obtain any additional borrowings, if required.
During 1995, TWA completed its financial restructuring and has made all
1996 payments due. Additionally, during 1996, 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 and
May 1996, made a similar request for payments otherwise due in July 1996 and a
longer term deferral for August 1996 rents (with related maintenance reserves
payable at the next C check interval). The Partnership settled the early
termination of the Continental 747 lease in 1995 and accepted redelivery of the
aircraft. The Partnership delivered the aircraft to TWA in July 1996 for a term
of 48 months at a lease rate of $180,000 per month. The Partnership incurred
scheduled maintenance and integration costs, which aggregated approximately
$1,300,000 to complete the remarket of the 747-100 aircraft to TWA, of which
$574,000 was unpaid at June 30, 1996. The Partnership has or will finance such
costs through its cash reserves and loan facility. Additionally, because of the
need to meet Stage 3 aircraft thresholds required by FAA mandated noise
regulation, Kiwi and the Partnership have entered into discussions which may
result in the hushkitting of 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 which may or may not be
obtainable. If the Partnership elects not to do such work,
15
<PAGE> 17
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 any
changes in the status of the Kiwi leases as the result of Kiwi's continued
liquidity concerns or because of Stage 3 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
See Footnote Item 1, "Legal Proceedings" for a complete discussion of certain
class action lawsuits and related settlement.
RESULTS OF OPERATIONS
The Partnership's net (loss) income was ($21,000) and $59,000 for the
quarter and six months ended June 30, 1996 ("1996 Quarter" and "1996 Period",
respectively) as compared to $319,000 and $523,000 for the quarter and six
months ended June 30, 1995 (1995 Quarter and 1995 Period, respectively).
The decrease in the Partnership's net income for the 1996 Quarter and 1996
Period resulted primarily from the maintenance expense incurred in connection
with the delivery of the 747-100 aircraft to TWA.
Rental revenue increased by $13,000, but decreased by $224,000, or 1% and
(7%), for the 1996 Quarter and 1996 Period respectively as compared to the
corresponding periods in the prior year. The increase in the 1996 Quarter is
attributable to the rental income recognized with respect to the lease of the
spare engine to Kiwi; the decrease in the 1996 Period as compared to the 1995
Period is due to the fact that one month of rental income was recognized in the
1995 Period with respect to the 747 aircraft which was off lease for the entire
1996 Period, partially offset by the rents generated by the spare Kiwi engine.
Interest income for the 1996 Quarter decreased by $10,000 or 14% as
compared to the 1995 Quarter but was the same for the 1996 Period and the 1995
Period. This decrease in the 1996 Quarter was primarily attributable to the
continued repayment of advances and deferrals pursuant to various repayment
schedules reducing the balances on which interest income is earned which was
offset for the 1996 Period by the interest earned on cash deposits held by the
Partnership during the 1996 Period (primarily from the 747 Settlement).
Depreciation and amortization decreased $25,000 and $394,000, or 3% and
18%, for the 1996 Quarter and 1996 Period,
16
<PAGE> 18
respectively, in comparison to the 1995 Quarter and 1995 Period. The decrease in
the 1996 Quarter was attributable to provisions for decline in value of certain
aircraft provided at December 31, 1995 reducing the depreciable bases. The
significant decrease in the 1996 Period was also attributable to the fact that
in the 1996 Period no depreciation was recognized with respect to the 747
aircraft; depreciation was recognized on the 747 aircraft for a portion of the
1995 Period.
Management and re-lease fees payable to the General Partners for the 1996
Quarter decreased $18,000 and $ 46,000, or 16% and 19%, for the 1996 Quarter and
1996 Period, respectively, in comparison to the 1995 Quarter and 1995 Period,
due to decreases in rental revenue and net income (adjusted for depreciation)
which serve as the bases for these fees.
General and administrative expense decreased by $1,000, but increased by
$1,000 or (2%) and 1% in the 1996 Quarter and 1996 Period, respectively as
compared to the 1995 Quarter and 1995 Period, which was consistent with the
Partnership's operations.
Interest expense decreased by $16,000 and $26,000 or 30% and 25% in the
1996 Quarter and 1996 Period, respectively, as compared to the 1995 Quarter and
1995 Period, due principally to the continued repayment of principal which
reduced the outstanding balances.
Direct lease expenses increased by $21,000 and $36,000 or 72% and 65% in
the 1996 Quarter and 1996 Period, respectively, as compared to the 1995 Quarter
and 1995 Period, due to an increase in insurance premiums as well as aircraft
storage costs relating to the 747 aircraft.
Aircraft maintenance expense of $382,000 and $669,000 was incurred in 1996
Quarter and 1996 Period, respectively, which reflected the work completed with
respect to a maintenance check performed on the 747 aircraft prior to the
delivery to TWA in July 1996. No such amount was incurred in the 1995 Quarter or
1995 Period.
17
<PAGE> 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
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 sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber 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 each 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 investments 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 partnerships, as well as disgorgement of all fees
and other income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
On May 30, 1995, the US 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 ("District Court") to be used to resolve the litigation. On July 17, 1996,
the District Court granted preliminary approval of the proposed settlement of
the class action litigation. As part of the class action settlement, PaineWebber
agreed to pay $125 million and additional consideration to class members. The
order entered by the District Court provides for notice to be mailed to class
members and schedules a final hearing on the proposed settlement for October 25,
1996.
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
18
<PAGE> 20
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 denied their request, and the plaintiffs
have taken an appeal to the United States Court of Appeals for the Second
Circuit. The Illinois case has been dismissed.
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 and consolidated under the
title, Mallia vs. PaineWebber, Inc. 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 the Mallia and
Abbate litigations. The General Partners are unable to determine the effect, if
any, of such action on the Partnership's financial statements, taken as a whole.
19
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and reports to be filed: none
(b) The Partnership filed a Form 8-K during the second quarter of the
fiscal year ending December 31, 1996, dated June 6, 1996, reporting
the Partnership's annual report.
20
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
A General Partner
Date: August 12, 1996 By: /s/ Joseph P. Ciavarella
------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996 FOR PEGASUS AIRCRAFT PARTNERS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,086,000
<SECURITIES> 0
<RECEIVABLES> 889,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,549,000
<PP&E> 75,057,000
<DEPRECIATION> 46,472,000<F3>
<TOTAL-ASSETS> 34,044,000
<CURRENT-LIABILITIES> 5,041,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 28,003,000<F2>
<TOTAL-LIABILITY-AND-EQUITY> 34,044,000
<SALES> 0
<TOTAL-REVENUES> 1,510,000
<CGS> 0
<TOTAL-COSTS> 1,446,000
<OTHER-EXPENSES> 49,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,000
<INCOME-PRETAX> (21,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,000)
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F3>Includes allowances for equipment impairment.
<F2>Includes partners capital plus accumulated earnings and distributions to
partners.
<F1>Income per unit of limited partnership interest.
</FN>
</TABLE>
