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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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18387
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Pegasus Aircraft Partners II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1111757
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(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Pegasus Aircraft Partners II, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1996
Table of Contents
<TABLE>
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Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - March 31, 1996
and December 31, 1995 2
Statements of Income for the three
months ended March 31, 1996
and 1995 3
Statements of Partners' Equity for the
three months ended March 31, 1996
and 1995 4
Statements of Cash Flows for the three
months ended March 31, 1996 and
1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Part II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 3. Exhibits and Reports on Form 8-K 20
</TABLE>
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS II, L.P.
BALANCE SHEETS -- MARCH 31, 1996 AND DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
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(in thousands, except unit data)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,838 $ 11,955
Restricted cash 2,327 2,104
Rent and other receivables 1,979 2,557
Aircraft, net (Notes 2 and 4) 60,796 63,482
Other assets 685 701
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Total Assets $ 77,625 $ 80,799
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LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 154 $ 148
Payable to affiliates (Note 3) 873 893
Interest payable 41 46
Maintenance payable 2,327 2,104
Notes payable 6,159 6,638
Deferred income 3,901 4,672
Distributions payable to partners 2,945 2,931
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Total Liabilities 16,400 17,432
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COMMITMENTS AND CONTINGENCIES (Notes 3,4, and 5)
PARTNERS' EQUITY:
General Partners (837) (816)
Limited Partners (7,255,000 units outstanding) 62,062 64,183
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Total Partners' Equity 61,225 63,367
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Total Liabilities and Partners' Equity $ 77,625 $ 80,799
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
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(in thousands, except unit data
and per unit amounts)
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 3,927 $ 3,561
Interest 208 126
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4,135 3,687
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EXPENSES:
Depreciation and amortization 2,705 2,341
Management and re-lease fees (Note 3) 291 266
Interest 172 202
General and administrative (Note 3) 87 70
Direct lease 91 59
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3,346 2,938
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NET INCOME $ 789 $ 749
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NET INCOME ALLOCATED:
To the General Partners $ 8 $ 7
To the Limited Partners 781 742
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$ 789 $ 749
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NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .11 $ .10
========== ==========
WEIGHTED AVERAGE NUMBER
OF LIMITED PARTNERSHIP
UNITS OUTSTANDING 7,255,000 7,255,000
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
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(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1996 $(816) $ 64,183 $ 63,367
Net income 8 781 789
Distributions to partners declared (29) (2,902) (2,931)
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Balance, March 31, 1996 ($837) $ 62,062 $ 61,225
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Balance, January 1, 1995 $(719) $ 73,792 $ 73,073
Net income 7 742 749
Distributions to partners declared (29) (2,902) (2,931)
----- -------- --------
Balance, March 31, 1995 $(741) $ 71,632 $ 70,891
===== ======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
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(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 789 $ 749
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,705 2,341
Change in assets and liabilities:
Rent and other receivables 476 (992)
Other assets 16 24
Accounts payable and accrued expenses 6 30
Payable to affiliates (20) (19)
Interest payable (5) 2
Deferred income (771) 48
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Net cash provided by operating activities 3,196 2,183
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (19) (16)
Repayment of advances by lessees 102 118
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Net cash provided by investing activities 83 102
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CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers to restricted cash -- (35)
Repayment of notes payable (479) (88)
Cash distributions paid to partners (2,917) (2,931)
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Net cash used in financing activities (3,396) (3,054)
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NET DECREASE IN
CASH AND CASH EQUIVALENTS (117) (769)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 11,955 4,513
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 11,838 $ 3,744
======== =======
Supplemental schedule of cash flow information:
Interest paid $ 177 $ 200
======== =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
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(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, 1996 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, 1995.
2. AIRCRAFT
The Partnership's net investment in aircraft as of March 31, 1996 and
December 31, 1995 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
Aircraft on operating leases $114,460 $ 114,460
Less: Accumulated depreciation (48,480) (45,775)
Provision for decline in market
value of aircraft (12,246) (12,246)
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$ 53,734 $ 56,439
Aircraft held for lease $ 28,747 $ 28,728
Less: Accumulated depreciation (11,013) (11,013)
Amounts received including value
of aircraft in Lease Settlement accounted
for under the cost recovery method (10,115) (10,115)
Reserves for maintenance (557) (557)
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7,062 7,043
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Aircraft, net $ 60,796 $ 63,482
======== =========
</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. 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 $58,000 of base management fees during the three months
ended March 31, 1996.
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 which 2.5% is payable to
the Managing General Partner and 2.0% is payable to the Administrative General
Partner. The General Partners earned $165,000 of incentive management fees
during the three months ended March 31, 1996.
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 $68,000 of re-lease fees during the three months ended
March 31, 1996.
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 $19,000
during the three months ended March 31, 1996, all of which was payable to the
Administrative General Partner.
During the quarter ended March 31, 1996 and the year ended December 31,
1995, the Administrative General Partner deferred the receipt of management fees
and re-lease fees earned beginning January 1, 1995. Such fees aggregated
$111,000 and $445,000 for the quarter ended March 31, 1996 and the year ended
December 31, 1995, respectively.
In the quarter ended March 31, 1996, the Partnership purchased certain
equipment and parts relating to the A-300 aircraft from a company owned by the
three directors of the Managing General Partner in the amount of $10,000.
4. AIRCRAFT LEASES
Continental Airlines Leases During September 1989, the Partnership
acquired a McDonnell Douglas DC-10-10 aircraft for a total purchase price of
$18,301,000, subject to an operating lease with Continental, originally
scheduled to expire on May 31, 1997, with rents of $252,000 per month.
Continental also has three two-year renewal options, with rent payable during
the first two such renewal periods at the lesser of the then fair market rental
value or the rental rate during the initial term, and during the third such
renewal period at the then fair market rental rate. In addition, the lessee has
a right of first
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refusal to purchase or re-lease the aircraft after the last renewal period on
the same terms as those included in any bona fide offer made to the Partnership
by a third party.
During September 1989, the Partnership acquired a Boeing 727-200
non-advanced aircraft for a total purchase price of $6,116,000, subject to an
operating lease with Continental.
During August 1990, the Partnership acquired an Airbus Industrie Model
A300-B4-103 ("A-300") aircraft for a total purchase price of $28,070,000,
subject to an operating lease with Continental, originally scheduled to expire
on December 29, 2000 and with monthly, in advance, rentals of $312,000.
In January 1995, Continental announced that it was grounding its fleet
of Airbus Industrie A-300 aircraft, including the A-300 aircraft leased to it by
the Partnership, and notified the Partnership of its intention to return the
aircraft to the Partnership. Continental paid $150,000 of the $312,000 monthly
rental payment due in February through May 1995. The Partnership did not accrue
as rental revenue the difference between the amount due and the amount paid by
Continental for such months. Continental took the A-300 out of service in May
1995, and the aircraft was prepared for delivery in June 1995 to a new lessee,
Akdeniz Air Mediterranean, Inc. ("Akdeniz") based in Turkey.
In June 1995, the Partnership executed a lease of the A-300 aircraft to
Akdeniz for a scheduled term of four years, under which Akdeniz has since
defaulted (See Footnote 9, to the Financial Statements, "Lessee Default"). The
Partnership has recovered the A-300 aircraft and is currently remarketing it.
The Partnership estimates that it will spend approximately $1.4 million for a
scheduled heavy maintenance check that will be required prior to delivery of the
aircraft to a new lessee. The Partnership received $557,000 from Continental
pursuant to the A-300 Settlement discussed below which will be applied towards
such maintenance.
On November 15, 1995, the Partnership reached an agreement with
Continental regarding the settlement for the lease obligations under the A-300
lease ("A-300 Lease Settlement"), which also included a restructuring of the
DC-10-10 Aircraft lease ("DC-10 Restructuring").
Under the terms of the A-300 Lease Settlement, the Partnership received
a cash payment of approximately $3,721,000, including approximately $325,000 as
reimbursement for certain integration and transaction expenses, and (i) title to
a Boeing 727-200 advanced aircraft subject to lease with Continental for a term
of approximately 26 months at a lease rate of $85,000 per month and (ii) title
to a second Boeing 727-200 advanced aircraft subject to a lease with Continental
for a term of approximately 42 months at a lease rate of $85,000 per month.
Additionally, the Partnership received approximately $557,000 as an economic
settlement in lieu of Continental performing certain maintenance work and
meeting the return conditions required by the lease.
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Under the DC-10 Restructuring the Partnership received approximately
$3,100,000, the lease expiration date was changed from May 31, 1997 to October
31, 1996 and the monthly lease payments were reduced from $252,000 to $135,000
effective September 15, 1995. All other terms and conditions of the DC-10-10
lease remain unchanged.
The Partnership provided $250,000 as a decline in market value of
aircraft to reflect the Partnership's estimate of recoverability of the
investments in the DC-10-10 aircraft at December 31, 1995.
Continental did not make the monthly rental payments due under the
three leases with the Partnership on December 1, 1990 and filed for Chapter 11
bankruptcy protection on December 3, 1990. The Partnership entered into various
lease modifications and financing arrangements with Continental as a result of
the bankruptcy. At March 31, 1996 the Partnership had $62,000, deferred rentals
receivable from Continental all of which was repaid in April 1996. Additionally,
at March 31, 1996, the Partnership had aircraft modification advances to
Continental totaling $229,000, which are being repaid monthly with interest.
Trans World Airlines Leases During December 1989, the Partnership
acquired a McDonnell Douglas MD-82 aircraft for a total purchase price of
$20,763,000, subject to an operating lease with TWA, which was originally
scheduled to expire on April 13, 1993, but was amended and extended until
November 1, 1998 with monthly, in advance, rental payments of $185,000.
Upon execution of the lease amendment, the Partnership reimbursed TWA
for $225,000 of capital improvements which were made to the aircraft and
advanced $750,000 to TWA to finance certain major maintenance procedures, which
is being repaid over the remaining lease term, in monthly installments with
interest at a fixed rate of 9.70%. At March 31, 1996, the balance of the
receivable was $400,000. All first quarter 1996 repayments of advances have been
made by TWA as scheduled.
During January 1990, the Partnership acquired a Lockheed L-1011
aircraft for a total purchase price of $17,555,000, subject to an operating
lease with TWA, originally scheduled to expire on March 31, 1993. The lease was
amended and extended to October 1, 1998 with rental payments payable monthly, in
advance, at the rate of $130,000.
Upon execution of the lease amendment, the Partnership reimbursed TWA
for $225,000 of capital improvements which were made to the aircraft and
advanced $550,000 to TWA to finance certain major maintenance procedures, which
is being repaid over the remaining lease term in monthly installments with
interest at 9.68%. At March 31, 1996, the balance of the receivable was
$289,000. All 1996 through May repayments of advances have been made by TWA as
scheduled. The Partnership is obligated to advance an additional $550,000 with
respect to additional maintenance procedures, when such work is completed.
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 obligations and lease
deferrals negotiated with
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aircraft lessors such as the Partnership ("Exchange Offer") with the objective
of an orderly financial reorganization through a prepackaged bankruptcy filing.
In conjunction with this restructuring, TWA and the Partnership agreed ("TWA
Agreement") to a deferral of 50% of the rent scheduled for November 1994, and
75% of the rent scheduled from December 1994 to April 1995 for the MD-82
aircraft (50% of the December 1994 through April 1995 rent with respect to the
L-1011 aircraft) followed by a return to the original payment schedule. Under
the terms of the TWA Agreement all rents deferred during the November 1994 to
April 1995 period are to be repaid with interest at 12% from the date of
deferral over an 18-month period, the repayments of which commenced May 1, 1995.
Deferred rent pursuant to the TWA Agreement of $523,000 and $736,000 was
included in rents and other receivables in the balance sheets as of March 31,
1996, and December 31, 1995 respectively. Additionally, TWA
and the Partnership agreed to extend the lease of the MD-82 aircraft six years
beyond the scheduled expiration date (to November 2004) at the current lease
rate of $185,000 per month. On June 30, 1995, TWA filed its prepackaged
reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On August 23,
1995 the reorganization plan which included the foregoing lease modification was
confirmed by the Bankruptcy Court and TWA emerged from bankruptcy. TWA has made
all rental payments, advance repayments and payments of deferred rent when due.
However, there can be no assurance that it will be able to meet its obligations
in the future.
The Partnership recorded $200,000, $2,000,000 and $2,040,000 during
1995, 1994 and 1992 as a provisions for decline in market value of the Lockheed
L-1011 aircraft. These provisions reflected the General Partners' estimate of
the recoverability of the Partnership's investment in this aircraft.
Aeromexico Leases During July 1992, the Partnership re-leased two
McDonnell Douglas DC-9-31 aircraft previously leased to Midway Airlines Inc. to
Aerovias de Mexico, S.A. de C.V. ("Aeromexico"). The leases are operating leases
that require quarterly rental payments, in advance, in the amount of $234,000
per aircraft. The terms of the leases expire on July 6, 1997 and July 23, 1997.
Aeromexico has the right to renew the leases for up to five consecutive one-year
renewal periods for the then fair market rental value.
The DC-9-31 aircraft had originally been acquired in April and March
1990 for purchase prices aggregating $14,295,000. At the time the Partnership
repossessed these two aircraft from Midway, the aircraft were in need of
substantial maintenance work. As a precondition to accepting the aircraft for
lease, Aeromexico required the Partnership to complete the needed maintenance
procedures and also to make certain capital improvements to the aircraft. The
Partnership incurred approximately $5.5 million in completing these maintenance
procedures and capital improvements.
In October 1994, Aeromexico failed to make the quarterly in advance
rental payments for both aircraft. Aeromexico announced it was having financial
and operating problems and, in response, made significant management changes and
began to develop a revised business plan. Aeromexico agreed to and paid monthly
rental payments equal to the monthly equivalent rent ($78,000 per aircraft)
beginning November 1994 in return for a four-month standstill agreement
("Standstill Agreement") from lessors and lenders not to pursue their rights and
remedies with respect to Aeromexico's failure to pay rent
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and other debt due in October 1994. The Standstill Agreement was extended an
additional three months to allow Aeromexico to complete the restructuring
discussed below. Aeromexico made all of its monthly rental payments due and
repaid the October 1994 rent with interest.
Aeromexico has taken certain steps to improve its operating results and
restructure its financial obligations. Aeromexico's commercial bank creditors
converted certain obligations of Aeromexico into equity in Aeromexico and
certain notes due in 1995 were restructured into long term notes. However, the
Aeromexico situation remains complicated by the lack of stability of the Mexican
economy and the Mexican peso.
At December 31, 1994 the Partnership recorded an aggregate of
approximately $300,000 as provisions for decline in market value of aircraft
with respect to the two Aeromexico aircraft.
Kiwi International Air Lines Leases During March and May 1993, the
Partnership leased its two Boeing 727-200 aircraft, which were previously leased
to Continental 727 (non-advanced aircraft) and Dan-Air Services Limited
("Dan-Air") ("727 Advanced Aircraft") to Kiwi International Air Lines, Inc.
("Kiwi"). The leases are operating leases which require monthly rental payments,
in advance, in the amounts of $60,000 (Non-advanced) and $115,000 (Advanced).
The terms of the leases were originally scheduled to expire on April 15, 1998
and June 30, 1998, respectively. During the terms of the leases Kiwi can request
that the aircraft be hushkitted to obtain Stage 3 noise abatement for which the
lease term will be reset to five years with lease payments increasing to
amortize the cost of the hushkitting at the rate of 2% per month. Alternatively,
the Partnership can deem the hushkitting economically infeasible at which point
Kiwi can terminate the leases and return the aircraft. The original leases also
had an annual one month rent abatement feature, which would extend the term of
the leases by a month for each year Kiwi opted for the abatement. Under the
original terms, Kiwi had two one-year renewal options, with rent payable at the
then current fair market rental rate.
The Partnership also received Kiwi stock and rights to warrants in
connection with these leasing transactions. The Partnership is subject to
significant restrictions on its ability to dispose of these securities. Based
upon the price at which Kiwi sold similar securities to unrelated third parties,
the Partnership recorded the securities at a value of $600,000 and began
recognizing the associated income ratably over the lease terms. Of the $600,000,
$81,000 and $75,000 were recognized as income during 1994 and 1993,
respectively. Because of concerns discussed below, the Partnership stopped
amortizing such income in the fourth quarter of 1994. The $600,000 is included
in other assets on the balance sheet.
Kiwi is also obligated to make monthly payments of $250 per flight hour
for maintenance reserve funds administered by the Partnership. The Partnership
is obligated to reimburse Kiwi for specified maintenance costs out of the
reserve funds, upon submission of appropriate evidence documenting the
maintenance costs incurred by Kiwi.
In connection with the delivery of the aircraft the Partnership
expended $2,228,000 with respect to the 727 Advanced aircraft, of which $971,000
was capitalized
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and $1,257,000 represented maintenance costs which were paid out of funds
received in a maintenance settlement with Dan-Air.
During 1994, the Partnership funded approximately $633,000 of costs
related to maintenance of the Kiwi aircraft, $308,000 of which was scheduled to
be repaid by Kiwi over a one-year period. To date, no payments have been made.
In March 1996 Kiwi signed a promissory note scheduling the repayment of this
amount, with interest from February 1996 at 12% per annum, over eighteen months
beginning June 1, 1996.
The Partnership recorded $300,000 and $2,175,000 during 1994 and 1993,
respectively, as a provision for decline in market value of the Boeing 727-200
aircraft which was previously leased to Dan-Air.
Kiwi, as a start-up airline, had continued liquidity concerns that were
worsened by operating problems in early 1995. Kiwi made significant management
changes and has sought to rationalize costs and raise capital. Kiwi elected to
defer January 1995 rent under the previously described rental abatement feature
of the original leases, and Kiwi did not make the rental payments due in
February and March 1995 and did not make maintenance reserve deposits due in
those months.
The Partnership and Kiwi executed lease amendments that modified the
lease terms that enabled Kiwi to defer February's and half of March's rent in
1995. Pursuant to the lease amendments, the deferred rent was repaid over a
nine-month period with 12% interest, which began July 1, 1995. Kiwi did not make
payments towards the maintenance reserves for February, March and April 1995 but
is obligated to fund the related maintenance work in its entirety as it becomes
due. Pursuant to the lease amendments, each of the leases was extended to
December 1999. The lease amendments removed the rental abatement feature of the
original leases.
Based upon the composition of its fleet and FAA mandated deadlines for
compliance with Stage 3 noise reduction standards, management believes that Kiwi
may request that the Partnership hushkit one or both of the 727 aircraft leased
to it by December 31, 1996. If the Partnership elected to complete such work, it
is anticipated that it would be funded from operating reserves and borrowings.
It is estimated that these upgrades would cost $1.9 million for the nonadvanced
aircraft and $3 million for the advanced aircraft. If the Partnership elected
not to complete such work, Kiwi could terminate the leases. See Item 2,
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations", for a discussion of capital requirements.
At March 31, 1996, the Partnership held maintenance deposits
aggregating $2,327,000 with respect to the Kiwi aircraft which is included in
restricted cash on the balance sheet. Kiwi made its February 1996 lease,
deferred rent and maintenance payments late and has requested a similiar
extension of time to make its May 1996 payments. Kiwi's ability to make timely
lease and maintenance reserve payments is uncertain due to its continued
liquidity and capital concerns.
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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 concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber 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
Pegasus Aircraft Partners II, L.P., PaineWebber and the Administrative General
Partners (1) failed to provide adequate disclosure of the risks involved with
each partnership; (2) made false and misleading representations about the safety
of the investments and the partnership's anticipated performance; and (3)
marketed the partnership to investors for whom such investments were not
suitable. The plaintiffs also alleged that following the sale of the partnership
investments PaineWebber and the Administrative General Partner misrepresented
financial information about the partnership's value and performance. The amended
complaint alleged that PaineWebber and the Administrative General Partner
violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the
federal securities laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also sought treble damages
under RICO.
On May 30, 1995, the US 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
have agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and plan of allocation which the parties expect to submit
to the court for its consideration and approval within the next several months.
Until a definitive settlement and plan of allocation is approved by the court,
there can be no assurance what, if any, payment or non-monetary benefits will be
made available to class members who are unitholders in the Partnership.
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
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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 subsequently sought to intervene in that action
and to be named class representatives for a separate subclass that they asked
the Court to establish consisting of investors in the Pegasus partnerships. The
court in the New York Limited Partnership Actions has not yet ruled on their
request.
Three actions were filed in the District Court for Brazoria County,
Texas, relating to the sale and sponsorship of interests in the Partnership and
an affiliated partnership. The complaints make state law claims, specifically,
common law fraud, conspiracy, violations of section 27.01 of the Texas Business
and Commerce Code, fraud in the inducement, negligent misrepresentation,
negligence, breach of fiduciary duty, violations of the Texas Securities Act,
and violations of the Texas Deceptive Trade Practices Act. The plaintiffs seek
unspecified damages, including attorneys' fees, reimbursement for all sums
invested by them in the partnerships, exemplary damages, and treble damages
under the Texas Deceptive Trade Practices Act. All three actions have been
removed to federal court and two have been transferred to the United States
District Court for the Southern District of New York. The third action has been
dismissed with the consent of the parties on the grounds that it is duplicative
of the two actions now before the federal court in New York.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleges, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner could be entitled to
indemnification from the Partnership for expenses and liabilities in connection
with this litigation. The General Partners are unable to determine the effect,
if any, of these actions on the Partnership's financial statements taken as a
whole.
14
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Partnership invests working capital and cash flow from operations
prior to its distribution to the partners in short-term, highly liquid
investments. At March 31, 1996, the Partnership's unrestricted cash and cash
equivalents of $11,838,000 was primarily invested in commercial paper. This
amount was $117,000 less than the Partnership's unrestricted cash and
equivalents at December 31, 1995 of $11,955,000. This decrease in unrestricted
cash was equal to the amount by which the combined total of the quarterly cash
distributions paid to the partners during the quarter, the required quarterly
principal payments on the Partnership's debt, and capitalized expenditures for
aircraft exceeded cash provided by operating activities plus the collection of
amounts previously advanced to lessees during the three months ended March 31,
1996.
Restricted cash increased $223,000 from $2,104,000 at December 31, 1995
to $2,327,000 at March 31, 1996. During 1993, the Partnership leased two Boeing
727-200 aircraft to Kiwi. Under the terms of the leases, Kiwi is obligated to
make monthly payments to maintenance reserve funds administered by the
Partnership. The Partnership is obligated to reimburse Kiwi for specified
maintenance costs out of the reserve funds, upon submission of appropriate
evidence documenting the maintenance costs incurred by Kiwi. Interest earned on
the reserve funds is deposited into the funds and utilized in the same manner as
other payments to the funds. This amount is reflected on the balance sheet both
as restricted cash and as maintenance payable. (See discussion below regarding
Kiwi deferrals.)
Rent and other receivables decreased $578,000 from $2,557,000 at
December 31, 1995 to $1,979,000 at March 31, 1996. This decrease resulted
primarily from the continued repayment of advances and deferrals with
Continental, TWA, Kiwi and Aeromexico.
During December 1992, the Partnership's lease agreements with
Continental with respect to the Partnership's McDonnell Douglas DC-10-10 and
Airbus Industries A300-B4-103 aircraft were amended. Pursuant to the terms of
the amendments, rentals attributable to the period from November 1, 1992 through
February 15, 1993 were deferred. Continental resumed paying rentals on a current
basis beginning February 15, 1993. The deferred rentals are payable, along with
interest at the rate of 8.70% per annum, in 36 equal monthly installments
beginning May 1, 1993. At March 31, 1996, the balance of the deferred rentals
was $62,000.
The Partnership has also made advances to Continental aggregating
$900,000 under the lease agreements with Continental. At March 31, 1996 the
balance of the advances aggregated $229,000. All related payments have been made
when due.
The Partnership's leases with TWA for the Lockheed L-1011 and McDonnell
Douglas MD-82 aircraft were modified and extended during April 1993. Upon
execution of the lease amendments, the Partnership advanced $1,300,000 to TWA to
finance certain major maintenance procedures which had been performed on the two
aircraft. The
15
<PAGE> 17
Partnership is obligated to advance an additional $550,000 if and when
additional maintenance procedures are completed on the Lockheed L-1011 aircraft
during 1995. TWA has agreed to repay these amounts to the Partnership over the
applicable remaining lease terms in equal monthly installments with interest at
a fixed rate of 450 basis points over the equivalent term U.S. treasury
obligations (9.68% and 9.70% for the initial advances). At March 31, 1996, the
balance of the advances to TWA aggregate $689,000.
Other assets decreased $16,000 from $701,000 at December 31, 1995 to
$685,000 at March 31, 1996. This decrease resulted primarily from a decrease in
prepaid expenses.
The Partnership received Kiwi stock and rights to warrants in
connection with the leasing of the two Boeing 727-200 aircraft to Kiwi. The
Partnership is subject to significant restrictions on its ability to dispose of
these securities and has no current plans to dispose of the securities. Based
upon the price at which Kiwi sold similar securities to unrelated third parties,
the Partnership recorded the securities at a value of $600,000 and began
recognizing the associated income ratably over the lease terms. Through
September 30, 1994, the Partnership recognized $156,000 of income with respect
to such securities. Because of Kiwi's operating and liquidity problems, the
Partnership did not recognize income with respect to these securities in 1995
and the quarter ended March 31, 1996.
The payable to affiliates decreased $20,000 from $893,000 at December
31, 1995 to $873,000 at March 31, 1996. The decrease was attributable to the
payment of fees associated with the A-300 Lease Settlement and DC-10
Restructuring offset by the continued deferral of fees earned by the
Administrative General Partner.
In order to finance expenditures made during 1992 and 1993 for the
maintenance work and the capital improvements to the aircraft leased to
Aeromexico and Kiwi and re-leased to TWA, as well as the various advances to
Continental and TWA, the Partnership established two loan facilities which
permit the Partnership to borrow up to $10.5 million. Borrowings, up to the
amounts expended, were made when needed to fund Partnership operations or
distributions. At March 31, 1996, the Partnership borrowings, net of repayments,
totaled $6,159,000. The Partnership will incur additional borrowings if
necessary to fund future advances to lessees as required to finance or
modification enhancements (such as hushkitting) if such investment is necessary
to maintain or enhance the value of the Partnership's assets. The General
Partners expect to repay all related borrowings over the remaining terms of the
Aeromexico, Kiwi and TWA leases and the repayment periods for the various
Continental and TWA advances.
Deferred income was $3,901,000 at March 31, 1996 as compared to
$4,672,000 at December 31, 1995. The decrease was attributable to the
recognition of amounts previously received in connection with the A-300 Lease
Settlement and the DC-10 Restructuring.
During the three months ended March 31, 1996, the Partnership paid cash
distributions pertaining to the fourth quarter of (except the amount due to the
Administrative General Partner which remains unpaid). The quarterly distribution
represented an annualized rate equal to 8.0% of contributed capital ($.40 per
Unit).
16
<PAGE> 18
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 1996 was
paid on April 25, 1996 at an annualized rate equal to 8.0% 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 73% of
the cash distributions paid to the partners for the three months ended March 31,
1996 constituted a return of capital. Also, based on the amount of net income
reported by the Partnership for accounting purposes, approximately 83% of the
cash distributions paid to the partners from the inception of the Partnership
through March 31, 1996 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.
Based upon the operating cash reserves held at March 31, 1996 and the
leases currently in place, the Partnership anticipates being able to maintain
current cash distribution levels through 1996. The Partnership continues to
actively remarket the A-300, which is currently off lease. The A-300 will
require a heavy maintenance check in connection with its remarketing and the
work required is estimated to cost $1,400,000. As part of the A-300 Settlement,
the Partnership received $557,000 settlement in lieu of Continental meeting
certain return conditions required by the lease. Such amount was accounted for
as a reserve for maintenance and will be utilized to fund a portion of such
maintenance. It is anticipated the Partnership will utilize a portion of the
operating reserves to fund the balance of work required. Additionally, the lease
of the DC-10-10 will expire in October 1996, unless renewed. Finally, because of
the need to comply with FAA mandated Stage 3 Noise Reduction regulation, Kiwi
may require the Partnership to hushkit (upgrade to Stage 3) one or both of the
727-200 aircraft leased to Kiwi. If the Partnership elects to do such work,
estimated to cost $1.9 million for the non-advanced aircraft and approximately
$3 million for the advanced aircraft, it will utilize operating reserves and
borrowings. However, there can be no assurance that additional borrowings could
be obtained. If the Partnership elected not to do the work, Kiwi could terminate
the leases. Partnership cash flow would be negatively impacted during any
remarketing period. Additionally, significant costs could be incurred in
redeployment.
RESULTS OF OPERATIONS
The Partnership's net income was $789,000 for the three months ended
March 31, 1996 ("1996 Quarter") as compared to $749,000 for the quarter ended
March 31, 1995 ("1995 Quarter"). Net income per limited partnership unit also
increased from $.10 in the 1995 Quarter to $.11 for the 1996 Quarter.
The increase in the Partnership's net income for the 1996 Quarter
resulted primarily from the recognition of income during the quarter with
respect to the A-300 Lease Settlement (including the income associated with the
two 727 aircraft received in connection with the settlement) and the DC-10
Restructuring offset by an increase in
17
<PAGE> 19
depreciation attributable to the DC-10-10 aircraft (discussed below). (See
"Liquidity and Capital Resources" and Footnote 4 to the Financial Statements,
"Aircraft Leases" for a discussion of Continental.)
Rental income increased by $366,000, or 10% in the 1996 Quarter as
compared to the 1995 Quarter which reflects the difference between the income
recognized with respect to the A-300 Lease Settlement (including the rent
associated with the two 727 aircraft received in the settlement) and DC-10
Restructuring in the 1996 Quarter and the rents recognized in the 1995 Quarter,
which included the DC-10-10 rentals at the original lease rate and the rents
recognized under the A-300 Lease under which rentals of $312,000 were recognized
in January 1995 and reduced rents ($150,000 per month) were recognized in
February and March 1995.
Interest income increased $82,000, or 65%, for the 1996 Quarter in
comparison to the 1995 Quarter. This increase was primarily attributable to the
interest income earned with respect to the cash reserves held by the Partnership
during the 1996 Quarter (substantially provided by the A-300 Lease Settlement
and DC 10-10 Restructuring discussed above).
Depreciation and amortization expense increased $364,000, or 16%, for
the 1996 Quarter in comparison to the 1995 Quarter. The increase was
attributable to the increase in depreciation relating to the DC 10-10 aircraft
(based upon a change in estimate of the aircraft's end of lease residual value)
as well as the depreciation relating to the two 727 aircraft received in the
A-300 Lease Settlement, which were not in place in the 1995 Quarter, offset by a
reduction in depreciation expense in respect to the A-300 which was off lease
during the 1996 Quarter (thus no depreciation was recognized).
Management and re-lease fees for the 1996 Quarter increased by $25,000
or 9% in comparison to the 1995 Quarter primarily because of the increases in
rental income and net income adjusted for depreciation which serve as the bases
upon which management fees are calculated.
Interest expense for the 1996 Quarter decreased by $30,000 or 15% in
comparison to the 1995 Quarter primarily because of an decrease in interest
rates which affected the variable rate note as well as a reduction in the
principal outstanding.
General and administrative expenses increased by $17,000 or 24% in the
1996 Quarter as compared to the 1995 Quarter due to an increase in the level of
certain administrative expenses.
Direct lease expenses increased by $32,000 or 40% in the 1996 Quarter
as compared to the 1995 Quarter due primarily to an increase in insurance
premiums as well as certain storage costs and technical consulting costs related
to the A-300 aircraft.
18
<PAGE> 20
Part II. OTHER INFORMATION
Item 3. 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 concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber 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
Pegasus Aircraft Partners II, L.P., PaineWebber and the Administrative General
Partners (1) failed to provide adequate disclosure of the risks involved with
each partnership; (2) made false and misleading representations about the safety
of the investments and the partnership's anticipated performance; and (3)
marketed the partnership to investors for whom such investments were not
suitable. The plaintiffs also alleged that following the sale of the partnership
investments PaineWebber and the Administrative General Partner misrepresented
financial information about the partnership's value and performance. The amended
complaint alleged that PaineWebber and the Administrative General Partner
violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the
federal securities laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also sought treble damages
under RICO.
On May 30, 1995, the US 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
have agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York to be used to resolve the litigation in accordance with a definitive
settlement agreement and plan of allocation which the parties expect to submit
to the court for its consideration and approval within the next several months.
Until a definitive settlement and plan of allocation is approved by the court,
there can be no assurance what, if any, payment or non-monetary benefits will be
made available to class members who are unitholders in the Partnership.
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
19
<PAGE> 21
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 subsequently
sought to intervene in that action and to be named class representatives for a
separate subclass that they asked the Court to establish consisting of investors
in the Pegasus partnerships. The court in the New York Limited Partnership
Actions has not yet ruled on their request.
Three actions were filed in the District Court for Brazoria County,
Texas, relating to the sale and sponsorship of interests in the Partnership and
an affiliated partnership. The complaints make state law claims, specifically,
common law fraud, conspiracy, violations of section 27.01 of the Texas Business
and Commerce Code, fraud in the inducement, negligent misrepresentation,
negligence, breach of fiduciary duty, violations of the Texas Securities Act,
and violations of the Texas Deceptive Trade Practices Act. The plaintiffs seek
unspecified damages, including attorneys' fees, reimbursement for all sums
invested by them in the partnerships, exemplary damages, and treble damages
under the Texas Deceptive Trade Practices Act. All three actions have been
removed to federal court and two have been transferred to the United States
District Court for the Southern District of New York. The third action has been
dismissed with the consent of the parties on the grounds that it is duplicative
of the two actions now before the federal court in New York.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleges, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner could be entitled to
indemnification from the Partnership for expenses and liabilities in connection
with this litigation. The General Partners are unable to determine the effect,
if any, of these actions on the Partnership's financial statements taken as a
whole.
Item 4. Exhibits and Reports on Form 8-K
(a) None
(b) The Partnership did not file any reports on Form 8-K during
the first quarter of the fiscal year ending December 31, 1996.
20
<PAGE> 22
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 II, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
A General Partner
Date: May 15, 1996 By: /s/ Joseph P. Ciavarella
------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
21
<PAGE> 23
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) Pegasus
Aircraft Partners II LP Form 10-Q and is qualified in its entirety by reference
to such (b) Form 10-Q for the quarter ended March 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 11,838,000
<SECURITIES> 0
<RECEIVABLES> 1,979,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,229,000
<PP&E> 143,207,000
<DEPRECIATION> (82,411,000)<F2>
<TOTAL-ASSETS> 77,625,000
<CURRENT-LIABILITIES> 12,157,000
<BONDS> 4,243,000
0
0
<COMMON> 0
<OTHER-SE> 61,225,000<F1>
<TOTAL-LIABILITY-AND-EQUITY> 77,625,000
<SALES> 0
<TOTAL-REVENUES> 4,135,000
<CGS> 0
<TOTAL-COSTS> 3,087,000
<OTHER-EXPENSES> 87,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,000
<INCOME-PRETAX> 789,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 789,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 789,0000
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0
<FN>
<F1>Partners capital and accumulated earnings and distributions to partners.
<F2>Includes allowances for impairment and other reserves.
<F3>$.11 per unit of limited partnership interest.
</FN>
</TABLE>
