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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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17712
PEGASUS AIRCRAFT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1099968
(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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PEGASUS AIRCRAFT PARTNERS, L.P.
QUARTERLY REPORT ON FORM 10Q FOR THE
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets-March 31, 1998 2
and December 31, 1997
Statements of Income for the three months 3
ended March 31, 1998 and 1997
Statements of Partners' Equity for the three 4
months ended March 31, 1998 and 1997
Statements of Cash Flows for the three months 5
ended March 31, 1998 and 1997
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 13
of Financial Conditions and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS -- MARCH 31, 1998 AND DECEMBER 31, 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
(IN THOUSANDS
EXCEPT UNIT DATA)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,093 $ 1,356
Rent and other receivables, net 474 422
Aircraft, net (Notes 2 and 5) 29,015 28,708
Other assets 29 26
-------- --------
Total Assets $ 30,611 $ 30,512
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Note 4) $ 8,771 $ 7,271
Accounts payable and accrued expenses 147 302
Payable to affiliates (Note 3) 370 458
Deferred rental income and deposits 1,106 982
Distributions payable to partners 1,616 1,632
Maintenance reserve payable 227 192
Accrued interest payable 74 --
-------- --------
Total Liabilities 12,311 10,837
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 5)
PARTNERS' EQUITY:
General Partners (613) (599)
Limited Partners (4,000,005 units outstanding) 18,913 20,274
-------- --------
Total Partners' Equity 18,300 19,675
-------- --------
Total Liabilities and Partners' Equity $ 30,611 $ 30,512
======== ========
</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 MARCH 31, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
(IN THOUSANDS
EXCEPT UNIT DATA
AND PER UNIT AMOUNTS)
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 1,940 $ 1,680
Interest 12 30
Gain on sale of engine -- 177
---------- ----------
1,952 1,887
========== ==========
EXPENSES:
Depreciation and amortization 1,260 1,100
Interest expense 208 68
Management and re-lease fees (Note 3) 155 138
General and administrative (Note 3) 45 63
Direct lease 43 54
Maintenance expense -- --
---------- ----------
1,711 1,423
---------- ----------
NET INCOME $ 241 $ 464
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 2 $ 5
To the Limited Partners 239 459
---------- ----------
$ 241 $ 464
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .06 .11
========== ==========
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.
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PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1, 1998 $(599) $ 20,274 $ 19,675
Net income 2 239 241
Distributions declared to partners (16) (1,600) (1,616)
----- -------- --------
Balance, March 31, 1998 $(613) $ 18,913 $ 18,300
====== ======== ========
Balance, January 1, 1997 $(542) $ 25,965 $ 25,423
Net income 5 459 464
Distributions declared to partners (16) (1,600) (1,616)
----- -------- --------
Balance, March 31, 1997 $(553) $ 24,824 $ 24,271
====== ======== ========
</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 THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 241 $ 464
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,260 1,100
Gain on sale of engine -- (177)
Change in assets and liabilities:
Rent and other receivables (94) 4
Other assets (3) 21
Accounts payable and accrued expenses (155) 14
Payable to affiliates (88) 96
Deferred rental income 124 15
Unrestricted maintenance reserves 35 --
Accrued interest payable 74 19
------- -------
Net cash provided by operating activities 1,394 1,556
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of engine -- 275
Capitalized aircraft improvement (1,567) (1,026)
Repayment of advances by lessees 42 77
------- -------
Net cash used in investing activities (1,525) (674)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,500 2,150
Cash distributions paid to partners (1,632) (1,608)
Repayment of notes payable -- (107)
Maintenance reserves payable -- 92
------- -------
Net cash (used in) provided by financing activities (132) 527
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (263) 1,409
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,356 2,521
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,093 $ 3,930
======= =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 134 $ 49
======= =======
</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
MARCH 31, 1998
(unaudited)
1. GENERAL
The accompanying unaudited interim financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of the General Partners, necessary to fairly present the financial
position of the Partnership as of March 31, 1998 and the results of its
operations, changes in partners' equity, and cash flows for the three months
then ended.
These financial statements should be read in conjunction with the
Significant Accounting Policies and other Notes to Financial Statements included
in the Partnership's annual audited financial statements for the year ended
December 31, 1997.
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.
2. AIRCRAFT UNDER OPERATING LEASES
The Partnership's net investment in aircraft as of March 31, 1998 and
December 31, 1997 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Aircraft on operating leases $ 84,242 $ 71,120
Less: Accumulated depreciation (45,708) (40,609)
Reserve for decline in market
value of aircraft (5,668) (3,368)
Net Lease Settlement proceeds
accounted for as cost recovery (3,673) (3,673)
Provision for maintenance cost (178) (178)
-------- --------
$ 29,015 $ 23,292
-------- --------
Aircraft held for lease -- $ 11,555
Less: Accumulated depreciation -- (3,839)
Reserves for decline in market
value of aircraft -- (2,300)
-------- --------
-- 5,416
-------- --------
Aircraft net $ 29,015 $ 28,708
======== ========
</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 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 $28,000 of base
management fees during the three months ended March 31, 1998.
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 $70,000 of incentive
management fees during the three months ended March 31, 1998.
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 $57,000 of re-lease fees during the three months ended
March 31, 1998. All of the above fees are subordinated to the limited partners
receiving an 8% annual non-cumulative return based upon original contributed
capital.
Accountable General and Administrative Expenses: The General Partners
are entitled to reimbursement of certain expenses paid on behalf of the
Partnership which are incurred in connection with the administration and
management of the Partnership. Such reimbursable expenses amounted to $13,000
during the three months ended March 31, 1998, all of which were payable to the
Administrative General Partner.
During the quarter ended March 31, 1998 the Partnership paid $634,000
to a maintenance facility that is affiliated with the Managing General Partner.
Additionally, the Partnership paid $885,000 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.
4. NOTES PAYABLE
In July 1995, the Partnership and its Lender completed an extension of
their existing 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 was able
to borrow up to $7,500,000 at an interest rate of 1% over the lender's prime
rate of
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interest. The lender's commitment is for a term of 36 months, at which
time all principal will be due. 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. During 1997, the Partnership used an aggregate $7.2
million to retire prior outstanding debt and purchase hushkits for, ultimately,
the Sky Trek and TNT aircraft. 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 or will be utilized to fund
the cargo conversion of the aircraft delivered to TNT.
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5. AIRCRAFT
Continental Airline Leases: During December 1988, the Partnership
acquired a Boeing 727-200 advanced aircraft for a total purchase price of
$8,025,000 which as of March 31, 1997 is subject to a lease with Continental
providing for rentals of $75,000 per month through June 30, 1998, the scheduled
expiration date. The Partnership is in discussions with Continental regarding a
short extension of the lease beyond that date.
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
In January 1995, Continental announced that it was grounding certain
aircraft, including the Boeing 747 aircraft owned by the Partnership.
Continental discontinued utilizing the Boeing 747 aircraft, did not make any
rental payments after January 1995 and returned the Boeing 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 thereby 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 which as of March 31, 1998 is subject to a lease with Trans World
Airlines, Inc. (TWA) providing for rentals of $185,000 per month for a term
scheduled to expire in September 2004.
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Pursuant to a previous lease amendment relating to the MD-82, 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 through September 1, 1998, in equal monthly
installments, with interest at a fixed rate of 9.68%. At March 31, 1998 the
balance of the receivable was $86,000. All 1998 payments to date 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 including
lease deferrals negotiated with aircraft lessors such as the Partnership
("Exchange Offer"). TWA and the Partnership agreed to a deferral of 50% of the
original rent scheduled for November 1994 and 75% of the original rent 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 at
$185,000 per month. All rents deferred during the November 1994 to April 1995
period were repaid with interest at 12% from the date of the deferral over an 18
month period which commenced May 1, 1995. On June 30, 1995, TWA filed a
prepackaged reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On
August 23, 1995, the reorganization plan, which included the foregoing lease
modifications, was confirmed by the Bankruptcy Court, and TWA emerged from
bankruptcy.
In July 1996, the Partnership delivered its Boeing 747-100 aircraft,
formerly leased to Continental, to TWA under a 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 Boeing 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 Boeing 747 leased from the Partnership. TWA continues to make
lease payments with respect to the aircraft. TWA has made all rental payments,
advance repayments and payments of deferred rent. TWA has narrowed its losses
and improved its liquidity although it has yet to achieve sustained
profitability.
US Airways Group, Inc. ("USAir"): During March 1989, the Partnership
acquired one half of the beneficial interest in a trust ("Trust") that is the
owner/lessor of a McDonnell Douglas MD-81 ("USAir Aircraft") for a purchase
price of $9,999,000. The remaining one-half interest in the Trust is owned by
Pegasus Aircraft Partners II, L.P. an affiliated partnership.
Rental payments are payable quarterly, in arrears, at a rate of
$304,000 (for the Partnership's one-half interest in the aircraft). During 1997,
US Air exercised its renewal option for a three-year extension (to June 2001) at
the original lease rate. US Air also has three additional one-year renewal
options at fair market rental rates. US Air may elect to purchase the aircraft
at its fair market value at the end of any renewal term.
The McDonnell Douglas MD-81 aircraft was purchased subject to a tax
benefit transfer lease ("TBT lease") which provided for the transfer of the
investment tax credits and depreciation deductions with respect to the aircraft
to a tax lessor. Under the TBT lease, the Trust, as the owner of the aircraft
and tax lessee under the TBT lease, has agreed to indemnify the tax lessor if
certain anticipated tax benefits are lost by the tax lessor as a result of,
among other things, acts or omission by the Trust, breach of covenants by the
Trust under the TBT lease, loss or damage to the aircraft or use of the aircraft
outside the United States. The TBT lease requires that
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a letter of credit be posted to collateralize this obligation. The Partnership
shares in the annual cost of the letter of credit and is obligated for one-half
of any calls on the letter of credit.
The letter of credit has a current face amount of approximately $1.2
million. Through June 1996 the letter of credit agreement obligated the
Partnership to deposit $35,000 per quarter (beginning on June 1, 1992 and
originally scheduled to terminate on June 1, 1997) into a restricted account at
the bank ("Lender") which issued the current letter of credit. In July 1995, the
Partnership restructured its borrowing arrangement with the Lender, under which
the Lender released its security interest in the cash collateral account and
eliminated the requirement for future deposits to such account.
Under the operating lease, the lessee, USAir, has assumed all
liabilities, indemnities and obligations of the Trust to the tax lessor under
the TBT lease and has agreed to indemnify the Trust for any liability, indemnity
or obligation to the tax lessor under the TBT lease except for liability
resulting from breaches by the Trust of covenants under the operating lease.
USAir has not posted a letter of credit to collateralize this obligation. As a
result of the foregoing, if the tax lessor draws on the letter of credit as a
result of an action by the lessee, the Partnership and Pegasus Aircraft Partners
II, L.P., through the Trust will be responsible for the loss to the tax lessor
until and if indemnification can be obtained from the lessee.
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 upon 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 to
obtain Stage III noise abatement status or terminate the lease.
During 1996, in part, because of the grounding of certain Kiwi aircraft
by the FAA as the result of pilot handbook deficiencies and the market reaction
to the Valujet incident, Kiwi did not meet its financial goals. Kiwi requested
and was granted by the Partnership a deferral of its August 1996 rental and July
1996 maintenance payments. Kiwi was also unable to make its September rental and
August maintenance payments and was placed in default by the Partnership.
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.
At December 31, 1996, the Partnership held maintenance deposits aggregating
approximately $1,627,000, 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
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amount of $240,000 relating to amounts due from Kiwi as of the bankruptcy date
and did not record any revenue beyond that date. The Partnership recovered the
aircraft and the spare engine in late 1996.
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 1997
for $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. 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 included certain of the parties that
had provided debtor-in-possession financing. Based upon the approved purchase
price and other liabilities, 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 Boeing 727-200 aircraft, formerly leased to Kiwi, to Nations Air
Express Inc. ("Nations") subject to a lease for a term of approximately 36
months at a lease rate of $65,000 per month. Nations was also required to make
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 its delivery to Nations, because of Kiwi's noncompliance
with lease return condition provisions and the need to deliver the aircraft
quickly, the Partnership delivered the aircraft with one engine which belonged
to Pegasus Aircraft Partners II, L.P., an affiliated partnership, and two
engines which belonged to affiliates of the Managing General Partner. The
Partnership paid those entities for their share of the rents (of $45,000 in the
aggregate per month plus related reserves) while using such engines. The
Partnership purchased five rebuilt engines in January 1997 from an unaffiliated
third party, three of which were installed on the aircraft in March 1997.
Additionally, the Partnership hushkitted the aircraft at a cost of approximately
$1.9 million and simultaneously extended the lease to April 2002 and increased
the monthly lease rate from $65,000 to $105,000, effective April 1997. During
1997, Nations incurred operating problems and struggled with adequate liquidity
and capitalization requirements. Nations fell in arrears with respect to rent
and maintenance reserves due and in July 1997 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 then due and after Nations
was unable to raise any additional financing, the Partnership recovered the
aircraft in September 1997. At December 31, 1997, the Partnership had unfunded
maintenance reserves due from Nations totaling $400,000 (which are not reflected
on the financial statements) 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 provided a writedown of $200,000 with respect to rent receivable
relating to this aircraft during the year ended December 31, 1997.
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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 Airlines Inc.
("Sky Trek"). The lease was executed and the aircraft was delivered in late June
1997. 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 before the
application of maintenance reserves of $888,000 to restore the aircraft and has
purchased a hushkit at a cost of $1,900,000, a portion of which was funded from
the Kiwi maintenance reserves. Two of the five engines purchased in January 1997
were installed on the aircraft and the Partnership purchased a third engine from
an unaffiliated party at a cost of $625,000. The Partnership provided a
writedown of $150,000 with respect to this aircraft at December 31, 1997.
TNT Transport International B.V.: In November 1997, the Partnership
entered into an agreement in principle to lease the aircraft formerly leased to
Nations to a European freight carrier, TNT Transport International B.V. ("TNT")
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 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. As of December 31, 1997, TNT provided a $150,000 security
deposit. TNT also has the right to extend the lease for an additional two years
after the fourth year (if the above option is not exercised) at $95,000 per
month. The Partnership spent approximately $2.6 million for a "C" check and
cargo conversion of the aircraft. The work was performed and the aircraft parts
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 in
March 1998.
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.
Rent and other receivables increased by $52,000 from $422,000 at
December 31, 1997 to $474,000 at March 31, 1998. This increase was due to
amounts due from TWA and Sky Trek at March 31, 1998 (which were paid in early
April, 1998) offset by the continued repayment of the advance by TWA.
Other assets increased by $3,000 from $26,000 at December 31, 1997 to
$29,000 at March 31, 1998.
Deferred rental income and deposits increased $124,000 from $982,000 at
December 31, 1997 to $1,106,000 at March 31, 1998, due to the receipt in March,
upon delivery of the aircraft, of the April, 1998 rent from TNT.
Payable to affiliates decreased by $88,000, from $458,000 at December
31, 1997 to $370,000 at March 31, 1998.
14
<PAGE> 15
During the three months ended March 31, 1998 the Partnership paid cash
distributions pertaining to the fourth quarter of 1997. The quarterly
distribution represented an annualized rate equal to 8% of contributed capital
($.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 first quarter of 1998 was
paid on April 25, 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 85% of
the cash distributions declared for the quarter ended March 31, 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 March 31, 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 July 1995, the Partnership and the Lender completed an extension of
their existing loan 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 0.5%. The Lender
released the Boeing 747-100 aircraft as collateral under the loan and received a
security interest in the Partnership's MD-82 aircraft leased to TWA. The
Partnership borrowed an aggregate of $2,150,000 pursuant to the loan agreement,
of which $1,218,000 was outstanding at December 31, 1996.
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. During 1997, the Partnership used an
aggregate $7.2 million to return prior outstanding debt and purchase hushkits
for the Sky Trek and TNT aircraft. In January 1998, the Lender increased the
borrowing commitment from $7.5 million to $10 million and increased the interest
rate to 1.25% over prime. The proceeds from the increased borrowing commitment
will be utilized to fund the cargo conversion of the aircraft delivered to TNT.
With the exception of the 727-200 advanced aircraft leased to
Continental which is scheduled to expire on June 30, 1998 all of the
Partnership's assets are subject to leases with remaining terms of at least 27
months. The Partnership is currently investigating remarketing opportunities for
the 727-200 advanced aircraft. 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 1997 the Partnership invested $9.4 million in
capitalized aircraft's improvements and maintenance checks, of which $1.6
million was funded by the application of maintenance
15
<PAGE> 16
reserves collected from Kiwi and Nations. During the quarter ended March 31,
1998, the Partnership spent approximately $1.2 million with respect to the cargo
conversion relating to the Boeing 727 leased to TNT. In January 1998, the
availability under the borrowing facility was increased from $7.5 million to $10
million. Upon the completion of the cargo conversion and delivery of the
aircraft to TNT in March 1998 all of the Partnership's aircraft were deployed.
(See Item 1, Financial Statements, Footnote 5, "Aircraft".)
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.
LITIGATION
None
RESULTS OF OPERATIONS
The Partnership's net income was $241,000 for the three months ended
March 31, 1998 ("1998 Quarter") as compared to $464,000 for the quarter ended
March 31, 1997 ("1997 Quarter"). Net income per limited partnership unit also
decreased to $.06 for the 1998 Quarter from $.11 per Unit for the 1997 Quarter.
The decrease in the Partnership's net income for the 1998 Quarter
resulted primarily from greater depreciation expense relating to the Sky Trek
aircraft (off-lease in the 1997 Quarter) and greater interest expense relating
to increased borrowings to finance capitalized aircraft improvements made
throughout 1997 partially offset by an increase in rental revenue.
Rental revenue increased $260,000, or 15%, for the 1998 Quarter, due
primarily to the rents recognized with respect to the Sky Trek aircraft which
was off-lease in the 1997 Period, partially offset by the fact that the former
Nations Aircraft was off-lease for substantially all of the 1998 Quarter prior
to its delivery to TNT on March 24, 1998.
Interest income for the 1998 Quarter decreased by $18,000 or 60%, in
comparison to the 1997 Quarter. The decrease was primarily attributable to the
continued repayment of advances by TWA, reducing the balances on which interest
is earned, as well as the utilization of cash reserves for capitalized aircraft
improvements.
Depreciation and amortization increased $160,000, or 15%, for the 1998
Quarter in comparison to the 1997 Quarter. The increase was attributable to the
depreciation relating to capitalized aircraft improvements made during 1997,
principally those related to the Sky Trek aircraft, which was also off-lease
during 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 Quarter increased $17,000, or 12%, in comparison to the 1997 Quarter, which
was attributable to higher rental revenue in the 1998 Quarter, which serves as
the basis for certain fees.
16
<PAGE> 17
General and administrative expense decreased by $18,000 or 29% in the
1998 Quarter as compared to the 1997 Quarter which was consistent with the
Partnership's level of operations.
Interest expense increased by $140,000 in the 1998 Quarter as compared
to the 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 $11,000 or 20% due principally to the Kiwi related
expenditures incurred in the prior year period.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and reports to be filed: none
(b) The Partnership did not file any reports on Form 8-K during the
first quarter of the fiscal year ending December 31, 1998.
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
A General Partner
Date: May 13, 1998 By: /s/ Joseph P. Ciavarella
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1998 FOR PEGASUS AIRCRAFT PARTNERS II L.P. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,093,000
<SECURITIES> 0
<RECEIVABLES> 734,000
<ALLOWANCES> (260,000)
<INVENTORY> 0
<CURRENT-ASSETS> 1,596,000
<PP&E> 82,675,000
<DEPRECIATION> (53,660,000)<F3>
<TOTAL-ASSETS> 30,611,000
<CURRENT-LIABILITIES> 3,540,000
<BONDS> 8,771,000
0
0
<COMMON> 0
<OTHER-SE> 18,300,000<F2>
<TOTAL-LIABILITY-AND-EQUITY> 30,611,000
<SALES> 0
<TOTAL-REVENUES> 1,952,000
<CGS> 0
<TOTAL-COSTS> 1,458,000
<OTHER-EXPENSES> 45,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208,000
<INCOME-PRETAX> 241,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 241,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241,000
<EPS-PRIMARY> .06<F1>
<EPS-DILUTED> 0
<FN>
<F1>INCOME PER UNIT OF LIMITED PARTNERSHIP INTEREST.
<F2>INCLUDES PARTNERS CAPITAL AND ACCUMULATED EARNINGS AND DISTRIBUTION TO
PARTNERS.
<F3>INCLUDES WRITEDOWNS.
</FN>
</TABLE>
