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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 September 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.
(Exact name of registrant as specified in its charter)
Delaware 84-1099968
(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Pegasus Aircraft Partners, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1997
Table of Contents
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Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - September 30, 1997
and December 31, 1996 2
Statements of Income for the three months
ended September 30, 1997 and 1996 3
Statements of Income for the nine months
ended September 30, 1997 and 1996 4
Statements of Partners' Equity for the nine
months ended September 30, 1997 and 1996 5
Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
Part II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 5. Other Events 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS -- SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(unaudited)
ASSETS
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1997 1996
---- ----
(in thousands except unit data)
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Cash and cash equivalents $ 2,624 $ 2,521
Restricted cash -- 1,627
Rent and other receivables, net (Note 6) 511 660
Aircraft, net (Notes 2, 6 and 7) 28,985 26,315
Prepaid expenses 25 35
-------- --------
Total Assets $ 32,145 $ 31,158
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Notes 4 and 7) $ 7,271 $ 1,218
Accounts payable and accrued expenses 83 73
Payable to affiliates (Note 3) 398 484
Deferred rental income and deposits 903 676
Distributions payable to partners 1,664 1,648
Maintenance reserve payable 162 1,627
Accrued interest payable -- 9
-------- --------
Total Liabilities 10,481 5,735
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5, 6 and 7)
PARTNERS' EQUITY:
General Partners (579) (542)
Limited Partners (4,000,005 units outstanding) 22,243 25,965
-------- --------
Total Partners' Equity 21,664 25,423
-------- --------
Total Liabilities and Partners' Equity $ 32,145 $ 31,158
======== ========
</TABLE>
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 THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
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1997 1996
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(in thousands, except unit data and per unit amounts)
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REVENUE:
Rentals from operating lease $ 2,040 $ 1,893
Interest 34 46
---------- ----------
2,074 1,939
---------- ----------
EXPENSES:
Provision for decline in market value
of aircraft 200 -
Provision for bad debts (Note 6) 20 240
Depreciation and amortization 1,228 1,148
Management and re-lease fees (Note 3) 155 133
General and administrative (Note 3) 53 44
Interest expense 179 32
Direct lease 22 24
---------- ----------
1,857 1,621
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NET INCOME $ 217 $ 318
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 2 $ 3
To the Limited Partners 215 315
---------- ----------
$ 217 $ 318
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .06 $ . 08
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
2
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
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1997 1996
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(in thousands, except unit data and per unit amounts)
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REVENUE:
Rentals from operating leases $ 5,666 $ 4,791
Interest 86 184
Gain on sale of engine (Note 6) 177 --
---------- ----------
5,929 4,975
---------- ----------
EXPENSES:
Provision for decline in market value
of aircraft 200 --
Provision for bad debts (Note 6) 20 240
Depreciation and amortization 3,444 2,988
Management and re-lease fees (Note 3) 460 325
General and administrative (Note 3) 176 150
Interest expense 406 111
Direct lease 134 115
Aircraft maintenance -- 669
---------- ----------
4,840 4,598
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NET INCOME $ 1,089 $ 377
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 11 $ 4
To the Limited Partners 1,078 373
---------- ----------
$ 1,089 $ 377
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .27 $ .09
========== ==========
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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
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General Limited
Partners Partners Total
-------- -------- -----
(in thousands)
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Balance, January 1, 1997 $(542) $ 25,965 $ 25,423
Net income 11 1,078 1,089
Distributions declared to partners (48) (4,800) (4,848)
----- -------- --------
Balance, September 30, 1997 $(579) $ 22,243 $ 21,664
===== ======== ========
Balance, January 1, 1996 $(485) $ 31,661 $ 31,176
Net income 4 373 377
Distributions declared to partners (48) (4,800) (4,848)
----- -------- --------
Balance, September 30, 1996 $(529) $ 27,234 $ 26,705
===== ======== ========
</TABLE>
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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
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1997 1996
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(in thousands)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,089 $ 377
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,444 2,988
Provision for decline in market value of aircraft 200 --
Provisions for bad debts 20 240
Gain on sale of engine (177) --
Change in assets and liabilities:
Rent and other receivables (28) 458
Prepaid expenses 10 (153)
Accounts payable and accrued expenses 10 (25)
Payable to affiliates (86) (242)
Accrued interest payable (9) (5)
Deferred rental income 37 (15)
Unrestricted maintenance reserves payable 162 248
------- -------
Net cash provided by operating activities 4,672 3,871
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of engine 275 --
Capitalized aircraft improvements (6,412) (611)
Repayment of advances by lessees 157 223
------- -------
Net cash used in investing activities (5,980) (388)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers from restricted cash, net 1,627 --
Restricted maintenance reserves 27 --
Application of maintenance reserves to restore aircraft (1,654) --
Security deposit 190 360
Proceeds from notes payable 7,271 --
Repayment of notes payable (1,218) (302)
Cash distributions paid to partners (4,832) (4,824)
------- -------
Net cash provided by (used in) financing activities 1,411 (4,766)
------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 103 (1,283)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,521 4,081
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,624 $ 2,798
======= =======
Supplementary schedule of cash flow information:
Interest paid $ 415 $ 116
======= =======
</TABLE>
The accompanying notes are an integral
part of these financial statements.
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PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1997 and the results of its
operations, changes in partners' equity, and cash flows for the nine 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 September 30, 1997
and December 31, 1996 consisted of the following (in thousands):
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1997 1996
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Aircraft on operating leases $ 71,203 $ 67,145
Less: Accumulated depreciation (39,180) (36,095)
Reserve for decline in market
value of aircraft (3,217) (2,934)
Provision for maintenance cost - (178)
Net lease settlement proceeds
accounted for as cost recovery (3,673) (3,673)
-------- --------
25,133 24,265
------ ------
Aircraft held for lease $ 10,171 $ 7,817
Less: Accumulated depreciation (3,840) (3,481)
Reserves for decline in market
value of aircraft and provision
for maintenance cost (2,479) (2,384)
-------- --------
3,852 1,952
-------- --------
Aircraft engine - 195
Less: Accumulated depreciation - (97)
-------- --------
- 98
Aircraft, net $ 28,985 $ 26,315
======== ========
</TABLE>
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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 release 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 $28,000 and $81,000
of base management fees during the quarter and nine months ended September 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 $67,000 and $214,000
of incentive management fees during the quarter and nine months ended September
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 $60,000 and $165,000 of re-lease fees during the quarter
and nine months ended September 30, 1997, respectively.
All of the above fees are subordinated to the limited partners
receiving an 8% annual non-cumulative return based upon original contributed
capital. The Partnership did not record any fees related to the Nations rent for
which a provision for bad debts was provided at September 30, 1997.
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 $37,000 during the quarter and nine months ended September 30, 1997,
respectively, all of which were payable to the Administrative General Partner.
Other During the nine months ended September 30, 1997, the Partnership
purchased certain equipment and parts from a company owned by three directors of
the Managing General Partner in the amount of $740,000. In addition, the
Partnership paid $859,000 to a licensed maintenance provider in which affiliates
of the Managing General Partner have an ownership interest. Additionally, during
the nine months ended September 30, 1997, 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 which was paid to those related entities.
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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%.
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 was leased to Nations Air Express
Inc., prior to its recovery by the Partnership in September 1997, and the other
of which is leased to Sky Trek International Airlines, Inc. (See Footnote 6,
"Aircraft Leases" and Footnote 7, "Subsequent Event").
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").
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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 PaineWebber and the Administrative
General Partner misrepresented financial information about the partnership's
value and performance. The amended complaint alleged that PaineWebber and the
Administrative General Partner violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
On May 30, 1995, the 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 made 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 sought
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 were removed to
federal court and two were transferred to the District Court and consolidated
under the title, Mallia vs. PaineWebber, Inc. The third action was dismissed
with the consent of the
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parties on the grounds that it was duplicative of the two actions that were
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
alleged, 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 sought 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 were brought by
approximately 50 plaintiffs and sought 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
the 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 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, 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 Fund
vs. 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
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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. AIRCRAFT - LEASES
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 October 31, 1996. In 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
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installments, with interest at a fixed rate of 9.68%. At September 30, 1997 the
balance of the receivable was $169,000. 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. Additionally, TWA and the Partnership reached an agreement
to extend the lease of the MD-82 aircraft by six years beyond the then scheduled
expiration date to October 1, 2004 at the current lease rate of $185,000 per
month. All rents deferred during the November 1994 to April 1995 period 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, TWA continues to incur
substantial losses and its liquidity has declined. There can be no assurance
that TWA will be able to meet its obligations in the future. TWA has accounted
for approximately 58% of Partnership rental revenue in 1997.
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. TWA has entered into a fleet restructuring program that has resulted in
grounding a substantial portion of its Boeing 747 aircraft, including the 747
leased from the Partnership.
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 1996 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 to Kiwi 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
12
<PAGE> 15
returned to full capacity. In addition to the FAA grounding, Kiwi was also
negatively impacted by the market reaction to the Valujet incident. During 1997,
Kiwi did not meet its financial goals. In July 1997, 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.
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 in Kiwi's bankruptcy case for all unpaid
items in connection with the leases as well as rejection damages. 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 EXPRESS, INC. 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
13
<PAGE> 16
approximately 36 months at a lease rate of $65,000 per month. Nations was 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 was 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 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 February 1997 from an unaffiliated third
party, three of which were installed on the aircraft in March - April 1997 and
returned the affiliates' engines. The five engines were purchased for a price of
$2,150,000 plus the six cores originally on the two 727's recovered from Kiwi.
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 was unable to fund a "C" check currently due and after
Nations was unable to raise any additional financing, the Partnership recovered
the aircraft in September 1997. At September 30, 1997, the Partnership had
unfunded maintenance reserves due from Nations totaling approximately $400,000
and had provided an allowance for bad debts of $20,000 with respect to rents
earned prior to the recovery of the aircraft. The Partnership recognized a
provision for decline in market value of aircraft of $200,000 in the quarter
ended September 30, 1997 with respect to the aircraft. The Partnership entered
into an agreement in principle to lease this aircraft to a foreign freighted
carrier. (See Footnote 7, "Subsequent Event")
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 aircraft were delivered with two of the five engines purchased in January
1997 plus an additional engine purchased for $.6 million. The Sky Trek lease
provides for rent of $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.
7. SUBSEQUENT EVENT
In November 1997, the Partnership entered into an agreement in
principle to lease the aircraft formerly leased to Nations to a European
freight carrier for a term of four years. The lease would provide for monthly
rentals of $123,500 (subject to a reduction of approximately 10% after two
years if the lessee exercises an option to extend the lease for an additional
two years beyond the original expiration date) and airframe and landing gear
reserves aggregating $85 per flight hour. Thelessee provided a $150,000
security deposit in November 1997. The lessee also has the right to extend the
lease for an additional two years (if the above option is not exercised) at
$95,000 per month. The Partnership has committed to spend approximately
$2,600,000 for a "C" check and cargo conversion of the aircraft. The work will
be performed
14
<PAGE> 17
and the aircraft parts provided by companies affiliated with the Managing
General Partner or three of its directors and officers . The Partnership has
entered into discussions with its lender to increase its borrowing facility from
$7,500,000 to $10,000,000. Proceeds from the increased borrowing facility will
be utilized to fund the work performed. The Managing General Partner believes
that the Partnership has sufficient collateral to consummate the required
borrowing. However, to the extent that a borrowing is not consummated,
the Partnership will have to utilize cash from operations to fund the work and
thus reduce cash distributions for several quarters.
15
<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 September 30, 1997, the Partnership's unrestricted cash and cash
equivalents exceeded declared but unpaid distributions to partners by $960,000.
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
nine months ended September 30, 1997.
Rent and other receivables decreased by $149,000 from $660,000 at December
31, 1996 to $511,000 at September 30, 1997. This decrease was due primarily to
the continued repayments of advances by Continental and TWA.
Prepaid expenses decreased by $10,000 from $35,000 at December 31, 1996 to
$25,000 at September 30, 1997.
Deferred rental income and deposits increased $227,000 from $676,000 at
December 31, 1996, to $903,000 at September 30, 1997, primarily due to the
collection of a security deposit ($190,000) from Sky Trek.
Payable to affiliates decreased by $86,000, from $484,000 at December 31,
1996 to $398,000 at September 30, 1997. The decrease was attributable to the
payment of accrued fees to the Administrative General Partner. As part of the
class action settlement, the fees and distributions earned by the Administrative
General have been assigned by an affiliate to an escrow account for the benefit
of class action members (See Note 5 "Litigation").
During the three months ended September 30, 1997 the Partnership paid cash
distributions pertaining to the second quarter. The quarterly distribution
represented an annualized rate equal to 8% of contributed capital ($.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 third quarter of 1997 was
paid on October 24, 1997 at an annualized rate of 8% of contributed capital
($.40 per Unit).
16
<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, 87% of the cash
distributions declared for the quarter ended September 30, 1997 (78% for the
nine months then ended), constituted a return of capital. Also, based on the
amount of net income reported by the Partnership for accounting purposes,
approximately 71% of the cash distributions paid to the partners from inception
of the Partnership through September 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 1995. In July 1995, the Partnership and the
Lender completed an extension of the commitment. Under the new agreement, the
aggregate commitment remained at $4,000,000, the Partnership's ability to borrow
under the facility was extended until May 1, 1997 and the floating interest rate
charged under the facility was reduced to the Lender's prime rate plus .5%. The
Lender released the Boeing 747-100 aircraft as collateral under the loan and
received a perfected security interest in the Partnership's MD-82 aircraft
leased to TWA. 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 was leased to Nations Air Express Inc. prior to its recovery by the
Partnership in September 1997, 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. The Partnership has
entered into discussions with the lender to increase its borrowing facility from
$7,500,000 to $10,000,000 to fund its cargo conversion and other work associated
with a 727 aircraft scheduled to be delivered to a cargo carrier. The Managing
General Partner believes that there is sufficient collateral to consummate such
borrowing increase (See further discussion below and footnote 7, "Subsequent
Event").
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 exploring financial alternatives. The court approved Kiwi's
rejection of both of the Partnership's leases as of November 15, 1996. The
Partnership recovered the aircraft and spare engine and delivered one
17
<PAGE> 20
aircraft to Nations and the 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. The Partnership also purchased an
additional engine for $.6 million and expended 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 partially 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 was unable to
restructure its obligations to the Partnership. The Partnership recovered the
aircraft in September 1997, but the aircraft will require a "C" check which may
result in delays in redeployment. The Partnership entered into an agreement
in principle to lease the aircraft to a European freight carrier for a term of
four years. The Partnership has committed approximately $2.6 million to complete
the work which includes cargo conversion, a "C" check and certain integration
costs. The Partnership has entered into discussion with its lender to
increase its borrowing facility from $7.5 million to $10 million. The Managing
General Partner believes that there is sufficient collateral to consummate the
borrowing increase. However, to the extent that a borrowing is not consummated,
the Partnership will have to utilize cash from operations to fund the work and
thus reduce cash distributions for several quarters. 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 was $217,000 and $1,089,000 for the
quarter and nine months ended September 30, 1997 ("1997 Quarter" and "1997
Period", respectively) as compared to $318,000 and $377,000 for the quarter and
nine months ended September 30, 1996 (1996 Quarter and 1997 Period,
respectively).
The increase in the Partnership's net income in the 1997 Period as
compared to the 1996 Period was primarily due to the fact that the Partnership
incurred certain maintenance expense during the 1996 Period; no such similar
amounts were incurred in the 1997 Period. The increase in rental income during
the 1997 Quarter and 1997 Period was substantially offset by similar increases
in depreciation and interest expense.
Rental revenue increased by $147,000, and $875,000, or 8% and 18% in
the 1997 Quarter and 1997 Period, respectively, as compared to the corresponding
periods in the prior year. The increase in the 1997 Period as compared to the
1996 Period is attributable primarily to the fact that the 747 aircraft was
off-lease for a substantial portion of the 1996 Period as well as the increase
in lease rates attributable to the ex-Kiwi aircraft (the lease rate increases
were due primarily to the enhancements to the aircraft made by the Partnership,
primarily the hushkitting of the aircraft). This was partially offset by the
fact that one of the ex-Kiwi aircraft was off-lease for a substantial portion of
the 1997 Period prior to delivery to Falcon in June 1997 and that the
Partnership did not accrue any rent after Nations ceased flying the aircraft
during August 1997.
18
<PAGE> 21
Interest income for the 1997 Quarter and 1997 Period decreased by
$12,000 and $98,000 or 26% and 53% 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 $80,000 and $456,000, or 7% and
15%, for the 1997 Quarter and 1997 Period, respectively, in comparison to the
1996 Quarter and 1996 Period. The increase in the 1997 Period was attributable
to the depreciation associated with the 747 aircraft which was placed in service
in July 1996 and which was off-lease for a substantial portion of the 1996
Period. The increase for the 1997 Quarter as compared to the 1996 Quarter, was
attributable principally to depreciation associated with capitalized aircraft
improvements made during 1997.
Management and re-lease fees payable to the General Partners for the
1997 Quarter increased $22,000 and $135,000, or 17% and 42%, for the 1997
Quarter and 1997 Period, respectively, in comparison to the 1996 Quarter and
1996 Period. The increase was due primarily to an increase in rental income and
net income (adjusted for depreciation) which provide the bases on which
management and re-lease fees are calculated.
General and administrative expenses increased by $9,000 and $26,000 or
20% and 17%, respectively, in the 1997 Quarter and 1997 Period as compared to
the 1996 Quarter and 1996 Period which was consistent with the Partnership's
operations.
Interest expense increased by $147,000 and $295,000 in the 1997 Quarter
and 1997 Period, respectively, as compared to the 1996 Quarter and 1996 Period,
due principally to the increase in borrowings outstanding from approximately
$1.2 million to approximately $7.3 million during 1997.
Direct lease expenses decreased by $2,000 but increased by $19,000 or
(8%) and 17% in the 1997 Quarter and 1997 Period, respectively, as compared to
the 1996 Quarter and 1996 Period. The increase in the 1997 Period as compared to
the 1996 Period was due to certain maintenance costs relating to the ex-Kiwi
aircraft.
Aircraft maintenance expense of $669,000 was incurred in the 1996
Period, 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.
During the 1997 quarter, the Partnership provided a provision for
market decline in aircraft of $200,000 to reflect less value of the aircraft
formerly leased to nations.
19
<PAGE> 22
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 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, 1995, 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
20
<PAGE> 23
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 made 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 sought
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 were removed to
federal court and two were transferred to the District Court and consolidated
under the title Mallia vs. PaineWebber, Inc. The third action was dismissed with
the consent of the parties on the grounds that it was duplicative of the two
actions that were 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
alleged, 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 sought compensatory damages of $15 million plus punitive damages. In
September 1997, 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 were brought by
approximately 50 plaintiffs and sought 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.
21
<PAGE> 24
On September 30, 1997, 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.
22
<PAGE> 25
Item 5 Other Events
In September 1997, Richard S. Wiley purchased Richard W. Doust's interest
in Pegasus Capital Corporation, the parent of the Pegasus Aircraft Management
Corp., the Managing General Partner of the Partnership. Mr. Wiley now owns a
controlling interest in PCC. Mr. Doust retains his position as a senior officer
and director of the Managing General Partner.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits and reports to be filed: none
(b) The Partnership did not file a Form 8-K during the third
quarter of the fiscal year ending December 31, 1997.
23
<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: November 5, 1997 By: /s/ Joseph P. Ciavarella
------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 OF PEGASUS AIRCRAFT PARTNERS, LP, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,624,000
<SECURITIES> 0
<RECEIVABLES> 771,000
<ALLOWANCES> (260,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,160,000
<PP&E> 81,374,000
<DEPRECIATION> (52,389,000)<F3>
<TOTAL-ASSETS> 32,145,000
<CURRENT-LIABILITIES> 3,210,000
<BONDS> 7,271,000
0
0
<COMMON> 0
<OTHER-SE> 21,664,000<F2>
<TOTAL-LIABILITY-AND-EQUITY> 32,145,000
<SALES> 0
<TOTAL-REVENUES> 5,929,000
<CGS> 0
<TOTAL-COSTS> 4,238,000
<OTHER-EXPENSES> 176,000
<LOSS-PROVISION> 20,000
<INTEREST-EXPENSE> 406,000
<INCOME-PRETAX> 1,089,000
<INCOME-TAX> 0<F4>
<INCOME-CONTINUING> 1,089,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,089,000
<EPS-PRIMARY> .27<F1>
<EPS-DILUTED> 0
<FN>
<F1>REPRESENTS NET INCOME PER LIMITED PARTNERSHIP UNIT OUTSTANDING.
<F2>REPRESENTS AGGREGATE PARTNERSHIP CAPITAL.
<F3>INCLUDES PROVISIONS FOR WRITEDOWNS AND CERTAIN OTHER RESERVES.
<F4>THE INCOME TAXES ARE PROVIDED AS THEY ARE THE DIRECT OBLIGATION OF THE
PARTNERS.
</FN>
</TABLE>
