<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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) May 23, 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 Juristiction (Commission (IRS Employer
of Incorporation) File Number) Identification No)
Four Embarcadero Center 35th Floor, San Fransisco, California 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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(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS
On May 23, 1996, the Partnership mailed its 1995 Annual Report to
holders of limited partnership interest {See Exhibit 7(c)(19)}.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
(19) Annual Report for the year ended December 31, 1995 provided to
owners of limited partnership interests.
<PAGE> 4
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 23, 1996 By: /s/ Joseph P. Ciavarella
----------------------------
Joseph P. Ciavarella
Vice President, Treasurer and Chief
Financial and Accounting Officer
<PAGE> 5
EXHIBIT INDEX
Exhibit No. Description
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19 Annual Report for the year ended December 31, 1995
<PAGE> 1
[PEGASUS AIRCRAFT PARTNERS II, L.P.- LOGO]
1995
ANNUAL
REPORT
<PAGE> 2
PEGASUS AIRCRAFT PARTNERS II, L.P.
CONTENTS
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PRESIDENTS' LETTER
THREE
ASSET ACTIVITY
FIVE
FINANCIAL HIGHLIGHTS
SIX
ESTIMATED ANNUAL VALUATIONS
SEVEN
LOOKING AHEAD
NINE
SUMMARY OF AIRCRAFT PORTFOLIO
TEN
ANSWERS TO FREQUENTLY ASKED QUESTIONS
TWELVE
FINANCIAL STATEMENTS
THIRTEEN
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIRTY
PARTNERSHIP DIRECTORY
THIRTY-FIVE
<PAGE> 3
PEGASUS AIRCRAFT PARTNERS II, L.P.
PRESIDENTS'
---------------
LETTER
APRIL 30, 1996
Dear Limited Partners:
Enclosed is the Annual Report for the year ended December 31, 1995 for Pegasus
Aircraft Partners II, L.P.
The Partnership's revenues for the year ended December 31, 1995 (consisting
primarily of rents and interest income) were approximately $14.6 million versus
$16.0 million for 1994. Net income for the year was approximately $2.0 million
($0.28 per $20.00 Unit) versus approximately $1.4 million ($0.19 per $20.00
Unit) for 1994. Revenues for 1995 were down versus 1994 primarily due to the
decline in lease revenue from the Airbus A-300. Net income was up despite the
reduction in revenue due to the lack of depreciation expense relating to the
Airbus A-300 and less of a provision for the decline in the market value of the
Partnership's aircraft in 1995 versus 1994. The $3.8 million Airbus A-300 lease
termination payment, along with the current value of the two Boeing 727s
received from Continental, were primarily accounted for as a partial recovery of
the cost incurred in acquiring the aircraft; therefore, they did not
significantly impact revenues or income.
The Partnership declared cash distributions of $1.60 per $20.00 Unit in 1995,
representing an annual distribution rate of 8.0% of contributed capital.
Cumulative cash distributions through year-end 1995 totaled $11.62 per $20.00
Unit for those investors admitted in the first closing. Under current market
conditions, the ultimate value received at the time of the sale of the aircraft
will generally be less than the original cost. Therefore, at least a portion of
each distribution during the life of the Partnership will constitute a return of
capital.
Using both the present value of lease payments under existing leases and
estimated aircraft residual values, the Partnership's aircraft portfolio was
independently appraised as of December 31, 1995 at a value of $70.1 million,
down from $86.5 million at year-end 1994. Based upon an assumed liquidation at
the appraised value of the Partnership's aircraft plus the remaining net assets
of the Partnership, the 1995 year-end estimated annual valuation is $9.65 per
$20.00 Unit, down from $10.91 per $20.00 Unit at year-end 1994. Appraised
residual values of the aircraft, excluding leases, increased from last year, in
part due to two Boeing 727 aircraft received as partial consideration for
cancelling the A-300 Continental lease. The present value of future rents
declined because of the receipt of rents and the cancellation of the A-300
lease, although this decline was partially offset by the present value of the
rents for the two Boeing 727s. As described in the "Estimated Annual Valuations"
section of this report (page seven), there can be no assurance that the
Partnership would receive the appraised values if the portfolio of aircraft were
liquidated today.
As discussed in the 1995 third quarter report, due to uncured defaults by
Akdeniz Air Mediterranean ("Akdeniz"), the Partnership was forced to repossess
its Airbus A-300. Also, during the third quarter of 1995, the Partnership and
Continental settled the Airbus A-300 lease and restructured the McDonnell
Douglas DC-10 lease. As settlement for the Airbus A-300 lease, the Partnership
received from Continental $3.8 million and title to two Boeing 727 aircraft,
currently on lease to Continental. In exchange for amending the lease expiration
date for the McDonnell Douglas DC-10 to October 31, 1996 from May 31, 1997 and
reducing the monthly rental payments from $252,000 to $135,000, the Partnership
received a cash payment of $3.1 million from Continental. This payment will be
recognized ratably over the new lease term.
The Partnership continues to seek a new lessee for the Airbus A-300. However,
due to weak demand for such aircraft, it may take some time for the Partnership
to identify a new lessee, and, if a lessee is found, the lease rate would likely
be substantially less than under the Continental lease.
The number of used aircraft available for sale or lease at year-end 1995 fell to
473 from 534 last year. The number of used aircraft is representative of those
aircraft that are either currently parked or readily available but
THREE
<PAGE> 4
does not include fleet retirements announced or known to the industry. The
number of narrow-bodies available for sale or lease declined by 12.8% in 1995
while the number of wide-bodies available for sale or lease, such as the Airbus
A-300 owned by the Partnership, declined by only 9.3%.
In general, the U.S. airline industry enjoyed a continuing turnaround in 1995,
with net earnings exceeding $2.0 billion. This represents the first year of
positive earnings since 1989 and tops the previous record set in 1988. The
airlines benefited during 1995 from previously implemented cost cutting
programs, increases in passenger traffic, relatively stable fares and an
increasing load factor (the measure of passengers flying as compared to the
number of available seats).
In the context of strong industry performance, the Partnership's lessees
experienced varying results. Continental Airlines recovered from its failed Cal
Lite low fare initiative and reported earnings of $224 million in 1995
(including a $30 million gain relating to a joint venture transaction) versus a
loss of $613 million in 1994 (including non-recurring charges of $447 million).
Continental's revenues remained relatively stable in 1995. TWA successfully
emerged from its prepackaged bankruptcy in August 1995 and reported a net loss
of $227 million in 1995 (including a $58 million non-cash expense related to
distribution of stock to employees and a $144.4 million extraordinary gain)
versus a net loss of $436 million in 1994 (including a $2 million extraordinary
charge). TWA's revenues were relatively unchanged in 1995. USAir reported 1995
net income of $119 million versus a net loss of $685 million in 1994 (including
a charge of $254.5 million). USAir's revenues increased slightly in 1995 and the
company continues to struggle with one of the industry's higher cost structures.
Both USAir and TWA also continue to face significant competition from lower fare
carriers. Kiwi, an employee owned company, also was buoyed by the industry
fundamentals and is reported to have achieved a breakeven year in 1995. However,
Kiwi has to date been unable to attract additional outside capital. Aeromexico
successfully completed a significant financial restructuring in 1995. With
relatively flat revenues, Aeromexico's net loss for 1995 narrowed to
approximately $18 million from approximately $441 million in 1994 (the company
benefitted significantly in 1995 from a gain in monetary position of
approximately $208 million).
The amount of future cash distributions will depend on the ability of the
Partnership's lessees to meet their obligations to the Partnership, particularly
Kiwi, on the Partnership's ability to re-lease the Airbus A-300 and the renewal
or re-marketing of the McDonnell Douglas DC-10 at its October 1996 lease
expiration. The Partnership distributed $0.40 per $20.00 Unit for the first
quarter of 1996, which was paid in April 1996. Including this distribution,
cumulative distributions to date for those investors admitted in the first
closing total $12.02 per $20.00 Unit.
If you have any questions, please call the Partnership at (800) 234-7342.
Sincerely,
/s/ Richard S. Wiley /s/ Clifford B. Wattley
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Richard S. Wiley Clifford B. Wattley
President President
Pegasus Aircraft Management Corporation Air Transport Leasing, Inc.
FOUR
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PEGASUS AIRCRAFT PARTNERS II, L.P.
ASSET
------------
ACTIVITY
As part of TWA's restructuring program announced in October 1994, the
Partnership agreed to a partial deferral of lease payments with respect to the
L-1011 and the MD-82, which have monthly lease payments of $130,000 and
$185,000, respectively. Both rents were reduced from November 1994 through April
1995. TWA began repaying the deferred rents May 1, 1995 at an interest rate of
12%. The lease term for the MD-82 has also been extended by 72 months.
Kiwi did not pay to the Partnership its regularly scheduled January, February or
March 1995 rent. Under the terms of the original leases, Kiwi had the option of
deferring the payment of one month's rent per twelve months to the end of the
lease term and it exercised the option relative to the January rents. The
Partnership and Kiwi agreed to defer February's and half of March's rent and
Kiwi agreed to extend both leases to December 1999. Kiwi has repaid all of the
1995 deferred rent with interest. Kiwi was late in making its February and March
1996 lease payments. Kiwi, like all airlines, will be required to have 50% of
its fleet achieve Stage III noise standards by December 31, 1996. To comply, it
is likely that Kiwi will request the Partnership to hushkit one or both of the
aircraft the Partnership leases to Kiwi. If the Partnership elects not to
hushkit an aircraft, Kiwi could return the aircraft to the Partnership and the
Partnership would need to find a new lessee.
The Partnership and Continental agreed to amend the lease expiration date for
the McDonnell Douglas DC-10 to October 31, 1996 from May 31, 1997. In addition,
the Partnership agreed to reduce the monthly lease payments from $252,000 to
$135,000 and received a cash payment of $3.1 million from Continental for
agreeing to the reduction in rate and shortening the lease.
In addition, Continental and the Partnership agreed to an early termination of
the lease for the Airbus A-300 and subsequently completed settlement
negotiations. The Partnership received a cash payment of $3.8 million and title
to two Boeing 727 aircraft, currently on lease to Continental.
In June 1995, after recovering the Airbus A-300 from Continental, the
Partnership entered into a lease agreement with Akdeniz for an average monthly
rental payment of $117,000. The Partnership repossessed the aircraft during the
fourth quarter and is currently evaluating its legal options against Akdeniz
regarding payment of outstanding amounts due, although the timing and actual
recovery of additional amounts is uncertain. The Partnership is seeking a new
lessee for the Airbus A-300.
FIVE
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PEGASUS AIRCRAFT PARTNERS II, L.P.
FINANCIAL
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HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31 OR FOR THE YEAR ENDED DECEMBER 31
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1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total Rental Revenues $14,026 $15,537 $14,985 $ 14,556 $ 15,225
Net Income (Loss) 2,019 1,413 1,549 1,949 (2,616)
PER UNIT RESULTS
Net Income (Loss) 0.28 0.19 0.21 0.27 (0.36)
Distributions(1) 1.60 1.60 1.60 1.90 1.85
Weighted Average
Cash Flow from
Operating Activities(2) 2.40 1.94 1.48 1.46 2.26
FINANCIAL CONDITION
Total Assets 80,799 86,051 95,842 101,690 112,119
Total Long-Term Debt 6,638 7,382 7,735 4,000 --
Total Partners' Equity(3) 63,367 73,073 83,385 93,561 105,535
</TABLE>
(1) Distribution amounts are reflected during the period in which the cash for
the distributions was generated and a portion of each distribution is a
return of capital. Distributions declared in a fourth quarter of a year are
reflected in that year, although actually paid in January of the following
year. Distribution amounts shown are applicable to limited partners admitted
in the initial closing.
(2) Cash generated from operating activities before the net effect of advances
and repayments of advances to lessees, capital improvements to aircraft,
debt service, the funding of the cash collateral account established with
respect to the tax benefit transfer lease with USAir and distributions to
partners.
(3) Total Partners' Equity is reduced annually by the amount that distributions
exceed net income.
SIX
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PEGASUS AIRCRAFT PARTNERS II, L.P.
ESTIMATED
---------------------
ANNUAL VALUATIONS
At year-end 1995, the Partnership engaged an independent appraisal firm to
estimate at year-end 1995 the aircraft's value using existing lease rates and
forecasts of residual values for the aircraft at the end of each of the leases.
The appraiser assumed an inflation rate of 3.5% per annum and discounted future
cash flows at 10% to obtain the valuation at year-end 1995. Appraisals of
aircraft are only estimates of current values and involve many assumptions.
There are no assurances that the Partnership could receive an amount equal to
these appraised values now or when the Partnership ultimately sells the
aircraft. The ultimate residual values of the aircraft depend heavily on, among
other factors, the condition of the aircraft, the then cost of new aircraft as
compared to used aircraft, rates of inflation and supply and demand of used
aircraft at the time they are sold.
Once the appraised values were provided to the General Partners, the General
Partners calculated an estimated year-end value per Unit assuming a liquidation
at the appraised values and taking into account the allocation provisions of the
Partnership Agreement. Thus, the estimated year-end valuation represents the net
book value of the Partnership's assets, adjusted for the appraised values, net
of certain liquidation expenses. The General Partners then calculated the
estimated annual valuation allocable to each Partnership Unit, but did not take
into account any discount to reflect the fact that there is no public market for
the Units. As of December 31, 1995, the estimated annual valuation was $9.65 per
$20.00 Unit, which is a decline of $1.26 from the year-end 1994 estimated annual
valuation of $10.91 per $20.00 Unit. There can be no assurance that the
Partnership would receive the appraised values for the aircraft if liquidated
today. Also, the estimated annual valuation does not necessarily represent the
amount of benefits an investor will realize if an investor continues to hold
Units through the life of the program.
The 1995 estimated annual valuation of $9.65 is comprised of two components:
$4.55 per Unit is the estimated residual value of the aircraft and $5.10 per
Unit is the present value of the lease payments, net of the liquidation of the
Partnership's liabilities. The reduction in the estimated annual valuation from
1994 is primarily attributable to the distribution to limited partners of cash
generated in 1995 (which was part of the 1994 estimated annual valuation).
As you are aware, the Partnership Units were designed for long-term investment.
While the values for most other securities are generally obtained by looking at
market trading prices as quoted on the stock exchanges, the Units are not traded
on any organized stock exchange and only a limited number of shares change hands
during the year. As a result, prices obtained from isolated secondary market
transactions may not be a reliable indicator of the value of a Unit in the
Partnership.
The General Partners are aware that, pursuant to the regulations of the Internal
Revenue Service (the "IRS"), custodians of Individual Retirement Accounts
("IRAs") annually provide to the IRS and IRA holders year-end estimated values
for securities held in their clients' IRA accounts. Some custodians may choose
to meet this obligation by obtaining estimated values of limited partnership
interests from a third party valuation firm, which estimates may differ from the
estimated annual valuation reported in this Annual Report due to, among other
things, differences in methodology. Further, independent valuation firms may
discount their values to account for a lack of marketability, lack of control
and other relevant factors to arrive at their third party estimated values.
Investors should discuss with their custodian any questions they have about
estimates of value communicated by that custodian.
SEVEN
<PAGE> 8
PEGASUS AIRCRAFT PARTNERS II, L.P.
SUMMARY OF APPRAISED VALUES OF AIRCRAFT PORTFOLIO
-------------------------------------------------
AS OF DECEMBER 31, 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
Estimated
Estimated + Present Value = Total
Current Acquisition Residual of Lease Appraised
Aircraft Lessee Costs(1) Value(3) Payments(3) Value
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<S> <C> <C> <C> <C> <C>
MCDONNELL Aeromexico
DOUGLAS DC-9 Airlines $ 8.9 $ 2.5 $ 1.4 $ 3.9
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MCDONNELL Aeromexico
DOUGLAS DC-9 Airlines 8.9 2.5 1.4 3.9
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MCDONNELL Continental
DOUGLAS DC-10 Micronesia 18.3 6.2 1.3 7.5
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MCDONNELL
DOUGLAS MD-81(2) USAir, Inc. 10.0 3.7 2.6 6.3
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MCDONNELL Trans World
DOUGLAS MD-82 Airlines, Inc. 21.0 4.1 13.0 17.1
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AIRBUS INDUSTRIE(5) Currently
A-300 off lease 28.1 7.6 -- 7.6
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LOCKHEED Trans World
L-1011 Airlines, Inc. 17.7 3.1 3.7 6.8
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BOEING 727-200 Kiwi International
ADVANCED Air Lines, Inc. 11.7 1.2 4.5 5.7
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BOEING 727-200 Kiwi International
NON-ADVANCED Air Lines, Inc. 7.0 0.5 2.4 2.9
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BOEING 727-200(4) Continental
ADVANCED Airlines, Inc. 4.5 1.5 2.9 4.4
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BOEING 727-200(4) Continental
ADVANCED Airlines, Inc. 4.1 2.1 1.9 4.0
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1995 TOTAL $ 140.2(6) $ 35.0 $ 35.1 $ 70.1
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1994 TOTAL $ 131.6 $ 30.2 $ 56.3 $ 86.5
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</TABLE>
(1) Acquisition costs do not include acquisition-related fees of $3.0 million
paid to the General Partners. The amounts shown include capital expenditures
of $26,000, $0.3 million and $2.2 million incurred during 1995, 1994 and
1993, respectively. (Such amounts include the Boeing 727-200 advanced.)
(2) The aircraft is owned 50% by the Partnership. The remaining 50% is held by
an affiliated partnership, Pegasus Aircraft Partners, L.P.
(3) To calculate the present value, a 10% discount was applied to the future
lease payments and to the estimated residual value at the end of the current
lease term.
(4) The Partnership received these aircraft in 1995 as a part of the Airbus
A-300 settlement with Continental. Acquisition costs represent appraised
value at the time the Partnership took title. Reduction in 12/31/95
appraised value represents the effect of one month's lease payment.
(5) Aircraft is off lease. Appraised value represents approximate current market
value unencumbered by lease and does not include the estimated $1.4 million
in maintenance costs likely to be incurred during 1996.
(6) Difference between 1995 and 1994 is primarily a result of the two Boeing
727 aircraft described in footnote 4.
EIGHT
<PAGE> 9
PEGASUS AIRCRAFT PARTNERS II, L.P.
LOOKING
-------------
AHEAD
As previously discussed, the Partnership's Airbus A-300 was off lease at
December 31, 1995 and the Partnership is currently re-marketing the aircraft.
The Partnership will likely incur an estimated expense of $1.4 million for a
heavy maintenance check prior to delivery of the Airbus A-300. As settlement for
the A-300 lease, the Partnership received from Continental a cash payment of
$3.7 million and title to two Boeing 727s on lease to Continental.
Of the remaining ten aircraft owned by the Partnership, nine have leases
scheduled to expire between 1998 and 2004 and one aircraft, the McDonnell
Douglas DC-10, has a lease with Continental Micronesia scheduled to expire in
October 1996, unless renewed. As consideration for the restructuring of the
lease for this aircraft, the Partnership received a cash payment of $3.1
million. The Partnership is currently exploring renewal and other opportunities
with respect to this aircraft.
Because of the need to have 50% if its fleet meet Stage III aircraft noise
levels by year-end, Kiwi may request that the Partnership hushkit (upgrade to
Stage III) one or both of the Boeing 727 aircraft leased to Kiwi. If requested
by Kiwi and agreed to by the Partnership, the hushkitting is expected to cost
the Partnership approximately $1.9 million for the non-advanced aircraft and
$3.0 million for the advanced aircraft. If the Partnership elects not to hushkit
the aircraft, Kiwi can return the aircraft and the Partnership would need to
find a new lessee.
The timing and expenses associated with the re-marketing of the Partnership's
Airbus A-300 and the possible re-marketing of the McDonnell Douglas DC-10, the
potential hushkitting of the Kiwi aircraft and Kiwi's continued liquidity
concerns could all impact the Partnership's future cash flow. As a result,
future cash distributions to partners, which are paid out of cash flow from
operations, will continue to be determined on a quarter by quarter basis. The
distribution for the first quarter of 1996, paid on April 25, 1996, was $0.40
per Unit, or an annualized rate of 8% of contributed capital.
NINE
<PAGE> 10
PEGASUS AIRCRAFT PARTNERS II, L.P.
SUMMARY OF
--------------------
AIRCRAFT PORTFOLIO
AS OF DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1995 CURRENT
PARTNERSHIP ACQUISITION APPRAISED LEASE
MANUFACTURE ACQUISITION COST(1) VALUE(2) ORIGINATION
CURRENT LESSEE AIRCRAFT TYPE DATE DATE ($ MILLIONS) ($ MILLIONS) DATE
<S> <C> <C> <C> <C> <C> <C>
AEROVIAS DE MEXICO McDonnell Douglas
S.A. DE C.V DC-9-31 1970 1990 $ 8.9 $ 3.9 1992
AEROVIAS DE MEXICO McDonnell Douglas
S.A. DE C.V DC-9-31 1971 1990 8.9 3.9 1992
CONTINENTAL McDonnell Douglas
MICRONESIA, INC DC-10-10 1973 1989 18.3 7.5 1989
Currently Airbus Industrie
off lease A-300-B4-103 1979 1990 28.1 7.6 (10)
KIWI INTERNATIONAL Boeing 727-200
AIR LINES, INC (Non-Advanced) 1970 1989 7.0 2.9 1993
KIWI INTERNATIONAL Boeing 727-200
AIR LINES, INC (Advanced) 1973 1990 11.7 5.7 1993
CONTINENTAL Boeing 727-200(11)
AIRLINES, INC (Advanced) 1973 1995 4.5 4.4 1995
CONTINENTAL Boeing 727-200(11)
AIRLINES, INC (Advanced) 1973 1995 4.1 4.0 1995
TRANS WORLD McDonnell Douglas
AIRLINES, INC MD-82 1983 1989 21.0 17.1 1989
TRANS WORLD Lockheed
AIRLINES, INC L-1011 1974 1990 17.7 6.8 1990
USAIR, INC McDonnell Douglas
MD-81(5) 1982 1989 10.0 6.3 1989
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$ 140.2 $70.1
</TABLE>
(1) Acquisition costs do not include acquisition-related fees of $3.0 million
paid to the General Partners. The amounts shown include capital expenditures
of $26,000, $0.3 million and $2.2 million incurred during 1995, 1994 and
1993, respectively. (Such amounts include the two Boeing 727 advanced
received in connection with the A-300 settlement.)
(2) The December 1995 appraised values were determined by an independent
aircraft appraisal firm. It should be noted that appraisals are only
estimates of value and should not be relied on as measures of realizable
value.
(3) Lease expiration dates do not include renewal options.
(4) Cumulative flight cycles and cumulative flight hours are current as of
December 1995 except with respect to the USAir MD-81,
which is as of February 2, 1996 and the Aeromexico DC-9 aircraft, which are
as of February 4, 1996. This information as well as the anticipated
prospective utilization of the aircraft under its lease and the age of the
aircraft are significant in determining the status of the aircraft vis a vis
compliance with aging aircraft Airworthiness Directives issued by the FAA.
The cumulative flight cycle thresholds are as follows: Boeing 727-60,000;
Boeing 737-75,000; Boeing 747-20,000; McDonnell Douglas DC9-100,000;
McDonnell Douglas MD80-75,000 and the McDonnell Douglas DC10-42,000. The
cycle aging modifications are not expected to be due to be performed until
approximately the end or beyond the end of each of the leases. The aircraft
age threshold is 20 years.
(5) The aircraft is owned 50% by the Partnership. The remaining 50% is held by
an affiliated partnership, Pegasus Aircraft
TEN
<PAGE> 11
PEGASUS AIRCRAFT PARTNERS II, L.P.
<TABLE>
<CAPTION>
CURRENT TOTAL LEASE MAINTENANCE
ANNUAL CURRENT PAYMENTS COST INCURRED STAGE OF
LEASE LEASE RECEIVED BY THE PARTNERSHIP NOISE CUMULATIVE CUMULATIVE
PAYMENTS EXPIRATION FROM INCEPTION FROM INCEPTION ABATEMENT FLIGHT FLIGHT
($ MILLIONS) DATE(3) THROUGH 12/31/95(6) THROUGH 12/31/95 COMPLIANCE HOURS(4) CYCLES(4)
<S> <C> <C> <C> <C> <C> <C>
$0.9 1997 $4.1 $0.5 Stage II 56,919 54,423
0.9 1997 4.0 1.1 Stage II 62,232 59,680
1.6 1996 19.3(12) - Stage III 73,422 26,771
- - 17.8(13) - Stage III 46,107 19,527
0.7 1999 3.9 0.4 Stage II 71,246 52,524
1.4 1999 8.4 0.0 Stage II 55,574 28,797
1.0 1999 0.1 0.0 Stage II 66,608 47,954
1.0 1998 0.1 0.0 Stage II 66,061 47,980
2.2 2004(8) 13.9 0.0 Stage III 38,455 19,940
1.5 1998 12.8 0.0 Stage III 60,605 22,694
1.2 1998(9) 7.6 0.0 Stage III 38,405 35,312
</TABLE>
- --------------------------------------------------------------------------------
Partners, L.P. Acquisition cost, 1995 appraised value and current annual
lease payment reflect 50% interest.
(6) Such amounts reflect all rents received in respect to the referenced
aircraft.
(7) The current lease origination date represents either the date that the
aircraft was delivered to the current lessee or the date that the
Partnership assumed the lease from the prior owner.
(8) Reflects lease extension for six years at current lease rate pursuant to
overall deferral agreements with TWA.
(9) If USAir does not renew the lease for an initial three year renewal period,
the Partnership is entitled to a lease termination payment.
(10) Aircraft is off lease. Appraised value represents approximate current
market value unencumbered by lease.
(11) The Partnership received these aircraft as a part of the Airbus A-300
settlement with Continental. Acquisition costs represent appraised value at
the time the Partnership took title. Reduction in 12/31/95 appraised value
represents the effect of one month's lease payment.
(12) Includes rentals earned through 12/31/95 under generally accepted
accounting principles in connection with the DC-10 lease restructuring.
(13) Reflects rentals earned through 12/31/95 under generally accepted
accounting principles in connection with the A-300 lease settlement and
excludes amounts accounted for under the cost recovery method.
ELEVEN
<PAGE> 12
PEGASUS AIRCRAFT PARTNERS II, L.P.
ANSWERS TO FREQUENTLY
-------------------------
ASKED QUESTIONS
1. WHY IS THE ESTIMATED ANNUAL VALUATION OF MY INVESTMENT IN THE PARTNERSHIP
LOWER THAN LAST YEAR?
The primary reason for lower estimated valuations at year-end 1995 is that
during the year, investors received distributions, part of which were deemed to
be a return of capital.
2. HOW IS AN INVESTOR'S ORIGINAL CAPITAL RETURNED?
Because aircraft are depreciating assets in the current market and are expected
to be in the foreseeable future, at least a portion of the cash distributions to
a limited partner paid from lease revenues reflects a return of capital. Thus,
original capital is returned gradually over time, as part of each quarterly cash
distribution. The total return to an investor will depend on lease renewal
rates, lease terms, aircraft sales proceeds and other factors and cannot be
determined until the dissolution of the Partnership.
3. WHY ARE THE PRICES THAT I COULD RECEIVE ON THE SECONDARY MARKET BELOW THE
ESTIMATED VALUE OF MY INVESTMENT IN THIS PARTNERSHIP?
The secondary market is not an organized market or exchange, but a way that
investors might sell their investment if they have to prior to the liquidation
of the Partnership. Limited Partnership units do not trade in the same manner or
to the same extent as equity securities, and secondary market prices generally
are not a reliable indicator of the value of an investment in a limited
partnership. The lack of an organized market for limited partnership interests
complicates efforts to report valuation information for these investments. Thus,
these estimates are often based on estimates of the future performance of the
aircraft leases and the liquidation value of the aircraft, which can be
difficult to assess. In addition, there are currently more potential sellers
than buyers, so prices have remained low. Because of this imbalance, the resale
process is not considered to be an efficient marketplace. That is, the prices
paid typically do not reflect the estimated value of the underlying assets if
held to maturity, but are instead the result of sellers who are willing to
accept low prices because of their immediate need for liquidity.
4. HOW MUCH LONGER DO YOU ANTICIPATE THE PARTNERSHIP TO BE IN EXISTENCE?
The portfolio of aircraft or individual aircraft will be sold when the General
Partners feel it is in the best interest of the Partnership to do so, subject to
the existing lease and resale market. Depending on the creditworthiness of a
lessee, an aircraft with a lease in place may be more valuable than one without.
The General Partners still believe 1997-2001 to be a good estimate although,
with current market conditions, the latter part of that time frame is more
likely. The Partnership will be liquidated when all aircraft are sold, either
individually or as a portfolio, the business is concluded and final
distributions have been made.
TWELVE
<PAGE> 13
PEGASUS AIRCRAFT PARTNERS II, L.P.
FINANCIAL
-------------
STATEMENTS
BALANCE SHEETS
FOURTEEN
STATEMENTS OF INCOME
FIFTEEN
STATEMENTS OF PARTNERS' EQUITY
SIXTEEN
STATEMENTS OF CASH FLOWS
SEVENTEEN
NOTES TO FINANCIAL STATEMENTS
EIGHTEEN
REPORT OF INDEPENDENT ACCOUNTANTS
TWENTY-NINE
THIRTEEN
<PAGE> 14
PEGASUS AIRCRAFT PARTNERS II, L.P.
BALANCE SHEETS
--------------
(IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1995 1994
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 4) $11,955 $ 4,513
Restricted cash (Notes 1 and 5) 2,104 1,821
Rent and other receivables (Note 5) 2,557 3,569
Aircraft, net (Notes 5 and 9) 63,482 75,690
Other assets 701 757
- -------------------------------------------------------------------------------------------------------------------
Total Assets $80,799 $86,350
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 148 $ 90
Payable to affiliates (Note 7) 893 451
Interest payable 46 48
Maintenance reserves payable (Notes 1 and 5) 2,104 1,436
Notes payable (Note 6) 6,638 7,382
Deferred income (Note 5) 4,672 939
Distributions payable to partners 2,931 2,931
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 17,432 13,277
- -------------------------------------------------------------------------------------------------------------------
CONTINGENCIES (Note 5)
PARTNERS' EQUITY:
General Partners (816) (719)
Limited Partners (7,255,000 units outstanding
in 1995 and 1994) 64,183 73,792
- -------------------------------------------------------------------------------------------------------------------
Total Partners' Equity 63,367 73,073
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Partners' Equity $80,799 $86,350
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
FOURTEEN
<PAGE> 15
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME
====================
(IN THOUSANDS, EXCEPT UNIT DATA AND PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
REVENUE:
Rentals from operating leases $ 14,026 $ 15,537 $ 14,985
Interest 601 408 341
Other -- 81 812
- -------------------------------------------------------------------------------------------------------------------
14,627 16,026 16,138
- -------------------------------------------------------------------------------------------------------------------
EXPENSES:
Depreciation and amortization 9,662 9,716 10,023
Provision for decline in market
value of aircraft (Note 5) 450 2,600 2,175
Management and re-lease fees (Note 7) 1,162 1,140 945
Interest 839 754 611
General and administrative (Note 7) 298 237 246
Direct lease 185 166 148
Aircraft maintenance and storage (Note 7) 12 -- 441
- -------------------------------------------------------------------------------------------------------------------
12,608 14,613 14,589
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,019 $ 1,413 $ 1,549
- -------------------------------------------------------------------------------------------------------------------
NET INCOME ALLOCATED:
To the General Partners $ 20 $ 14 $ 15
To the Limited Partners 1,999 1,399 1,534
- -------------------------------------------------------------------------------------------------------------------
$ 2,019 $ 1,413 $ 1,549
- -------------------------------------------------------------------------------------------------------------------
NET INCOME PER LIMITED PARTNERSHIP UNIT $ .28 $ .19 $ .21
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 7,255,000 7,255,000 7,255,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
FIFTEEN
<PAGE> 16
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF PARTNERS' EQUITY
==============================
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31 1995, 1994 AND 1993
----------------------------------------------------
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
<S> <C> <C> <C>
Balance, December 31, 1992 $ (514) $ 94,075 $ 93,561
Net income 15 1,534 1,549
Distributions to partners declared (117) (11,608) (11,725)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 (616) 84,001 83,385
Net income 14 1,399 1,413
Distribution to partners declared (117) (11,608) (11,725)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 (719) 73,792 73,073
Net income 20 1,999 2,019
Distributions to partners declared (117) (11,608) (11,725)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ (816) $ 64,183 $ 63,367
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
SIXTEEN
<PAGE> 17
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
========================
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,019 $ 1,413 $ 1,549
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,662 9,716 10,023
Provision for maintenance costs and decline
in market value of aircraft 450 2,600 2,175
Maintenance funds received from lessee 557 - -
Incurrence of maintenance costs previously provided for - - (1,257)
Income from maintenance settlement - - (737)
Income from securities received in leasing transaction - (81) (75)
Change in assets and liabilities:
Rent and other receivables 590 34 (553)
Other assets 56 76 86
Accounts payable and accrued expenses 58 35 (93)
Deferred income 3,733 70 (383)
Payable to affiliates 442 355 76
Interest payable (2) 6 20
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,565 14,224 10,831
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft costs (26) (325) (2,346)
Lease settlement proceeds accounted for under the
cost recovery method 1,565 - -
Advances to lessees - (537) (1,627)
Repayment of advances by lessees 422 426 255
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,961 (436) (3,718)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - - 4,000
Repayment of notes payable (744) (353) (265)
Transfers from (to) restricted cash 385 (140) (140)
Cash distributions paid to partners (11,725) (11,725) (11,725)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (12,084) (12,218) (8,130)
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,442 1,570 (1,017)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,513 2,943 3,960
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,955 $ 4,513 $ 2,943
- -------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Cash Flow Information:
Interest paid $ 841 $ 748 $ 591
- -------------------------------------------------------------------------------------------------------------------
Restricted maintenance reserves collected, net of
maintenance drawdowns $ 668 $ 788 $ 648
- -------------------------------------------------------------------------------------------------------------------
NONCASH TRANSACTIONS
Leased aircraft received in lease settlement accounted
for under the cost recovery method $ 8,550 $ - $ -
Distributions to partners declared but unpaid $ 2,931 $ 2,931 $ 2,931
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
SEVENTEEN
<PAGE> 18
PEGASUS AIRCRAFT PARTNERS II, L.P.
NOTES TO FINANCIAL
STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Pegasus Aircraft Partners II, L.P. (the "Partnership"), a
Delaware limited partnership, maintains its accounting records and prepares
financial statements on the accrual basis of accounting. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. The most significant
assumptions and estimates relate to useful life and recoverability of the
aircraft and tax indemnity provisions described below. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS The Partnership invests funds not immediately required
for operations or distributions in temporary investments until such time as the
funds are required to meet its obligations. The short term, highly liquid
investments are recorded at cost, which approximates fair market value. For
purposes of the balance sheets and the statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
RESTRICTED CASH Restricted cash represents maintenance reserves (also described
below) collected from Kiwi International Air Lines, Inc. ("Kiwi") with respect
to the two aircraft leased to Kiwi. (See also Note 5 "Aircraft Under Operating
Leases") In prior years, restricted cash included cash in a collateral account
that collateralized the Partnership's obligation under a letter of credit
agreement (See Note 5 "Aircraft Under Operating Leases" and Note 6, "Notes
Payable" for further discussion).
AIRCRAFT AND DEPRECIATION The aircraft are recorded at cost, which includes
acquisition costs and the acquisition fee and the financial management advisory
fee paid to the General Partners. Depreciation to an estimated salvage value (in
general, 10%) is computed using the straight-line method over an estimated
economic life of twelve years. Improvements to aircraft are capitalized when
incurred and depreciated over the useful life of the improvement. The
Partnership evaluates these estimates based upon changes in market conditions in
accordance with generally accepted accounting principles and accordingly,
records a provision for decline in market value of aircraft to recognize loss in
the value of an aircraft when the General Partners believe that the
recoverability of the Partnership's investment in an aircraft has been impaired.
Proceeds received in lease settlements are accounted for under the cost recovery
method when, based upon third party appraisals and market conditions, there has
been a dimunition to the carrying value of the aircraft.
IMPACT OF FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS The Financial
Accounting Standards Board recently issued FASB 121, "Accounting for the
Impairment of Long-lived Assets and Long-lived Assets to be Disposed of " ("FAS
121"). FAS 121 requires companies to review their long-lived assets, such as the
Partnership's aircraft, and certain identifiable intangibles for impairment
whenever events and changes in circumstances indicate that the carrying value of
a long-lived asset may not be recoverable. The Partnership will be required to
adopt the provisions of FAS 121 as of January 1996. The Partnership believes
that based upon current operations and current methods used to evaluate declines
in market value, the future adoption of FAS 121 will not have a material impact
on the Partnership's financial position or results of operations.
TAX BENEFIT TRANSFER LEASE The McDonnell Douglas MD-81 aircraft under lease to
USAir, Inc. was purchased subject to a tax benefit transfer lease, which
provided for the transfer of the investment tax credits and depreciation
deductions with respect to the aircraft to a tax lessor. The transfer was
accomplished by the sale, for income tax purposes only, of the aircraft to the
tax lessor for cash and a note and a leaseback of the aircraft for rental
payments that match the payments on the note. Under the terms of the tax benefit
transfer lease, the Partnership's required rental payments are contingent upon
and may, by agreement, be offset by the lessor's required note payments.
Accordingly, no asset or liability for the tax benefit transfer lease has been
recorded.
MAINTENANCE RESERVE FUNDS Two of the Partnership's leases require the lessee to
make monthly payments to maintenance reserve funds administered by the
Partnership. The Partnership is obligated to reimburse the lessee for specified
maintenance costs out of the reserve funds upon submission of appropriate
evidence documenting the maintenance costs incurred by the lessee. Interest
earned on the reserve funds is deposited into the funds and utilized in the same
manner as other payments to the funds. These funds are included in restricted
cash on the balance sheets.
OPERATING LEASES The aircraft leases, which are structured principally as triple
net leases, are accounted for as operating leases. Lease revenues are recognized
in equal installments over the terms of the related leases.
EIGHTEEN
<PAGE> 19
PEGASUS AIRCRAFT PARTNERS II, L.P.
DEFERRED INCOME Some of the Partnership's operating leases require rental
payments to be paid monthly or quarterly, in advance. Lease revenues not yet
earned are deferred and recognized as income when earned.
The Partnership received stock and rights to warrants of the lessee in
connection with two of its leases. The Partnership recorded the securities at
their estimated value and previously recognized a portion of such associated
income ratably over the respective lease terms. The Partnership stopped
recognizing such income in the fourth quarter of 1994 (see Footnote 5,
"Aircraft" for discussion of Kiwi).
Lease settlement payments received in connection with the termination or
modification of a lease of an aircraft, the carrying value of which has not been
impaired, are recognized ratably over the original lease term in the case of a
lease termination and over the modified lease term in connection with a lease
modification.
INCOME TAXES No provision for income taxes has been made in the financial
statements since such taxes are the responsibility of the individual partners
rather than the Partnership.
NET INCOME PER LIMITED PARTNERSHIP UNIT The net income per limited partnership
unit is computed by dividing the net income allocated to the limited partners by
the weighted average number of Units outstanding during the year.
RECLASSIFICATIONS Certain reclassifications have been made to the 1994 financial
statements to conform to the classifications used in 1995.
2. ORGANIZATION OF THE PARTNERSHIP
The Partnership was formed on April 26, 1989 for the purpose of acquiring,
leasing and ultimately selling used commercial aircraft. The Managing General
Partner of the Partnership is Pegasus Aircraft Management Corporation, a wholly
owned subsidiary of Pegasus Capital Corporation, and the Administrative General
Partner is Air Transport Leasing, Inc., a wholly owned subsidiary of PaineWebber
Group Inc. (collectively, the "General Partners").The Partnership is required to
dissolve and distribute all of its assets no later than December 31, 2007. The
Partnership may reinvest the proceeds from sales of aircraft occurring prior to
August 21, 1998, provided that the aggregate amount of sales proceeds so
reinvested will in no event exceed $60,000,000, and provided further that, prior
to any such reinvestment the Partnership distributes to limited partners cash in
an amount sufficient to pay any federal and state income taxes to be incurred by
the limited partners as a result of the aircraft sale. Thereafter, the net
proceeds of any sales of aircraft will be distributed to the partners.
Upon formation of the Partnership, the General Partners each contributed $500 to
the capital of the Partnership. An additional 7,255,000 units of limited
partnership interest ("Units") were then sold at a price of $20 per Unit with
the Partnership receiving gross offering proceeds of $145,100,000.
Title to the aircraft owned by the Partnership is held by non-affiliated
trustees of trusts of which the Partnership is the beneficiary or one of two
beneficiaries. The purpose of this method of holding title is to satisfy certain
registration requirements of the Federal Aviation Administration.
3. PARTNERSHIP ALLOCATIONS
The Partnership Agreement provides that cash flow from operations be distributed
on a quarterly basis at the General Partners' discretion, 99% to the limited
partners and 1% to the General Partners. Cash flow is defined in the
Partnership Agreement as including cash receipts from operations and interest
income earned, less expenses incurred and paid in connection with the ownership
and operation of the aircraft. Depreciation and amortization expenses are not
deducted from cash receipts in determining cash flow. Distributable proceeds
from sales of aircraft upon liquidation of the Partnership will be distributed
in accordance with the partners' capital accounts after all allocations of
income and losses.
Income and losses generally will be allocated 99% to the limited partners and 1%
to the General Partners. Upon the sale of aircraft, gain generally will be
allocated, first, to the General Partners in an amount equal to the difference
between their capital contributions and 1.01% of the aggregate capital
contributions of the limited partners, and, then, 99% to the limited partners,
and 1% to the General Partners.
4. CASH EQUIVALENTS
The Partnership invests funds not immediately required for operations or
distributions in short-term, highly liquid investments. The investments are
primarily commercial paper issued by large domestic corporations. At December
31, 1995, the Partnership held short-term commercial paper with various
maturities as follows:
NINETEEN
<PAGE> 20
PEGASUS AIRCRAFT PARTNERS II, L.P.
<TABLE>
<CAPTION>
ISSUER PURCHASE DATE PURCHASE PRICE PAR VALUE
<S> <C> <C> <C>
Ford Motor Credit Corp. Various $ 3,852,914 $ 3,875,000
AAA Funding November 16, 1995 991,551 1,000,000
ASI November 16, 1995 1,978,187 2,000,000
Associates December 8, 1995 994,653 1,000,000
John Deere, Inc. December 12, 1995 422,094 425,000
Spiegel, Inc. December 27, 1995 1,766,909 1,775,000
IBM, Inc. December 28, 1995 1,991,300 2,000,000
- -------------------------------------------------------------------------------------------------------------------
$11,997,608 $12,075,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
5. AIRCRAFT
NET INVESTMENT IN AIRCRAFT
The Partnership's net investment in aircraft as of December 31, 1995 and 1994
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Aircraft on operating leases $114,460 $134,612
Less: Accumulated depreciation (45,775) (47,126)
Reserve for decline in
market value of aircraft (12,246) (11,796)
- ----------------------------------------------------------
$ 56,439 $ 75,690
- ----------------------------------------------------------
Aircraft held for lease $ 28,728 $ -
Less: Accumulated depreciation (11,013) -
Amounts received, including
value of aircraft, in Lease
Settlement accounted for
under the cost recovery
method (10,115) -
Reserves for maintenance (557) -
- ----------------------------------------------------------
7,043 -
- ----------------------------------------------------------
Aircraft, net $ 63,482 $ -
- ----------------------------------------------------------
</TABLE>
FINANCIAL TERMS OF 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 Airlines ("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 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
Industries Model A300-B4-103 ("A-300") aircraft for a total purchase price of
$28,070,000, 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
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 its delivery in June 1995 to a new
lessee, Akdeniz Air Mediterranean, Inc. ("Akdeniz") based in Turkey. The rentals
generated by the lease of the A-300 aircraft accounted for approximately 24% of
the Partnership's rental revenue for the year ended December 31, 1994 and
accounted for approximately 11% of rental revenue for the year ended December
31, 1995.
In June 1995, the Partnership executed a lease of the A-300 aircraft with
Akdeniz for a term of approximately four years, under which Akdeniz has since
defaulted (see Footnote 9, "Lessee Default"). The Partnership has recovered the
A-300 aircraft and is currently re-marketing it. The Partnership estimates that
it will spend approximately $1.4 million for a scheduled heavy maintenance check
that will be required before delivery of the aircraft to a new lessee. The
Partnership received $557,000 from Continental for non-compliance with lease
return conditions in connection with the A-300 Settlement, which is discussed
below.
TWENTY
<PAGE> 21
PEGASUS AIRCRAFT PARTNERS II, L.P.
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") as well as a restructuring of the DC-10-10 Aircraft ("DC-10
Restructuring").
Under the terms of the A-300 Lease Settlement, the Partnership received a cash
payment of approximately $3,721,000 (which included a reimbursement for certain
expenses including redeployment and integration costs) 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. Under the DC-10
Restructuring, the Partnership received approximately $3,100,000, the term of
the lease was amended to change the lease expiration date from May 31, 1997 to
October 31, 1996 and reduce the monthly lease payments 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.
Below is a description of various other financial agreements that the
Partnership has with Continental that arose out of Continental's bankruptcy in
1990. 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.
On July 3, 1991, the Bankruptcy Court approved an agreement amending the
Partnership's lease agreements with Continental with respect to the Boeing
727-200 non-advanced, McDonnell Douglas DC-10-10 and A-300 aircraft. Pursuant to
the agreement, Continental began paying 50% of the rentals due each month,
effective June 1, 1991. Continental resumed paying 100% of the rentals due each
month beginning October 1, 1991.
Continental issued promissory notes to the Partnership for the rentals that were
not received, which totaled $4,932,000, and that were sold in July 1991 to an
unrelated third party for $4,410,000.
Under the terms of the July 1991 agreement, the rental payments payable with
respect to the Boeing 727-200 non-advanced aircraft were reduced from $99,000 to
$53,000 per month, effective December 1, 1990. The amount of the rentals payable
with respect to the McDonnell Douglas DC-10-10 and the A-300 aircraft were not
changed at that time.
Under the terms of the July 1991 agreement, the Partnership agreed to and
advanced $400,000 for certain qualifying capital expenditures incurred by
Continental with respect to the McDonnell Douglas DC-10-10 aircraft and $500,000
with respect to the A-300 aircraft which Continental agreed to repay with
interest at 12% per annum over thirty-six months from the date the funds were
advanced by the Partnership. At December 31, 1995, the balance of the related
receivable was $271,000. All first quarter 1996 repayments of advances have been
made by Continental as scheduled.
Continental returned the Partnership's Boeing 727-200 non-advanced aircraft to
the Partnership on November 1, 1991. The Partnership is pursuing claims for
damages against Continental in accordance with the applicable provisions of the
lease and the agreement which amends the lease between the Partnership and
Continental, which was approved by the Bankruptcy Court during July 1991, for
the maintenance costs incurred by the Partnership and the unpaid rents
attributable to the period subsequent to the return of the aircraft. (See
discussion below concerning the re-lease of this aircraft to Kiwi during 1993).
On December 30, 1992, the Bankruptcy Court approved an agreement to further
amend the Partnership's lease agreement with Continental with respect to the
Partnership's McDonnell Douglas DC-10-10 and A-300 aircraft. Pursuant to the
agreement, 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 which
began May 1, 1993. At December 31, 1995, the balance of the deferred rentals was
$245,000. All first quarter 1996 repayments of deferred rentals have been made
by Continental as scheduled.
During April 1993, the Bankruptcy Court approved a motion by Continental
transferring Continental's lease for the Partnership's McDonnell Douglas
DC-10-10 aircraft to Continental Micronesia, Inc., a 90% owned subsidiary of
Continental.
DAN-AIR LEASE During April 1990, the Partnership acquired a Boeing 727-200
advanced aircraft for a total purchase price of $10,500,000. The aircraft was
subject to an operating lease with Dan-Air Services Limited ("Dan-Air"), an
TWENTY-ONE
<PAGE> 22
PEGASUS AIRCRAFT PARTNERS II, L.P.
English corporation, the term of which ended on October 31, 1992. Pursuant to
the aircraft return provisions of the lease, Dan-Air was obligated to perform
various maintenance procedures on the aircraft prior to returning the aircraft
to the Partnership. In lieu of completing these procedures, Dan-Air paid the
Partnership $1,994,000 and the Partnership assumed the responsibility for the
costs of completing the maintenance work. This payment was accounted for at
December 31, 1992 as a reserve for maintenance costs for the aircraft. During
1993, the Partnership completed the maintenance procedures at a total cost of
$1,257,000. The Partnership recognized the remaining $737,000 as other income
during 1993. (See discussion below concerning the re-lease of this aircraft to
Kiwi during 1993.)
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 Trans World Airlines ("TWA"), which in April
1993 was amended and extended until November 1, 1998 with monthly, in advance,
rental payments of $185,000 per month.
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, that is being
repaid over the remaining lease term, in monthly installments, with interest of
9.70%. At December 31, 1995, the balance of the receivable was $434,000. 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,
extended to October 1, 1998 with monthly rental payments 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 of
9.68%. At December 31, 1995, the balance of the receivable was $313,000. All
first quarter 1996 repayments of advances have been made by TWA as scheduled.
Additionally, 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 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, TWA and the Partnership agreed
("TWA Agreement") to a deferral of 50% of the original schedule for November
1994, and 75% of the original schedule 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. TWA
has made all payments due pursuant to this 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. $736,000 and $361,000 of
deferred rent pursuant to the TWA Agreement was included in rents and other
receivables in the balance sheets as of December 31, 1995 and December 31, 1994,
respectively. Additionally, TWA and the Partnership reached an agreement to
extend the lease of the MD-82 aircraft six years beyond the current expiration
date (to November 2004) at the current lease rate. 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, respectively, as provisions for decline in market value of the
Lockheed L-1011 aircraft. These provisions reflected the General Partners'
estimate of the Partnership's investment in this aircraft as of December 31,
1995.
USAIR LEASE During September 1989, the Partnership acquired one-half of the
beneficial interest in a trust ("Trust") which is the owner/lessor of a
McDonnell Douglas MD-81 aircraft for a total purchase price of $10,041,000. The
remaining one-half interest in the Trust is owned by Pegasus Aircraft Partners,
L.P., an affiliated partnership. The aircraft is subject to an operating lease
with USAir, Inc., the term of which ends on June 1, 1998. The lease may be
terminated after August 1993 subject to the lessee's guarantee that the
Partnership will receive contractually defined minimum termination values upon
re-marketing of the aircraft. Rental payments are payable quarterly, in arrears,
at the rate of $304,000 (for the Partnership's one-half interest in the
aircraft). The lease provides for one three-year renew-
TWENTY-TWO
<PAGE> 23
PEGASUS AIRCRAFT PARTNERS II, L.P.
al option, at the same quarterly rental rate. If the lease is not renewed for
this first renewal period, the lessee must make a termination payment of
$1,113,000 to the Partnership. The lessee also has three additional one-year
renewal options at fair market rental rates. The lessee may elect to purchase
the aircraft at its fair market value at the end of any renewal term.
The McDonnell Douglas MD-81 aircraft under lease to USAir, Inc., was purchased
subject to a tax benefit transfer lease ("TBT lease") that 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 the 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 omissions 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 a
letter of credit be posted to collateralize this obligation. The Partnership is
obligated for one-half the annual cost of the letter of credit as well as any
calls on the letter of credit.
Under the operating lease, the lessee, USAir, Inc., 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. It 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, L.P.,
through the Trust, will be responsible for the loss to the tax lessor until and
if the lessee performs under its indemnification. To date there have been no
calls against the letter of credit.
The letter of credit has a current face amount of approximately $2.3 million.
The letter of credit agreement obligated the Partnership to deposit $35,000 per
quarter (beginning on June 1, 1992) as cash collateral to collateralize the
Partnership's obligation under the letter of credit agreement. In July 1995, the
Partnership consummated an agreement with the issuer of the letter of credit
under which the issuer released its interest in substantially all of the cash in
the cash collateral account. The balance in the cash collateral account was
$385,000 at December 31, 1994.
The tax lessor is entitled to call on the letter of credit whether its loss of
tax benefits is caused by Pegasus Aircraft Partners, L.P. or the Partnership,
and Pegasus Aircraft Partners, L.P. and the Partnership have agreed to indemnify
each other for any loss occasioned by the acts of the other.
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 and other debt due in
October 1994. The Standstill Agreement was extended to allow Aeromexico to
complete the restructuring described below. Aeromexico has 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.
TWENTY-THREE
<PAGE> 24
PEGASUS AIRCRAFT PARTNERS II, L.P.
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 (727 advanced aircraft) to
Kiwi. The leases are operating leases that require monthly rental payments, in
advance, in the amounts of $60,000 (non-advanced) and $115,000 (advanced). 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 III 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 abatement feature, which would extend the term of the leases by one 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 and, presently, has
no 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 is 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 sheets.
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 Boeing 727 advanced aircraft, of which $971,000
was capitalized and $1,257,000 represented maintenance costs that 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 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 that was previously leased to Dan-Air.
Kiwi, as a start-up airline, has had continued liquidity concerns that were
worsened by recent 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 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 is being 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 but will be obligated to
fund the related maintenance work in its entirety as it becomes due. Pursuant to
the lease amendments, Kiwi also agreed to extend each of the leases until
December 1999. The lease amendments removed the rental abatement feature of the
original leases. All payments were made as scheduled through January 1996. In
February 1996, Kiwi requested an extension of time to make rental payments,
deferred rental payments and maintenance reserve payments due with respect to
the Kiwi aircraft and made such payments in late February 1996 and March 1996.
Based upon the composition of its fleet and FAA mandated deadlines for
compliance with Stage III 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
non-advanced aircraft and $3 million for the advanced aircraft. If the
Partnership elected not to complete such work, Kiwi could terminate the leases.
See Item 7, "Management's Discussion And Analysis of Financial Condition And
Results of Operations" for a discussion of capital requirements.
TWENTY-FOUR
<PAGE> 25
PEGASUS AIRCRAFT PARTNERS II, L.P.
The Kiwi leases accounted for approximately 14.6% of the Partnership's rental
revenue for the year ended December 31, 1995. Additionally, at December 31,
1995, the Partnership held maintenance deposits aggregating $2,104,000 with
respect to the Kiwi aircraft. Kiwi's ability to make timely lease and
maintenance reserve payments is uncertain due to its continued liquidity and
capital concerns.
SIGNIFICANT LESSEES
The Partnership leased its aircraft to six different airlines during 1995.
Revenues from airlines that accounted for greater than 10% of the Partnership's
total rental revenue during 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF RENTAL REVENUES
AIRLINES 1995(1) 1994 1993
<S> <C> <C> <C>
Continental Airlines, Inc.* 32.8% 43.6% 45.2%
Trans World Airlines, Inc. 27.0 24.3 25.8
Kiwi International Air Lines, Inc. 14.6 12.3 -
Aerovias de Mexico S.A. de C.V. 13.3 12.0 12.4
</TABLE>
* Includes rental revenue from Continental Micronesia, Inc., a subsidiary
of Continental Airlines, Inc.
(1) Such percentages exclude the portion of the settlement proceeds received
with respect to the A-300 Lease Settlement that were accounted for under
the cost recovery method.
Revenues include rentals from aircraft leased to foreign airlines or carriers of
$2,376,000, $1,872,000 and $1,872,000 in 1995, 1994 and 1993 respectively.
FUTURE MINIMUM RENTAL INCOME
The following is a schedule by year of future minimum rental income under the
leases as of December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1996 $12,356
1997 10,070
1998 7,809
1999 5,959
2000 3,434
Thereafter 9,118
- ----------------------------------------------
Total $48,746
- ----------------------------------------------
</TABLE>
The above schedule of future minimum rental income does not include the rental
income that would result from the renewal of existing leases or the re-leasing
of the aircraft, except for the initial three-year renewal period for the
McDonnell Douglas MD-81 aircraft under lease to USAir, Inc. This renewal
representing $3,644,000 is included since USAir must make a significant
termination payment if the renewal is not exercised.
The Partnership operates in one industry, the leasing of used aircraft to
commercial airlines.
6. NOTES PAYABLE
At December 31, 1995, the Partnership had outstanding borrowings of $6,638,000
under two separate loan facilities. The Partnership's first loan facility had
outstanding borrowings of $6,109,000 and is currently collateralized by three of
the Partnership's aircraft. The Partnership may borrow up to $8.0 million
through September 1995, subject to lender approval. The loan bears interest at
prime, plus 2.5%, (10.75% at March 1, 1996) and there are no compensating
balance requirements. The principal is payable, in monthly installments of
$130,000, beginning in October 1995 and with the balance (balloon payment) due
in September 1997.
The Partnership's second loan facility had outstanding borrowings of $529,000 at
December 31, 1995 and is collateralized by two of the Partnership's aircraft.
The Partnership may currently borrow up to $2.5 million, which amount declines
through June 1997 when the loan matures. The outstanding borrowings bear
interest at a fixed rate of 7.15% and there are no compensating balance
requirements. The principal is payable in equal quarterly installments over the
remaining term of the loan.
Based on the outstanding borrowings at December 31, 1995, the required repayment
schedule is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1996 $1,918
1997 4,720
- ----------------------------------------------
Total $6,638
- ----------------------------------------------
</TABLE>
7. TRANSACTIONS WITH AFFILIATES
MANAGEMENT FEES The General Partners 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.
During the years ended December 31, 1995, 1994 and 1993, the General Partners
earned base management fees of $230,000, $229,000 and $221,000, respectively.
The General Partners also 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),
TWENTY-FIVE
<PAGE> 26
PEGASUS AIRCRAFT PARTNERS II, L.P.
of which 2.5% is payable to the Managing General Partner and 2.0% is payable to
the Administrative General Partner. Prior to September 20, 1993, the fee was
equal to 3.0% and was payable solely to the Managing General Partner. During the
years ended December 31, 1995, 1994 and 1993, the General Partners earned
incentive management fees of $645,000, $647,000 and $503,000, respectively.
RE-LEASE FEES The General Partners 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
received. Of this amount, 2.5% is payable to the Managing General Partner and
1.0% is payable to the Administrative General Partner. During the years ended
December 31, 1995, 1994 and 1993, the General Partners earned re-lease fees of
$287,000, $264,000 and $220,000, respectively.
ACCOUNTABLE EXPENSES The General Partners are entitled to reimbursement of
certain expenses paid on behalf of the Partnership that are incurred in
connection with the administration and management of the Partnership. Such
reimbursable expenses amounted to $75,000, $75,000 and $121,000 during 1995,
1994 and 1993, respectively, of which $75,000, $75,000 and $77,000 was paid or
accrued to the Administrative General Partner and $0, $0 and $44,000 was paid to
the Managing General Partner.
The Administrative General Partner has voluntarily deferred the receipt of fees
earned commencing January 1995. Through December 31, 1995 such amount aggregated
$445,000.
OTHER In 1995, the Partnership purchased certain equipment and parts relating to
the integration of the A-300 aircraft to Akdeniz (see Footnote 9) from a company
owned by three officers of the Managing General Partner in the amount of
$89,000. Such amount was recovered from Continental and Akdeniz. No such amounts
were incurred in prior years.
8. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
The following is a reconciliation of the net income as shown in the accompanying
financial statements to the taxable income reported for federal income tax
purposes (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net income per
financial statements $2,019 $1,413 $1,549
Increase (decrease)
resulting from:
Depreciation (3,286) (2,820) (1,847)
TBT interest income less
TBT rental expense (590) (471) (375)
Reserves for
maintenance costs,
net of maintenance
expense and decline in
market value of aircraft 1,810 3,388 829
Deferred rental income 3,733 (310) 142
Lease settlement pay-
ment, including lease
aircraft received accounted
for under the cost
recovery method 10,115 - -
Other 187 53 375
- -------------------------------------------------------------
Taxable income per federal
income tax return $13,988 $ 1,253 $ 673
- -------------------------------------------------------------
</TABLE>
The following is a reconciliation of the amount of the Partnership's total
Partnership equity assets as shown in the accompanying financial statements to
the tax bases of the Partnership's net assets (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Total Partnership equity
per financial statements $63,367 $73,073 $83,385
Increase (decrease)
resulting from:
Commission and expenses
paid in connection with
the sale of limited
partnership units 16,295 16,295 16,295
Distributions payable
to partners 2,931 2,931 2,931
Reserves for maintenance
costs and decline in
market value of aircraft 15,042 13,232 9,844
Deferred income 4,672 939 950
Accumulated depreciation (30,784) (27,498) (24,678)
TBT interest income less
TBT rental expense (2,207) (1,617) (1,146)
Lease settlement payment,
including lease aircraft re-
ceived accounted for under
the cost recovery method 10,115 - -
Other 368 181 428
- -------------------------------------------------------------
Tax bases of net assets $79,799 $77,536 $88,009
- -------------------------------------------------------------
</TABLE>
TWENTY-SIX
<PAGE> 27
PEGASUS AIRCRAFT PARTNERS II, L.P.
9. LESSEE DEFAULT
In June 1995, the Partnership completed the negotiation of a lease with Akdeniz,
a start-up foreign charter carrier based in Turkey, regarding the lease of the
A-300 aircraft previously leased to Continental. The lease was for a scheduled
term of approximately four years, with two one-year renewal options and required
rentals payable monthly in advance, maintenance reserves based upon utilization
of the aircraft and a security deposit of $200,000. The lease rate averaged
approximately $117,000 per month over the term of the lease, which is
significantly less than the original scheduled lease rate paid by Continental
with respect to the lease. The aircraft was removed from the Federal Aviation
Administration ("FAA") registry and placed on the Turkish Ministry of
Transportation registry. Akdeniz did not pay the monthly, in advance, rental
payment due on September 10, 1995 and October 10, 1995 and had made a pro-rated
payment for June 1995. Further, it did not fund any maintenance reserves as
required under the lease, which aggregated $510,000. The Partnership placed
Akdeniz in default and, after a series of negotiations, obtained a judgment in
the Turkish Courts, moved to de-register the aircraft in Turkey and re-register
the A-300 with the FAA, and repossessed the aircraft. The Partnership collected
$175,000 through subsequent collection efforts, which were applied against rents
receivable. The Partnership is pursuing its legal remedies in Turkey to resolve
the remaining obligations Akdeniz has under the lease. Akdeniz has ceased
operations. The Partnership applied the security deposit against the remaining
unpaid September and October rents as well as certain integration costs,
repossession costs and legal expenses.
10. 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's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and PaineWebber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Air Transport Leasing Inc., an affiliate
of PaineWebber and the Administrative General Partner in the Partnership
("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions alleged, among
other things, that, in connection with the sale of interests in Pegasus Aircraft
Partners II, L.P., PaineWebber and the Administrative General Partner (1) failed
to provide adequate disclosure of the risks involved with the Partnership; (2)
made false and misleading representations about the safety of the investment 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 Partnership, as well as disgorgement of all fees
and other income derived by PaineWebber from the Partnership. 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 that 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 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 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
TWENTY-SEVEN
<PAGE> 28
PEGASUS AIRCRAFT PARTNERS II, L.P.
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.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value of certain financial instruments, whether or not
reported on the balance sheet. Where quoted market prices are available the
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used including
the discount rate and estimates of future case flows. In addition, SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements including leased aircraft owned by the Partnership.
Therefore, the aggregate fair value amounts presented do not purport to
represent and should not be considered representative of the underlying market
value of the Partnership.
The methods and assumptions used to estimate the fair value of each class of the
financial instruments are described below.
CASH EQUIVALENTS. For cash equivalents, carrying value approximates fair value.
RESTRICTED CASH. For restricted cash, carrying value approximates fair value.
RENTS AND OTHER RECEIVABLES. For rents and other receivables, carrying value
approximates fair value.
PREPAID EXPENSES. For prepaid expenses, carrying value approximates fair value.
NOTES PAYABLE. For notes payable, carrying value approximates fair value.
DISTRIBUTION TO PARTNERS. For distribution to partners, carrying value
approximates fair value.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES, PAYABLE TO AFFILIATES, AND ACCRUED
INTEREST PAYABLE. For accounts payable and accrued expenses payable to
affiliates, and accrued interest payable, carrying value approximates fair
value.
MAINTENANCE RESERVES PAYABLE. For maintenance reserves payable, carrying value
approximates fair value.
DEFERRED RENTAL INCOME. For deferred rental income, carrying value approximates
fair value.
TWENTY-EIGHT
<PAGE> 29
PEGASUS AIRCRAFT PARTNERS II, L.P.
REPORT OF INDEPENDENT
---------------------
ACCOUNTANTS
FEBRUARY 15, 1996*
To the Limited Partners of Pegasus Aircraft Partners II, L.P.
We have audited the accompanying financial statements as listed on page 13 of
this report. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pegasus Aircraft Partners II,
L.P. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
As discussed in Note 9 to the Financial Statements, there is litigation pending
against among others, the Administrative General Partner and affiliates of the
Administrative General Partner. The ultimate outcome of this litigation and its
effects if any, on the Partnership cannot presently be determined.
COOPERS & LYBRAND L.L.P.
New York, New York
*except as to Note 9 for which the date is March 19, 1996.
TWENTY-NINE
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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.
Cash distributions declared by the Partnership were approximately $11.7 million
($1.60 per Unit) in each of 1995, 1994 and 1993, respectively. Cash
distributions paid during 1995, 1994 and 1993 were also $11.7 million, for each
of the three years. Net cash provided by operating activities was $17.6 million
in 1995, $14.2 million in 1994 and $10.8 million in 1993. In the aggregate, for
this three-year period, net cash provided by operating activities totaled $42.6
million and cash distributions declared by the Partnership totaled $35.17
million. In 1995, the Partnership received the A-300 Lease Settlement proceeds,
a portion of which was accounted for under the cost recovery method and thus,
was not included in cash from operations.
Partnership equity declined by approximately $9,706,000 from December 31, 1994
to December 31, 1995 as a result of the declaration of cash distributions to the
partners in excess of the Partnership's net income. This resulted primarily from
the fact that, unlike net income, cash flow generated from operations, which is
the source of the cash utilized to make the distributions, is not reduced by
depreciation expense and provisions for decline in market value of aircraft
attributable to the Partnership's aircraft.
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 that exceeds its net income may be deemed a return
of capital. Based on the amount of net income reported by the Partnership for
accounting purposes, approximately 83%, 88%, and 87% respectively, of the cash
distributions paid to the partners for the years ended December 31, 1995, 1994,
and 1993, respectively, constituted a return of capital. Also, based on the
amount of cumulative 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 December 31, 1995 constituted a return
of capital. However, the total actual return on capital over the Partnership's
life can be determined only at the termination of the Partnership after all cash
flows, including proceeds from the sale of the aircraft, have been realized.
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
payment due in February through May 1995. The Partnership entered into
negotiations with Continental regarding the settlement of the lease obligations
and the return of the aircraft and the restructuring of the lease of the
DC-10-10 Aircraft and on November 15, 1995, the Partnership reached agreements
with Continental regarding both. ("A-300 Lease Settlement") and ("DC-10
Restructuring").
Under the terms of the A-300 Lease Settlement, the Partnership received a cash
payment of approximately $3,721,000, including $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.
Under the DC-10 Restructuring, the Partnership received a cash payment of
$3,100,000, the term of the lease was amended to change the lease expiration
date from May 31, 1997 to October 31, 1996 and reduce prospectively the monthly
lease payments from $252,000 to $135,000, effective September 15, 1995. All
other terms and conditions of the DC-10-10 lease remain unchanged.
The A-300 Lease Settlement and DC-10 Restructuring were principal reasons for
the increased liquidity and provided the Partnership with the leased Boeing 727
advanced aircraft. The A-300 was off lease at December 31, 1995; the Partnership
continues to re-market it.
At December 31, 1995, the Partnership had $9,024,000 of unrestricted cash and
cash equivalents in excess of declared, but unpaid, distributions to the
partners. This represents an increase from a similarly computed amount at
December 31, 1994 of $1,582,000. The overall increase in the Partnership's
liquidity resulted primarily from the proceeds received relating to the A-300
Lease Settlement and the DC-10 Restructuring partially offset by the reduction
in lease rents received with respect to the A-300 from Continental and the
default by the subsequent lessee. (See Item 8, Financial Statements, Footnote 5,
"Leased Aircraft" or Footnote 9, "Lessee Default.") Additionally, in 1995, the
lender that held a security interest in a cash collateral
THIRTY
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PEGASUS AIRCRAFT PARTNERS II, L.P.
account collateralizing the Partnership's obligation under a letter of credit
released its interest in the account that aggregated $455,000. Such cash was
previously included in restricted cash. Distribution rates in 1995 were the same
as 1994. Rent and other receivables decreased $1,012,000 from $3,569,000 at
December 31, 1994 to $2,557,000 at December 31, 1995. This decrease is primarily
the result of the continued repayment by Continental of deferred rentals and the
repayment of advances by Continental, TWA and Aeromexico during 1995. This was
partially offset by the rent deferrals provided to Kiwi and TWA during 1995.
The payable to affiliates increased $442,000 from $451,000 at December 31, 1994
to $893,000 at December 31, 1995 principally due to (i) the voluntary deferral
by the Administrative General Partner of management fees and re-lease fees
otherwise payable with respect to the period commencing January 1, 1995 and (ii)
the fees associated with the A-300 Lease Settlement and the DC-10 Restructuring,
which were unpaid at December 31, 1995.
Deferred income increased $3,733,000 from $939,000 at December 31, 1994 to
$4,672,000 at December 31, 1995. This increase was attributable to proceeds
received in connection with the A-300 Lease Settlement and the DC-10 Lease
Restructuring. Such proceeds are being recognized as income ratably over the
various lease terms.
In order to finance the expenditures for the maintenance work and the capital
improvements to the aircraft leased to Aeromexico during July 1992, aircraft
leased to Kiwi, and the aircraft re-leased to TWA during 1993, as well as the
various advances to Continental and TWA, the Partnership established two loan
facilities that permitted the Partnership to borrow up to $10.5 million. At
December 31, 1995, the Partnership's borrowings, net of repayments, totaled
$6,638,000. While the Partnership currently holds significant operating
reserves, the Partnership, in the future, may require additional financing to
fund future maintenance or modification work to aircraft. The Partnership can
borrow up to 35% of the original offering proceeds from the sale of units. Any
such borrowings will only be made if the General Partners believe such
borrowings will enhance portfolio value. The Partnership cannot utilize
borrowings to purchase aircraft. However, there can be no assurance that the
Partnership would be able to obtain any additional borrowings, if required.
Based upon the operating cash reserves held at December 31, 1995 and the leases
currently in place, the Partnership anticipates being able to maintain current
cash distribution levels through 1996. The Partnership continues to actively
re-market the A-300, which is currently off lease. It is antici- pated that the
A-300 will require a heavy maintenance check in connection with its
re-marketing. 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 III
Noise Reduction regulation, Kiwi may require the Partnership to hushkit (upgrade
to Stage III) 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 re-marketing period. Additionally,
significant costs could be incurred in redeployment.
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's sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and PaineWebber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Air Transport Leasing Inc., an affiliate
of PaineWebber and the Administrative General Partner in the Partnership
("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions alleged,
among other things, that, in connection with the sale of interests in Pegasus
Aircraft Partners II, L.P., PaineWebber and the Administrative General Partner
(1) failed to provide adequate disclosure of the risks involved with the
Partnership; (2) made false and misleading representations about the safety of
the investment and the Partnership's anticipated performance; and (3) marketed
the Partnership to investors for whom such investments
THIRTY-ONE
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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 Partnership, as well as disgorgement of all fees and other income
derived by PaineWebber from the Partnership. 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 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 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.
RESULTS OF OPERATIONS
Substantially all of the Partnership's revenue was generated from the leasing of
the Partnership's aircraft to commercial air carriers under operating leases.
Under the terms of the triple net leases, substantially all of the expenses
related to the operation and maintenance of the aircraft during 1995 were paid
for by the lessees or funded out of maintenance reserves collected. The direct
lease expenses incurred by the Partnership represent the costs of providing
insurance coverage for the Partnership's aircraft in excess of the amounts
required to be carried by the lessees, trustee fees related to the ownership of
the aircraft, the cost of the letter of credit required under the terms of the
TBT
THIRTY-TWO
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PEGASUS AIRCRAFT PARTNERS II, L.P.
lease on the McDonnell Douglas MD-81 leased to USAir and the amortization of
costs incurred in connection with the Aeromexico leases.
The Partnership also records depreciation expense pertaining to the aircraft and
incurs interest expense and certain general and administrative expenses in
connection with the operations of the Partnership. General and administrative
expenses consist primarily of investor reporting expenses, transfer agent and
audit fees, and the cost of accounting services.
IMPACT OF FUTURE ADOPTION OF RECENTLY ISSUED
ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued FASB 121, "Accounting
for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of
" ("FAS 121"). FAS 121 requires companies to review their long-lived assets,
such as the Partnership's aircraft, and certain identifiable intangibles for
impairment whenever events and changes in circumstances indicate that the
carrying value of a long lived asset may not be recoverable. The Partnership
will be required to adopt the provisions of FAS 121 as of January 1996. The
Partnership believes that based upon its operations and current methods used to
evaluate declines in market value, the future adoption of FAS 121 will not have
a material impact on the Partnership's financial position or results of
operations.
1995 Compared to 1994
The Partnership's net income for the year ended December 31, 1995 ("1995
Period") was $2,019,000 as compared to $1,413,000 for the year ended December
31, 1994 ("1994 Period").
The increase in the Partnership's net income in the 1995 Period as compared to
the 1994 Period was due primarily to the fact that the Partnership provided for
a decline in market value of aircraft of $450,000 in the 1995 Period as compared
to $2,600,000 in the 1994 Period, offset by a reduction in rental revenue
principally due to the reduction in lease payments, and return of the aircraft
to off lease status as the result of the A-300 Lease Settlement and subsequent
default by Akdeniz.
Rental revenue decreased by approximately 10% or $1,511,000 for the 1995 Period,
as compared to the 1994 Period, principally due to the recognition of reduced
rental income in the 1995 Period with respect to the A-300 discussed above.
Interest income increased by 47% or $193,000 for the 1995 Period in comparison
to the 1994 Period. This increase was primarily attributable to the interest
income earned on the balances of the deferred rentals by TWA, Kiwi and
Aeromexico, which were not outstanding during the 1994 Period as well as the
cash received pursuant to the A-300 Lease Settlement and DC-10-10 Lease
Restructuring, partially offset by continued repayments of advances and
deferrals.
Depreciation and amortization decreased 1% or $54,000 in the 1995 Period as
compared to the 1994 Period. The decrease was the result of the reserve for
decline in market value of certain aircraft which the Partnership recorded at
December 31, 1994, which reduced the depreciable basis of the related aircraft.
This was offset by a change (reduction) to the estimated residual value of the
DC-10-10, which resulted in an increase in related depreciation expense in the
1995 Period.
Provision for decline in market value in aircraft was $450,000 in the 1995
Period as compared to $2,600,000 in the 1994 Period. Such amounts reflected
management's estimate of the recoverability of the value of the leased aircraft
at the end of the respective periods based upon third party cash flows, third
party appraisals and market conditions.
Management and re-lease fees for the 1995 Period increased by 2% or $22,000 in
comparison to the 1994 Period. This increase was attributable primarily to the
fees recognized with respect to the A-300 Lease Settlement (a portion of which
was recognized under the cost recovery method) and the DC-10-10 Lease
Restructuring, which was partially offset by a reduction in rental income
recognized during 1995.
Interest expense for the 1995 Period increased by $85,000 or 11% in comparison
to the 1994 Period primarily because of the increase in interest rates that
increased the rate on the variable rate note payable, that was slightly offset
by the continued repayment of the fixed rate loan.
General and administrative expenses increased by $61,000 or 26% in the 1995
Period as compared to the 1994 Period due to an increase in the level of certain
administrative expenses, including transfer agent fees and legal expenses.
Direct lease expenses increased by 11% or $19,000 in the 1995 Period as compared
to the 1994 Period. The increase of the 1995 Period as compared to the 1994
Period was due principally to expenses incurred in the first quarter in the 1995
Period associated with the Aeromexico transaction offset by a reduction in the
letter of credit fee.
1994 Compared to 1993
The Partnership's net income for 1994 was $1,413,000 as compared to $1,549,000
for 1993.
THIRTY-THREE
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PEGASUS AIRCRAFT PARTNERS II, L.P.
The decrease in the Partnership's net income in 1994 as compared to 1993 was due
principally to an increase in provision for maintenance cost and decline in
market value of aircraft, an increase in management fees and re-lease fees and
an increase in interest expense in 1994 compared to 1993. These items were
partially offset by an increase in rental income and a decrease in depreciation.
Additionally, in 1993, the Partnership recognized other income relating to
payments in excess of maintenance expense totaling $737,000 and incurred
maintenance and storage expense of $441,000. No such items were incurred in
1994.
Rental revenues for 1994 increased by $552,000 or 4% as compared to 1993. This
resulted from the net effect of the additional rentals received from Kiwi with
respect to the leases for the Partnership's two Boeing 727-200 aircraft, which
were delivered to Kiwi during March and May 1993 (each of which was off-lease
for part of 1993), and a decline in the monthly rental rates for two aircraft on
lease to TWA when the TWA leases were modified and extended in April 1993.
Interest income increased by $67,000 or 20% for 1994 in comparison to 1993. This
increase was attributable to the interest income earned with respect to the
advances which were made to TWA during April 1993 (and thus were not outstanding
for all of 1993) as well as an increase during the period in cash available for
short-term investments. These were partially offset by declining interest income
earned on deferrals and advances as amounts were repaid and principal balances
reduced.
Depreciation and amortization decreased $307,000 or 3% for 1994 as compared to
1993. This decrease was the result of reduced depreciation expense recognized in
1994 with respect to the Boeing 727-200 advanced aircraft leased to Kiwi as a
result of the reserve for decline in market value of the aircraft, which the
Partnership recorded at December 31, 1993. This decrease was partially offset by
additional depreciation expense attributable to the 1993 and 1994 capital
improvements made to the aircraft leased to Kiwi and TWA.
The Partnership recorded a provision for decline in market value of aircraft of
$2,6000,000 and $2,175,000 for 1994 and 1993, respectively, to reflect the
General Partners' estimate of recoverability of the investment in certain
aircraft.
Management and re-lease fees for 1994 increased by $195,000 or 21% in comparison
to 1993 primarily because, pursuant to the terms of the Partnership Agreement,
the amount of the subordinated incentive management fee increased from 3.0% to
4.5% of quarterly cash flow effective September 1993 and, to a lesser extent,
because of re-lease fees recognized in respect of the new Kiwi leases in 1993
and TWA renewals in 1994. These transactions were only subject to the re-lease
fee for a portion of 1993.
Interest expense in 1994 increased by $143,000 or 23% in comparison to 1993
primarily because the Partnership borrowed $4,000,000 during the second quarter
of 1993 (and thus was not outstanding for all of 1993), as well as an increase
in interest rates which increased the rate on the variable rate note payable.
Other income was $81,000 in 1994 as compared to $812,000 in 1993. The amount
recognized in 1994 represents the recognition of a portion of the deferred
income established in connection with the receipt of the Kiwi stock. Due to
Kiwi's operating and financial problems, the Partnership stopped amortizing the
deferred income at September 30, 1994. Furthermore, in 1993, the Partnership
recognized $737,000 of other income representing the difference between a
payment received from a lessee upon the return of an aircraft as a final
settlement in lieu of meeting return conditions as required under the lease and
the cost required to complete such maintenance and the recognition of $75,000 of
the deferred income established in connection with the receipt of the Kiwi
stock.
General and administrative expenses decreased by approximately $9,000 or 4% in
1994 as compared to 1993. These expenses were generally consistent based upon
the level of operations.
Direct lease expenses, which include trustees fees, letters of credit cost and
insurance, increased by $18,000 or 12% in 1994 as compared to 1993 principally
due to an increase in insurance related expenses.
INFLATION AND CHANGING PRICES
Inflation has had no material impact on the operations or financial condition of
the Partnership from inception through December 31, 1995. However, market and
worldwide economic conditions and changes in federal regulations have in the
past, and may in the future, affect the airline industry and thus lease rates
and aircraft values. Additionally, inflation and changing prices, may affect
subsequent lease rates and the eventual selling price of the aircraft.
THIRTY-FOUR
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PEGASUS AIRCRAFT PARTNERS II, L.P.
PARTNERSHIP
-----------
DIRECTORY
Pegasus Aircraft Partners II, L.P.
2424 SOUTH 130TH CIRCLE
OMAHA, NEBRASKA 68144-2596
(800) 234-7342
Managing General Partner
PEGASUS AIRCRAFT MANAGEMENT CORPORATION
Administrative General Partner
AIR TRANSPORT LEASING, INC.
Auditors
COOPERS & LYBRAND L.L.P.
NEW YORK, NEW YORK
Legal Counsel
DERENTHAL & DANNHAUSER
SAN FRANCISCO, CALIFORNIA
Transfer Agent
SERVICE DATA CORPORATION
OMAHA, NEBRASKA
A copy of the Annual Report on Form 10-K,
as filed with the Securities and Exchange
Commission, will be furnished without charge
to limited partners upon request.
THIRTY-FIVE
