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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) September 30, 1996
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Pegasus Aircraft Partners II, L.P.
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(Exact Name of Registrant as Specified in Charter)
Delaware 0-18387 84-1111757
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(State or Other Jurisdiction (Commission (IRS Employer
Of Incorporation) File Number) Identification No.)
Four Embarcadero Center, Suite 3550, San Francisco, CA 94111
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (415) 434-3900
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N/A
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(Former Name or Former Address, if Changed Since Last Report)
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Item 5 Other Events
During March and May 1993, Pegasus Aircraft Partners II, L.P. (the
"Partnership") leased its two Boeing 727-200 aircraft, to Kiwi International
Air Lines, Inc. ("Kiwi"). The aircraft were originally purchased in 1989
(non-advanced) and 1990 (advanced) for purchase prices of $6,261,000 and
$10,748,000 respectively (including related fees). 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. In 1995, the leases were amended and extended to December 31,
1999. Kiwi is also obligated to make monthly payments of $250 per flight hour
for maintenance reserve funds administered by the Partnership. 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 approximately 2% per month. Alternatively, the Partnership can deem
the hushkitting economically unfeasible at which point Kiwi can terminate the
leases and return the aircraft. An affiliated partnership and affiliates of
the Managing General Partner also own aircraft leased to 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 and $1,257,000 represented maintenance costs which were paid out of
funds received in a maintenance settlement with Dan-Air. Capitalized
improvements of $743,000 were made with respect to the non-advanced aircraft.
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 originally recorded the securities at a value of $600,000. The
securities were valued at $1,000 at September 30, 1996.
During 1994, the Partnership funded approximately $633,000 of costs related to
maintenance of the Kiwi aircraft, including compliance with certain FAA
airworthiness directives, $308,000 of which was scheduled to be repaid by Kiwi
over a one-year period. In March 1996 Kiwi signed a promissory note
("Bellyskin Note") scheduling the repayment of this amount, with interest from
February 1996 at 12% per annum, over eighteen months which began June 1, 1996.
In August 1996, the Partnership paid $1.9 million to hushkit the non-advanced
727 aircraft. The purchase price was funded out of cash reserves previously
generated.
In June 1996, Kiwi agreed with the FAA to ground 25% of its fleet due to
certain pilot training handbook deficiencies. In August 1996, Kiwi and the FAA
resolved the deficiencies and Kiwi returned to full capacity. In addition to
the FAA grounding, Kiwi was also negatively impacted by the market reaction to
the ValuJet incident and as a result, did not meet its financial goals. In
July 1996, an outside institutional investor contributed $4,000,000 in return
for a convertible note due in March 1997, for up to 32%
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of Kiwi's common stock and two seats on Kiwi's Board of Directors. The
investor has options to invest an additional $6,000,000 in convertible
preferred stock which expires in March 1997. Existing shareholders (including
directors and employees) were to be given the opportunity to make additional
investments.
Kiwi requested and was granted by the Partnership a deferral of its August 1996
rental and July 1996 maintenance payments for the advanced aircraft and the
July rental and June maintenance reserves with respect to the non-advanced
aircraft. Kiwi was also unable to make its September rental and August
maintenance payments for each aircraft and was placed in default by the
Partnership
In late September, Kiwi proposed a restructuring of its obligations with
certain creditors, including the Partnership, which the Partnership was
reviewing. On September 30, 1996, Kiwi filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code ("Bankruptcy
Code") and has not made any subsequent payments. Generally, under Section 1110
of the Bankruptcy Code, Kiwi has sixty days from the filing to cure all
arrearages with respect to an aircraft lease or return the aircraft. The Kiwi
leases account for approximately 17% of the Partnership's rental receipts and
the aircraft had net book values aggregating approximately $8,300,000
(including the hushkit). Additionally the unpaid balance of the Bellyskin Note,
plus interest was $290,000 at September 30, 1996. The Partnership currently
holds maintenance deposits aggregating approximately $2.4 million, which the
Partnership believes will not be sufficient to complete work required on the
aircraft and the related engines to meet lease return conditions and make the
aircraft marketable. Kiwi indicated that it is going to reduce its fleet in
the short term, and it is likely that Kiwi will return one or both of the
Partnership's aircraft. Further, Kiwi told the Partnership that, absent debtor
in possession financing, it may cease operations. On Tuesday October 15,1996,
Kiwi ceased scheduled flight operations while still exploring financial
alternatives. The court granted the Partnership the right to retrieve its
aircraft for safekeeping. It is likely that the Partnership will incur
significant costs to re-lease the aircraft. Further, there could be a
significant delay before the aircraft are redeployed. The long term impact of
the Kiwi bankruptcy on the Partnership's ability to realize upon the value of
its aircraft is not determinable at this time.
In mid-1996, Trans World Airlines Inc. ("TWA") offered to return the L-1011
aircraft it leases from the Partnership. The lease, which provided for monthly
rental of $130,000, was originally scheduled to expire in September 1998. TWA
agreed to pay the Partnership $2,846,000, which represents rents due under the
remaining term of the lease, discounted at 5% plus $3,000,000 as an economic
settlement for non-compliance with certain lease return conditions. The
aircraft was returned and the amounts were paid on October 16, 1996. The
Partnership is reviewing alternatives for the use of the proceeds received,
including the use of the economic settlement to purchase an additional
aircraft. It is likely that the Partnership will lease the engines that were a
part of the L-1011 separately and sell the airframe for parts.
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The L-1011 aircraft was originally purchased in 1990 for $18,205,000 (including
related fees) and had a net book value of $6,176,000 at September 30, 1996.
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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.
Administrative General Partner
Dated: October 16, 1996 By: /s/ Joseph P. Ciavarella
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Joseph P. Ciavarella
Vice President, Treasurer and
Chief Financial and Accounting Officer
