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March 28, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, DC 20549
Attention: 1934 Act Filing Department
Re: Pegasus Aircraft Partners, L.P. (the "Registrant")
Commission File Number 0-17712
Ladies and Gentlemen:
On behalf of the Registrant we are delivering herewith for filing
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, and the Rules and Regulations promulgated thereunder, the following:
(1) One (1) complete copy which has been manually executed, of the
Registrant's Annual Report on Form 10-K for 1994 (the "Form
10-K");
(2) Two (2) conformed copies of the complete Form 10-K; and
(3) Five (5) conformed copies of the Form 10-K, excluding exhibits.
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Please acknowledge receipt of this letter and the enclosures on the
attached copy of this letter and return it to us in the enclosed, self-addressed
envelope.
Very truly yours,
Joseph P. Ciavarella, Vice President
Air Transport Leasing, Inc.
JPC/mm
Enclosures
cc: Laura Banchini
Lorna G. Bell / Moody's
Gregory Harding-Brown
Carol L. Chase, Esq.
Paul J. Derenthal, Esq.
Richard W. Doust
Stephen R. Dyer
Gerald F. Goertz, Jr.
Spencer Jefferies
Anthony Anderson
Clifford B. Wattley
Richard S. Wiley
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-17712
Pegasus Aircraft Partners, L.P.
(Exact name of Registrant as specified in its charter)
Delaware 84-1099968
(State of organization) (IRS employer
Identification No.)
Four Embarcadero Center, 35th Floor
San Francisco, California 94111
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Depositary Units
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: Not applicable.
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Pegasus Aircraft Partners, L.P.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1996
Table of Contents
Page
----
Part I
Item 1 Business................................................................................... 1
Item 2 Properties................................................................................. 11
Item 3 Legal Proceedings.......................................................................... 11
Item 4 Submission of Matters to a Vote
of Security Holders.................................................................... 13
Part II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters........................................................ 14
Item 6 Selected Financial Data.................................................................... 15
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations.............................................................. 15
Item 8 Financial Statements....................................................................... F-1
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................................................................... 22
Part III
Item 10 Directors and Executive Officers
of the Registrant...................................................................... 22
Item 11 Executive Compensation..................................................................... 24
Item 12 Security Ownership of Certain
Beneficial Owners and Management....................................................... 25
Item 13 Certain Relationships and
Related Transactions................................................................... 26
Part IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................................................ 28
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PART I
Item 1. Business
General
Pegasus Aircraft Partners, L.P. (the "Partnership" or the "Registrant")
is a limited partnership organized under the laws of the State of Delaware on
June 23, 1988. The general partners of the Partnership are Pegasus Aircraft
Management Corporation, the Managing General Partner, a California corporation
that is a wholly-owned subsidiary of Pegasus Capital Corporation, and Air
Transport Leasing, Inc., the Administrative General Partner, a Delaware
corporation that is a wholly-owned subsidiary of PaineWebber Group Inc.
(collectively, the "General Partners")
On October 18, 1988, the Partnership commenced an offering of limited
partnership depositary units ("Units"). The $80,000,000 maximum offering size
was reached during the first quarter of 1989. The Partnership incurred
$8,441,000 of commissions and other expenses in connection with the sale of
these Units.
Although the Partnership was organized on June 23, 1988, the
Partnership conducted no activities and recognized no revenues, profits or
losses prior to December 21, 1988 at which time the Partnership commenced
operations. During the period between December 23, 1988 and March 22, 1989, the
Partnership acquired its portfolio of used commercial aircraft, which are
principally subject to triple net operating leases with commercial air carriers.
The Partnership is required to dissolve and distribute all of its
assets no later than December 31, 2012. The Partnership had the right, subject
to certain conditions, to reinvest the proceeds of sales of aircraft occurring
prior to March 22, 1997. The net proceeds of any future sales of aircraft will
be distributed to the partners.
At a meeting of the Board of Directors of Air Transport Leasing, Inc.
("Board"), the Board adopted the Policy Regarding Requests for Partner Lists
attached as Exhibit 11.
Outlook for the Airline and Aircraft Leasing Industries
The US airline industry had another profitable year in 1996 with net
earnings estimated at $6 billion, which continued the industry's profitability
trend. However, the year was marred by the ValueJet and TWA crashes which raised
questions about aircraft maintenance and aging aircraft. With new aircraft
orders increasing, it was a robust year in aircraft production. The demand for
used aircraft was reflected in, for the most part, stable lease rates for used
aircraft. Continental Airlines Inc. ("Continental") continued to report positive
financial results in 1996 and USAirways Group, Inc. (formerly USAir, Inc.) ("US
Air") continued to show financial improvements. TWA was hurt by the incident
discussed above and continued to report losses while announcing a reduction in
European service and its fleet of 747 widebody aircraft. Kiwi International Air
Lines Inc. ("Kiwi") continued to have significant liquidity concerns and in
September 1996 filed for protection from its creditors under Chapter 11 of the
U.S. Bankruptcy
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Code. Aircraft leasing continues to be a highly competitive business. The
Partnership's lessees continue to face significant competitive challenges;
although air traffic has been and continues to be correlated to overall economic
activity.
Recent Partnership Developments
Immediately below is a table which shows the December 1996 appraised
value of the Partnership's aircraft (including a spare engine) to be
approximately $37.9 million, or 52% of the portfolio's original acquisition cost
(excluding acquisition fees) adjusted for capital expenditures since
acquisition. Based on these appraised values, the Partnership's net asset value
at December 31, 1996 was equal to $8.45 per Unit. It should be noted that these
are only estimates of values at that date and not necessarily representative of
the values that will ultimately be realized when these aircraft are disposed of,
nor does this represent the values that may be realized upon the disposition of
a Unit.
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Aircraft Portfolio
The following table describes the Partnership's aircraft portfolio
including a spare engine at December 31, 1996:
December Current
1996 Lease Original Noise Cumulative Cumulative
Current Aircraft Ownership Acquisition Appraised Expiration Delivery Abatement Flight Flight
Lessee Type Interest Costs (1) Value (2) Date (3) Date Compliance Hours (4) Cycles (4)
- ------ ---- -------- --------- --------- -------- ---- ---------- --------- ----------
(in millions) (in millions)
Aircraft on Operating Leases
- ----------------------------
Continental Boeing 727-200
Airlines, Inc. Advanced 100% $ 8.0 $ 3.2 6/98 1974 Stage 2 64,884 43,271
Trans World
Airlines, Inc. Boeing 747-100 100 18.4 9.3 7/00 1970 Stage 2(5) 83,478 16,436
Trans World McDonnell
Airlines, Inc. Douglas MD-82 100 21.3 16.0 10/04 1983 Stage 3 43,165 22,408
USAirways McDonnell
Group, Inc. Douglas MD-81 50(6) 10.0 5.5 06/98(8) 1982 Stage 3 40,781 37,116
Nations Air Boeing 727-200
Inc, (9) Non-Advanced 100 7.6 2.7 01/00 1969 Stage 2 63,530 50,814
(10) Boeing 727-200
Non-Advanced 100 7.5 .9 (10) 1969 Stage 2 61,928 49,554
(7) JT8D-9A engine 100 0.2 .3 (7) 1969 Stage 2 62,937 50,430
----- -----
$73.0 $37.9
===== =====
Notes:
(1) Acquisition costs do not include acquisition related fees of $2.0
million paid to the General Partners. The amounts shown include
additional investments in the respective aircraft which aggregate
approximately $3.6 million, which includes $.6 million of capital
improvements in 1996 to the 747 leased to TWA.
(2) The December 1996 appraised values were determined by an independent
aircraft appraisal firm. Appraised values include the present value of
rents due under leases in place plus the present value of an estimated
residual value for the aircraft at the end of the lease. 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 except in the
case of USAir.
(4) The number of cumulative flight cycles and cumulative flight hours
shown are as of December 31, 1996, except for TWA which is as of March
6, 1997.
(5) The Boeing 747 currently complies with Stage 3 requirements if it is
flown with certain operating restrictions.
(6) The remaining one-half beneficial interest is owned by Pegasus Aircraft
Partners II, L.P., an affiliated partnership.
(7) The engine was recovered from Kiwi and was sold to an unaffiliated
third party in February 1997 for $275,000.
(8) If USAir does not renew for an initial three-year renewal period to
June 2001, the Partnership is entitled to a lease termination payment.
(9) This aircraft was delivered to Nationsair, Inc. on December 31, 1996
after being returned by Kiwi.
(10) This aircraft was returned by Kiwi and was being prepared for delivery
to Sky Trek International Airlines, Inc. ("Sky Trek") a start-up
airline. Value reflected in the table does not include benefit of a
lease with Sky Trek.
The following is a description of the principal financial terms of the
leases listed in the table.
Continental Airlines Leases During December 1988, the Partnership
acquired a Boeing 727-200 advanced aircraft for a total purchase price of
$8,025,000. The aircraft was originally subject to an operating lease with
Continental, originally scheduled to expire on October 31, 1996 with rental
payments payable monthly, in advance at the rate of $81,000.
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In 1996, Continental and the Partnership reached an agreement to extend the
lease to June 30, 1998 at a lease rate of $75,000 per month.
During December 1988, the Partnership acquired a Boeing 747-100
aircraft for a total purchase price of $17,847,000. The aircraft was originally
subject to an operating lease with Continental, the term of which was scheduled
to expire on April 30, 1996 with rental payments payable monthly, in advance, at
the rate of $269,000.
In January 1995, Continental announced that it was grounding its Airbus
Industrie manufactured aircraft and taking certain Boeing 747 aircraft out of
service, including the Boeing 747 Aircraft owned by the Partnership. Continental
discontinued utilizing the Aircraft, did not make any rental payments after
January 1995 and returned the Aircraft to the Partnership. During the quarter
ended September 30, 1995, the Partnership and Continental completed the
negotiation of a lease settlement agreement ("Lease Settlement"). Under the
terms of the Lease Settlement, Continental agreed to pay the Partnership the
amount otherwise due under the Lease as rent for the period February 1995 to
August 1995 plus a discounted amount representing the amount of rent that would
have been due under the Lease for the period September 1, 1995 to April 30,
1996, the scheduled expiration date of the Lease. Continental returned the
Aircraft and engines in the return condition required by the Lease. On October
16, 1995 the Partnership received the Lease Settlement proceeds totaling
$3,906,000.
A substantial portion of the proceeds were accounted for under the cost
recovery method reducing the Partnership's net carrying value of the aircraft.
The remaining gain on the lease settlement was offset by the related management
fees accrued and thus no net gain or loss was recognized on the settlement. Item
8, Financial Statements, Note 5, "Aircraft Under Operating Leases," for a
further description of the Boeing 747-100 aircraft, which is currently leased to
TWA.
Continental filed for Chapter 11 bankruptcy protection on December 3,
1990 and had stopped making lease payments. The Partnership entered into various
lease modifications and financing arrangements with Continental as a result of
the bankruptcy. At December 31, 1996, the Partnership had an advance remaining
to Continental in the amount of $40,000 with respect to aircraft modifications,
which was paid off in early 1997.
Trans World Airlines Lease During February 1989, the Partnership
acquired a McDonnell Douglas MD-82 aircraft for a total purchase price of
$21,017,000, subject to an operating lease with TWA. The lease, which was
originally scheduled to expire on April 23, 1993 was modified and under the
terms of the lease amendment was extended until October 1, 1998 with rentals
payable monthly, in advance, at the rate of $185,000 per month.
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Pursuant to the lease amendment, the Partnership reimbursed TWA for
$225,000 of capital improvements and advanced $750,000 to TWA to finance certain
major maintenance procedures. TWA is repaying the $750,000 to the Partnership
over the remaining lease term, in equal monthly installments, with interest at a
fixed rate of 9.68%. At December 31, 1996, the balance of the receivable was
$284,000 ($428,000 at December 31,1995). All 1997 payments have been made by TWA
when due.
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 (the
"Exchange Offer"). TWA and the Partnership agreed to a deferral of 50% of the
original rent scheduled for November 1994 and 75% of the original rent scheduled
from December 1994 to April 1995, with originally scheduled payments resuming in
May 1995. Additionally, TWA and the Partnership reached an agreement to extend
the lease of the MD-82 aircraft by six years beyond the then scheduled
expiration date to October 1, 2004 at the current lease rate of $185,000 per
month. All rents deferred during the November 1994 to April 1995 period were
repaid with interest at 12% from the date of the deferral over an 18 month
period commencing May 1, 1995. On June 30, 1995, TWA filed its prepackaged
reorganization plan under Chapter 11 of the US Bankruptcy Code. On August 23,
1995, the reorganization plan, which included the foregoing lease modifications,
was confirmed by the Bankruptcy Court, and TWA emerged from bankruptcy. TWA has
made all rental payments, advance repayments and payments of deferred rent when
due. However, there can be no assurance that TWA will be able to meet its
obligations in the future.
In July, the Partnership delivered its Boeing 747-100 aircraft,
formerly leased to Continental, to TWA subject to lease with a term of four
years. The lease provides for a monthly rent of $180,000. The Partnership
performed a scheduled maintenance check on the aircraft to prepare the aircraft
for delivery. The Partnership incurred costs of $1,280,000 in connection with
the redelivery, integration and maintenance of the 747 aircraft, of which
$669,000 represented maintenance expense and $611,000 were capitalized
expenditures. The aircraft was delivered to TWA on July 12, 1996. The
Partnership received a security deposit of $360,000 from TWA with respect to the
lease.
USAir Lease During March 1989, the Partnership acquired one-half of the
beneficial interest in a trust ("Trust") that is the owner/lessor of a McDonnell
Douglas MD-81 aircraft ("USAir Aircraft") for a total purchase price of
$9,999,000. The remaining one-half interest in the Trust is owned by Pegasus
Aircraft Partners II, L.P, an affiliated partnership. The aircraft is subject to
an operating lease with USAir, the term of which ends on June 1, 1998. The lease
may be terminated subject to the lessee's guarantee that the Partnership will
receive contractually defined minimum termination values upon remarketing of the
aircraft. Rental payments are payable quarterly, in arrears, at a rate of
$304,000 (for the Partnership's one-half interest in the aircraft). The lease
provided for one three-year renewal option, at the same quarterly rental rate.
If the lease is not renewed for the 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 fair market value at the end of any renewal
term. The Aircraft was purchased subject to a tax benefit transfer
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lease ("TBT Lease"), which provided for the transfer of certain tax benefits to
a tax lessor. The Trust, as owner and tax lessor under the TBT Lease, has agreed
to indemnify the tax lessor for the loss of the tax benefits in certain
circumstances and posted a letter of credit to secure the obligation under such
indemnification. Under the operating lease, USAir has assumed all obligations,
liabilities and indemnities of the Trust to the tax lessor and has indemnified
the Trust for its obligations to the tax lessor except those arising from
breaches by the Trust of covenants under the operating lease. USAir has not
posted a letter of credit to collateralize this obligation. As a result of the
foregoing, if the tax lessor draws on the letter of credit as a result of action
by the lessee, the Partnership and Pegasus Aircraft Partners II, L.P. through
the Trust will be responsible for the loss to the tax lessor until and if the
lessee performs under its indemnification. To date, there have been no calls on
the letter of credit.
The tax lessor is entitled to call on the letter of credit whether its
loss of tax benefits is caused by Pegasus Aircraft Partners II, L.P. or the
Partnership, and Pegasus Aircraft Partners II, L.P. and the Partnership have
agreed to indemnify each other for any loss occasioned by the acts of the other.
Kiwi International Air Lines Inc. - Bankruptcy The Partnership owns two
Boeing 727-200 non-advanced aircraft, originally acquired on December 1988 for
$6,308,000 per aircraft. In February 1994 and April 1994, the Partnership
entered into leases with Kiwi International Air Lines Inc., ("Kiwi") each
originally for a term of approximately five years with rents payable monthly in
advance at $55,000 per aircraft. The leases were modified in 1995 and extended
to December 31, 1999. The leases also required Kiwi to pay maintenance reserves
for airframe and engines, of $250 per flight hour, which could be drawn upon by
Kiwi for specific maintenance procedures. The aircraft were delivered in April
and July 1994. In connection with the first Kiwi lease, the Partnership also
acquired an additional aircraft engine, at a cost of $195,000, which was used as
a spare by Kiwi on a utilization basis at $105 per flight hour of use. The
Partnership invested an additional $3,108,000 for maintenance, aging aircraft
modifications and other Kiwi requested modifications prior to delivery, $580,000
of which was funded by return condition settlement payments from the prior
lessee. The leases allowed Kiwi to request that the aircraft be hushkitted by
the Partnership at a cost of approximately $1.9 million each to obtain Stage 3
noise abatement status or terminate the lease.
In June 1996, Kiwi agreed with the FAA to ground 25% of its fleet due
to certain pilot training handbook deficiencies. In August 1996, Kiwi and the
FAA resolved the deficiencies and Kiwi returned to full capacity. In addition to
the FAA grounding, Kiwi was also negatively impacted by the market reaction to
the ValuJet incident. During 1996, Kiwi did not meet its financial goals. In
July 1996, an institutional investor contributed $4,000,000 in return for a
convertible note due in March 1997, for up to 32% of Kiwi's common stock and two
seats on Kiwi's Board of Directors. The institutional investor had options to
invest an additional $6,000,000 in convertible preferred stock which expire in
March 1997. Existing shareholders (including directors and employees) were given
the opportunity to make additional investments.
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Kiwi requested and was granted by the Partnership a deferral of its August 1996
rental and July 1996 maintenance payments. Kiwi was also unable to make its
September rental and August maintenance payments and was placed in default by
the Partnership.
In late September, Kiwi proposed a restructuring of its obligations
with certain creditors, including the Partnership. On September 30, 1996, Kiwi
filed a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code ("Bankruptcy Code") and did not make any subsequent payments.
The Kiwi leases accounted for approximately 19% of the Partnership's rental
revenue in 1996 and the aircraft had net book values aggregating approximately
$4,000,000, after reflecting a provision for decline in market value of $150,000
at December 31, 1996. On October 15, 1996, Kiwi ceased scheduled flight
operations while still exploring financial alternatives. The Court approved
Kiwi's motion to reject both leases as of November 15, 1996. The Partnership
provided an allowance for bad debts in the amount of $240,000 relating to
amounts due from Kiwi as of the bankruptcy date and did not record any revenue
beyond that date. Kiwi obtained debtor-in-possession financing and recommenced
operations in early 1997.
The Partnership has a claim against Kiwi for all unpaid items in
connection with the leases as well as rejection damages. The Partnership
currently holds maintenance deposits aggregating approximately $1,627,000, which
the Partnership believes are not sufficient to complete work required on the
aircraft and the related engines to meet lease return conditions and make the
aircraft marketable. The Partnership filed an adversarial complaint seeking the
Bankruptcy Court's authority to utilize the maintenance reserves held. The
Partners are in settlement discussions with a hearing date scheduled for June
1997. The Partnership estimates that the cost to meet lease return conditions
would be approximately $2.9 million. The Partnership is also involved in
litigation within the Kiwi bankruptcy with the company who acted as Kiwi's
engine manager regarding each party's compliance with a settlement agreement
entered into to facilitate the recovery of the aircraft.
The Partnership recovered the aircraft and leased one to Nations Air
Inc. in December 1996 (see below) and committed the second to Sky Trek
International Airlines, Inc ("Sky Trek").
Nations Air
On December 31, 1996, the Partnership delivered a 727-200 non-advanced
aircraft, formerly leased to Kiwi, to Nations Air, Inc. ("Nations"). Nations is
a start-up airline providing contract and charter service. The lease is for a
term of approximately 36 months at a lease rate of $65,000 per month. Nations is
also required to make initial maintenance reserve payments of $347 per flight
hour (to be reduced thereafter and used only for specific maintenance)and is
obligated to complete the next phase "C" check without reimbursement from
maintenance reserves.
At the time of its delivery to Nations, one of the installed engines
belonged to Pegasus Aircraft Partners II, LP an affiliated partnership and the
other two engines belonged to affiliates of the Managing General Partner. The
Partnership will pay those entities for their share of the rents (in the
aggregate of $45,000 per month plus related reserves) while using such engines.
The Partnership purchased five rebuilt engines in February 1997 for an aggregate
purchase price
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of $2,150,000 plus the core engines returned with the Kiwi aircraft (see Item 8,
Footnote 11, "Subsequent Events"), three of which will be installed on the
aircraft when the aircraft is input for its next maintenance service scheduled
for late April-May 1997.
Significant Lessees
The Partnership leased its aircraft to four different airlines during
1996. Revenues from all of these airlines accounted for greater than 10% of the
total rental revenues of the Partnership during 1996 as follows:
Airline Percent of Total Rental Revenues
------- --------------------------------
TransWorld Airlines, Inc. 49.0%
Kiwi International Air Lines, Inc. 18.8%(1)
USAirway Group, Inc. 18.4%
Continental Airlines, Inc. 13.8%
(1) Includes $240,000 of rentals for which an allowance for bad debts was
provided.
Safety Requirements and Aircraft Aging
In addition to registration, the FAA imposes strict requirements
governing aircraft inspection and certification, maintenance, equipment
requirements, general operating and flight rules (including limits on arrivals
and departures), noise levels, certification of personnel and record keeping in
connection with aircraft maintenance. FAA regulations establish standards for
repairs, periodic overhauls and alterations and require that the owner or
operator of an aircraft establish an airworthiness inspection program to be
carried out by certified mechanics. No aircraft of the Partnership may be
operated without a current airworthiness certificate.
The FAA periodically reviews Service Bulletins which are issued by the
aircraft manufacturers. These bulletins focus on safety problems that have
developed during the aircraft's operation. The FAA may incorporate these Service
Bulletins in Airworthiness Directives ("ADs"), which are mandates requiring the
airline to perform specific maintenance within a specified period of time.
Aircraft aging is a significant issue in aircraft safety regulation. In
the past, certain aviation incidents and accidents raised concerns over the
structural integrity of older aircraft. In 1989, in its "Report to Congress on
the Status of the U.S. Stage 2 Commercial Aircraft Fleet", the FAA stated that
"no correlation has been established between the chronological age of an
aircraft and its structural airworthiness. A more accurate assessment of the
physical "age" of an aircraft is the total number of flight cycles and flight
hours flown." A flight cycle is defined as one takeoff and one landing. A flight
cycle is important because of the added stress on the airframe, landing gear and
other components from repeated takeoffs, landings and pressurizations. As
different types of aircraft have different missions, and carriers fly a variety
of routes, flight cycles can vary widely among aircraft of the same
chronological age. In general, narrow-body aircraft which are used for
short-haul service will have greater cycles per year than wide-body aircraft
used for longer routes. Other factors which contribute to the aging of an
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aircraft are the number of hours actually flown, the predominant environment in
which an aircraft has flown, and its actual age in years.
The FAA has adopted certain ADs for Boeing and McDonnell Douglas
aircraft models, including Boeing 727s, 737s and 747s and McDonnell Douglas
DC-9s, MD-80s and DC-10s. These ADs make mandatory the periodic replacement or
modification of structural materials, fittings and skin at certain times in the
life of an aircraft, typically when the aircraft reaches a certain number of
flight cycles or age threshold. Previously, these aircraft were subject only to
periodic inspection, and the replacement and modification of materials and parts
was done where deemed necessary. Similar ADs for Lockheed and Airbus
manufactured aircraft are expected to be proposed and adopted by the FAA. In
addition, it is widely expected that foreign civil aviation authorities,
especially in Europe and Japan, will adopt similar measures to protect the
structural integrity of older aircraft.
These aging aircraft ADs will initially impact only a limited number of
older aircraft, but additional aircraft will be covered as they accumulate
time-and-service and reach the thresholds for the required modifications.
Significantly, in the case of each aircraft type, a significant majority of
replacements or modifications are mandated when a plane reaches a certain number
of flight cycles and relatively few required replacements are triggered when a
plane reaches a certain chronological age or number of flight hours.
The following table summarizes the age, flight cycle, and flight hour
thresholds for each major aircraft type under the ADs. In general, these
thresholds are based on the "economic design goal" of an aircraft, which is
typically considered to be the period of service after which an increase in
maintenance costs is expected to take place in order to assure continued
operational safety. In addition, the table provides an estimate by the FAA of
the costs of complying with all of the mandated replacements and modifications
of the ADs. It is important to note that since most of the proposed work under
the ADs is based on flight cycle thresholds, those lower-cycle aircraft which
reach the aircraft age or flight hour thresholds should incur significantly
lower AD compliance cost than the total amounts estimated below.
Aircraft Flight Flight Estimated
Aircraft Age Cycle Hour AD
Type Threshold Threshold Threshold Costs
---- --------- --------- --------- -----
(Years)
Boeing 727 20 60,000 N/A $1,100,000
Boeing 737 20 75,000 N/A $ 934,000
Boeing 747 20 20,000* N/A $3,400,000
McDonnell Douglas DC-9 20 100,000 75,000 $ 79,000
McDonnell Douglas MD-80 20 75,000 75,000 $ 4,000
McDonnell Douglas DC-10 None 42,000 60,000 $ 187,000
* Substantially cycle limited
Flight cycle and flight hour information with respect to the
Partnership's aircraft are included in the aircraft portfolio table included
earlier on page 3.
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The Partnership's leases generally require the lessees to bear the
costs of compliance with ADs which require action during the lease terms. The
Partnership's three 727 Boeing aircraft have had the major calendar
modifications performed as required.
Overall, the General Partners believe that the increased maintenance
costs mandated for older aircraft may have some impact on re-lease and resale
values for these aircraft, but counterbalancing this, compliance with the ADs
should also serve to prolong the revenue lives of the affected aircraft.
Aircraft Noise Regulations
On November 5, 1990, Congress enacted into law the Airport Noise and
Capacity Act of 1990 (the "Act"). On September 24, 1991, the FAA issued the
final rules of implementation for the Act. The Act provides that Stage 2
aircraft will be phased out from operation within United States airspace as of
December 31, 1999.
Implementing regulations proposed by the FAA would require each United
States operator to increase its Stage 3 airplane fleet; to 50 percent by
December 31, 1996; to 75 percent by December 31, 1998 and to 100 percent by
December 31, 1999.
However, the Act further provides, that if by July 1, 1999, at least
85% of an air carrier's fleet complies with Stage 3 noise levels, the carrier
may apply for a waiver of the operational ban for the remaining aircraft in the
operator's fleet until December 31, 2003. The application for such a waiver must
be submitted to the Secretary of the Department of Transportation no later than
January 1, 1999 and must include a plan with firm orders for making all aircraft
operated by the air carrier comply with Stage 3 noise levels by December 31,
2003.
Stage 3 hushkitting and re-engineering for the Boeing 727-200 aircraft
have been approved by the FAA. The Partnership's Boeing 747 will comply with
Stage 3 noise levels if it is flown with certain operating restrictions.
Alternatively, the engines can be upgraded with existing technology to provide
for greater performance and compliance with Stage 3 requirements.
Certain airlines have determined that it is economically feasible to
hushkit certain Stage 2 aircraft to achieve Stage 3 noise standards. The
Partnership continues to monitor the marketplace based upon the availability of
aircraft, pricing for Stage 2 and Stage 3 aircraft and the timetable for
implementation of Stage 3, to best position the Partnership's aircraft for
continued and future deployment.
Competition
The aircraft leasing industry is highly competitive. The Partnership
competes with aircraft manufacturers, distributors, airlines and other
operators, equipment managers, leasing companies, financial institutions and
other parties engaged in leasing, managing or remarketing aircraft, many of
which have significantly greater financial resources and greater experience than
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15
the Partnership. Such competitors may lease aircraft at lower rates than the
Partnership and provide benefits, such as direct maintenance, crews, support
services and trade-in privileges, which the Partnership does not intend to
provide. Competitors may include certain affiliates of the General Partners.
Employees
The Partnership has no employees. The officers, directors and employees
of the General Partners and their affiliates perform services on behalf of the
Partnership. The General Partners are entitled to certain fees and
reimbursements of certain out-of-pocket expenses incurred in connection with the
performance of these management services. See Item 10 of this Report, "Directors
and Executive Officers of the Registrant", and Item 13 of this Report, "Certain
Relationships and Related Transactions", which are incorporated herein by
reference.
Item 2. Properties
The Partnership does not own or lease any physical properties other
than the aircraft and engine which are discussed in Item 1 of this Report,
"Business", which is incorporated herein by reference.
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York ("District Court") 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 Paine Webber Group, Inc. (together, "PaineWebber"),
among others, by allegedly dissatisfied partnership investors. In March 1995,
after the actions were consolidated under the title In re: PaineWebber Limited
Partnerships Litigation, the plaintiffs amended their complaint to assert claims
against a variety of other defendants, including Air Transport Leasing, Inc., an
affiliate of PaineWebber and the Administrative General Partner in the
Partnership ("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions
alleged, among other things, that, in connection with the sale of interests in
the Partnership, PaineWebber and the Administrative General Partner (1) failed
to provide adequate disclosure of the risks involved with each partnership; (2)
made false and misleading representations about the safety of the investments
and the partnership's anticipated performance; and (3) marketed the partnership
to investors for whom such investments were not suitable. The plaintiffs also
alleged that following the sale of the partnership investments PaineWebber and
the Administrative General Partner misrepresented financial information about
the partnership's value and performance. The amended complaint alleged that
PaineWebber and the Administrative General Partner violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the federal securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested
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by them in the partnerships, as well as disgorgement of all fees and other
income derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
On May 30, 1995, the 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
agreed to settle the case. A definitive settlement was signed in July 1996 and
in March 1997, the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement, PaineWebber agreed to pay $125
million and additional consideration to class members.
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
challenged the proposed settlement of these cases. Their objections were
overruled when the District Court approved the class action settlement with
respect to the New York Limited Partnership Actions. The Illinois case has been
dismissed.
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 District Court and
consolidated under the title, Mallia vs. PaineWebber, Inc. 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 230 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. In
September 1996, the California Superior Court dismissed many of the
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plaintiffs' claims as barred by the applicable statutes of limitation.
In June 1996, counsel for the Abbate plaintiffs instituted two
additional actions containing allegations nearly identical to those set forth in
Abbate. Bandrowski v PaineWebber Incorporated, et al, was filed in California
Superior Court and Barstad v. PaineWebber Incorporated, et al, was filed in
Arizona Superior Court. Collectively, the two additional actions are brought by
approximately 50 plaintiffs and seek compensatory damages of approximately $4
million plus punitive damages. In March 1997 all of these actions were settled.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner were entitled to indemnification
from the Partnership for expenses and liabilities in connection with the above
actions. PaineWebber and its affiliates have agreed to not seek any
indemnification from the Partnership for any amounts payable in connection with
the New York Limited Partnership Actions. The General Partners do not believe
that the settlement of the Abbate, Bandrowski and Barstad actions will have a
material effect on the Partnership's financial statements, taken as a whole.
On September 30, 1996, Kiwi filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code and the
Partnership recovered the aircraft. The Partnership has a claim against Kiwi for
all unpaid items under the leases as well as rejection damages. The Partnership
filed or adversarial complaint seeking the Bankruptcy Court's authority to use
certain maintenance reserves ($1.6 million) collected from Kiwi. The Partnership
estimates that the cost to meet return condition would be approximately
$2,900,000. The parties are in settlement discussions with a hearing date
scheduled for June 1997.The Partnership is also involved in a litigation within
the Kiwi bankruptcy with the company that acted as Kiwi's engine manager
regarding each party's compliance with a settlement agreement entered into to
facilitate the recovery of the aircraft.
On December 5, 1996, an action was filed in the Court of Chancery of
the State of Delaware in New Castle County entitled "Equity Resources Cambridge
Fund v. Pegasus Aircraft Partners, L.P. et al. The named defendants include the
Partnership and its general partners. Equity Resources Cambridge Fund seeks
access to the list of limited partners of the Partnership. On January 2, 1997
defendants answered the complaint, denying the substantive allegations thereof
and asserting several affirmative defenses. The parties are in pre-trial
discovery. It is impossible to predict the outcome of this litigation, however,
the General Partners do not believe that the outcome will have a material effect
on the Partnership's financial statements, taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Limited Partners of the
Partnership, through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year ended December 31, 1996.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Units represent the economic rights attributable to limited
partnership interests in the Partnership. There is no organized trading market
for the purchase and sale of the Units and certain measures have been adopted
and implemented to assure that no such organized trading market will develop to
assure continued Partnership status.
As of March 1, 1997, the number of Limited Partners of record was
approximately 4,900.
The Partnership declared the following distributions to its Limited
Partners out of cash flow received from operations during 1996 and 1995:
Amount Of
Distribution
Period Per Unit Record Date Payment Date
------ -------- ----------- ------------
1st Quarter 1996 $.40 March 31, 1996 April 29, 1996
2nd Quarter 1996 .40 June 30, 1996 July 29, 1996
3rd Quarter 1996 .40 September 30, 1996 October 28, 1996
4th Quarter 1996 .40 December 31, 1996 January 24, 1997
1st Quarter 1995 .25 March 31, 1995 April 29, 1995
2nd Quarter 1995 .30 June 30, 1995 July 29, 1995
3rd Quarter 1995 .90 September 30, 1995 October 29, 1995
4th Quarter 1995 .40 December 31, 1995 January 26, 1996
Total distributions to all partners for 1996 and 1995 were declared as
follows (in thousands):
1996 1995
------ ------
Limited Partners $6,400 $7,400
General Partners 64 74
------ ------
$6,464 $7,474
====== ======
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital, or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the amount of net
income reported by the Partnership for accounting purposes, approximately 89%,
88%, and 94%, respectively, of the cash distributions declared for the years
ended December 31, 1996, 1995 and 1994 constituted a return of capital. Also,
based on the amount of
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19
net income reported by the Partnership for accounting purposes, approximately
70% of the cash distributions paid to the partners from inception of the
Partnership through December 31, 1996 constituted a return of capital. However,
the total actual return on capital over the Partnership's life can only be
determined at the termination of the Partnership after all cash flows, including
proceeds from the sale of the aircraft, have been realized.
Item 6. Selected Financial Data
The following selected financial data of the Partnership was derived
from the audited financial statements for the indicated periods. The information
set forth below should be read in conjunction with the Partnership's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Items 8 and 7,
respectively, of this Report.
As of December 31,
or Year Ended December 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------- ------- -------
(in thousands, except per unit amounts)
Rental Revenue $ 6,604 $6,076(2) $8,527 $ 9,062 $10,006
Net Income 711 880 426 2,881 1,740
Net Income per Limited
Partnership Unit (1) .18 .22 .11 .71 .43
Distributions per Limited
Partnership Unit (1) 1.60 1.85 1.80 1.90 2.30
Total Assets 31,158 36,611 42,619 46,727 51,875
Notes Payable 1,218 1,625 2,000 -- --
Partners' Equity 25,423 31,176 37,770 44,616 49,411
- ----------------
(1) Distribution amounts are reflected on the accrual basis.
(2) Such amount excludes lease settlement proceeds accounted for under the
cost recovery method.
Item 7. 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 $6.5
million in 1996 ($1.60 per unit), $7.5 million in 1995 ($1.85 per Unit), and
$7.3 million in 1994 ($1.80 per Unit). Net cash provided by operating activities
was $5.2 million in 1996, $6.1 million for 1995, and $7.9 million for 1994. In
1995, the Partnership received the Continental Lease Settlement proceeds of $3.9
million which was substantially accounted for under the cost recovery method and
thus, was not included in cash from operating activities. In the aggregate, for
this three year period net cash provided by operating activities totaled $19.2
million and cash distributions
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20
declared by the Partnership totaled $21.3 million. Further, during 1996, 1995
and 1994 the Partnership paid cash distributions of $6.4 million, $7.7 million
and $7.3 million, respectively, totaling $21.4 million for the three year
period.
Partnership equity declined by approximately $5.8 million from December
31, 1995 to December 31, 1996 as a result of the declaration of cash
distributions to the partners in excess of the Partnership's net income. This
resulted from the fact that, unlike net income, cash flow generated by
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.
At December 31, 1996, the Partnership's unrestricted cash and cash
equivalents exceeded declared, but unpaid, distributions to partners by
$873,000. At December 31, 1995, the Partnership's unrestricted cash and cash
equivalents exceeded declared, but unpaid, distributions to the partners by
$2,456,000. The decrease in liquidity was primarily attributable to the
expenditure of approximately $1.3 million relating to the remarket of the Boeing
747 aircraft to TWA as well as the Kiwi bankruptcy which reduced cash flow.
Rent and other receivables, net decreased by $874,000 from $1,534,000
at December 31, 1995 to $660,000 at December 31, 1996. This decrease is
primarily the result of the continued repayments of advances and deferrals by
Continental and TWA as well as the repayment of previously deferred rent by Kiwi
in 1996. However, the Partnership's collections were impacted by the Kiwi
bankruptcy and the Partnership provided an allowance for bad debts totaling
$220,000 (2 months aggregate rent) with respect to the Kiwi aircraft and $20,000
with respect to the spare engine (see Item 8 Financial Statements, Note 5
"Aircraft Under Operating Leases - Kiwi Bankruptcy").
Prepaid expenses and other increased by $88,000 from $47,000 at
December 31, 1995 to $135,000 at December 31, 1996. The increase represents the
costs associated with the remarket to Nations, partially offset by a reduction
in certain prepayments.
Deferred rental income and deposits increased $458,000 from $218,000 at
December 31, 1995 to $676,000 at December 31, 1996 primarily due to the security
deposit received from TWA.
Payable to affiliates decreased by $144,000, from $628,000 at December
31, 1995 to $484,000 at December 31, 1996. The decrease was attributable
primarily to the payment to the Administrative General Partner, during 1996, of
amounts previously deferred, partially offset by amounts due to an affiliate of
the Managing General Partner for maintenance on the aircraft delivered to
Nations. As part of the class action settlement (see Item 8, Financial
Statements, Note 9, "Litigation"), the fees previously deferred as well as
future fees and distributions earned by the Administrative General Partner have
been assigned by an affiliate to an escrow account for the benefit of the class
action members (see Item 8, Financial Statements, Note 6, "Transactions with
Affiliates").
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During the year ended December 31, 1996 the Partnership paid cash
distributions aggregating $1.60 per Unit. The quarterly distribution represented
an annualized rate equal to 8% of contributed capital ($0.40 per Unit).
The amount of each distribution will be determined on a quarterly basis
after an evaluation of the Partnership's operating results and its current and
expected financial position.
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 for the
fiscal period may be deemed a return of capital. Based on the amount of net
income reported by the Partnership for accounting purposes, 89% of the cash
distributions declared for 1996, constituted a return of capital. Also, based on
the amount of net income reported by the Partnership for accounting purposes,
approximately 70% of the cash distributions paid to the partners from inception
of the Partnership through December 31, 1996 constituted a return of capital.
However, the total actual return on capital over the Partnership's life can only
be determined at the termination of the Partnership after all cash flows,
including proceeds from the sale of the aircraft, have been realized.
In April 1994, the Partnership established a loan facility with a third
party lender that expired in May 1995. In July 1995, the Partnership and the
Lender completed an extension of the commitment. Under the new agreement, the
aggregate commitment remained at $4,000,000, the Partnership's ability to borrow
under the facility was extended until May 1, 1997 and the floating interest rate
charged under the facility was reduced to the Lender's prime rate plus 0.5%. The
Lender released the Boeing 747-100 aircraft as collateral under the loan and
received a perfected security interest in the Partnership's MD-82 aircraft
leased to TWA. Through December 31, 1995, the Partnership had borrowed an
aggregate of $2,150,000 pursuant to the loan agreement, of which $1,218,000 and
$1,625,000 were outstanding at December 31, 1996 and December 31, 1995,
respectively. In connection with the extension of the loan commitment the Lender
released its interest in a cash collateral account established to secure the
Partnership's obligation under the letter of credit agreement relating to the
TBT lease.
The Partnership may require additional financing to fund future
maintenance work on the aircraft, hushkitting the aircraft to comply with Stage
3 aircraft noise regulation, or other capital improvements such as cargo
conversion. The Partnership is permitted to borrow up to 35% of the original
offering proceeds for improvements, enhancement or maintenance of aircraft. Any
such borrowings will only be made if the General Partners believe such
borrowings will be in the best interests of the Partnership and will enhance or
protect portfolio value. However, there can be no assurance that the Partnership
would be able to obtain any additional borrowings, if required.
As previously reported, the Partnership settled the early termination
of the Continental 747 lease in 1995 and accepted redelivery of the aircraft
(see Item 1 "Business" and Item 8 "Financial Statements", Note 5, "Equipment
Under Operating Leases" for a complete discussion). The Partnership delivered
the aircraft to TWA in July 1996 for a term of 48 months at a lease rate of
$180,000 per month. The Partnership incurred scheduled maintenance and
integration costs, which aggregated approximately $1,300,000 to complete the
remarket of the Boeing 747-100
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22
aircraft to TWA. The Partnership financed such costs through its cash reserves
that had been provided by the Lease Settlement. The lease of the Boeing 727
aircraft, originally scheduled to expire in October 1996, was extended to June
30, 1998 at a rate of $75,000 per month.
Additionally, during 1996, Kiwi continued to have liquidity and capital
concerns. In late September, Kiwi proposed a restructuring of its obligations
with certain creditors, including the Partnership. On September 30, 1996, Kiwi
filed a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code ("Bankruptcy Code") and did not make any subsequent payments.
The Kiwi leases accounted for approximately 19% of the Partnership's rental
revenue during 1996 and the aircraft had net book values aggregating
approximately $4,000,000. The Partnership currently holds maintenance deposits
aggregating approximately $1,627,000, which the Partnership believes is not
sufficient to complete work required on the aircraft and the related engines to
meet lease return conditions and make the aircraft marketable. On October
15,1996, Kiwi ceased scheduled flight operations while still exploring financial
alternatives. The court approved Kiwi's rejection of both leases as of November
15, 1996. The Partnership recovered the aircraft and delivered one to Nations
and committed the second aircraft to the Sky Trek. The Partners purchased five
engines at a cost of $2,150,000 plus the six cores from the two former Kiwi
aircraft in February 1997 and committed $2.7 million including a hushkit for the
Sky Trek aircraft. The Partnership has reached an agreement in principle to
establish a $7.5 million borrowing facility which would pay off existing debt
and fund capital expenditures. The General Partners will determine the amount of
future cash distributions after assessing the Partnership's operating results,
its obligations and other cash requirements.
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 triple
net operating leases. The balance of the Partnership's revenue consisted of
interest income earned with respect to certain advances made to lessees as well
as certain deferred rental arrangements with Continental, TWA and Kiwi.
Under the terms of the triple net leases, substantially all of the
expenses related to the operation and maintenance of the aircraft during 1996,
were paid for by the lessees or in the case of Kiwi (until the bankruptcy filing
by Kiwi and subsequent rejection of the leases), funded to a certain extent
through hourly maintenance reserves paid by Kiwi. 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 and the
cost of the letter of credit required under the terms of the TBT lease on the
McDonnell Douglas MD-81 leased to USAir. Additionally, the Partnership incurred
maintenance costs of $669,000 with respect to the 747 aircraft leased to TWA.
18
23
The Partnership also records depreciation expense pertaining to the
aircraft and incurs certain general and administrative expenses in connection
with 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.
1996 as compared to 1995
The Partnership's net income for the year ended December 31, 1996
("1996 Period") was $711,000 as compared to $880,000 for the year ended December
31, 1995 ("1995 Period").
The decrease in the Partnership's net income in the 1996 Period as
compared to the 1995 Period resulted primarily from the maintenance expense
incurred in connection with the delivery of the 747-100 aircraft to TWA and the
provision for bad debts provided in the 1996 Period with respect to the Kiwi
receivables offset by the amount that rents generated by the Boeing 747 remarket
in July 1996 exceeded the rents recognized in the 1995 Period (one month)
relating to the 747 prior to Continental returning it.
Rental revenue increased by $528,000, or 9% for the 1996 Period as
compared to the 1995 Period. The increase in the 1996 Period as compared to the
1995 Period was attributable to the remarket of the 747 aircraft to TWA in July
1996 (the 747 generated only one month of rental revenue in the 1995 Period) and
the revenue recognized with respect to the spare engine leased to Kiwi,
partially offset by the Kiwi bankruptcy. The Partnership did not recognize any
rental revenue with respect to the Kiwi aircraft after Kiwi's bankruptcy filing
on September 30, 1996.
Interest income for the 1996 Period decreased by $71,000 or 24% as
compared to the 1995 Period. This decrease was primarily attributable to the
continued repayment of advances and deferrals pursuant to various repayment
schedules reducing the balances on which interest income is earned, as well as
reduction in cash reserves principally due to the amounts expended relating to
the TWA remarket (approximately $1,300,000 of maintenance and capital
expenditures).
Depreciation and amortization decreased by $45,000 or 1% for the 1996
Period, in comparison to the 1995 Period which was consistent with the aircraft
in service during the respective years.
Management and re-lease fees payable to the General Partners for the
1996 Period decreased $239,000, or 34%, in comparison to the 1995 Period. The
primary reason for the decrease was the recognition in the 1995 Period of the
management fees associated with the Continental Settlement, which aggregated
$233,000 (and which was offset by the other income recognized in its 1995
period). The decrease was partially offset in the 1996 Period, by the management
and re-lease fees associated with 747 aircraft remarketed to TWA in July. The
maintenance expense incurred in connection with the remarket of the 747 aircraft
in the 1996 Period was an additional factor in the decrease in management fees
in the 1996 Period as compared to the 1995 Period.
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24
General and administrative expenses increased by $24,000 or 11% in the
1996 Period as compared to the 1995 Period due principally to an increase in
legal fees as the result of the Kiwi bankruptcy.
Direct lease expenses increased by $20,000 or 19% in the 1996 Period as
compared to the 1995 Period, due principally to insurance premiums as well as
aircraft storage costs relating to the 747 aircraft while the aircraft was off
lease, partially offset by a decrease in letter of credit fees.
Interest expense decreased by $66,000 or 33% in the 1996 Period as
compared to the 1995 Period, due principally to the continued repayment of
principal which reduced the outstanding balances as well as the full year effect
of the reduction in interest rates in July 1995.
Aircraft maintenance and other expense of $709,000 was incurred in the
1996 Period, of which $669,000 reflected the work completed with respect to a
maintenance check performed on the 747 aircraft prior to the delivery to TWA in
July 1996. No such amount was incurred in the 1995 Period.
1995 as compared to 1994
The Partnership's net income was $880,000 for the 1995 Period as
compared to $426,000 for the year ended December 31, 1994 ("1994 Period").
The increase in the Partnership's net income for the 1995 Period as
compared to the 1994 Period resulted primarily from the reduced requirement for
provision for decline in market value of aircraft in the 1995 Period as compared
to the 1994 Period ($400,000 as compared to $2,000,000) offset by a decrease in
rental revenue, as a result of the return of the 747-100 aircraft leased to
Continental. (See above discussion regarding Continental and the related Lease
Settlement.) The decrease in rental revenue was partially offset by a decrease
in depreciation due primarily to the non-recognition of depreciation expense in
the 1995 Period with respect to the 747-100 aircraft which was off lease for
substantially all of 1995 as well as a reduction in depreciable base of certain
aircraft due to the provisions for declines in market value provided in 1994.
Rental revenue decreased $2,451,000 or 28% for the 1995 Period
principally due to the non-accrual of rent with respect to the 747-100 aircraft
which was returned early in 1995 by Continental (see discussion of Continental
Lease Settlement), which was partially offset by rents generated by the two
727-200 aircraft leased to Kiwi that were off-lease for a portion of the 1994
Period.
Interest income for the 1995 Period increased by $63,000, or 27% in
comparison to the 1994 Period. The increase was primarily attributable to the
interest income earned with respect to the TWA rent deferrals, the Kiwi rent
deferrals and the advance made to Continental in the fourth quarter of 1994 and
the undistributed proceeds from the Continental settlement, partially offset by
the continued repayment of advances pursuant to various repayment schedules.
20
25
The Partnership recognized other income in 1995 of $233,000 which
represented the difference between the Continental Lease Settlement proceeds and
the amount of such proceeds accounted for under the cost recovery method. The
other income was offset by related management fees.
Depreciation and amortization decreased by $1,207,000 or 23%, for the
1995 Period in comparison to the 1994 Period. This was due primarily to the fact
that the Partnership did not recognize depreciation after the first quarter 1995
with respect to the 747-100 aircraft, which was taken out of service by
Continental during the first quarter of 1995, as well as the decrease in
depreciable basis of certain aircraft due to the provision for decline in market
value of aircraft provided in the 1994 Period.
The Partnership provided an allowance for decline in market value of
$400,000 in the 1995 Period as compared to $2,000,000 in the 1994 Period to
reflect the General Partner's estimate of recoverability of the Partnership's
investment in certain aircraft, based upon estimated cash flow, third party
appraisal and market conditions.
General and administrative expenses for the 1995 Period increased by
$30,000 or 17% in comparison to the 1994 Period, principally due to an increase
in professional fees, including transfer agent servicing expenses.
Interest expense for the 1995 Period increased by $79,000 or 64% in
comparison to the 1994 Period due to the fact that the related borrowings were
made in April and July 1994 and thus were not outstanding for the entire 1994
Period, partially offset by principal installments paid during 1995 reducing the
balance outstanding.
Direct lease expenses for the 1995 Period decreased by $8,000, or 7% as
compared to the 1994 Period due principally to a reduction in the letter of
credit fee in 1995 as compared to 1994.
Inflation and Changing Prices
Inflation has had no material impact on the operations or financial
condition of the Partnership during 1996. However, market and worldwide economic
conditions and changes in federal regulations have in the past, and may in the
future, impact the airline industry and thus lease rates and aircraft values.
Additionally, inflation and changing prices, may affect future leasing rates and
the eventual selling price of the aircraft.
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Item 8. Financial Statements
List of Financial Statements
Page
----
Report of Independent Accountants F-2
Balance Sheets -- December 31, 1996 and 1995 F-3
Statements of Income for the years ended
December 31, 1996, 1995 and 1994 F-4
Statements of Partners' Equity for the years ended
December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-8 to F-22
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the financial statements and notes
thereto; (2) schedules are not required under the related instruction or; (3)
the schedules are inapplicable.
F-1
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Limited Partners of
Pegasus Aircraft Partners, L.P.
We have audited the accompanying financial statements as listed in the
index on Page F-1 herein. 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, L.P. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995 and
1994, in conformity with generally accepted accounting principles.
New York, New York
March 7, 1997
F-2
28
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS - DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
-------- --------
(in thousands, except unit data)
Cash and cash equivalents (Note 4) $ 2,521 $ 4,081
Restricted cash (Note 5) 1,627 1,135
Rent and other receivables, net (Note 5) 660 1,534
Aircraft, net (Note 5) 26,215 29,814
Prepaid expenses and other 135 47
-------- --------
Total Assets $ 31,158 $ 36,611
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Notes 7 and 11) $ 1,218 $ 1,625
Accounts payable and accrued expenses 73 98
Payable to affiliates (Note 6) 484 628
Distributions payable to partners 1,648 1,616
Maintenance reserves payable 1,627 1,235
Deferred rental income and deposits 676 218
Accrued interest payable 9 15
-------- --------
Total Liabilities 5,735 5,435
-------- --------
CONTINGENCIES (Notes 5, 7, 9 and 11)
PARTNERS' EQUITY:
General Partners (542) (485)
Limited Partners (4,000,005 units outstanding
in 1996 and 1995) 25,965 31,661
-------- --------
Total Partners' Equity 25,423 31,176
-------- --------
Total Liabilities and Partners' Equity $ 31,158 $ 36,611
======== ========
The accompanying notes are an integral
part of these financial statements.
F-3
29
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------- -------------
(in thousands, except unit data
and per unit amounts)
REVENUE:
Rentals from operating leases $ 6,604 $ 6,076 $ 8,527
Interest 222 293 230
Other income - 233 -
------------ ------------- -------------
6,826 6,602 8,757
------------ ------------- -------------
EXPENSES:
Depreciation and amortization 4,060 4,105 5,312
Provision for decline in market
value of aircraft (Note 5) 150 400 2,000
Provision for bad debts (Note 5) 240 - -
Management and re-lease fees (Note 6) 459 698 601
General and administrative (Note 6) 234 210 180
Direct lease 127 107 115
Interest expense 136 202 123
Aircraft maintenance and other 709 - -
------------ ------------- -------------
6,115 5,722 8,331
------------ ------------- -------------
NET INCOME $ 711 $ 880 $ 426
============ ============= =============
NET INCOME ALLOCATED:
To the General Partners 7 9 4
To the Limited Partners 704 871 422
------------ ------------- -------------
$ 711 $ 880 $ 426
============ ============= =============
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .18 $ .22 $ .11
============ ============= =============
WEIGHTED AVERAGE NUMBER
OF LIMITED PARTNERSHIP
UNITS OUTSTANDING 4,000,005 4,000,005 4,000,005
============ ============= =============
The accompanying notes are an integral
part of these financial statements.
F-4
30
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited
Partners Partners Total
-------- -------- -----
(in thousands)
Balance, December 31, 1993 $(352) $44,968 $44,616
----- ------- -------
Net income 4 422 426
Distribution to partners declared (72) (7,200) (7,272)
----- ------- -------
Balance, December 31, 1994 (420) 38,190 37,770
Net income 9 871 880
Distributions to partners declared (74) (7,400) (7,474)
----- ------- -------
Balance, December 31, 1995 (485) 31,661 31,176
Net income 7 704 711
Distribution to partners declared (64) (6,400) (6,464)
----- ------- -------
Balance, December 31, 1996 $(542) $25,965 $25,423
===== ======= =======
The accompanying notes are an integral
part of these financial statements.
31
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------- ----- ------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 711 $ 880 $ 426
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,060 4,105 5,312
Provision for bad debts 240 - -
Provision for decline in market value of aircraft 150 400 2,000
Unrestricted maintenance reserves (paid to)
received from lessee (100) 100 325
Utilization of maintenance reserve
previously provided for - - (580)
Change in assets and liabilities:
Rent and other receivables 332 128 231
Prepaid expenses and other (88) (12) (7)
Accounts payable and accrued expenses (25) 22 28
Payable to affiliates (144) 348 217
Deferred rental income 98 81 (45)
Accrued interest payable (6) (1) 16
------- ----- ------
Net cash provided by operating activities 5,228 6,051 7,923
------- ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Continental settlement, net - 3,673 -
Capitalized aircraft improvements (611) (31) (2,723)
Advances to lessees - - (100)
Repayment of advances by lessees 302 291 332
------- ----- ------
Net cash (used in) provided by investing activities (309) 3,933 (2,491)
======= ===== ======
The accompanying notes are an integral
part of these financial statements.
F-6
32
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED)
1996 1995 1994
------ ------ ------
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Security deposit 360 - -
Proceeds from notes payable - - 2,150
Repayment of notes payable (407) (375) (150)
Transfers from (to) restricted cash - 385 (140)
Cash distributions paid to partners (6,432) (7,676) (7,272)
------ ------ ------
Net cash used in financing activities (6,479) (7,666) (5,412)
------ ------ ------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,560) 2,318 20
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,081 1,763 1,743
------ ------ ------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $2,521 $4,081 $1,763
====== ====== ======
Supplemental Schedule of Cash Flow Information:
Interest Paid $ 142 $ 203 $ 107
====== ====== ======
Restricted maintenance reserves collected net of
maintenance drawdowns $ 492 $ 613 $ 522
====== ====== ======
NONCASH TRANSACTIONS
Distributions to partners declared but unpaid $1,648 $1,616 $1,818
====== ====== ======
The accompanying notes are an integral
part of these financial statements.
F-7
33
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation Pegasus Aircraft Partners, 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 these estimates.
Cash and Cash Equivalents The Partnership invests funds not immediately
required for operations or distributions in short term, highly liquid
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 previously leased to Kiwi. (See also Note 5,
"Aircraft under Operating Leases - Kiwi Bankruptcy").
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 is computed using the
straight-line method over an estimated economic life of twelve years (five years
for the aircraft engine separately leased to Kiwi). Improvements to aircraft are
capitalized when incurred and are depreciated, generally, over the remaining
useful life of the improvement. Depreciation is not recorded for aircraft that
are off lease. The Partnership evaluates these costs based upon changes in
market conditions in accordance with generally accepted accounting principles.
Accordingly, the Partnership records a provision for decline in market value of
aircraft to recognize a 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 or
terminations are accounted for under the cost recovery method when and to the
extent that, based upon third party appraisals and market conditions, there has
been a diminution to the carrying value of the aircraft.
Tax Benefit Transfer Lease The McDonnell Douglas MD-81 aircraft under
lease to USAirways Group, Inc. ("USAir") 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
F-8
34
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 which 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 tax 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 former leases
required 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 is deposited into the reserve funds and utilized in the
same manner as other payments to the funds. These reserve 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 ratably over the terms of the related leases.
Deferred Rental Income Deferred rental income represents rental
payments received in advance which have not been earned.
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 for the period.
2. ORGANIZATION OF THE PARTNERSHIP
The Partnership was formed on June 23, 1988 for the purpose of
acquiring, leasing, and ultimately selling used commercial aircraft principally
to US airlines. 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, 2012. The Partnership had the right, subject
to certain conditions to reinvest the proceeds from sales of aircraft occurring
prior to March 22, 1997. Thereafter, the net proceeds of
F-9
35
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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, and the initial Limited
Partner contributed $100 for five limited partnership depositary units
("Units"). An additional 4,000,000 Units were then sold at a price of $20.00 per
Unit, with the Partnership receiving gross offering proceeds of $80,000,000.
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. The Partnership's share of the assets of the trusts are
recorded herein on a proportional consolidation basis.
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 lease 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. These investments are
primarily short-term commercial paper issued by large domestic corporations. At
December 31, 1996, the Partnership held short-term commercial paper issued by
Ford Motor Credit Company (with various maturities) with par values aggregating
$2,125,000, which were acquired at costs aggregating $2,119,302 and short term
commercial paper issued by Fleet Funding, Inc. with a par value of $300,000
which was purchased at a cost of $297,875.
F-10
36
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
5. AIRCRAFT UNDER OPERATING LEASES
Net Investment in Aircraft
The Partnership's net investment in aircraft as of December 31, 1996
and 1995 consisted of the following (in thousands):
1996 1995
-------- --------
Aircraft on operating leases $ 67,045 $ 55,900
Less: Accumulated depreciation (36,095) (26,927)
Reserve for decline in market value of aircraft (2,934) (5,169)
Net lease settlement proceeds accounted for as cost recovery (3,673) -
Provision for maintenance cost (178) (178)
-------- --------
24,165 23,626
Aircraft held for lease 7,817 $ 18,351
Less: Accumulated depreciation (3,481) (8,617)
Reserve for decline in market value of aircraft (2,384)
Net lease settlement proceeds accounted for as cost recovery - (3,673)
-------- --------
1,952 6,061
-------- --------
Aircraft engine 195 195
Less: Accumulated depreciation (97) (68)
-------- --------
98 127
-------- --------
Aircraft, net $ 26,215 $ 29,814
======== ========
F-11
37
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Rents and Other Receivables
Rents and other receivables, net were composed of the following at
December 31, 1996 and 1995.
1996 1995
------- -------
Rents receivable $ 569 $ 870
Advances to lessees 324 626
Accrued interest receivable and other 7 38
------- -------
900 1,534
Less: Allowance for bad debts (240)
------- -------
Rents and other receivables, net $ 660 $ 1,534
======= =======
Financial Terms of Leases
Continental Airlines Leases During December 1988, the Partnership
acquired a Boeing 727-200 advanced aircraft for a total purchase price of
$8,025,000. The aircraft was originally subject to an operating lease with
Continental, the term of which was scheduled to end on October 31, 1996. Rental
payments were payable monthly, in advance at the rate of $81,000. In 1996,
Continental and the Partnership reached an agreement to extend the lease to
June 30, 1998 at a rate of $75,000 per month.
During December 1988, the Partnership acquired a Boeing 747-100
aircraft for a total purchase price of $17,847,000. The aircraft was originally
subject to an operating lease with Continental, the term of which was scheduled
to expire on April 30, 1996 with rental payments payable monthly, in advance, at
the rate of $269,000.
In January 1995, Continental announced that it was grounding its Airbus
Industrie manufactured aircraft and taking certain Boeing 747 aircraft out of
service, including the Boeing 747 Aircraft owned by the Partnership. Continental
discontinued utilizing the Aircraft, did not make any rental payments after
January 1995 and returned the Aircraft to the Partnership. During the quarter
ended September 30, 1995 the Partnership and Continental completed the
negotiation of a lease settlement agreement ("Lease Settlement"). Under the
terms of the Lease Settlement, Continental agreed to pay the Partnership the
amount otherwise due under the Lease as rent for the period February 1995 to
August 1995 plus a discounted amount representing the amount of rent that would
have been due under the Lease for the period September 1, 1995 to April 30,
1996, the scheduled expiration date of the Lease. Continental returned the
Aircraft and engines in the return condition
F-12
38
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
required by the Lease. On October 16, 1995 the Partnership received the Lease
Settlement proceeds totaling $3,906,000.
A substantial portion of the proceeds were accounted for under the cost
recovery method reducing the Partnership's net carrying value of the aircraft.
The remaining gain on the lease settlement was offset by the related management
fees accrued and thus no net gain or loss was recognized on the settlement. See
TWA discussion below for a further description of the Boeing 747 aircraft.
Continental filed for Chapter 11 bankruptcy protection December 3, 1990
and had stopped making lease payments. The Partnership entered into various
lease modifications and financing arrangements with Continental as a result of
the bankruptcy. At December 31, 1996, the Partnership had an advance remaining
to Continental of $40,000 with respect to aircraft modifications, which was
repaid in early 1997.
Trans World Airlines Lease During February 1989, the Partnership
acquired a McDonnell Douglas MD-82 aircraft for a total purchase price of
$21,017,000. The aircraft is subject to an operating lease with TWA. The lease,
which was originally scheduled to expire on April 23, 1993 was modified and
under the terms of the lease amendment was extended until October 1, 1998 with
rentals payable monthly, in advance, at the rate of $185,000 per month.
Pursuant to the lease amendment, the Partnership reimbursed TWA for
$225,000 of capital improvements and advanced $750,000 to TWA to finance certain
major maintenance procedures. TWA is repaying the $750,000 to the Partnership
over the remaining lease term, in equal monthly installments, with interest at a
fixed rate of 9.68%. At December 31, 1996, the balance of the receivable was
$284,000 ($428,000 at December 31, 1995). All 1997 payments have been made by
TWA when due.
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 (the
"Exchange Offer"). TWA and the Partnership agreed to a deferral of 50% of the
original rent scheduled for November 1994 and 75% of the original rent scheduled
from December 1994 to April 1995, with originally scheduled payments resuming in
May 1995. Additionally, TWA and the Partnership reached an agreement to extend
the lease of the MD-82 aircraft by six years beyond the then scheduled
expiration date to October 1, 2004 at the current lease rate of $185,000 per
month. All rents deferred during the November 1994 to April 1995 period were
repaid with interest at 12% from the date of the deferral over an 18 month
period commencing May 1, 1995. On June 30, 1995, TWA filed its prepackaged
reorganization plan under Chapter 11 of the US Bankruptcy Code. On
F-13
39
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
August 23, 1995, the reorganization plan, which included the foregoing lease
modifications, 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 TWA will be able
to meet its obligations in the future.
In July, the Partnership delivered its Boeing 747-100 aircraft,
formerly leased to Continental, to TWA subject to lease with a term of
approximately four years. The lease provides for a monthly rent of $180,000. The
Partnership commenced a scheduled maintenance check on the aircraft to prepare
the aircraft for delivery. The Partnership incurred costs of approximately
$1,280,000 in connection with the redelivery integration and maintenance of the
747 aircraft, of which $669,000 represented maintenance expense and $611,000
were capitalized expenditures. The aircraft was delivered to TWA on July 12,
1996 and the Partnership received a security deposit of $360,000 from TWA with
respect to the lease.
USAir Lease During March 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 $9,999,000. The
remaining one-half interest in the Trust is owned by Pegasus Aircraft Partners
II, L.P., an affiliated partnership. Such interest is included herein on a
proportional consolidation basis. The aircraft is subject to an operating
lease with USAir, the term of which ends on June 1, 1998. The lease may be
terminated subject to the lessee's guarantee that the Partnership will receive
contractually defined minimum termination values upon remarketing of the
aircraft. Rental payments are payable quarterly, in arrears, at a rate of
$304,000 (for the Partnership's one-half interest in the aircraft). The lease
provides for one three-year renewal option, at the same quarterly rental rate.
If the lease is not renewed for the 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 was purchased subject to a tax
benefit transfer lease ("TBT lease") which provided for the transfer of the
investment tax credits and depreciation deductions with respect to the aircraft
to a tax lessor. Under the TBT lease, the Trust, as the owner of the aircraft
and 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 shares in the annual
cost of the letter of credit and is obligated for one-half of any calls on the
letter of credit.
The letter of credit has a current face amount of approximately $1.7
million. Through June 1995 the letter of credit agreement obligated the
Partnership to deposit $35,000 per quarter
F-14
40
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(beginning on June 1, 1992 and originally scheduled to terminate on June 1,
1997) into a restricted account at the bank ("Lender") which issued the current
letter of credit. In July 1995, the Partnership restructured its borrowing
arrangement with the Lender, extending the $4,000,000 commitment to May 1997.
The Lender, which also separately held the cash collateral account, released its
security interest in the cash collateral account and eliminated the requirement
for future deposits to such account.
Under the operating lease, the lessee, USAir, has assumed all
liabilities, indemnities and obligations of the Trust to the tax lessor under
the TBT lease and has agreed to indemnify the Trust for any liability, indemnity
or obligation to the tax lessor under the TBT lease except for liability
resulting from breaches by the Trust of covenants under the operating lease. It
has not posted a letter of credit to secure this obligation. As a result of the
foregoing, if the tax lessor draws on the letter of credit as a result of action
by the lessee, the Partnership and Pegasus Aircraft Partners II, L.P., through
the Trust will be responsible for the loss to the tax lessor until they can
obtain indemnification from the lessee.
The tax lessor is entitled to call on the letter of credit whether its
loss of tax benefits is caused by Pegasus Aircraft Partners II, L.P. or the
Partnership, and Pegasus Aircraft Partners II, L.P. and the Partnership have
agreed to indemnify each other for any loss occasioned by the acts of the other.
To date, there have been no calls against the letter of credit.
Kiwi International Airlines Inc. - Bankruptcy The Partnership owns two
Boeing 727-200 non-advanced aircraft, originally acquired on December 1988 for
$6,308,000 per aircraft. In February 1994 and April 1994, the Partnership
entered into leases with Kiwi each originally for a term of approximately five
years with rents payable monthly in advance at $55,000 per aircraft. The leases
were modified in 1995 and extended to December 31, 1999. The leases also
required Kiwi to pay maintenance reserves for airframe and engines, of $250 per
flight hour, which could be drawn upon by Kiwi for specific maintenance
procedures. The aircraft were delivered in April and July 1994. In connection
with the first Kiwi lease, the Partnership also acquired an additional aircraft
engine, at a cost of $195,000, which was used as a spare by Kiwi on a
utilization basis at $105 per flight hour of use. The Partnership invested an
additional $3,108,000 for maintenance, aging aircraft modifications and other
Kiwi requested modifications prior to delivery, $580,000 of which was funded by
return condition settlement payments from the prior lessee. The leases allowed
Kiwi to request that the aircraft be hushkitted by the Partnership at a cost of
approximately $1.9 million each to obtain Stage 3 noise abatement status or
terminate the lease.
In June 1996, Kiwi agreed with the FAA to ground 25% of its fleet due
to certain pilot training handbook deficiencies. In August 1996, Kiwi and the
FAA resolved the deficiencies and Kiwi returned to full capacity. In addition to
the FAA grounding, Kiwi was also negatively impacted
F-15
41
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
by the market reaction to the ValuJet incident. During 1996, Kiwi did not meet
its financial goals. In July 1996, an institutional investor had options to
invest $4,000,000 in return for a convertible note due in March 1997, for up to
32% of Kiwi's common stock and two seats on Kiwi's Board of Directors. The
institutional investor has options to invest an additional $6,000,000 in
convertible preferred stock which expire in March 1997. Existing shareholders
(including directors and employees) were given the opportunity to make
additional investments.
Kiwi requested and was granted by the Partnership a deferral of its
August 1996 rental and July 1996 maintenance payments. Kiwi was also unable to
make its September rental and August maintenance payments and was placed in
default by the Partnership.
In late September, Kiwi proposed a restructuring of its obligations
with certain creditors, including the Partnership. On September 30, 1996, Kiwi
filed a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code ("Bankruptcy Code") and did not make any subsequent payments.
The Kiwi leases accounted for approximately 19% of the Partnership's rental
revenue and the aircraft had net book values aggregating approximately
$4,000,000 after reflecting a provision for market decline of $150,000 at
December 31, 1996. The Partnership currently holds maintenance deposits
aggregating approximately $1,627,000, which the Partnership believes are not
sufficient to complete work required on the aircraft and the related engines to
meet lease return conditions and make the aircraft marketable. On October 15,
1996, Kiwi ceased scheduled flight operations while still exploring financial
alternatives. The Court approved Kiwi's motion to reject both leases as of
November 15, 1996. The Partnership provided an allowance for bad debts in the
amount of $240,000 relating to amounts due from Kiwi as of the bankruptcy date
and did not record any revenue from Kiwi beyond that date. The Partnership
recovered the aircraft in late 1996. Kiwi obtained debtor-in-possession
financing and started up operations in early 1997.
The Partnership has a claim against Kiwi for all unpaid items in
connection with the leases as well as rejection damages. The Partnership filed
an adversarial complaint seeking the Bankruptcy Court's authority to utilize the
maintenance reserves held ($1.6 million). The parties are in settlement
discussions with a hearing date scheduled for June 1997. The Partnership is also
involved in litigation within the Kiwi bankruptcy with the company who acted as
Kiwi's engine manager regarding each party's compliance with a settlement
agreement entered into to facilitate the recovery of the aircraft.
F-16
42
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Nations Air
On December 31, 1996, the Partnership delivered a 727-200, formerly
leased to Kiwi, to Nations Air, Inc. ("Nations") subject to a lease for a term
of approximately 36 months at a lease rate of $65,000 per month. Nations is also
required to make initial maintenance reserve payments of $347 per flight hour
(to be reduced thereafter and used only for specific maintenance) and is
obligated to complete the next phase "C" check without reimbursement from
maintenance reserves.
At the time of its delivery to Nations, one of the installed engines
belonged to Pegasus Aircraft Partners II, L.P., an affiliated partnership, and
the other two engines belonged to affiliates of the Managing General Partner.
The Partnership will pay those entities for their share of the rents (in the
aggregate $45,000 per month plus related reserves) while using such engines. The
Partnership purchased five engines in July 1997 (see Note 11, "Subsequent
Events"), three of which will be installed on the aircraft when the aircraft is
put in for its next maintenance service which is scheduled for late April-May
1997.
General The aircraft leases are principally triple net leases. As such,
during the terms of leases, the lessees are required to pay substantially all
expenses associated with the aircraft and in the case of Kiwi and Nations, also
funded or will fund certain maintenance expenses through hourly maintenance
reserves paid monthly.
F-17
43
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Significant Lessees
The Partnership leased its aircraft to four different airlines during
1996, excluding Nations, to which the Partnership delivered an aircraft on
December 31, 1996. Revenues from airlines which accounted for greater than 10%
of the Partnership's total rental revenues during 1996, 1995 and 1994 are as
follows:
PERCENTAGE OF RENTAL REVENUES
AIRLINES 1996 1995 1994
- -------- ---- ---- ----
Trans World Airlines, Inc. 49.0% 36.5% 26.0%
Kiwi International Air Lines, Inc. 18.8 23.2 --
USAir, Inc. 18.4 20.0 14.2
Continental Airlines, Inc. 13.8 20.3 49.2
Such percentages excluded the lease settlement payment received from Continental
in 1995 with respect to the 747-100 previously leased to them. The percentages
for 1996 include revenues generated by aircraft leased to Kiwi for which an
allowance for bad debts was provided.
Future Minimum Rental Income
The following is a schedule by year of future minimum rental income
under the leases as of December 31, 1996 (in thousands):
Year Amount
---- -------
1997 $ 7,091
1998 6,824
1999 6,374
2000 4,580
2001 2,827
Thereafter 5,975
-------
Total $33,671
=======
The above schedule of future minimum rental income does not include the
rental income which would result from the renewal of existing leases or the
re-leasing of aircraft, except for the initial three-year renewal period (June
1998 to June 2001) for the McDonnell Douglas MD-81 aircraft under lease to
USAir, Inc. This renewal is included since USAir must make a termination payment
$1,113,000 if the renewal is not exercised.
The Partnership operates in one industry, the leasing of used aircraft
to commercial airlines.
F-18
44
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
6. TRANSACTIONS WITH AFFILIATES
Management Fees The General Partners earn 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, 1996, 1995, 1994, the General Partners
earned base management fees of $93,000, $148,000 and $126,000, respectively.
The General Partners also earn a quarterly subordinated incentive
management fee in an amount equal to 4.5% of quarterly cash flow and sales
proceeds (net of resale fees), of which 2.5% is payable to the Managing General
Partner and 2.0% is payable to the Administrative General Partner. During the
years ended December 31, 1996, 1995 and 1994, the General Partners earned
incentive management fees of $221,000, $426,000 and $365,000, respectively.
Re-lease Fee The General Partners earn 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, 1996, 1995 and 1994, the General Partners earned $145,000,
$124,000, and $110,000, respectively of re-lease fees.
Beginning January 1, 1995 and for the year ended December 31, 1995, the
Administrative General Partner deferred the receipt of management fees and
re-lease fees earned which aggregated $273,000. As part of the class action
settlement (discussed more fully in Footnote 9, "Litigation"), these fees as
well as all 1996 and future fees and distributions earned by the Administrative
General Partner have been assigned by an affiliate to an escrow account for the
benefit of the class action members.
Accountable Expenses The General Partners are entitled to reimbursement
of certain expenses paid on behalf of the Partnership which are incurred in
connection with the administration and management of the Partnership. Such
reimbursable expenses amounted to $50,000 in 1996, 1995 and 1994, respectively,
all of which were paid to or accrued for the Administrative General Partner.
Other In 1994, the Partnership acquired an aircraft engine from Pacific
Aviation Holding Company, an affiliate of the Managing General Partner, at a
purchase price of $195,000. The purchase price paid by the Partnership was equal
to Pacific Aviation Holding Company's actual cost of the engine.
F-19
45
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
During 1996, the Partnership incurred costs totaling $217,000
associated with the work performed on the Boeing 747 leased to TWA and the work
performed on the Boeing 727 prior to delivery to Nations. Of this amount,
$56,000 was paid to an affiliate of the Managing General Partner and $161,000
was paid to a company owned by the three directors of the Managing General
Partner.
During 1996, the Partnership received an advance rental payment from
Nations of $65,000 of which $45,000 was payable to an affiliated partnership and
to affiliates of the Managing General Partner with respect to the three engines
which were installed on the aircraft delivered to Nations (see Note 5, "Aircraft
under Operating Leases", for further discussion).
7. NOTES PAYABLE
During April 1994, the Partnership established a loan facility with an
unaffiliated, third-party lender ("Lender"), which was collateralized by the
Partnership's one-half interest in the McDonnell Douglas MD-81 aircraft leased
to US Airways Group, Inc. ("USAir") and the Partnership's Boeing 747-100
aircraft leased to Continental. Under the terms of the loan agreement, the
Partnership was entitled to borrow up to $4,000,000, the commitment for which
expired on May 1, 1995. The loan agreement required a commitment fee on the
unborrowed funds of .5% per annum payable quarterly. There were no compensating
balance requirements. The Partnership had an option for a fixed (market interest
rate on the U.S. Treasury bond with a similar maturity plus 2.75%) or floating
(the Lender's prime rate plus 1.5%) rate of interest.
In July 1995, the Partnership and the Lender completed an extension of
the commitment. Under the new agreement, the aggregate commitment will remain at
$4,000,000, the Partnership's ability to borrow under the facility was extended
until May 1, 1997 and the floating interest rate charged under the facility was
reduced to the Lender's prime rate plus .5% (8.75% at December 31, 1996). The
Lender released the Boeing 747-100 aircraft as collateral under the loan and
received as substitute collateral a perfected security interest in the
Partnership's MD-82 aircraft leased to TWA. Through December 31, 1996, the
Partnership had borrowed an aggregate of $2,150,000 pursuant to the loan
agreement, of which $1,218,000 and $2,000,000 were outstanding at December 31,
1996 and December 31, 1995, respectively. (See also Note 11, "Subsequent Events"
for additional change to the loan facility.)
F-20
46
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Based upon the outstanding borrowings at December 31, 1996, the
required repayment schedule is as follows (in thousands):
Year Amount
---- --------
1997 $ 442
1998 481
1999 295
--------
$ 1,218
========
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):
1996 1995 1994
------ ------ ------
Net income per financial statements $ 711 $ 880 $ 426
Increase (decrease) resulting from:
Depreciation 456 (2,037) (613)
Reserves for maintenance costs and
decline in market value of aircraft 150 500 1,745
Allowance for bad debts provided for book 240 - -
Aircraft expenditures capitalized for tax, net 514 - -
Continental lease settlement proceeds accounted
for as cost recovery - 3,673 -
TBT interest income less
TBT rental expense (742) (591) (470)
Maintenance reserves collected and related interest
net of expenditures 492 613 522
Deferred rental income (39) 218 (182)
Other (53) 43 53
------ ------ ------
Taxable income per federal income tax return $1,729 $ 3,299 $1,481
====== ====== ======
F-21
47
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
The following is a reconciliation of the amount of the Partnership's
total Partnership equity as shown in the accompanying financial statements to
the tax bases of the Partnership's net assets (in thousands):
1996 1995 1994
------- ------- -------
Total Partnership equity per financial statements $ 25,423 $ 31,176 $ 37,770
Increase (decrease) resulting from:
Commissions and expenses paid in connection with the sale
of limited partnership units 8,441 8,441 8,441
Reserves for maintenance costs and decline in market value
of aircraft including Continental lease settlement,
accounted for as cost recovery 9,170 9,020 4,947
Allowance for bad debts 240 - -
Aircraft expenditures capitalized for tax, net 514 - -
Distributions payable to partners 1,648 1,616 1,818
Deferred rental income 179 218 -
Accumulated depreciation (20,611) (21,067) (19,030)
TBT interest income less TBT rental expense (3,023) (2,281) (1,690)
Maintenance reserves payable 1,627 1,255 522
Other 58 (8) (31)
-------- -------- --------
Tax bases of net assets $ 23,666 $ 28,370 $ 32,747
======== ======== ========
9. 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 "District Court" 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
the Partnership, PaineWebber and the Administrative General Partner (1) failed
to provide adequate disclosure of the risks involved with each partnership; (2)
made false and misleading representations about the safety of the investments
and the partnership's anticipated performance; and (3) marketed the partnership
to investors for whom such investments were not suitable. The plaintiffs also
alleged that following the sale of the
F-22
48
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
partnership investments PaineWebber and the Administrative General Partner
misrepresented financial information about the partnership's value and
performance. The amended complaint alleged that PaineWebber and the
Administrative General Partner violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and the federal securities laws. The plaintiffs
sought unspecified damages, including reimbursement for all sums invested by
them in the partnerships, as well as disgorgement of all fees and other income
derived by PaineWebber from the limited partnerships. In addition, the
plaintiffs also sought treble damages under RICO.
On May 30, 1995, the 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
agreed to settle the case. A definitive settlement was signed in July 1996 and
in March 1997, the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement, PaineWebber agreed to pay $125
million and additional consideration to class members.
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
challenged the proposed settlement of these cases. Their objections were
overruled when the District Court approved the class action settlement with
respect to the New York Limited Partnership Actions. The Illinois case has been
dismissed.
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 District Court and
consolidated under the title, Mallia vs. PaineWebber, Inc. 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.
F-23
49
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
In February 1996, approximately 230 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. In
September 1996, the California Superior Court dismissed many of the plaintiffs'
claims as barred by the applicable statutes of limitation.
In June 1996, counsel for the Abbate plaintiffs instituted two
additional actions containing allegations nearly identical to those set forth in
Abbate. Bandrowski v PaineWebber Incorporated, et al, was filed in California
Superior Court and Barstad v. PaineWebber Incorporated, et al, was filed in
Arizona Superior Court. Collectively, the two additional actions are brought by
approximately 50 plaintiffs and seek compensatory damages of approximately $4
million plus punitive damages. In March 1997, all of these actions were settled.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner were entitled to indemnification
from the Partnership for expenses and liabilities in connection with the above
actions. PaineWebber and its affiliates have agreed to not seek any
indemnification from the Partnership for any amounts payable in connection with
the New York Limited Partnership Actions. The General Partners do not believe
that the settlement of Abbate, Bandrowski and Barstad actions will have a
material effect on the Partnership's financial statements, taken as a whole.
On September 30, 1996, Kiwi filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy code and the
Partnership recovered the aircraft. The partnership has a claim against Kiwi for
all unpaid items under the leases as well as rejection damages. The Partnership
filed an adversarial complaint seeking the Bankruptcy court's authority to use
certain maintenance reserves ($1.6 million) collected from Kiwi. The parties are
in settlement discussions with a hearing date scheduled for June 1997. The
Partnership is also involved in a litigation with the Kiwi bankruptcy with the
company that acted as Kiwi's engine manager regarding each party's compliance
with a settlement agreement entered into to facilitate the recovery of the
aircraft.
F-24
50
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
On December 5, 1996, an action was filed in the Court of Chancery of
the State of Delaware in New Castle County entitled "Equity Resources Cambridge
Fund v. Pegasus Aircraft Partners, L.P. et al. The named defendants include the
Partnership and its general partners. Equity Resources Cambridge Fund seeks
access to the list of limited partners of the Partnership. On January 2, 1997
defendants answered the complaint, denying the substantive allegations thereof
and asserting several affirmative defenses. The parties are in pre-trial
discovery. It is impossible to predict the outcome of this litigation, however,
the General Partners do not believe that the outcome will have a material effect
on the Partnership's financial statements, taken as a whole.
10. 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 in the balance sheet. Where quoted market prices are available the
values are based on estimates using present value or other valuation techniques.
The results are significantly affected by the assumptions used including the
discount rate and estimates of future cash flows. In addition, because SFAS No.
107 excludes certain assets such as leased aircraft owned by the Partnership
from its disclosure requirements, the aggregate fair value amounts discussed
below 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 due to its short term nature.
Rents and other receivables. For rents and other receivables, carrying
value approximates fair value due to its short term nature.
Notes payable. For notes payable, carrying value approximates fair
value based on current rates offered for notes of the same remaining maturities.
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
due to its short term nature.
F-25
51
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
11. SUBSEQUENT EVENTS
A. In February 1997, the Partnership purchased five Pratt and Whitney
JT8D-7 engines from an unaffiliated third party for a purchase price of
$2,150,000 plus six engine cores which required overhaul. The cores represented
the six original engines on the two aircraft formerly leased to Kiwi which were
recovered in December 1996. The Partnership borrowed the purchase price from its
Lender. Under the terms of the borrowing the Partnership will pay interest at a
rate of 1.50% over the Lender's prime rate of interest monthly for one year, at
which time the entire principal will be due. In connection with this financing,
the interest rate on the Partnership's other borrowings was increased from .50%
over the prime rate of interest to 1.50% over prime.
B. In February 1997, the Partnership entered into an agreement in
principle to lease the former Kiwi 727 aircraft to a start-up airline, Sky Trek.
The agreement in principle provides for a lease term of 60 months with a lease
rate of $95,000 per month. The lessee is required to provide a lease deposit of
$190,000 and will be obligated to fund maintenance reserves, in the aggregate,
at a rate of $325 per flight hour. The Partnership will be required to complete
the "C" check phase currently due at a budgeted cost of approximately $800,000
and to purchase a hushkit at a cost of approximately $1,900,000. The Partnership
anticipates obtaining additional borrowings to finance such amounts. The
Partnership is negotiating a new borrowing facility with an unaffiliated third
party lender and reached an agreement in principle with respect to a new
borrowing facility. Under the terms of the agreement in principal, the
Partnership will be able to borrow up to $7,500,000 at an interest rate of 1%
over the lender's prime rate of interest. The lender's commitment (loan term)
will be for thirty-six months, at which time all outstanding principal will be
due. The loan will be collateralized by the Partnership's interest in the MD-82
aircraft leased to TWA. During the loan term, the Partnership will be obligated
to pay interest on a monthly basis and will also be required to maintain a
minimum borrowing outstanding of $2,000,000. A portion of the proceeds will be
used to retire other outstanding debt.
C. In March 1997, the Partnership sold the spare engine, formerly
leased to Kiwi, to an unaffiliated third party for $275,000. The engine, which
was purchased in March 1994 for $195,000, had a net book value of $98,000 at
December 31, 1996.
F-26
52
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in accountants or disagreements with accountants
with respect to accounting or financial disclosure issues during 1996 or 1995.
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no officers and directors. The General Partners
jointly manage and control the affairs of the Partnership and have general
responsibility and authority in all matters affecting its business. Information
concerning the directors and executive officers of the General Partners is as
follows:
Pegasus Aircraft Management Corporation
Name Positions Held
---- --------------
Richard S. Wiley President and Chairman of the Board
Richard W. Doust Executive Vice President, Assistant Secretary and
Director
Gregory Harding-Brown Executive Vice President, Assistant Secretary,
Treasurer and Director
Carol L. Chase Senior Vice President, General Counsel and Secretary
Richard S. Wiley, age 43, is President and Chairman of the Board of the
Managing General Partner and Pegasus Capital Corporation, which was formed in
1988. Prior to forming Pegasus Capital Corporation, Mr. Wiley was a Vice
President of CIS Corporation ("CIS"), a wholly-owned subsidiary of Continental
Information Systems Corporation ("Continental") for the period 1986 to 1988. Mr.
Wiley originated aircraft transactions throughout the world and sold aircraft to
third-party investors. From 1985 to 1986, Mr. Wiley worked as Treasurer of
Caterpillar Capital Company in San Diego, California. From 1983 to 1985, he
served as Managing General Partner and President of RAM Financial Corporation in
Houston, Texas, an equipment leasing venture capital company. Prior to joining
RAM, he worked for GATX Leasing Corporation as a District Manager from 1980 to
1983. Mr. Wiley received a B.S. degree from the Indiana University School of
Business and an M.B.A. from the University of California, Los Angeles.
Richard W. Doust, age 53, is an Executive Vice President, Assistant
Secretary and Director of the Managing General Partner and Pegasus Capital
Corporation. He is also a co-founder of Cirrus Capital Corporation of Florida
("CCCF") and Cirrus Capital Corporation ("Cirrus"), both of which were formed in
October 1989 to engage in aircraft and other financing activities. Under dual
capacity as President of Cirrus and Vice President of CCCF, Mr. Doust, along
with Mr. Harding-Brown (see below), was responsible for the day-to-day
operations for these companies including origination, finance and aircraft sales
transactions totaling $225,000,000 involving
22
53
DC-10s, MD-80s, 737-300s, 727s and other aircraft. Mr. Doust has 31 years of
varied experience within the aviation and finance industries dating back to
1966. Prior to forming Cirrus, Mr. Doust was with Security Pacific Leasing
Corporation from 1983 to 1989 as head of the Aviation Division. In that
position, he purchased and sold all aircraft types. From December 1978 to 1982,
Mr. Doust was director of aircraft marketing and air agreements for World
Airways. Mr. Doust holds an MBA from Golden Gate University (1982) in
International Business (finance) and a BA from the University of San Francisco
(1966). He has a Commercial Pilots License, and has been awarded the Air Medal
with Bronze Star and Distinguished Flying Cross by the U.S. Government. He also
holds both Series 7 and Series 24 licenses as a registered principal with
Pegasus Securities Corporation, an NASD member firm.
Gregory Harding-Brown, age 41, is an Executive Vice President,
Assistant Secretary, Treasurer and Director of the Managing General Partner and
Pegasus Capital Corporation. He is a co-founder of Cirrus Capital Corporation of
Florida ("CCCF") and Cirrus Capital Corporation ("Cirrus"), both of which were
formed in October 1989 to engage in aircraft and other financing activities.
Under dual capacity as Executive Vice President of Cirrus and Vice President of
CCCF, Mr. Harding-Brown, along with Mr. Doust (see above), was responsible for
the day-to-day operations for these companies including origination, finance,
equity sales and lease analysis transactions totaling $225,000,000. Prior to
forming Cirrus, Mr. Harding-Brown was with Security Pacific Leasing Corporation
from 1983 to 1989. He was responsible for more than $450 million in financing on
all types of aircraft and transportation equipment. From 1980 to 1983, he held
various positions with financial service companies. Mr. Harding-Brown holds a BA
from the University of California at Berkeley in Political Economy of Industrial
Societies (International Economics). He also holds both Series 7 and Series 24
licenses as a registered principal with Pegasus Securities Corporation, an NASD
member firm.
Carol L. Chase, Esq., age 44, is a Senior Vice President, General
Counsel and Secretary of the Managing General Partner and Pegasus Capital
Corporation. She is responsible for providing legal counsel for all aspects of
capital equipment leasing, financing and placement. Prior to joining Pegasus,
from 1987 to 1988, Ms. Chase was Senior Corporate Counsel at CIS where she
provided legal counsel for transactions involving aircraft and related
equipment. From 1981 to 1987, Ms. Chase was legal counsel at Transamerica
Airlines where she was responsible for the legal negotiation and documentation
for the purchase, sale, lease and finance of aircraft and aircraft-related
equipment. Ms. Chase received a B.A. degree from California State University,
Hayward and a J.D. degree from the University of California, Davis. She is a
member of the State Bar of California, the American Bar Association, and the
American Corporate Counsel Association.
Air Transport Leasing, Inc.
Name Positions Held
---- --------------
Gerald F. Goertz, Jr. Chairman of the Board
Clifford B. Wattley President and Director
Stephen R. Dyer Vice President, Assistant Secretary and Director
Joseph P. Ciavarella Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer
23
54
Gerald F. Goertz, Jr., age 39, is Chairman of the Board of Directors of
the Administrative General Partner. Mr. Goertz joined PaineWebber Incorporated
in December 1990 and holds the position of Senior Vice President and Director of
Specialized Investment Services. Prior to joining PaineWebber Incorporated, Mr.
Goertz was associated with CG Realty Advisors and The Freeman Company. He
received his Bachelor of Arts degree in Business Administration in 1979 from
Vanderbilt University and his Juris Doctorate and Masters of Business
Administration from Memphis State University in 1982.
Clifford B. Wattley, age 47, is President and a Director of the
Administrative General Partner. Mr. Wattley is a Corporate Vice President with
PaineWebber Incorporated, having joined the firm in 1986. He also was employed
previously by Paine, Webber, Jackson & Curtis from 1979 to 1980. From 1986 to
1992, Mr. Wattley participated in PaineWebber's Principal Transactions Group.
Since 1992, Mr. Wattley has been a member of the Private Investment Department.
He holds a Bachelor of Science degree in engineering from Columbia University
and a Masters in Business Administration from Harvard University.
Stephen R. Dyer, age 37, is a Vice President, Assistant Secretary and a
Director of the Administrative General Partner. He joined PaineWebber
Incorporated in June 1988 as a Divisional Vice President and is currently a
Corporate Vice President and Director of Private Investments. Prior to joining
PaineWebber Incorporated, Mr. Dyer had been employed, since June 1987, as an
Assistant Vice President in the Retail National Products Group of L.F.
Rothschild & Co. Incorporated. Prior to joining L.F. Rothschild he was employed,
beginning in January 1985, as an Associate in the Real Estate Department of
Thomson McKinnon Securities Inc. From July 1981 to August 1983, Mr. Dyer was on
the audit staff of the accounting firm of Arthur Young & Company. He received
his Bachelor of Science degree in Accounting in 1981 from Boston College and a
Masters of Business Administration from Indiana University in December 1984. Mr.
Dyer is a Certified Public Accountant.
Joseph P. Ciavarella, age 41, is a Vice President, Secretary, Treasurer
and Chief Financial and Accounting Officer of the Administrative General
Partner. He joined PaineWebber Incorporated in May 1994 as a Corporate Vice
President. Prior to joining PaineWebber Incorporated, he was affiliated with
Aviation Capital Group in the area of aircraft finance. He was associated with
Integrated Resources, Inc. from 1983 to 1993 as a first vice president as well
as a divisional senior vice-president and chief financial officer of the
equipment leasing, aircraft finance and venture capital groups. He has a
Bachelor of Business Administration degree in Accounting from Hofstra University
and is a Certified Public Accountant.
Item 11. Executive Compensation No compensation was paid by the Partnership to
the officers and directors of the General Partners. See Item 13 of this Report,
"Certain Relationships and Related Transactions", which is incorporated herein
by reference, for a description of the compensation and fees paid to the General
Partners and their affiliates by the Partnership during 1996.
24
55
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of the date hereof, no person is known by the Partnership
to be the beneficial owner of more than 5% of the Units of the
Partnership. The Partnership has no directors or officers, and
neither of the General Partners of the Partnership owns any
Units. The Assignor Limited Partner for the Partnership,
Pegasus Assignor L.P.A., Inc. (an affiliate of the Managing
General Partner), owns 5 Units. Additionally, as of December
31, 1996, ATL Inc., an affiliate of the Administrative General
Partner owns approximately 69,016 Units as the result of legal
settlements with various limited partners.
The names and addresses of the General Partners are as
follows:
Managing General Partner:
Pegasus Aircraft Management Corporation
Four Embarcadero Center, 35th Floor
San Francisco, CA 94111
Administrative General Partner:
Air Transport Leasing, Inc.
1200 Harbor Boulevard, 5th Floor
Weehawken, NJ 07087
The General Partners, collectively, have a 1% interest in each
item of the Partnership's income, gains, losses, deductions,
credits and distributions.
(b) The following table sets forth the number of Units
beneficially owned as of March 1, 1997, by directors of the
Managing General Partner and the Administrative General
Partner and by all directors and officers of such corporations
as a group:
25
56
Number
of Units
Beneficially Percent
Name Owned of Class
---- ----- --------
Managing General Partner
------------------------
Richard S. Wiley 3,216 *
Richard W. Doust 5,234 *
Gregory Harding-Brown 3,396 *
Administrative General Partner
------------------------------
None
All directors and officers
as a group (3 persons) 11,846 *
* Less than 1% of class.
(c) The Partnership knows of no arrangements, the
operation of the terms of which may at a subsequent
date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners and their affiliates have received, or will
receive, certain types of compensation, fees or other distributions in
connection with the operations of the Partnership. The fees and compensation
were determined in accordance with the applicable provisions of the Partnership
Agreement.
Following is a summary of the amounts paid, or payable, to the General
Partners and their affiliates during 1996.
Base Management Fee The General Partners receive a quarterly
subordinated 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 1996, the General Partners earned base management fees of $93,000.
Incentive Management Fee The General Partners also receive a quarterly
subordinated fee, in an amount equal to 4.5% of quarterly cash flow and sales
proceeds (net of resale fees), of which 2.5% is payable to the Managing General
Partner and 2.0% is payable to the Administrative General Partner. During 1996,
the General Partners earned incentive management fees of $221,000.
Re-lease Fee 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 1996
the General Partners earned re-lease fees of $145,000.
26
57
Beginning January 1, 1995 and for the year ended December 31, 1995, the
Administrative General Partner deferred the receipt of management fees and
re-lease fees which aggregated $273,000. As part of the class action settlement
(discussed more fully in footnote 9, "Litigation"), these fees as well as all
1996 and future fees and distributions earned by the Administrative General
Partner has been assigned by an affiliate to an escrow account for the benefit
of the class action members.
Accountable Expenses The General Partners are entitled to reimbursement
of certain expenses paid on behalf of the Partnership which are incurred in
connection with the administration and management of the Partnership. Such
reimbursable expenses amounted to $50,000 during 1996, all of which was paid or
is payable to the Administrative General Partner.
Other In 1994, the Partnership acquired an aircraft engine from Pacific
Aviation Holding Company, an affiliate of the Managing General Partner, at a
purchase price of $195,000. The purchase price paid by the Partnership was equal
to Pacific Aviation Holding Company's actual cost of the engine.
During 1996, the Partnership incurred costs totaling $217,000
associated with the work performed on the 747 leased to TWA and the work
performed on the 727 prior to delivery to Nations. Of this amount, $56,000 was
paid to an affiliate of the Managing General partner and $161,000 was paid to a
company owned by the three directors of the Managing General partner.
During 1996, the Partnership received an advance rental payment from
Nations of $65,000 of which $45,000 was payable to an affiliated partnership and
to affiliates of the Managing General Partner with respect to the three engines
which were installed on the aircraft delivered to Nations (see Item 8, Financial
Statements, Note 5, "Aircraft Under Operating Leases" for further discussion).
Partnership Interest In the aggregate, the General Partners received or
were entitled to receive cash distributions of $64,000 as their allocable share
of distributable cash flow for 1996. In addition, $17,000 of the Partnership's
net taxable income for 1996 was allocated to the General Partners.
27
58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: (Incorporated by reference to
Item 8 of this Report, "Financial Statements and
Supplementary Data").
(b) During the fourth quarter of 1996, the Partnership
filed a Form 8-K dated September 30, 1996 reporting
the bankruptcy of a significant lessee, Kiwi
International Air Lines, Inc. and a Form 8-K dated
November 22, 1996 reporting the net asset value per
unit at September 30, 1996 and the Partnership's Safe
Harbor policy regarding sale of units.
(c) Exhibits required to be filed.
Exhibit No. Description
----------- -----------
3.1(a) First Amended and Restated Limited Partnership
Agreement dated September 30, 1988. Filed as Exhibit
3.1 to Pre-Effective Amendment No. 2 to Form S-1
Registration Statement dated September 16, 1988
(Commission File No. 33-22986).*
(b) Amendment, dated as of December 26, 1990, to the
First Amended and Restated Limited Partnership
Agreement dated September 30, 1988. Filed as Exhibit
1 to the Registrant's Current Report on Form 8-K
dated December 26, 1990.*
(c) Amendment, dated as of March 31, 1992, to the First
Amended and Restated Limited Partnership Agreement
dated September 30, 1988. Filed as Exhibit 4 to
Registrant's Current Report on Form 8-K dated April
16, 1992.*
4.1 Depositary Agreement dated December 20, 1988, by and
among Pegasus Aircraft Partners, L.P. ("Registrant"),
Pegasus Aircraft Management Corporation, a California
corporation, PaineWebber Aircraft Leasing, Inc., a
Delaware corporation, Pegasus Assignor L.P.A., Inc.,
a California corporation, dated April 27, 1989. Filed
as Exhibit 4.1 to the Registrant's Form 8-A on May 1,
1989 (Commission File No. 33-22986).*
10.1(a) Lease Agreement dated as of September 26, 1988 by
and between Pegasus Capital Corporation, a California
corporation ("Seller") and Northwest Aircraft, Inc.
("Lessee") (Boeing Model 727-251 airframe,
28
59
SN 20289). Filed as Exhibit 10.2(c) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988.*
(b) Lease Agreement dated as of September 26, 1988 by and
between the Seller and Northwest Aircraft, Inc.
("Lessee") (Boeing Model 727-251 airframe, SN 19977).
Filed as Exhibit 10.2(d) to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1988.*
(c) Sublease Agreement dated as of September 26, 1988 by
and between Lessee and Northwest Airlines, Inc.
("Sublessee") (Boeing Model 727-251 airframe, SN
20289). Filed as Exhibit 10.2(e) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1988.*
(d) Sublease Agreement dated as of September 26, 1988 by
and between Lessee and Northwest Airlines, Inc.
("Sublessee") (Boeing Model 727-251 airframe, SN
19977). Filed as Exhibit 10.2(f) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1988.*
(e) Trust Agreement 258 dated as of December 23, 1988 by
and between First Security Bank of Utah, National
Association in its capacity as Owner Trustee ("Owner
Trustee") and Registrant. Filed as Exhibit 10.2(i) to
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988.*
(f) Trust Agreement 267 dated as of December 23, 1988 by
and between the Owner Trustee and Registrant. Filed
as Exhibit 10.2(j) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1988.*
(g) Amendment 1 to Lease Agreement, dated May 27, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and Northwest Aircraft
Inc. to amend a Lease Agreement, dated September 26,
1988, for one Boeing 727-200 aircraft, U.S.
Registration No. N258US. Filed as Exhibit 10.1(a) to
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993.*
(h) Amendment 1 to Lease Agreement, dated May 27, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and Northwest Aircraft
Inc. to amend a Lease Agreement, dated September 26,
1988, for one Boeing 727-200 aircraft, U.S.
Registration No. N267US. Filed as Exhibit 10.1(b) to
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993.*
29
60
(i) Lease Agreement dated April 15, 1994 between First
Security Bank of Utah, National Association, as
Trustee, (Lessor) and Kiwi International Airlines,
Inc., (Lessee) with respect to one used Boeing
727-251 Aircraft US Registration number N258US.*
(j) Lease Agreement dated February 15, 1994, between
First Security Bank of Utah, National Association, as
Trustee, (Lessor) and Kiwi International Airlines,
Inc., (Lessee) with respect to one used Boeing
727-251 Aircraft US Registration number N267US.*
(k) Lease Amendment No. 1 dated March 15, 1995 with
respect to the lease between First Security Bank of
Utah, National Association, as Trustee, (Lessor) and
Kiwi International Airlines, Inc., (Lessee) in
reference 10 (1) (i) dated April 15, 1994.*
(l) Lease Amendment No. 1 dated March 15, 1995 with
respect to the lease between First Security Bank of
Utah, National Association, as Trustee, (Lessor) and
Kiwi International Airlines, Inc., (Lessee) in
reference 10 (1) (j) dated February 15, 1994.*
10.2(a) Trust Agreement 603, dated as of October 10, 1988 by
and between the Seller and Owner Trustee providing
for, among other things, the acquisition of one
Boeing Model 747-143 Aircraft (the "Aircraft"), and
concurrently therewith leasing the Aircraft to
Continental Airlines, Inc. ("Lessee"). Filed as
Exhibit 10.3(b) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.*
(b) Lease Agreement 603, dated as of October 14, 1988 by
and between the Owner Trustee and Lessee. Filed as
Exhibit 10.3(e) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.*
(c) Stipulation and Order, dated June 19, 1991, among
Continental Airlines, Inc., New York Airlines, Inc.,
Bay Air Lease I, Cirrus Capital Corporation of
Florida, Bay Air Lease III, Meridian Trust Company,
as Owner Trustee, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital
Corporation, IAL Aviation Resources, Inc., Aircraft
Leasing, Inc., Pegasus Aircraft Partners, L.P.,
Gilman Financial Services, Inc. and First Security
Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit
19.1(a) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991.*
(d) Agreed Order, dated July 3, 1991, in connection with
approval of Stipulation and Order, dated June 19,
1991, among Continental Airlines, Inc., New York
Airlines, Inc., Bay Air Lease I, Cirrus Capital
Corporation of Florida, Bay Air Lease III, Meridian
Trust Company, as
30
61
Owner Trustee, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital
Corporation, IAL Aviation Resources, Inc., Aircraft
Leasing, Inc., Pegasus Aircraft Partners, L.P.,
Gilman Financial Services, Inc. and First Security
Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit
19.1(b) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991.*
(e) Supplemental Stipulation and Order, dated December
30, 1992, among Continental Airlines, Inc., Bay Air
Lease I, Cirrus Capital Corporation of Florida, Bay
Air Lease III, Aviation Assets I, Aviation Assets II,
Aviation Assets III, Aviation Assets IV, IAL Aircraft
Acquisitions, Inc., Pegasus Aircraft Partners II,
L.P., Pegasus Capital Corporation, IAL Aviation
Resources, Inc., Pegasus Aircraft Partners, L.P.,
Gilman Financial Services, and First Security Bank of
Utah, as Owner Trustee concerning various aircraft
and aircraft engines. Filed as Exhibit 10.2(e) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.*
(f) Lease termination agreement dated October 16, 1995,
between Continental Airlines, Inc. and First Security
Bank of Utah, N.A. as trustee of a trust in which
Pegasus Aircraft Partners, L.P. is the sole
beneficiary with respect to the lease of the 747-143
aircraft.*
10.3(a) Trust Agreement 735, dated as of September 26, 1988
by and between Seller and Owner Trustee providing
for, among other things, the acquisition of one
Boeing Model 727-224 aircraft (the "Aircraft"), and
concurrently therewith leasing the Aircraft to
Continental Airlines, Inc. ("Lessee"). Filed as
Exhibit 10.4(b) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.*
(b) Lease Agreement 735, dated as of September 26, 1988
by and between Owner Trustee and Lessee. Filed as
Exhibit 10.4(d) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.*
(c) Stipulation and Order, dated June 19, 1991, among
Continental Airlines, Inc., New York Airlines, Inc.,
Bay Air Lease I, Cirrus Capital Corporation of
Florida, Bay Air Lease III, Meridian Trust Company,
as Owner Trustee, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital
Corporation, IAL Aviation Resources, Inc., Aircraft
Leasing, Inc., Pegasus Aircraft Partners, L.P.,
Gilman Financial Services, Inc. and First Security
Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit
19.1(a) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991.*
31
62
(d) Agreed Order, dated July 3, 1991, in connection with
approval of Stipulation and Order, dated June 19,
1991, among Continental Airlines, Inc., New York
Airlines, Inc., Bay Air Lease I, Cirrus Capital
Corporation of Florida, Bay Air Lease III, Meridian
Trust Company, as Owner Trustee, IAL Aircraft
Acquisitions, Inc., Pegasus Aircraft Partners II,
L.P., Pegasus Capital Corporation, IAL Aviation
Resources, Inc., Aircraft Leasing, Inc., Pegasus
Aircraft Partners, L.P., Gilman Financial Services,
Inc. and First Security Bank of Utah, as Owner
Trustee concerning various aircraft and aircraft
engines. Filed as Exhibit 19.1(b) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991.*
(e) Supplemental Stipulation and Order, dated December
30, 1992, among Continental Airlines, Inc., Bay Air
Lease I, Cirrus Capital Corporation of Florida, Bay
Air Lease III, Aviation Assets I, Aviation Assets II,
Aviation Assets III, Aviation Assets IV, IAL Aircraft
Acquisitions, Inc., Pegasus Aircraft Partners II,
L.P., Pegasus Capital Corporation, IAL Aviation
Resources, Inc., Pegasus Aircraft Partners, L.P.,
Gilman Financial Services, and First Security Bank of
Utah, as Owner Trustee concerning various aircraft
and aircraft engines. Filed as Exhibit 10.3(e) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.*
(f) Amendment No. 1 to Lease Agreement 735 dated as of
February 28, 1997 between the Owner Trustee and
Continental Airlines, Inc.
10.4(a) Trust Certificate dated February 16, 1989, for the
benefit of the Registrant from New DC-9T-I, Inc., a
New York Corporation and Meridian Trust Company
("Trustee"). Filed as Exhibit 19.2(c) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1989.*
(b) Lease, dated as of May 20, 1983, as supplemented by
Lease Supplement No. 1 dated May 24, 1983, between
DC-9T-I, Inc., as Lessor, and Trans World Airlines,
Inc., as Lessee, pertaining to one McDonnell Douglas
DC-9-82 aircraft, U.S. Registration No. 904TW. Filed
as Exhibit 10.4 (b) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1991. *
(c) Amendment Agreement, dated as of December 15, 1986,
between Trans World Airlines, Inc., as Lessee, and
DC-9T-I, Inc., as Lessor. Filed as Exhibit 10.4 (c)
to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991. *
(d) Amendment No. 1, dated as of May 1, 1991, to Lease
dated as of May 20, 1983, each between Meridian Trust
Company, as Owner Trustee
32
63
and Lessor, and Trans World Airlines, Inc., as
Lessee. Filed as Exhibit 19.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1991.*
(e) Amendment No. 2, dated as of April 15, 1993, between
Meridian Trust Company, as Owner Trustee, and Trans
World Airlines, Inc. as Lessee.*
(f) Agreed Order, dated April 14, 1993, approving lease
amendments among Trans World Airlines, Inc.,
Registrant, Pegasus Aircraft Partners II, L.P. and
Pegasus Capital Corporation relating to leases of
certain aircraft.*
(g) Amendment No. 3 dated as of January 16, 1995 between
Meridian Trust Company Owner Trustee as Lessor and
TWA as lessee with respect to the lease of one
McDonnell Douglas MD-82, U.S. Registration No.
N904TW.*
10.5(a) Amended and Restated Lease No. 1, dated October 14,
1988, between PS Group, Inc. and USAir, Inc. Filed as
Exhibit 10.2.9 to Form S-1 Registration Statement,
dated July 3, 1989 for Pegasus Aircraft Partners II,
L.P. (Commission File No. 33-28359).*
(b) Agreement pursuant to Section 168(f)(8) of the
Internal Revenue Code of 1954, as Amended between
Pacific Southwest Airlines and General Mills, Inc.
Filed as Exhibit 19.3(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1989.*
(c) Assumption Agreement, dated March 22, 1989, among
Pegasus Capital Corporation, a California corporation
("PCC"), the Purchaser, Concord Asset Management,
Inc., a Delaware corporation ("CAMI") and the
Registrant. Filed as Exhibit 19.3(e) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1989.*
(d) Participation Agreement, dated September 21, 1989,
among Registrant, First Security Bank of Utah, a
national association (the "Owner Trustee"), CAMI and
Pegasus Aircraft Partners II, L.P., a Delaware
limited partnership. Filed as Exhibit 19.2(e) to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989 for Pegasus Aircraft Partners II,
L.P. (Commission File No. 33-28359).*
33
64
(e) Amended and Restated Reimbursement Agreement, dated
September 21, 1989, between the Registrant and CAMI.
Filed as Exhibit 19.2(f) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989
for Pegasus Aircraft Partners II, L.P. (Commission
File No. 33-28359).*
(f) Amended and Restated Security Agreement, dated
September 21, 1989, between the Registrant and CAMI.
Filed as Exhibit 19.2(h) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989
for Pegasus Aircraft Partners II, L.P. (Commission
File No. 33-28359).*
(g) Security Agreement, dated September 21, 1989, between
the Registrant and Pegasus Aircraft Partners II, L.P.
Filed as Exhibit 19.2(j) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989
for Pegasus Aircraft Partners II, L.P. (Commission
File No. 33-28359).*
(h) Security Agreement, dated September 21, 1989, between
Pegasus Aircraft Partners II, L.P. and the
Registrant. Filed as Exhibit 19.2(k) to the Quarterly
Report on Form 10-Q for the quarter ended September
30, 1989 for Pegasus Aircraft Partners II, L.P.
(Commission File No. 33-28359).*
(i) Trust Agreement 814, dated as of March 10, 1989,
among PCC, as Beneficiary, the Registrant, as
Beneficiary, and the Owner Trustee. Filed as Exhibit
19.3(i) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1989.*
(j) First Amendment to Trust Agreement 814, dated
September 21, 1989, among Pegasus Aircraft Partners
II, L.P., as Beneficiary, the Registrant, as
Beneficiary and the Owner Trustee. Filed as Exhibit
19.2(m) to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989 for Pegasus Aircraft
Partners II, L.P. (Commission File No. 33-28359).*
(k) Letter of Credit Agreement, dated as of April 30,
1992, between First Security Bank of Utah as Owner
Trustee and Philadelphia National Bank, Incorporated,
as CoreStates Bank, N.A. Filed as Exhibit 10.1(a) to
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1992.*
34
65
(l) Assumption Agreement, dated April 30, 1992, among
Pegasus Aircraft Partners, L.P. and Pegasus Aircraft
Partners II, L.P. as Obligors and Philadelphia
National Bank, Incorporated, as CoreStates Bank, N.A.
Filed as Exhibit 10.1(b) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1992.*
(m) Security Agreement and Assignment of lease, dated as
of April 30, 1992, between First Security Bank of
Utah, National Association as Owner Trustee and
Philadelphia National Bank, Incorporated, as
CoreStates Bank, N.A. Filed as Exhibit 10.1 (c) to
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1992. *
(n) Assignment of Collateral, dated as of April 30, 1992,
between Pegasus Aircraft Partners, L.P. and
Philadelphia National Bank, Incorporated, as
CoreStates Bank, N.A. Filed as Exhibit 10.1(d) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992. *
10.6(a) Loan Agreement, dated April 22, 1994, between Pegasus
Aircraft Partners, L.P. and Philadelphia National
Bank, Incorporated as CoreStates Bank, N.A..*
(b) Promissory Note, dated April 22, 1994, made by
Pegasus Aircraft Partners, L.P. in favor of
Philadelphia National Bank Incorporated as CoreStates
Bank, N.A.*
(c) Security Agreement and Assignment of lease between
First Security Bank of Utah, National Association as
owner trustee and Philadelphia National Bank
Incorporated as CoreStates Bank, N.A. with respect to
aircraft N17010.*
(d) Assignment of beneficial interest for Pegasus
Aircraft Partners, L.P. to Philadelphia National Bank
Incorporated as CoreStates Bank, N.A. with respect to
the Pegasus interest in the USAir Trust Agreement and
the Continental Trust Agreement.*
(e) Amended and restated loan agreement dated as of July
20, 1995 between Pegasus Aircraft Partners, L.P. and
CoreStates Bank N.A..*
11 Partnership Policy Regarding Requests for Partner
Lists.
19.1 Prospectus of Registrant, dated as of September 30,
1988. Filed as Exhibit 19.1 to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1988.*
35
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 1997
Pegasus Aircraft Partners, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
Administrative General Partner
By: /s/ Clifford B. Wattley
-------------------------------------
Clifford B. Wattley
President and Director
By: /s/ Joseph P. Ciavarella
-------------------------------------
Joseph P. Ciavarella
Vice President, Treasurer,
Secretary and Chief Financial
and Accounting Office
By: Pegasus Aircraft Management Corporation
Managing General Partner
By: /s/ Richard S. Wiley
-------------------------------------
Richard S. Wiley
President and Chairman
of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March ___, 1997.
Signature Title
- --------- -----
/s/ Richard S. Wiley President and Chairman of
Richard S. Wiley the Board of Pegasus Aircraft
Management Corporation
36
67
/s/ Richard W. Doust Executive Vice President,
Richard W. Doust Assistant Secretary and
Director of Pegasus Aircraft
Management Corporation
/s/ Gregory Harding-Brown Executive Vice President,
Gregory Harding-Brown Assistant Secretary, Treasurer
and Director of Pegasus Aircraft
Management Corporation
/s/ Gerald F. Goertz, Jr. Chairman of the Board of
Gerald F. Goertz, Jr. Air Transport Leasing, Inc.
/s/ Clifford B. Wattley President and Director of
Clifford B. Wattley Air Transport Leasing, Inc.
/s/ Stephen R. Dyer Vice President, Assistant
Stephen R. Dyer Secretary and Director of
Air Transport Leasing, Inc.
37
68
PARTNERSHIP INFORMATION
PEGASUS AIRCRAFT PARTNERS, L.P.
2424 South 130th Circle
Omaha, Nebraska 68144-2596
1-800-234-7342
GENERAL PARTNERS
Pegasus Aircraft Management Corporation
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.
40
69
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
10.3 (f) Amendment No. 1 to Lease Agreement 735 dated as of
February 28, 1997 between the Owner Trustee and
Continental Airlines, Inc.
11 Partnership Policy for Requests for Partner List
27 Financial Data Schedule