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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________________to_________________________
Commission file number 0-17712
Pegasus Aircraft Partners, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1099968
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(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
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(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, 1997
Table of Contents
Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - June 30, 1997
and December 31, 1996 2
Statements of Operations for the three months
ended June 30, 1997 and 1996 3
Statements of Income for the six months
ended June 30, 1997 and 1996 4
Statements of Partners' Equity for the six
months ended June 30, 1997 and 1996 5
Statements of Cash Flows for the six
months ended June 30, 1997 and 1996 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
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS -- JUNE 30, 1997 AND DECEMBER 31, 1996
(unaudited)
ASSETS
1997 1996
-------- --------
(in thousands except
unit data)
Cash and cash equivalents $ 3,211 $ 2,521
Restricted cash -- 1,627
Rent and other receivables, net 703 660
Aircraft, net (Notes 2 and 6) 30,172 26,315
Prepaid expenses 18 35
-------- --------
Total Assets $ 34,104 $31,158
-------- --------
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable-aircraft $ 236 $ --
Notes payable (Note 4) 7,271 1,218
Accounts payable and accrued expenses 103 73
Payable to affiliates (Note 3) 550 484
Deferred rental income and deposits 882 676
Distributions payable to partners 1,664 1,648
Maintenance reserve payable 277 1,627
Accrued interest payable 58 9
-------- --------
Total Liabilities 11,041 5,735
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COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6)
PARTNERS' EQUITY:
General Partners (565) (542)
Limited Partners (4,000,005 units outstanding) 23,628 25,965
-------- --------
Total Partners' Equity 23,063 25,423
-------- --------
Total Liabilities and Partners' Equity $ 34,104 $ 31,158
======== ========
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
1997 1996
----------- -----------
(in thousand, except unit data
and per unit amounts)
Rentals from operating leases (Note 5) $ 1,946 $ 1,447
Interest 22 63
----------- -----------
1,968 1,510
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EXPENSES:
Depreciation and amortization 1,116 920
Management and re-lease fees (Note 3) 167 94
General and administrative (Note 3) 60 49
Interest expense 159 36
Direct lease 58 50
Maintenance and aircraft expense -- 382
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1,560 1,531
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NET INCOME (LOSS) $ 408 $ (21)
----------- -----------
NET INCOME (LOSS) ALLOCATED:
To the General Partners $ 4 $ --
To the Limited Partners 404 (21)
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$ 408 $ (21)
=========== ===========
NET INCOME (LOSS) PER LIMITED PARTNERSHIP
UNIT $ .10 $ (.01)
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
=========== ===========
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
1997 1996
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(in thousands, except unit
data and per unit amounts)
REVENUE:
Rentals from operating leases (Note 5) $ 3,626 $ 2,898
Interest 52 138
Gain on sale of engine 177 --
---------- ----------
3,855 3,036
---------- ----------
EXPENSES:
Depreciation and amortization 2,216 1,840
Management and re-lease fees (Note 3) 305 192
General and administrative (Note 3) 123 106
Interest expense 227 79
Direct lease 112 91
Maintenance and aircraft expense -- 669
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2,983 2,977
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NET INCOME $ 872 $ 59
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 9 $ 1
To the Limited Partners 863 58
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$ 872 $ 59
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .21 $ .01
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
========== ==========
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
General Limited
Partners Partners Total
-------- -------- --------
(in thousands)
Balance, January 1, 1997 $(542) $ 25,965 $ 25,423
Net income 9 863 872
Distributions declared to partners (32) (3,200) (3,232)
----- -------- --------
Balance, June 30, 1997 $(565) $ 23,628 $ 23,063
===== ======== ========
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
===== ======== ========
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
1997 1996
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(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 872 $ 59
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of engine (177) --
Depreciation and amortization 2,216 1,840
Change in assets and liabilities:
Rent and other receivables (160) 498
Prepaid expenses 17 (2)
Accounts payable and accrued expenses 30 (23)
Payable to affiliates 66 (45)
Accrued interest payable 49 (3)
Accounts payable arising from maintenance related items -- 200
Deferred rental income 16 (81)
Unrestricted maintenance reserves payable 277 67
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Net cash provided by operating activities 3,206 2,510
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of engine 275 --
Capitalized aircraft improvements (6,171) (611)
Accounts payable-aircraft 236 374
Repayment of advances by lessees 117 147
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Net cash used in investing activities (5,543) (90)
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The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
1997 1996
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(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Security deposits 190 --
Restricted maintenance reserves 27 --
Transfers from restricted cash 1,627 --
Application of maintenance reserves to restore aircraft (1,654) --
Cash distributions paid to partners (3,216) (3,216)
Proceeds from notes payable 7,271 --
Repayments of notes payable (1,218) (199)
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Net cash provided by (used in) financing activities 3,027 (3,415)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 690 (995)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,521 4,081
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,211 $ 3,086
======= =======
SUPPLEMENTAL INFORMATION:
Interest paid $ 178 $ 80
======= =======
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(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, 1997 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, 1996.
2. AIRCRAFT UNDER OPERATING LEASES
The Partnership's net investment in aircraft as of June 30, 1997 and
December 31, 1996 consisted of the following (in thousands):
1997 1996
-------- --------
Aircraft on operating leases $ 81,133 $ 67,145
Less: Accumulated depreciation (41,792) (36,095)
Reserve for decline in market
value of aircraft (5,318) (2,934)
Net lease settlement proceeds
accounted for as cost recovery (3,673) (3,673)
Provision for maintenance cost (178) (178)
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$ 30,172 $ 24,265
-------- --------
Aircraft held for lease $ -- $ 7,817
Less: Accumulated depreciation -- (3,481)
Reserves for decline in market
value of aircraft -- (2,384)
-------- --------
-- 1,952
-------- --------
Aircraft engine $ -- $ 195
Less: Accumulated depreciation -- (97)
-------- --------
-- 98
-------- --------
Aircraft, net $ 30,172 $ 26,315
======== ========
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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 payable to the
Administrative General Partner. The General Partners earned $29,000 and $53,000
of base management fees during the quarter and six months ended June 30, 1997,
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 $81,000 and $147,000
of incentive management fees during the quarter and six months ended June 30,
1997, 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 $57,000 and $105,000 of re-lease fees during the quarter
and six months ended June 30, 1997, respectively. All of the above fees are
subordinated to the limited partners receiving an 8% annual non-cumulative
retiurn 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, 1997, respectively,
all of which were payable to the Administrative General Partner.
During the six months ended June 30, 1996 the Partnership paid or
accrued $829,000 to a maintenance facility that is affiliated with the Managing
General Partner. The Partnership also paid or accrued $571,000 for aircraft
parts to a company owned by the three directors of the Managing General
Partners. Additionally, the Partnership received rental payments of $114,000
(including $45,000 received in advance in December 1996) and maintenance reserve
payments of $115,000, from Nations Air Express Inc relating to engines owned by
an affiliated partnership and affiliates of the Managing General Partner of
which $148,000 has been paid to the related affiliates at June 30,1997. The
balance was paid in July 1997.
4. NOTES PAYABLE
During April 1994, the Partnership established a $4,000,000 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 USAirways, Inc. ("USAir") and the Partnership's Boeing
747-100 aircraft then leased to Continental with interest at a fixed rate
(market interest rate on US Treasury bond with similar maturity + 2.75%) or
floating at prime plus 1.5%.
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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 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 as substitute
collateral a perfected security interest in the Partnership's MD-82 aircraft
leased to TWA. At December 31, 1996, the outstanding loan balance was
$1,218,000.
In February 1997, the Partnership purchased five aircraft engines from
an unaffiliated third party for $2,150,000 plus six engine cores from the former
Kiwi aircraft which required overhaul, utilizing its then existing borrowing
facility. The Lender charged the Partnership 1.50% over prime with respect to
this borrowing and increased the rate on the other borrowings to 1.50% over
prime. In April 1997, the Partnership obtained a new borrowing facility with a
different lender. Under the terms of the new agreement, the Partnership will be
able to borrow up to $7,500,000 at an interest rate of 1% over the lender's
prime rate of interest. The lender's commitment is for a term of 36 months, at
which time all principal will be due. The loan is collateralized by the
Partnership's interest in the MD-82 aircraft leased to TWA. During the loan
term, the Partnership will be required to pay interest on a monthly basis and
maintain a minimum outstanding balance of $2,000,000. The Partnership used
approximately $3.3 million of proceeds from this facility to retire the amounts
previously outstanding and used an additional $3.9 million to finance hushkits
for the two former Kiwi aircraft, one of which is leased to Nations Air Express
Inc. and the other of which is leased to Sky Trek International Airlines, Inc..
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 ("District Court") 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 each partnership; (2)
made false and misleading representations about the safety of the investments
and the partnerships' anticipated performance; and (3) marketed th epartnership
to investors for whom such 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
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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, 1996, the 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
agreed to settle the case. A definitive settlement was signed in July 1996 and
in March 1997, the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement, PaineWebber agreed to pay $125
million and additional consideration to class members. The investors who had
objected to the settlement have appealed the District Court's approval to the
United States Court of Appeals for the Second Circuit. In July 1997, the U.S.
Court of Appeals for the Second Circuit affirmed the District Court's approval
of the settlement.
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
challenged the proposed settlement of these cases. Their objections were
overruled when the District Court approved the class action settlement with
respect to the New York Limited Partnership Actions. 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 District Court 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 230 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
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concerning the investments. The complaint seeks compensatory damages of $15
million plus punitive damages. In September 1996, the California Superior Court
dismissed many of the plaintiffs' claims as barred by the applicable statutes of
limitation.
In June 1996, counsel for the Abbate plaintiffs instituted two
additional actions containing allegations nearly identical to those set forth in
Abbate. Bandrowski v PaineWebber Incorporated, et al, was filed in California
Superior Court and Barstad v. PaineWebber Incorporated, et al, was filed in
Arizona Superior Court. Collectively, the two additional actions are brought by
approximately 50 plaintiffs and seek compensatory damages of approximately $4
million plus punitive damages. In March 1997, all of these actions were settled.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner were entitled to indemnification
from the Partnership for expenses and liabilities in connection with the above
actions. PaineWebber and its affiliates have agreed to not seek any
indemnification from the Partnership for any amounts payable in connection with
the New York Limited Partnership Actions. The General Partners do not believe
that the settlement of Abbate, Bandrowski and Barstad actions will have a
material effect on the Partnership's financial statements, taken as a whole.
On September 30, 1996, Kiwi filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy code and the
Partnership recovered the aircraft. The Partnership has a claim against Kiwi for
all unpaid items under the leases as well as rejection damages. The Partnership
filed an adversarial complaint seeking the Bankruptcy court's authority to use
certain maintenance reserves ($1.6 million) collected from Kiwi. In April 1997,
the Partnership won summary judgment in bankruptcy court permitting the use of
the reserves. The Partnership is also involved in a litigation within the Kiwi
bankruptcy with the company that acted as Kiwi's engine manager regarding each
party's compliance with a settlement agreement entered into to facilitate the
recovery of the aircraft and engines. The parties achieved a negotiated
settlement in May 1997. (See Note 6, "Aircraft, Kiwi" for a complete
description.)
On December 5, 1996, an action was filed in the Court of Chancery of
the State of Delaware in New Castle County entitled "Equity Resources Cambridge
Partnership and its general partners. Equity Resources Cambridge Fund seeks
access to the list of limited partners of the Partnership. On January 2, 1997
defendants answered the complaint denying the substantive allegations thereof
and asserting several affirmative defenses. It is impossible to predict the
outcome of this litigation, however, the General Partners do not believe that
the outcome will have a material effect on the Partnership's financial
statements, taken as a whole.
6. AlRCRAFT
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"), scheduled to expire on
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October 31, 1996. Continental and the Partnership extended the lease to June
1998 and reduced the monthly rate from $81,000 to $75,000.
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 originally
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 certain
aircraft, including the Boeing 747 Aircraft owned by the Partnership.
Continental discontinued utilizing the 747 Aircraft, did not make any rental
payments after January 1995 and returned the 747 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 $3,906,000.
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
TWA discussion below for a further discussion of the Boeing 747 aircraft.
Trans World Airlines Leases 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 June 30, 1997 the balance of the receivable was
$208,000. All 1997 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
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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 were repaid with interest at 12% from the date of the deferral over an 18
month period, which commenced May 1, 1995. On June 30, 1995, TWA filed a
prepackaged reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On
August 23, 1995, the reorganization plan, which included the foregoing lease
modifications, was confirmed by the Bankruptcy Court, and TWA emerged from
bankruptcy. Although TWA has made all rental payments and advance repayments,
however, there can be no assurance that TWA will be able to meet its obligations
in the future.
In July 1996, the Partnership delivered its Boeing 747-100 aircraft,
formerly leased to Continental, to TWA subject to lease with a term of
approximately four years. The lease provides for a monthly rent of $180,000. The
Partnership incurred costs of approximately $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
Partnership received a security deposit of $360,000 from TWA with respect to the
lease.
Kiwi International Air Lines Inc. - Bankruptcy. The Partnership owns
two Boeing 727-200 non-advanced aircraft, originally acquired in December 1988
for $6,308,000 per aircraft. In February 1994 and April 1994, the Partnership
entered into leases with Kiwi, each originally for a term of approximately five
years with rents payable monthly in advance at $55,000 per aircraft. The leases
were modified in 1995 and extended to December 31, 1999. The leases also
required Kiwi to pay maintenance reserves for airframe and engines, of $250 per
flight hour, which could be drawn down by Kiwi for specific maintenance
procedures. 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 was used as a spare by Kiwi on a
utilization basis at $105 per flight hour of use. The Partnership invested an
additional $3,108,000 for maintenance, aging aircraft modifications and other
Kiwi requested modifications prior to delivery, $580,000 of which was funded by
return condition settlement payments from the prior lessee. The leases allowed
Kiwi to request that the aircraft be hushkitted by the Partnership at a cost of
approximately $1.9 million each to obtain Stage III noise abatement status or
terminate the lease.
In June 1996, Kiwi agreed with the FAA to ground 25% of its fleet due
to certain pilot training handbook deficiencies. In August 1996, Kiwi and the
FAA resolved the deficiencies and Kiwi returned to full capacity. In addition to
the FAA grounding, Kiwi was also negatively impacted by the market reaction to
the Valujet incident. During 1996, Kiwi did not meet its financial goals. In
July 1996, an institutional investor invested $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 institutional investor had options to
invest an additional $6,000,000 in convertible preferred stock. Existing
shareholders (including directors and employees) were to be given the
opportunity to make additional investments.
Kiwi requested and was granted by the Partnership a deferral of its
August 1996 rental and July 1996 maintenance payments. Kiwi was subsequently
unable to make its September rental and August maintenance payments and was
placed in default by the Partnership.
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In late September, Kiwi proposed a restructuring of its obligations
with certain creditors, including the Partnership. On September 30, 1996, Kiwi
filed a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code ("Bankruptcy Code") and did not make any subsequent payments.
The Kiwi leases accounted for approximately 19% of the Partnership's rental
revenue in 1996 and the aircraft had net book values aggregating approximately
$4,000,000 at December 31, 1996. The Partnership held maintenance deposits
aggregating approximately $1,654,000, which were not sufficient to complete work
required on the aircraft and the related engines to meet lease return conditions
and make the aircraft leasable. On October 15, 1996, Kiwi ceased scheduled
flight operations. The Bankruptcy Court approved Kiwi's motion to reject both
leases as of November 15, 1996. The Partnership provided an allowance for bad
debts in the amount of $240,000 relating to amounts due from Kiwi as of the
bankruptcy date and did not record any revenue from Kiwi beyond that date. The
Partnership recovered the aircraft and the spare engine in late 1996. Kiwi
obtained debtor-in-possession financing and started up operations in early 1997.
The Partnership filed a claim against Kiwi for all unpaid items in
connection with the leases as well as rejection damages and filed a claim in
Kiwi's bankruptcy case preserving its rights in the Kiwi estate. The Partnership
also filed an adversarial complaint seeking the Bankruptcy Court's authority to
utilize the maintenance reserves held ($1.6 million). In April 1997, the
Partnership won a summary judgment in Bankruptcy Court permitting the use of the
collected maintenance reserves. The maintenance reserves were reclassified from
restricted cash to cash and cash equivalents and the maintenance reserve payable
was applied against expenditures made to make the aircraft leasable. The spare
engine was sold during the quarter ended March 31, 1997 for proceeds of
$275,000. The Partnership was also involved in litigation within the Kiwi
bankruptcy with the company who acted as Kiwi's engine manager regarding each
party's compliance with a settlement agreement entered into to facilitate the
recovery of the aircraft and engines. The parties achieved a negotiated
settlement in May 1997.
In July 1997, the Bankruptcy Court approved a proposal to purchase the
assets of Kiwi submitted by a group which includes certain of the parties that
had provided debtor-in-possession financing. Based upon the approved purchase
price, it is likely that the Partnership will have little or no recovery of its
bankruptcy claims.
Nations Air On December 31, 1996, the Partnership delivered a 727-200,
formerly leased to Kiwi, to Nations Air Express, Inc. ("Nations") subject to a
lease for a term of approximately 36 months at a lease rate of $65,000 per
month. Nations is also required to make initial maintenance reserve payments of
approximately $347 per flight hour (to be reduced thereafter and used only for
specific maintenance) and is obligated to complete the next phase "C" check
without reimbursement from maintenance reserves.
At the time of delivery to Nations, one of the installed engines
belonged to Pegasus Aircraft Partners II, L.P., an affiliated partnership, and
the other two engines belonged to affiliates of the Managing General Partner.
The Partnership paid or will pay those entities for their share of the rents (in
the aggregate $45,000 per month plus related reserves) while using such engines.
The
15
<PAGE> 17
Partnership purchased five engines in January 1997 from an unaffiliated third
party, three of which were installed on the aircraft in March - April 1997.
Additionally, the Partnership hushkitted the aircraft at a cost of approximately
$1.9 million and simultaneously extended the lease to April 2002 and increased
the monthly lease rate from $65,000 to $105,000 effective April 1997. During
1997, Nations incurred operating problems and continued to struggle with
liquidity and capitalization issues. Nations fell in arrears with respect to
rent and maintenance reserves due and in July began making weekly payments of
rent and maintenance reserves instead of monthly payments. In late July 1997,
Nations stopped making weekly payments and stopped flying the aircraft shortly
thereafter. Nations is in discussions with potential sources of capital. Nations
is currently unable to fund a "C" check for the aircraft which is due shortly.
If Nations is unable to obtain additional capital, the Partnership may recover
the aircraft. At June 30, 1997, Nations owed the Partnership $130,000 with
respect to the short-term lease of a Kiwi engine which had little economic life
left before it would need an overhaul when it was delivered to Nations and for
which amounts due had been accounted for as maintenance reserves.
Sky Trek International Airlines, Inc. In February 1997, the Partnership
entered into an agreement in principle to lease the second former Kiwi 727
aircraft to a start up airline, Sky Trek International Airline's Inc. ("Sky
Trek").The lease was executed and the aircraft was delivered in late June 1997.
The Sky Trek lease provides for rent $95,000 per month for a term of
approximately 60 months. Sky Trek provided a lease deposit of $190,000 and will
be obligated to fund maintenance reserves, in the aggregate, at a rate of $325
per flight hour. The Partnership completed a C check (including replacing
time-controlled parts) at a cost of approximately $1,500,000 and has purchased
a hushkit at a cost of $1,900,000.
16
<PAGE> 18
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, 1997, the Partnership's unrestricted cash and cash
equivalents exceeded declared but unpaid distributions to partners by
$1,547,000. At December 31, 1996, the Partnership's unrestricted cash and cash
equivalents exceeded declared, but unpaid, distributions to the partners by
$873,000. The principal reason for the increase was the transfer from restricted
cash of maintenance reserves held with respect to the former Kiwi aircraft (See
Footnote 5, "Litigation" and Footnote 6, "Aircraft, Kiwi" for a description) and
the Sky Trek security deposit partially offset by the fact that distributions to
partners exceeded cash from operating activities, adjusted for collections of
advances, debt service and capital expenditures(net of borrowings) during the
six months ended June 30, 1997.
Rent and other receivables increased by $43,000 from $660,000 at
December 31, 1996 to $703,000 at June 30, 1997. This increase is due primarily
to maintenance reserves due from Nations partially offset by the result of the
continued repayments of advances by Continental and TWA.
Prepaid expenses decreased by $17,000 from $35,000 at December 31, 1996
to $18,000 at June 30, 1997.
Deferred rental income and deposits increased $206,000 from $676,000 at
December 31, 1996, to $882,000 at June 30, 1997, primarily due to the collection
of a security deposit ($190,000) from Sky Trek.
Payable to affiliates increased by $66,000, from $484,000 at December
31, 1996 to $550,000 at June 30, 1997. The increase was attributable to the
amounts due to related parties with respect to the engines originally delivered
in connection with the lease of the Boeing 727-200 aircraft to Nations.
During the three months ended June 30, 1997 the Partnership paid cash
distributions pertaining to the first quarter. The quarterly distribution
represented an annualized rate equal to 8% of contributed capital ($.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 1997 was
paid on July 25, 1997 at an annualized rate of 8% of contributed capital ($.40
per Unit).
17
<PAGE> 19
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital, or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the amount of net
income reported by the Partnership for accounting purposes, 75% of the cash
distributions declared for the quarter ended June 30, 1997 (74% 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
70% of the cash distributions paid to the partners from inception of the
Partnership through June 30, 1997 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 1996. In July 1996, 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. In February 1997, the Partnership purchased five aircraft engines
from an unaffiliated third party for $2,150,000 plus six engine cores from the
former Kiwi aircraft which required overhaul. The Partnership utilized borrowing
under its borrowing facility. The Lender charged the Partnership 1.50% over
prime with respect to this borrowing and increased the rate on the other
borrowings to the same rate. In April 1997, the Partnership consummated a new
borrowing facility with a different lender. Under the terms of the new
agreement, the Partnership will be able to borrow up to $7,500,000 at an
interest rate of 1% over the lender's prime rate of interest. The lender's
commitment is for a term of 36 months, at which time all principal will be due.
The loan is collateralized by the Partnership's interest in the MD-82 aircraft
leased to TWA. During the loan term, the Partnership will be required to pay
interest on a monthly basis and maintain a minimum outstanding balance of
$2,000,000. The Partnership used approximately $3.3 million of proceeds from
this facility to retire the amounts previously outstanding and used an
additional $3.9 million to finance hushkits for the two former Kiwi aircraft,
one of which is leased to Nations Air Express Inc. and the other of which is
leased to Sky Trek International Airlines, Inc.
The Partnership may require additional financing to fund future
maintenance work on the aircraft, or capital improvements such as cargo
conversion. 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.
On October 15,1996, after filing for protection under Chapter 11 of the
U.S. Bankruptcy Code on September 30, 1996, Kiwi ceased scheduled flight
operations while still exploring financial alternatives. The court approved
Kiwi's rejection of both of the Partnerships' leases as of November 15, 1996.
The Partnership recovered the aircraft and delivered one to Nations and the
18
<PAGE> 20
second aircraft to Sky Trek. The Partnership purchased five engines at a cost
of $2,150,000 plus the six cores from the two former Kiwi aircraft in February
1997 purchased an additional engine for $.6 million and expended or committed
to expend approximately $3.4 million with respect to the Sky Trek aircraft
including a hushkit. Additionally, in April 1997 the Partnership purchased a
hushkit for the Nations aircraft at a price of approximately $1.9 million. At
the same time the Nations lease was extended to April 2002 and the monthly
rent was increased from $65,000 to $105,000. The Partnership utilized the
maintenance reserves collected from Kiwi borrowings under its new facility to
finance the Sky Trek and Nations expenditures. Additionally, during the
quarter ended March 31, 1997, the Partnership sold the spare engine formerly
leased to Kiwi for proceeds of $275,000. Nations fell behind in payments in
mid-1997 and unless Nations can successfully restructure its obligations the
Partnership may have to recover the aircraft which will require "C" check
(estimated to cost $400,000). This may result in delays in redeployment which
will impact Partnership cash flow. The General Partners will determine the
amount of future cash distributions after assessing the Partnership's operating
results, it obligations and other cash requirements.
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 income (loss) was $408,000 and $872,000 for the
quarter and six months ended June 30, 1997 ("1997 Quarter" and "1997 Period",
respectively) as compared to ($21,000) and $59,000 for the quarter and six
months ended June 30, 1996 ("1996 Quarter" and "1996 Period", respectively).
The increase in the Partnership's net income for the 1997 Quarter and
1997 Period resulted primarily from the maintenance expense incurred during the
1996 Quarter and 1996 Period in connection with the delivery of the 747-100
aircraft to TWA. The increase was primarily attributable to the rents earned
with respect to the 747 aircraft(which was delivered in July 1996 and thus was
not generating rent during the prior year periods)during the 1997 Quarter and
1997 Period net of the related depreciation incurred, offset by increases in
interest expense, management and re-lease fees.
Rental revenue increased by $499,000, and $728,000, or 34% and 25%, for
the 1997 Quarter and 1997 Period respectively, as compared to the corresponding
periods in the prior year. The increase is attributable to the rental income
recognized with respect to the 747 aircraft, which was off lease for the entire
1996 Quarter and 1996 Period, partially offset by the fact that the former Kiwi
aircraft delivered to Sky Trek in June 1997 was off lease for substantially all
of the 1997 Quarter and 1997 Period.
Interest income for the 1997 Quarter decreased by $41,000 and $86,000
or 65% and 62%, respectively, as compared to the 1996 Quarter and 1996 Period.
This decrease 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.
Depreciation and amortization increased $196,000 and $376,000, or 21%
and 20%, for the 1997 Quarter and 1997 Period, respectively, in comparison to
the 1996 Quarter and 1996
19
<PAGE> 21
Period. The increase in the 1997 Quarter and 1997 Period was attributable to
depreciation recognized during the 1997 Period with respect to the 747 aircraft
remarketed to TWA in July 1996 (no depreciation was incurred during the prior
year periods) partially offset by the off-lease status of one of the former Kiwi
aircraft for substantially all of the 1997 Quarter and 1997 Period prior to
delivery to Sky Trek. No depreciation is recognized with respect to off-lease
aircraft.
Management and re-lease fees incurred, increased $73,000 and $113,000,
or 78% and 59%, for the 1997 Quarter and 1997 Period, respectively, in
comparison to the 1996 Quarter and 1996 Period, due to increases in rental
revenue and net income (adjusted for depreciation) increased by $11,000 and
$17,000, or which serve as a bases for these fees.
General and administrative expenses increased by $11,000 and $17,000,
or by 22% and 16% in the 1997 Quarter and 1997 Period, respectively as compared
to the 1996 Quarter and 1996 Period, which was consistent with the Partnership's
operations.
Interest expense increased by $123,000 and $148,000 in the 1997 Quarter
and 1997 Period, respectively, as compared to the 1996 Quarter and 1996 Period,
due principally to the increase in outstanding borrowings from $1,218,000 at
December 31, 1996 to $7,271,000 at June 30, 1997. The borrowings were used to
purchase replacement engines for the ex-Kiwi aircraft, as well as Stage 3
hushkits for the two ex-Kiwi aircraft in connection with the deliveries to
Nations Air and Sky Trek.
Direct lease expenses increased by $8,000 and $21,000 or 16% and 23% in
the 1997 Quarter and 1997 Period, respectively, as compared to the 1996 Quarter
and 1996 Period, due to certain Kiwi related costs incurred in the 1997 Quarter
and 1997 Period partially offset by certain storage and insurance costs
(relating to the 747 aircraft) incurred in the 1996 Quarter and 1996 Period.
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 1997. No such amount was incurred in the 1997 Quarter or
1997 Period.
20
<PAGE> 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
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 ("District Court") 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 each partnership; (2)
made false and misleading representations about the safety of the investments
and the partnerships' 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 partnerships 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, 1996, the 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
agreed to settle the case. A definitive settlement was signed in July 1996 and
in March 1997, the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement, PaineWebber agreed to pay $125
million and additional consideration to class members. The investors who had
objected to the settlement have appealed the District Court's approval to the
United States Court of Appeals for the Second Circuit. In July 1997, the U.S.
Court of Appeals for the Second Circuit affirmed the District Court's approval
of the settlement.
21
<PAGE> 23
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
challenged the proposed settlement of these cases. Their objections were
overruled when the District Court approved the class action settlement with
respect to the New York Limited Partnership Actions. 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 District Court 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 230 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiffs 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. In
September 1996, the California Superior Court dismissed many of the plaintiffs'
claims as barred by the applicable statutes of limitation.
In June 1996, counsel for the Abbate plaintiffs instituted two
additional actions containing allegations nearly identical to those set forth in
Abbate. Bandrowski v PaineWebber Incorporated, et al, was filed in California
Superior Court and Barstad v. PaineWebber Incorporated, et al, was filed in
Arizona Superior Court. Collectively, the two additional actions are brought by
approximately 50 plaintiffs and seek compensatory damages of approximately $4
million plus punitive damages. In March 1997, all of these actions were settled.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner were entitled to indemnification
from the Partnership for expenses and liabilities in connection with the above
actions. PaineWebber and its affiliates have agreed to not seek any
indemnification from the Partnership for any amounts payable in connection with
the New York
22
<PAGE> 24
Limited Partnership Actions. The General Partners do not believe that the
settlement of Abbate, Bandrowski and Barstad actions will have a material effect
on the Partnership's financial statements, taken as a whole.
On September 30, 1996, Kiwi filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy code and the
Partnership recovered the aircraft. The Partnership has a claim against Kiwi for
all unpaid items under the leases as well as rejection damages. The Partnership
filed an adversarial complaint seeking the Bankruptcy court's authority to use
certain maintenance reserves ($1.6 million) collected from Kiwi. In April 1997,
the Partnership won summary judgment in bankruptcy court permitting the use of
the reserves. In July 1997, the Bankruptcy Court approved a proposal to purchase
the assets of Kiwi submitted by a group which includes certain of the parties
that has provided debtor-in-possession financing. Based upon the approved
purchase price, it is likely that the Partnership will have little or no
recovery of its bankruptcy claims.
The Partnership was also involved in a litigation within the Kiwi
bankruptcy with the company that acted as Kiwi's engine manager regarding each
party's compliance with a settlement agreement entered into to facilitate the
recovery of the aircraft and engines. The parties achieved a negotiated
settlement in May 1997. (See Note 6, "Aircraft" for a complete description.)
On December 5, 1996, an action was filed in the Court of Chancery of
the State of Delaware in New Castle County entitled "Equity Resources Cambridge
Fund v. Pegasus Aircraft Partners, L.P. et al. The named defendants include the
Partnership and its general partners. Equity Resources Cambridge Fund seeks
access to the list of limited partners of the Partnership. On January 2, 1997,
defendants answered the complaint denying the substantive allegations thereof
and asserting several affirmative defenses. It is impossible to predict the
outcome of this litigation, however, the General Partners do not believe that
the outcome will have a material effect on the Partnership's financial
statements, taken as a whole.
23
<PAGE> 25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and reports to be filed: none
(b) The Partnership did not file any reports on Form 8-K during the
second quarter of the fiscal year ending December 31, 1997.
24
<PAGE> 26
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, 1997 By: /s/ Joseph P. Ciavarella
---------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEGASUS
AIRCRAFT PARTNERS, L.P.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,211,000
<SECURITIES> 0
<RECEIVABLES> 943,000
<ALLOWANCES> (240,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,932,000
<PP&E> 81,133,000
<DEPRECIATION> (50,961,000)<F2>
<TOTAL-ASSETS> 34,104,000
<CURRENT-LIABILITIES> 3,770,000
<BONDS> 7,271,000
0
0
<COMMON> 0
<OTHER-SE> 23,063,000
<TOTAL-LIABILITY-AND-EQUITY> 34,104,000
<SALES> 3,626,000
<TOTAL-REVENUES> 3,855,000
<CGS> 0
<TOTAL-COSTS> 2,633,000
<OTHER-EXPENSES> 123,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227,000
<INCOME-PRETAX> 872,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 872,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 872,000
<EPS-PRIMARY> .21<F1>
<EPS-DILUTED> 0
<FN>
<F1>PER LIMITED PARTNERSHIP UNITS OUTSTANDING
<F2>INCLUDES WRITEDOWNS
</FN>
</TABLE>
