<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 March 31, 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.
(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 10Q for the
Quarter Ended March 31, 1997
Table of Contents
Page
Part 1 FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets-March 31, 1997 2
and December 31, 1996
Statements of Income for the three months 3
ended March 31, 1997 and 1996
Statements of Partners' Equity for the three 4
months ended March 31, 1997 and 1996
Statements of Cash Flows for the three months 5
ended March 31, 1997 and 1996
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 13
of Financial Conditions and Results
of Operations
Part II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS -- MARCH 31, 1997 AND DECEMBER 31, 1996
(unaudited)
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
(in thousands except unit data)
<S> <C> <C>
Cash and cash equivalents $ 3,930 $ 2,521
Restricted cash (Note 6) -- 1,627
Rent and other receivables, net 579 660
Aircraft, net (Notes 2 and 6) 26,143 26,315
Other assets 14 35
-------- --------
Total Assets $ 30,666 $ 31,158
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Note 4) $ 3,261 $ 1,218
Accounts payable and accrued expenses 87 73
Payable to affiliates (Note 3) 580 484
Deferred rental income and deposits 691 676
Distributions payable to partners 1,656 1,648
Maintenance reserve payable 92 1,627
Accrued interest payable 28 9
-------- --------
Total Liabilities 6,395 5,735
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, 5 and 6)
PARTNERS' EQUITY:
General Partners (553) (542)
Limited Partners (4,000,005 units outstanding) 24,824 25,965
-------- --------
Total Partners' Equity 24,271 25,423
-------- --------
Total Liabilities and Partners' Equity $ 30,666 $ 31,158
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
2
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands, except unit data
and per unit amounts)
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 1,680 $ 1,451
Interest 30 75
Gain on sale of engine 177 --
---------- ----------
1,887 1,526
========== ==========
EXPENSES:
Depreciation and amortization 1,100 920
Management and re-lease fees (Note 3) 138 98
General and administrative (Note 3) 63 57
Interest expense 68 43
Direct lease 54 41
Maintenance expense -- 287
---------- ----------
1,423 1,446
---------- ----------
NET INCOME $ 464 $ 80
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 5 $ 1
To the Limited Partners 459 79
---------- ----------
$ 464 $ 80
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .11 $ .02
========== ==========
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 PARTNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- -----
(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1997 $(542) $ 25,965 $ 25,423
Net income 5 459 464
Distributions declared to partners (16) (1,600) (1,616)
----- -------- --------
Balance, March 31, 1997 $(553) $ 24,824 $ 24,271
===== ======== ========
Balance, January 1, 1996 $(485) $ 31,661 $ 31,176
Net income 1 79 80
Distributions declared to partners (16) (1,600) (1,616)
----- -------- --------
Balance, March 31, 1996 $(500) $ 30,140 $ 29,640
===== ======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 464 $ 80
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,100 920
Gain on sale of engine (177) --
Change in assets and liabilities:
Rent and other receivables 4 327
Other assets 21 13
Accounts payable and accrued expenses 14 15
Payable to affiliates 96 (95)
Deferred rental income 15 (81)
Unrestricted maintenance reserves -- 12
Accrued interest payable 19 (2)
Maintenance expense payable -- 150
------- -------
Net cash provided by operating activities 1,556 1,339
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of engine 275 --
Capitalized aircraft improvements (1,026) --
Repayment of advances by lessees 77 72
------- -------
Net cash (used in) provided by investing activities (674) 72
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfer from restricted cash 1,654 --
Application of maintenance reserves to restore aircraft (1,654)
Proceeds from notes payable 2,150 --
Cash distributions paid to partners (1,608) (1,608)
Repayment of notes payable (107) (98)
Maintenance reserves payable 92 --
------- -------
Net cash provided by (used in) financing activities 527 (1,706)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,409 (295)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,521 4,081
------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,930 $ 3,786
======= =======
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION:
Interest paid $ 49 $ 45
======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
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PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1997 and the results of its
operations, changes in partners' equity, and cash flows for the three months
then ended.
These financial statements should be read in conjunction with the
Significant Accounting Policies and other Notes to Financial Statements included
in the Partnership's annual audited financial statements for the year ended
December 31, 1996.
Certain reclassifications were made to the 1996 financial statements to
conform to the classifications used in 1997.
2. AIRCRAFT UNDER OPERATING LEASES
The Partnership's net investment in aircraft as of March 31, 1997 and
December 31, 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Aircraft on operating leases $ 67,971 $ 67,145
Less: Accumulated depreciation (37,195) (36,095)
Reserve for decline in market
value of aircraft (2,934) (2,934)
Net Lease Settlement proceeds
accounted for as cost recovery (3,673) (3,673)
Provision for maintenance cost (178) (178)
-------- --------
$ 23,991 $ 24,265
-------- --------
Aircraft held for lease(A) $ 8,017 $ 7,817
Less: Accumulated depreciation (3,481) (3,481)
Reserves for decline in market
value of aircraft (2,384) (2,384)
-------- --------
2,152 1,952
-------- --------
Aircraft engine -- 195
Less:Accumulated depreciation -- (97)
-------- --------
-- 98
-------- --------
Aircraft net $ 26,143 $ 26,315
======== ========
</TABLE>
6
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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 $24,000 of base
management fees during the three months ended March 31, 1997.
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 $48,000 of incentive
management fees during the three months ended March 31, 1997.
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 $66,000 of re-lease fees during the three months ended
March 31, 1997. 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 $13,000
during the three months ended March 31, 1997, all of which were payable to the
Administrative General Partner.
During the quarter ended March 31, 1997 the Partnership paid $404,000
to a maintenance facility that is affiliated with the Managing General Partner.
Additionally, the Partnership received rental payments of $130,000 from Nations,
of which approximately $68,000 in the aggregate is due to an affiliated
partnership and to affiliates of the Managing General Partner.
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 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%.
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 as substitute
collateral a
7
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perfected security interest in the Partnership's MD-82 aircraft leased to TWA.
At December 31, 1996, the outstanding balance was $1,218,000.
In February 1997, the Partnership purchase five aircraft engines from
an unaffiliated third party for $2,150,000 plus six engine cores from the former
Kiwi aircraft which require 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 will be
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 apparently used $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 committed 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 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.
8
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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 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 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.
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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 judgement 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" 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. The parties are in pre-trial
discovery. 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. 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"), on October 31,
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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, 1997 with rental payable monthly, in advance,
at the rate of $269,000.
In January 1996, 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 1996 and returned the 747 Aircraft to the Partnership.
During the quarter ended September 30, 1996 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 1996 to August 1996 plus a discounted amount representing the amount of
rent that would have been due under the lease for the period September 1, 1996
to April 30, 1997, the scheduled expiration date of the lease. Continental
returned the Aircraft and engines in the return condition required by the lease.
On October 16, 1996 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 Lease During February 1989, the Partnership
acquired a McDonnell Douglas MD-82 aircraft for a total purchase price of
$21,017,000. The aircraft is subject to an operating lease with Trans World
Airlines, Inc. ("TWA"). The lease which was originally scheduled to expire on
April 23, 1993 was modified and under the terms of the lease amendment was
extended until October 1, 1998 with rentals payable monthly, in advance, at the
rate of $185,000 per month.
Pursuant to the lease amendment, the Partnership reimbursed TWA for
$225,000 of capital improvements and advanced $750,000 to TWA to finance certain
major maintenance procedures. TWA is repaying the $750,000 to the Partnership
over the remaining lease term, in equal monthly installments, with interest at a
fixed rate of 9.68%. At March 31, 1997, the balance of the receivable was
$247,000. All first quarter 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 1996.
Additionally, TWA and the Partnership reached an agreement to extend the lease
of the MD-82 aircraft by six
11
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years beyond the then scheduled expiration date to October 1, 2004 at the
current lease rate at $185,000 per month. All rents deferred during the November
1994 to April 1995 period 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 its prepackaged reorganization plan under Chapter 11 of the U.S.
Bankruptcy Code. On August 23, 1995, the reorganization plan, which included the
foregoing lease modifications, was confirmed by the Bankruptcy Court, and TWA
emerged from bankruptcy. TWA has made all rental payments 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 3 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 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 also 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 after reflecting a provision for market decline of $150,000 at
December 31, 1996. The Partnership held maintenance deposits aggregating
approximately $1,654,000, which the Partnership believes are not sufficient to
complete work required on the aircraft and the related engines to meet lease
return conditions and make the aircraft marketable. 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. However Kiwi's long term prospects are not determinable at
this time.
The Partnership has 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
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 judgement in Bankruptcy Court permitting the use of
the collected maintenance reserves. The maintenance reserves were reclassified
from restricted cash to cash and cash equivalents at March 31, 1997 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.
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 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.
13
<PAGE> 15
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
agreement principle provides a lease rate of $95,000 per month
for a term of approximately 60 months. Sky Trek is required to
provide a lease deposit of $190,000 ad will he obligated to fund
maintenance reserves, in the aggregate, at a rate of $325 per
flight hour. The Partnership is in the process of completing a
C check at a budgeted cost of approximately $800,000 and has
purchased a hushkit at a cost of $1,900,000.
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 March 31, 1997, the Partnership's unrestricted cash and cash
equivalents exceeded declared but unpaid distributions to partners by
$2,274,000. 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 maintenace reserves held with respect to the former Kiwi aircraft (See
Footnote 5, "Litigation, and Footnote 6, Aircraft, Kiwi for a description)
partially offset by the fact that distributions to partners exceeded cash from
operating activities, adjusted for collections of advances, debt service and
capital expenditure during the quarter ended March 31, 1997.
Rent and other receivables decreased by $81,000 from $660,000 at
December 31, 1996 to $579,000 at March 31, 1997. This decrease is primarily the
result of the continued repayments of advances by Continental and TWA.
Other assets decreased by $21,000 from $35,000 at December 31, 1996 to
$14,000 at March 31, 1997.
Deferred rental income increased $15,000 from $676,000 at December 31,
1996 to $691,000 at March 31, 1997.
Payable to affiliates increased by $96,000, from $484,000 at December
31, 1996 to $580,000 at March 31, 1997 due primarily to rents associated with
the engines on the Nations aircraft, partially offset by the payment of certain
amounts payable at December 31, 1996.
During the three months ended March 31, 1997 the Partnership paid cash
distributions pertaining to the fourth quarter (except the amount due to the
Administrative General Partner which remains unpaid). The quarterly distribution
represented an annualized rate equal to 8% of contributed capital ($.40 per
Unit).
14
<PAGE> 16
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 first quarter of 1997 was
paid on April 25, 1997 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 reported by the Partnership for accounting purposes, approximately 72%,
of the cash distributions declared for the quarter ended March 31, 1997,
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 partners from inception of the Partnership
through March 31, 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.
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 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%.
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 as substitute
collateral a perfected security interest in the Partnership's MD-82 aircraft
leased to TWA. At December 31, 1996, the outstanding 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 which require
overhaul. The Partnership utilized a borrowing to finance the purchase price.
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 will be 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 plus interest. Additionally the Partnership borrowed
approximately $39 million to finance hushkits purchased for the Nations and Sky
Trek Aircraft.
15
<PAGE> 17
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, Kiwi ceased scheduled flight operations while
still exploring financial alternatives. The court approved Kiwi's rejection of
both leases as of November 15, 1996. The Partnership recovered the aircraft and
delivered one to Nations and committed the second aircraft to the Sky Trek. The
Partners purchased five engines at a cost of $2,150,000 plus the six cores from
the two former Kiwi aircraft in February 1997 and committed $2.7 million
including a hushkit for the Sky Trek aircraft, a substantial amount of which was
expended in March and April 1997. 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 lease was extended to April 2002 and the monthly
rent was increased from $65,000 to $105,000. The Partnership utilized borrowings
under its new facility to finance the Sky Trek and Nations expenditures. In
April 1997, the Partnership won a summary judgment in Bankruptcy Court
permitting the use of the maintenance reserves collected from Kiwi.
Additionally, during the quarter ended March 31, 1997, the Partnership sold the
spare engine formerly leased to Kiwi for proceeds of $275,000. The General
Partners will determine the amount of future cash distributions after assessing
the Partnership's operating results, its 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 was $464,000 for the three months ended
March 31, 1997 ("1997 Quarter") as compared to $80,000 for the quarter ended
March 31, 1996 (1996 Quarter). Net income per limited partnership unit also
increased to $.11 for the 1997 Quarter from $.02 per Unit for the 1996 Quarter.
The increase in the Partnership's net income for the 1997 Quarter
resulted primarily from rental revenue, generated by the remarket of the 747-100
aircraft to TWA in July 1996 and the gain on the sale of the spare engine
partially offset by an increase to depreciation expense due principally to
depreciation associated with the 747 aircraft.
Rental revenue increased $229,000, or 16%, for the 1997 Quarter, due
primarily to the rents recognized with respect to the 747 aircraft remarketed to
TWA in July 1996, partially offset by the off lease status of one of the former
Kiwi aircraft, the sale of the spare engine that was generating rents in the
1996 Quarter and the extension, as of November 1996, at a lower lease rate of
the lease of the 727 aircraft leased to Continental.
16
<PAGE> 18
Interest income for the 1997 Quarter decreased by $45,000 or 60%, in
comparison to the 1996 Quarter. The decrease was primarily attributable to the
continued repayment of advances by Continental and TWA, reducing the balances
on which interest is earned.
Depreciation and amortization increased $180,000, or 20%, for the 1997
Quarter in comparison to the 1996 Quarter. The increase was due to the remarket
of the 747 aircraft (which was off lease in the 1996 Quarter) partially offset
by the off-lease status of one of the former Kiwi aircraft. The Partnership does
not recognize depreciation expense with respect to off-lease aircraft.
Management and re-lease fees payable to the General Partners for the
1997 Quarter increased $40,000, or 41%, in comparison to the 1996 Quarter. The
increase was attributable to management and re-lease fees associated with the
747 aircraft (which was off-lease in the 1996 Quarter, partially offset by the
off-lease status of one of the former Kiwi aircraft during the 1997 Quarter).
General and administrative expense increased by $6,000 or 11% in the
1997 Quarter as compared to the 1996 Quarter which was consistent with the
Partnership's operations.
Interest expense decreased by $10,000 or 19% in the 1997 Quarter as
compared to the 1996 Quarter due to a decrease in interest rates and the
continued repayment of principal which reduced the outstanding balances.
Direct lease expenses (which include the legal fees associated with the
Kiwi bankruptcy) increased by $13,000 or 32% due to the legal fees associated
with the Kiwi bankruptcy partially offset by a reduction in insurance premiums.
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 ("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 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, 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 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
18
<PAGE> 20
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 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.
19
<PAGE> 21
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 a summary judgement in Bankruptcy Court permitting the use
of the collected maintenance reserves. The maintenance reserves were
reclassified from restricted cash to cash and cash equivalents at March 31,
1997. 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.
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. The parties are in pre-trial
discovery. 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.
20
<PAGE> 22
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 first quarter of the fiscal year ending December 31, 1997.
21
<PAGE> 23
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: May 13, 1997 By: /s/ Joseph P. Ciavarella
------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) PEGASUS
AIRCRAFT PARTNERS L P
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,930,000
<SECURITIES> 0
<RECEIVABLES> 819,000
<ALLOWANCES> (240,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 75,988,000
<DEPRECIATION> (49,845,000)<F2>
<TOTAL-ASSETS> 30,666,000
<CURRENT-LIABILITIES> 0
<BONDS> 3,261,000
0
0
<COMMON> 0
<OTHER-SE> 24,271,000
<TOTAL-LIABILITY-AND-EQUITY> 30,666,000
<SALES> 1,680,000
<TOTAL-REVENUES> 1,887,000
<CGS> 0
<TOTAL-COSTS> 1,292,000
<OTHER-EXPENSES> 63,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,000
<INCOME-PRETAX> 464,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 464,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464,000
<EPS-PRIMARY> .11<F1>
<EPS-DILUTED> 0
<FN>
<F2>INCLUDES WRITEDOWNS AND AMOUNTS ACCOUNTED FOR UNDER COST RECOVERY
<F1>PER LIMITED PARTNERSHIP UNIT OUTSTANDING
</FN>
</TABLE>
