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, 1998
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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
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Pegasus Aircraft Partners, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1099968
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(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
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This document consists of 21 pages.
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Pegasus Aircraft Partners, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1998
Table of Contents
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Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 1998
and December 31, 1997 3
Statements of Income for the three months
ended September 30, 1998 and 1997 4
Statements of Income for the nine months
ended September 30, 1998 and 1997 5
Statements of Partners' Equity for the nine
months ended September 30, 1998 and 1997 6
Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 7
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
2
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Part I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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PEGASUS AIRCRAFT PARTNERS, L.P.
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BALANCE SHEETS -- SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
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(unaudited)
ASSETS
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1998 1997
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(in thousands except unit data)
Cash and cash equivalents $ 2,596 $ 1,356
Rent and other receivables, net 476 422
Aircraft, net (Note 2) 26,416 28,708
Other assets 35 26
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Total Assets $ 29,523 $ 30,512
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LIABILITIES AND PARTNERS' EQUITY
--------------------------------
LIABILITIES:
Notes payable (Note 4) $ 10,000 $ 7,271
Accounts payable and accrued expenses 148 302
Payable to affiliates (Note 3) 470 458
Deferred rental income and deposits 1,027 982
Distributions payable to partners 1,616 1,632
Maintenance reserves collected 349 192
Accrued interest payable 81 --
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Total Liabilities 13,691 10,837
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COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
General Partners (637) (599)
Limited Partners (4,000,005 units outstanding) 16,469 20,274
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Total Partners' Equity 15,832 19,675
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Total Liabilities and Partners' Equity $ 29,523 $ 30,512
======== ========
The accompanying notes are an integral
part of these financial statements.
3
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PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF INCOME
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FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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(unaudited)
1998 1997
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(in thousands, except unit data
and per unit amounts)
REVENUE:
Rentals from operating leases $ 2,279 $ 2,040
Interest and other 42 34
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2,321 2,074
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EXPENSES:
Depreciation and amortization 1,362 1,228
Write-downs 104 200
Provision for bad debts -- 20
Management and re-lease fees (Note 3) 189 155
General and administrative (Note 3) 48 53
Interest expense 253 179
Direct lease 17 22
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1,973 1,857
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NET INCOME $ 348 $ 217
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 3 $ 2
To the Limited Partners 345 215
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$ 348 $ 217
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NET INCOME PER LIMITED PARTNERSHIP
UNIT $ .09 $ .06
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WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
========== ==========
The accompanying notes are an integral
part of these financial statements.
4
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PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF INCOME
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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(unaudited)
1998 1997
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(in thousands, except unit data
and per unit amounts)
REVENUE:
Rentals from operating leases $ 6,499 $ 5,666
Interest and other 70 86
Gain on sale of engine -- 177
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6,569 5,929
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EXPENSES:
Depreciation and amortization 3,991 3,444
Write-downs 104 200
Provision for bad debts -- 20
Management and re-lease fees (Note 3) 532 460
General and administrative (Note 3) 170 176
Interest expense 690 406
Direct lease 77 134
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5,564 4,840
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NET INCOME $ 1,005 $ 1,089
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NET INCOME ALLOCATED:
To the General Partners $ 10 $ 11
To the Limited Partners 995 1,078
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$ 1,005 $ 1,089
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NET INCOME PER LIMITED PARTNERSHIP UNIT $ .25 $ .27
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 4,000,005 4,000,005
========== ==========
The accompanying notes are an integral
part of these financial statements.
5
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PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF PARTNERS' EQUITY
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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(unaudited)
General Limited
Partners Partners Total
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(in thousands)
Balance, January 1, 1998 $ (599) $ 20,274 $ 19,675
Net income 10 995 1,005
Distributions declared to partners (48) (4,800) (4,848)
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Balance, September 30, 1998 $ (637) $ 16,469 $ 15,832
======== ======== ========
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
======== ======== ========
The accompanying notes are an integral
part of these financial statements.
6
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PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF CASH FLOWS
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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(unaudited)
1998 1997
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(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,005 $ 1,089
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of engine and equipment (18) (177)
Depreciation and amortization 3,991 3,444
Write-downs 104 200
Provisions for bad debts -- 20
Change in assets and liabilities:
Rent and other receivables (182) (28)
Other assets (9) 10
Accounts payable and accrued expenses (154) 10
Payable to affiliates 12 (86)
Accrued interest payable 81 (9)
Deferred rental income and deposits 45 37
Maintenance reserves collected 157 162
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Net cash provided by operating activities 5,032 4,672
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of engine and equipment 18 275
Capitalized aircraft improvements (1,803) (6,412)
Repayment of advances by lessees 128 157
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Net cash used in investing activities (1,657) (5,980)
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The accompanying notes are an integral
part of these financial statements.
7
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PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF CASH FLOWS (CONTINUED)
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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(unaudited)
1998 1997
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(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Security deposits -- 190
Restricted maintenance reserves -- 27
Transfers from restricted cash -- 1,627
Application of maintenance reserves to restore aircraft -- (1,654)
Cash distributions paid to partners (4,864) (4,832)
Proceeds from notes payable 2,729 7,271
Repayments of notes payable -- (1,218)
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Net cash provided by (used in) financing activities (2,135) 1,411
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,240 103
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,356 2,521
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,596 $ 2,624
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SUPPLEMENTAL INFORMATION:
Interest paid $ 599 $ 415
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The accompanying notes are an integral
part of these financial statements.
8
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PEGASUS AIRCRAFT PARTNERS, L.P.
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NOTES TO FINANCIAL STATEMENTS
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SEPTEMBER 30, 1998
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(unaudited)
1. GENERAL
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The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the General Partners, all adjustments
necessary for a fair presentation have been included. For further information,
refer to the financial statements and footnotes thereto included in the
Partnership's annual report on Form 10-K for the year ended December 31, 1997.
(Operating results for the three and nine month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998.)
New Accounting Pronouncement: In March 1998, the Partnership adopted
SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances arising from nonowner sources. The adoption
of this pronouncement did not impact the reporting of the Partnership's results
of operations.
New Accounting Pronouncement: In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Partnership). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The adoption of this pronouncement is not expected to impact the
Partnership's earnings or statement of financial position.
9
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2. AIRCRAFT
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The Partnership's net investment in aircraft as of September 30, 1998
and December 31, 1997 consisted of the following (in thousands):
1998 1997
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Aircraft on operating leases, at cost $ 84,027 $ 71,120
Less: Accumulated depreciation (48,227) (40,609)
Write-downs (5,533) (3,368)
Net lease settlement proceeds accounted
for as cost recovery (3,673) (3,673)
Provision for maintenance cost (178) (178)
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$ 26,416 $ 23,292
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Aircraft held for lease, at cost $ -- $ 11,555
Less: Accumulated depreciation -- (3,839)
Write-downs -- (2,300)
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$ -- $ 5,416
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Aircraft, net $ 26,416 $ 28,708
======== ========
Continental Airline Lease: The Partnership owns a Boeing 727-200
advanced aircraft which was subject to a lease with Continental providing for
rentals of $75,000 per month through June 30, 1998. The Partnership and
Continental agreed to a short extension of the lease to August 18, 1998 at the
same rate of $75,000 per month. Continental returned this aircraft in October
1998 and made rental payments through the return date. The Partnership is
currently remarketing this aircraft.
TNT Transport International B.V.: The Partnership entered into a lease
for the aircraft formerly leased to Nations Air Express, Inc., with a European
freight carrier, TNT Transport International B.V. ("TNT") for a term of four
years. The lease provides for monthly rentals of $123,500 (subject to a
subsequent rent reduction of approximately 10% after two years if TNT 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. TNT has contracted with a third party service provider for
maintenance of the engines. TNT has provided a $150,000 security deposit. TNT
also has the right to extend the lease for an additional two years at the end of
the initial lease term (if the above option is not exercised) at $95,000 per
month.
The Partnership invested approximately $3.2 million for a "C" check and
cargo conversion of the aircraft. The work was performed and certain of the
aircraft parts were provided by companies affiliated with the Managing General
Partner or its President and Director. The Partnership increased its borrowing
facility from $7,500,000 to $10,000,000 to finance this work. The aircraft was
delivered to TNT in March 1998.
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In the third quarter of 1998, due to the conversion of this aircraft to
a freighter, the Partnership wrote-off the remaining net book value of the
interior, determined through a third party appraisal, which resulted in an
impairment expense of $104,000.
Sky Trek International Airlines, Inc.: In June 1997, the Partnership
delivered a Boeing 727-200, formerly leased to Kiwi International Airlines,
Inc., to Sky Trek International Airlines, Inc. ("Sky Trek") at a lease rate of
$95,000 per month for 60 months and received a $190,000 deposit which could
potentially be used to offset unpaid rent. Additionally, Sky Trek is obligated
under the terms of the lease, to fund maintenance reserves, at a rate of $325
per flight hour.
Sky Trek has fallen several months in arrears in rent payments and is
also in arrears with regards to maintenance reserve payments. The Partnership is
in discussions with Sky Trek regarding a rent deferral plan. Under the terms of
the proposed rent deferral plan, Sky Trek would provide a promissory note in an
amount equal to the past due rents and maintenance reserves. Such a note would
be payable over 12 months and would bear interest at 12% per annum. Sky Trek
appears to have a number of charter contracts but is in need of additional
working capital. If Sky Trek is unsuccessful in raising additional capital, the
Partnership will need to repossess the aircraft and search for a new lessee.
There can be no assurance as to the timeliness or success of such a remarketing
effort.
3. TRANSACTIONS WITH AFFILIATES
----------------------------
Base 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 a total of $34,000
and $97,000 of base management fees during the quarter and nine months ended
September 30, 1998, respectively.
Incentive Management Fees. 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 a total of
$86,000 and $240,000 of incentive management fees during the quarter and nine
months ended September 30, 1998, respectively.
Re-lease Fees. 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 a total of $69,000 and $196,000 of re-lease fees during
the quarter and nine months ended September 30, 1998, respectively.
All of the above fees are subordinated to the limited partners
receiving an 8% annual non-cumulative return based upon original contributed
capital (as adjusted per the Partnership agreement).
11
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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 nine months ended September 30, 1998 and was payable to the
Administrative General Partner.
During the nine months ended September 30, 1998 the Partnership paid
$635,000 to a maintenance facility that is affiliated with the Managing General
Partner. Additionally, the Partnership paid $1,066,000 to an aircraft parts
company, which is owned by the President and Director of the Managing General
Partner and two former officers and directors of the Managing General Partner.
The Partnership received an $18,000 cash payment for spare parts sold on
consignment by this affiliated aircraft parts company.
4. NOTES PAYABLE
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In January 1998, the Lender increased the borrowing commitment from
$7.5 million to $10 million and increased the interest rate from 1% to 1.25%
over prime. The proceeds were utilized to fund the "C" check and cargo
conversion of the aircraft delivered to TNT.
5. LITIGATION
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The Partnership, along with the Managing General Partner,
Administrative General Partner and PaineWebber Incorporated, had been named as a
defendant in a lawsuit entitled Paul Mallia, et al. v. PaineWebber, Inc., et
al., pending before the United States District Court for the Southern District
of New York, and relating to the sale and sponsorship of various limited
partnership investments, including the Partnership and an affiliated Partnership
("the Pegasus Partnerships"). The complaint asserts claims under the Racketeer
Influenced and Corrupt Organizations Act, as well as state law claims for 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, on behalf of those investors who
bought interests in the Pegasus Partnerships and in other limited partnerships
and investments. The plaintiffs seek unspecified damages, including attorneys'
fees, reimbursement for all sums invested by them in the partnerships, exemplary
damages, and treble damages. The Managing General Partner, Administrative
General Partner and the Pegasus Partnerships have been dismissed as defendants.
Under certain circumstances PaineWebber Incorporated can seek indemnification
from the Partnership. As a result, it cannot be determined at this time the
impact, if any, of the litigation on the Partnership.
The Partnership has filed a claim in the Bankruptcy Court for unpaid rents and
other damages related to the rejection, by Kiwi, of the leases. Given the sale
of Kiwi's assets as approved by the Court, it is unlikely that the Partnership
will obtain any recovery.
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Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
This report may contain, in addition to historical information,
forward-looking statements that include risks and other uncertainties. The
Partnership's actual results may differ materially from those anticipated in
these forward-looking statements. Factors that might cause such a difference
include those discussed below, as well as general economic and business
conditions, competition and other factors discussed elsewhere in this report.
The Partnership undertakes no obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of anticipated or unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership owns and manages a diversified portfolio of commercial
aircraft and makes quarterly distributions to the partners of net cash flow
generated by operations in the current and/or prior quarters. In certain
situations, the Partnership may retain cash flow from operations to finance
authorized capital expenditures.
The Partnership invests working capital and cash flow from operations
prior to its distribution to the partners in short-term, highly liquid
investments or a fund that invests in such instruments. At September 30, 1998,
the Partnership's unrestricted cash and cash equivalents of $2,596,000 was
primarily invested in such a fund. This amount was $1,240,000 more than the
Partnership's unrestricted cash and cash equivalents at December 31, 1997 of
$1,356,000. This increase in unrestricted cash was attributable to the amount by
which cash generated by operating activities, collection of advances to lessees,
proceeds from notes payable, and the unapplied maintenance reserves, exceeded
cash distribution to partners and capitalized aircraft improvements, during the
nine months ended September 30, 1998.
Rent and other receivables, which includes rent due from TWA, increased
by $54,000 from $422,000 at December 31, 1997 to $476,000 at September 30, 1998
primarily due to Sky Trek falling two months in arrears in rent payments (see
Sky Trek discussion below). This was partially offset by the total repayment of
the advance by TWA.
TWA, which had been expected to post a profit, reported a loss for the
third quarter of 1998, which is typically the best quarter of the year for
airlines due to summer travel. Although TWA had a cash position of $314 million
at September 30, 1998, given TWA's historical financial difficulties the third
quarter loss is of concern. A default or deferral of lease payments on the part
of TWA, (or a continuing default by Sky Trek, discussed below) or any other
lessee, may affect quarterly distributions. TWA accounted for 51% of the
Partnership's lease revenue in the third quarter of 1998.
Sky Trek has fallen several months in arrears in rent payments and is
also in arrears with regards to maintenance reserve payments. The Partnership is
in discussions with Sky Trek regarding a rent deferral plan. Under the terms of
the proposed rent deferral plan, Sky Trek would provide a promissory note in an
amount equal to the past due rents and maintenance reserves. Such a note would
be payable over 12 months and would bear interest at 12% per annum. Sky Trek
13
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appears to have a number of charter contracts but is in need of additional
working capital. If Sky Trek is unsuccessful in raising additional capital, the
Partnership will need to repossess the aircraft and search for a new lessee.
There can be no assurance as to the timeliness or success of such a remarketing
effort.
During the nine months ended September 30, 1998 the Partnership paid
cash distributions pertaining to the first and second quarters of 1998 and the
last quarter of 1997. The quarterly distribution represented an annualized rate
equal to 8% of contributed capital ($.40 per Unit). The amount of each
distribution is 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 1998 was paid in October, 1998 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 78% of
the cash distributions declared for the quarter ended September 30, 1998,
constituted a return of capital. Also, based on the amount of net income
reported by the Partnership for accounting purposes, approximately 72% of the
cash distributions paid to the partners from inception of the Partnership
through September 30, 1998 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 January 1998, the Lender increased the borrowing commitment from
$7.5 million to $10 million and the interest rate was increased to 1.25% over
prime. Proceeds from the increased borrowing commitment have been utilized to
fund the "C" check and cargo conversion of the Boeing 727-200 aircraft delivered
to TNT.
With the exception of the Boeing 727-200 advanced aircraft leased to
Continental which was returned to the Partnership in October 1998, all of the
Partnership's assets are subject to leases with remaining terms of at least 21
months. The Partnership is currently investigating remarketing opportunities for
the 727-200 advanced aircraft. Amongst other factors, if the Partnership is
unable to remarket this aircraft on a timely basis the Partnership may not be
able to sustain its current distribution rate.
During the nine months ended September 30, 1998, the Partnership
invested approximately $1.8 million with respect to the "C" check and cargo
conversion of the Boeing 727-200 aircraft leased to TNT. In January 1998, the
availability under the borrowing facility was increased from $7.5 million to $10
million, in part to fund this work.
The Limited Partnership Agreement permits the Partnership to borrow up
to 35% (or $28,000,000) of the original offering proceeds for improvements,
enhancement or maintenance of aircraft. The Partnership has drawn all available
funds under its $10 million borrowing facility and the principle balance at
September 30, 1998 is $10 million. Any such borrowings will only be made if the
General Partners believe such borrowings will be in the best interests of the
Partnership and may enhance or protect portfolio value. However, there can be no
assurance that the Partnership would be able to obtain any additional
borrowings, if required.
14
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Litigation
- ----------
See Note 5 "Litigation" for an update on certain legal proceedings.
RESULTS OF OPERATIONS
- ---------------------
The Partnership's net income was $1,005,000 for the nine months ended
September 30, 1998 (the "1998 Period") and $348,000 for the quarter ended
September 30, 1998 (the "1998 Quarter") as compared to $1,089,000 for the nine
months ended September 30, 1997 (the "1997 Period") and $217,000 for the quarter
ended September 30, 1997 (the "1997 Quarter").
The decrease in the Partnership's net income for the 1998 Period
resulted primarily from an increase in interest expense relating to increased
borrowings to finance capitalized aircraft improvements made in 1997 and 1998.
Rental revenue increased $833,000 and $239,000, or 15% and 12%,
respectively, for the 1998 Period and 1998 Quarter, due primarily to the rents
recognized with respect to the TNT aircraft (formerly the Nations Air aircraft)
which exceeded the amount collected from Nations Air in the 1997 Period and 1997
Quarter due to higher monthly rent, partially offset by the aircraft being
off-lease substantially all of the first quarter of 1998. Additionally, rents
recognized with respect to the Sky Trek aircraft in the 1998 Period exceeded
those recognized in the 1997 Period.
Interest and other income for the 1998 Period decreased by $16,000 or
19% in comparison to the 1997 Period. The decrease was primarily attributable to
the continued repayment of advances by TWA, as well as the reduction in cash
which was utilized for capitalized aircraft improvements, both of which reduced
balances on which interest is earned. This was partially offset by the
consignment sale of miscellaneous aircraft parts.
Interest and other income for the 1998 Quarter increased $8,000 or 24%
primarily due to the consignment sale of miscellaneous aircraft parts, partially
offset by the total repayment of advances by TWA, as well as the reduction in
cash which was utilized for capitalized aircraft improvements, both of which
reduced balances on which interest was earned.
Depreciation and amortization increased $548,000 and $134,000, or 16%
and 11%, respectively, for the 1998 Period and 1998 Quarter in comparison to the
1997 Period and 1997 Quarter. The increase was attributable to the depreciation
relating to capitalized aircraft improvements made during 1997 and 1998,
principally those related to the Sky Trek and TNT aircraft. The Sky Trek
aircraft was off-lease for a substantial portion of the 1997 Period. 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
1998 Period and 1998 Quarter increased $72,000 and $34,000, or 16% and 22%,
respectively, in comparison to the 1997 Period and 1997 Quarter, which was
attributable to higher rental revenue in the 1998 Period and 1998 Quarter, which
serves as the basis for certain fees.
General and administrative expense decreased $7,000 and $5,000 or 4%
and 9%, respectively, in the 1998 Period and the 1998 Quarter, as compared to
the 1997 Period and 1997 Quarter, which was primarily due to a decrease in
15
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certain legal fees and accrued expenses for investor reports, partially offset
by an increase in accrued expenses related to audit and tax services for the
period.
Interest expense increased by $284,000 and $74,000, or 70% and 41%,
respectively, in the 1998 Period and 1998 Quarter, as compared to the 1997
Period and 1997 Quarter, due to an increase in borrowings to fund capitalized
aircraft improvements.
Direct lease expenses (which include the legal fees associated with the
Kiwi bankruptcy) decreased by $57,000 or 43% during the 1998 Period, due
principally to the Kiwi related expenditures incurred in the 1997 Period.
IMPACT OF YEAR 2000 ISSUE
- -------------------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. This
could result in a failure of the information technology systems (IT systems) and
other equipment containing imbedded technology (non-IT systems) in the Year
2000, causing disruption of operation of the Partnership, its lessees or
vendors.
The Partnership does not own its own software, but is reliant upon
software owned by the General Partners or third party vendors. The General
Partners and third party vendors are either currently Year 2000 compliant or
have instituted plans to be so.
The plan for addressing third party critical dependencies includes:
identification of third party critical dependencies including lessees, vendors
and financial institutions; circulation to all applicable third parties of a
written request for their plans and progress in addressing the Year 2000 issue;
evaluation of responses; and development of contingency plans to address risks
of non-compliance by third parties. The Partnership has completed the
identification of critical dependencies and the circulation for requests for
Year 2000 compliance status.
The costs associated with addressing the Year 2000 issue, including
developing and implementing the above stated plan will be nominal and will be
expensed as incurred.
While the Partnership expects to have no interruption of operations as
a result of internal IT and non-IT systems, uncertainties remain about the
affect of third party critical dependencies who are not Year 2000 compliant.
The Partnership is not aware of any significant Year 2000 systems
issues with respect to the airworthiness of aircraft, however, should such an
issue result in Airworthiness Directives or other manufacturer recommended
maintenance, the implementation and the majority of the cost of such
implementation would be the responsibility of the aircraft lessee. Any resulting
costs to the Partnership cannot be estimated at this time.
Non-compliance on the part of a lessee could result in lost revenue for
the lessee and an inability to make lease payments to the Partnership.
Non-compliance by the lessee's financial institution could also affect the
16
<PAGE>
ability to process lease payments. The Partnership has attempted to mitigate
such risks by inquiring of each lessee about its Year 2000 plans, including
whether they have addressed the issue with their financial institution.
The Partnership's lessees face the potential risk of non-compliance by
the air traffic control systems throughout the world. A disruption in the
operations of some or all of the air traffic control systems may cause
disruption to the operations of the Partnership's lessees, which may adversely
affect their ability to generate revenue.
A worst case scenario would be that a number of lessees are unable to
operate and generate revenues and as a result unable to make lease payments. The
Partnership is unable to estimate the likelihood or the magnitude of the
resulting lost revenue at this time. Should this occur, the Partnership would
attempt to repossess aircraft from non-compliant lessees and place the aircraft
with compliant lessees. No assurances can be given that the Partnership would be
able to re-lease such aircraft at favorable terms or at all. If a significant
number of aircraft could not be re-leased at favorable terms or at all, or their
re-lease is delayed, the Partnership's business, financial condition and results
of operations would be adversely affected.
17
<PAGE>
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
The Partnership, along with the Managing General Partner, Administrative General
Partner and PaineWebber Incorporated, had been named as a defendant in a lawsuit
entitled Paul Mallia, et al. v. PaineWebber, Inc., et al., pending before the
United States District Court for the Southern District of New York, and relating
to the sale and sponsorship of various limited partnership investments,
including the Partnership and an affiliated Partnership ("the Pegasus
Partnerships"). The complaint asserts claims under the Racketeer Influenced and
Corrupt Organizations Act, as well as state law claims for 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, on behalf of those investors who bought
interests in the Pegasus Partnerships and in other limited partnerships and
investments. The plaintiffs seek unspecified damages, including attorneys' fees,
reimbursement for all sums invested by them in the partnerships, exemplary
damages, and treble damages. The Managing General Partner, Administrative
General Partner and the Pegasus Partnerships have been dismissed as defendants.
Under certain circumstances PaineWebber Incorporated can seek indemnification
from the Partnership. As a result, it cannot be determined at this time the
impact, if any, of the litigation on the Partnership.
The Partnership has filed a claim in the Bankruptcy Court, for unpaid rents and
other damages related to the rejection, by Kiwi, of the leases. Given the sale
of Kiwi's assets as approved by the Court, it is unlikely that the Partnership
will obtain any recovery.
Item 5. Other Information
-----------------
On October 20, 1998 Paul L. Novello, Vice President, Chief Financial Officer,
Secretary and Treasurer of the Administrative General Partner resigned.
On October 20, 1998 Carmine Fusco was named Vice President, Secretary, Treasurer
and Chief Financial and Accounting Officer of the Administrative General
Partner.
Carmine Fusco, age 30, is Vice President, Secretary, Treasurer and Chief
Financial and Accounting Officer of the Administrative General Partner, he also
serves as an Assistant Vice President within the Private Investments Department
of PaineWebber Incorporated. Mr. Fusco had previously been employed as a
Financial Valuation Consultant in the Business Valuation Group of Deloitte &
Touche, LLP from January 1997 to August 1998. He was employed as a Commodity
Fund Analyst in the Managed Futures Department of Dean Witter Reynolds
Incorporated, from October 1994 to November 1995. Prior to joining Dean Witter,
Mr. Fusco was a Mutual Fund Accountant with the Bank of New York Company
Incorporated. He received his Bachelor of Science degree in Accounting and
Finance in May 1991 from Rider University and a Master of Business
Administration from Seton Hall University in June 1996.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits and reports to be filed
27. Financial Data Schedule (in electronic format only).
(b) Reports on Form 8-K
The Partnership did not file any reports on Form 8-K during the third
quarter of the fiscal year ending December 31, 1998.
19
<PAGE>
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 12, 1998 By: /s/ Carmine Fusco
------------------
Carmine Fusco
Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,596,000
<SECURITIES> 0
<RECEIVABLES> 737,000
<ALLOWANCES> 261,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,107,000
<PP&E> 84,027,000
<DEPRECIATION> 57,611,000 <F3>
<TOTAL-ASSETS> 29,523,000
<CURRENT-LIABILITIES> 3,691,000
<BONDS> 10,000,000
0
0
<COMMON> 0
<OTHER-SE> 15,832,000 <F2>
<TOTAL-LIABILITY-AND-EQUITY> 29,523,000
<SALES> 0
<TOTAL-REVENUES> 6,569,000
<CGS> 0
<TOTAL-COSTS> 4,704,000
<OTHER-EXPENSES> 170,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 690,000
<INCOME-PRETAX> 1,005,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,005,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,005,000
<EPS-PRIMARY> .25 <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.
</FN>
</TABLE>
