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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, 1997
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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
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Commission file number 0-17712
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Pegasus Aircraft Partners, L.P.
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(Exact name of Registrant as specified in its charter)
Delaware 84-1099968
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(State of organization) (IRS employer
Identification No.)
Four Embarcadero Center, 35th Floor
San Francisco, California 94111
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(Address of principal executive offices) (Zip Code)
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, 1997
Table of Contents
Page
----
Part I
Item 1 Business....................................................... 1
Item 2 Properties..................................................... 12
Item 3 Legal Proceedings.............................................. 12
Item 4 Submission of Matters to a Vote
of Security Holders............................................ 14
Part II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters............................. 15
Item 6 Selected Financial Data........................................ 16
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations................................... 16
Item 8 Financial Statements........................................... F-1
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure........................................ 23
Part III
Item 10 Directors and Executive Officers
of the Registrant........................................... 23
Item 11 Executive Compensation......................................... 26
Item 12 Security Ownership of Certain
Beneficial Owners and Management............................ 26
Item 13 Certain Relationships and
Related Transactions........................................ 27
Part IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K..................................... 29
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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 Paine Webber 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 all partners.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. This could result in
a system failure or miscalculations in the year 2000 causing disruptions of
operations of the Partnership, its lessees, or general partners.
The Partnership has already reviewed and identified its computer systems
that are subject to Year 2000 risk. Accordingly, the Partnership has commenced
the remediation of all software not Year 2000 compliant. The costs of such
remediation is expensed as incurred and is not expected to be material to the
Partnership's financial position or results of operations.
The Partnership has also initiated communication with lessees and
vendors to determine the extent to which the Partnership is vulnerable to those
third parties' failures to remediate their own Year 2000 issues. The Partnership
has not yet completed its communication with its lessees and vendors. As a
result, the Partnership cannot determine at this time
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the extent, if any, to which the Partnership may be exposed to financial risk
from the inability of the Partnership's lessees and vendors to remediate their
own Year 2000 issues.
Outlook for the Airline and Aircraft Leasing Industries
The US airline industry had another profitable year in 1997 which
continued the industry's profitability trend. 1997 remained a strong year in
aircraft production. The demand for used aircraft was reflected in, for the most
part, stable lease rates for used aircraft. 1997 also continued a recent upward
trend in aircraft production. Continental Airlines, Inc. ("Continental")
continued to report positive financial results in 1997 and USAirways Group, Inc.
("US Air") continued to show financial improvements. Trans World Airlines
significantly narrowed its loss in 1997, increased its liquidity and continued
its fleet rationalization program. Although some analysts foresee a profitable
1998, TWA has yet to achieve substantial profitability. Aircraft leasing
continues to be a highly competitive business and the Partnership's lessees
continue to face significant competitive challenges.
Recent Partnership Developments
Immediately below is a table which shows the December 1997 appraised value
of the Partnership's aircraft to be approximately $45.9 million, or 57% of the
portfolio's original acquisition cost (excluding acquisition fees) increased by
capital expenditures (and net of maintenance reserves collected from lessees
applied against aircraft maintenance checks and aircraft capital improvements)
since acquisition. Based on these appraised values, the Partnership's net asset
value at December 31, 1997 was equal to $8.36 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 at
December 31, 1997:
December Current
1997 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 $ 3.0 6/98 1974 Stage 2 67,636 44,719
Trans World
Airlines, Inc. Boeing 747-100 100 18.4 8.2 7/00 1970 Stage 2(5) 83,477 16,436
Trans World McDonnell
Airlines, Inc. Douglas MD-82 100 21.3 15.4 10/04 1983 Stage 3 45,833 23,698
USAirways McDonnell
Group, Inc. Douglas MD-81 50(6) 10.0 6.2 06/01 1982 Stage 3 43,528 39,104
Boeing 727-200
(7) Non-Advanced 100 11.5 7.5 3/02 1969 Stage 3 64,915 51,356
Sky Trek
International
Airlines, Boeing 727-200
Inc. Non-Advanced 100 11.5 5.6 06/02 1969 Stage 3 62,528 49,859
---- ---
$80.7 $45.9
===== =====
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 aggregated approximately $11.4 million, of which $7.8
million was made in 1997 in respect of the two Boeing 727-200
non-advanced aircraft, net of the application of $1.7 million
of maintenance reserves collected.
(2) The December 1997 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. During
1997, US Airways Group Inc., (USAir) exercised its option to
renew its lease for three years.
(4) The number of cumulative flight cycles and cumulative flight
hours shown are as of December 31, 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) This aircraft was delivered to Nationsair, Inc. ("Nations") on
December 31, 1996 and recovered in September 1997 after
Nations stopped making payments. The Partnership entered into
an agreement in principle to lease the aircraft to TNT
Transport International B.V. for a term of approximately 4
years. The Partnership committed $2.6 million to complete a
maintenance check and cargo conversion. At December 31, 1997,
the Partnership invested $1.3 million which is reflected in
acquisition costs. The appraised value at December 31, 1997
reflects such investment
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The following is a description of the principal financial terms of the
leases listed in the table.
CONTINENTAL AIRLINE LEASES During December 1988, the Partnership acquired
a Boeing 727-200 advanced aircraft for a total purchase price of $8,025,000
which as of December31, 1997 was subject to a lease with Continental providing
for rentals of $75,000 per month through June30, 1998, the scheduled expiration
date.
During December 1988, the Partnership acquired a Boeing 747-100 aircraft
for a total purchase price of $17,847,000. The aircraft was originally subject
to an operating lease with Continental, the term of which was originally
scheduled to expire on April30, 1996.
In January 1995, Continental announced that it was grounding certain
aircraft, including the Boeing 747 Aircraft owned by the Partnership.
Continental discontinued utilizing the 747 Aircraft, did not make any rental
payments after January 1995 and returned the 747 Aircraft to the Partnership.
During the quarter ended September30, 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 September1, 1995 to
April30, 1996, the scheduled expiration date of the lease. Continental returned
the Aircraft and engines in the return condition required by the lease. On
October16, 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 discussion of the Boeing 747 aircraft.
TRANS WORLD AIRLINES LEASES During February 1989, the Partnership acquired
a McDonnell Douglas MD-82 aircraft for a total purchase price of $21,017,000
which as of December31, 1997 was subject to a lease with Trans World Airlines,
Inc. ("TWA") providing for rentals of $185,000 per month for a term scheduled to
expire in September 2004.
Pursuant to a lease amendment in 1993, the Partnership reimbursed TWA for
$225,000 of capital improvements and advanced $750,000 to TWA to finance certain
major maintenance procedures. TWA is repaying the $750,000 to the Partnership
through September 1, 1998, in equal monthly installments, with interest at a
fixed rate of 9.68%. At December31, 1997 the balance of the receivable was
$128,000. All 1998 payments to date have been made by TWA.
In mid-October 1994 because of operating and financial problems, TWA
announced that it would seek a global restructuring of its capital by offering
common stock for its debt securities preferred stock obligation and lease
deferrals negotiated with aircraft lessors such as the Partnership ("Exchange
Offer"). TWA and the Partnership agreed to a deferral of 50% of the
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original rent scheduled for November 1994 and 75% of the original schedule from
December 1994 to April 1995. Additionally, TWA and the Partnership reached an
agreement to extend the lease of the MD-82 aircraft by six years beyond the then
scheduled expiration date to October 1, 2004 at the current lease rate 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, which commenced May 1, 1995. On June 30, 1995, TWA filed a
prepackaged reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On
August 23, 1995, the reorganization plan, which included the foregoing lease
modifications, was confirmed by the Bankruptcy Court, and TWA emerged from
bankruptcy.
In July 1996, the Partnership delivered its Boeing 747-100 aircraft,
formerly leased to Continental, to TWA under a lease with a term of
approximately four years. The lease provides for a monthly rent of $180,000. The
Partnership incurred costs of approximately $1,280,000 in connection with the
redelivery, integration and maintenance of the 747 aircraft, of which $669,000
represented maintenance expense and $611,000 were capitalized expenditures. The
Partnership received a security deposit of $360,000 from TWA with respect to the
lease. TWA has entered into a fleet restructuring program that has resulted in
grounding a substantial portion of its Boeing 747 aircraft, including the Boeing
747 leased from the Partnership. While TWA did show some improvement in 1997,
lowering its loss and increasing its liquidity, it has yet to achieve consistent
earnings. TWA has continued to make lease payments with respect to the aircraft.
To date, TWA has made all rental payments and advance repayments. TWA
accounted for approximately 58% of Partnership rental revenue in 1997.
US AIRWAYS GROUP INC (USAir) During March 1989, the Partnership acquired
one-half of the beneficial interest in a trust ("Trust") that is the
owner/lessor of a McDonnell Douglas MD-81 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
USAir aircraft is subject to an operating lease with USAir, the term of which
was originally scheduled to expire on June 1, 1998. Rental payments are payable
quarterly at a rate of $304,000 (for the Partnership's one-half interest in the
aircraft). During 1997, USAir exercised its option to renew the lease at the
same lease rate for a period of three years to June 1, 2001. 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 lease
("TBT Lease"), which provided for the transfer of certain tax benefits to a tax
lessor. The Trust, as owner of the aircraft and tax lessee 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
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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. There have been no calls on the Trust's letter of credit as of
December 31, 1997.
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, each originally for a term of approximately five
years with rents payable monthly in advance at $55,000 per aircraft. The leases
were modified in 1996 and extended to December 31, 1999. The leases also
required Kiwi to pay maintenance reserves for airframe and engines, of $250 per
flight hour, which could be drawn upon by Kiwi for specific maintenance
procedures. The aircraft were delivered 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.
During 1996 in part, because of the grounding of certain aircraft by the
FAA as the result of pilot handbook deficiencies and the market reaction to the
Valujet incident, Kiwi did not meet its financial goals. Kiwi requested and was
granted by the Partnership a deferral of its August 1996 rental and July 1996
maintenance payments. Kiwi was also unable to make its September rental and
August maintenance payments and was placed in default by the Partnership.
On September 30, 1996, Kiwi filed a voluntary petition for reorganization
under Chapter 11 of the Federal Bankruptcy Code ("Bankruptcy Code") and did not
make any subsequent payments. The Kiwi leases accounted for approximately 19% of
the Partnership's rental revenue in 1996. At December 31, 1996 the Partnership
held maintenance deposits aggregating approximately $1,627,000, which were not
sufficient to complete work required on the aircraft and the related engines to
meet lease return conditions and make the aircraft leasable. On October 15,
1996, Kiwi ceased schedule flight operations. The Bankruptcy Court approved
Kiwi's motion to reject both leases as of November 15, 1996. In 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. The Partnership recovered the aircraft and the
spare engine in late 1996.
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The Partnership filed a claim in Kiwi's bankruptcy case for all unpaid
items in connection with the leases as well as rejection damages. The
Partnership also filed an adversarial complaint seeking the Bankruptcy Court's
authority to utilize the maintenance reserves held ($1.6 million). In April
1997, the Partnership won a summary judgment in Bankruptcy Court permitting the
use of the collected maintenance reserves. The maintenance reserves were
reclassified from restricted cash to cash and cash equivalents and the
maintenance reserve payable was applied against expenditures made to make the
aircraft leasable. The spare engine was sold during the quarter ended March 31,
1997 for proceeds of $275,000. The Partnership was also involved in litigation
with the company who acted as Kiwi's engine manager regarding each party's
compliance with a settlement agreement entered into to facilitate the recovery
of the aircraft. The parties achieved a negotiated settlement in May 1997 by the
payment by the Partnership of amounts due and the receipt by the Partnership of
services provided.
In July 1997, the Bankruptcy Court approved a proposal to purchase the
assets of Kiwi submitted by a group which includes certain of the parties that
had provided debtor-in-possession financing. Based upon the approved purchase
price, it is likely that the Partnership will have little or no recovery of its
bankruptcy claims.
Nations Air Express, Inc. On December 31, 1996, the Partnership delivered
a Boeing 727-200 aircraft, formerly leased to Kiwi, to Nations Air Express Inc.
("Nations") subject to a lease for a term of approximately 36 months at a lease
rate of $65,000 per month. Nations was also required to make maintenance reserve
payments of approximately $347 per flight hour (to be reduced thereafter and
used only for specific maintenance) and was obligated to complete the next phase
"C" check without reimbursement from maintenance reserves.
At the time of its delivery to Nations, because of Kiwi's noncompliance
with lease return condition provisions and the need to deliver the aircraft
quickly, the Partnership delivered the aircraft with one engine which belonged
to Pegasus Aircraft Partners II, L.P., an affiliated partnership, and two
engines which belonged to affiliates of the Managing General Partner. The
Partnership paid those entities for their share of the rents (in the aggregate
of $45,000 per month plus related reserves) while using such engines. The
Partnership purchased five rebuilt engines in January 1997 from an unaffiliated
third party, three of which were installed on the aircraft in March and April
1997. Additionally, the Partnership hushkitted the aircraft at a cost of
approximately $1.9 million and simultaneously extended the lease to April 2002
and increased the monthly lease rate from $65,000 to $105,000 effective April
1997. During 1997, Nations incurred operating problems and struggled with
adequate liquidity and capitalization requirements. Nations fell in arrears with
respect to rent and maintenance reserves due and in July 1997 began making
weekly payments of rent and maintenance reserves instead of monthly payments. In
late July 1997, Nations stopped making weekly payments and stopped flying the
aircraft shortly thereafter. Nations was unable to fund a "C" check then due and
after Nations was unable to raise any additional financing, the Partnership
recovered the aircraft in September 1997. At December 31, 1997, the Partnership
had unfunded maintenance reserves due from Nations totaling $400,000 (which are
not reflected on the financial statements) and had provided
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an allowance for bad debts of $20,000 with respect to rents earned prior to the
recovery of the aircraft. In addition, the Partnership provided a writedown
of $200,000 with respect to the aircraft at December 31, 1997.
SKY TREK INTERNATIONAL AIRLINES, INC. In February 1997, the Partnership
entered into an agreement in principle to lease the second former Kiwi 727
aircraft to a start up airline, Sky Trek International Airlines Inc. ("Sky
Trek"). The lease was executed and the aircraft was delivered in late June 1997.
The Sky Trek lease provides for rent of $95,000 per month for a term of
approximately 60 months. Sky Trek provided a security deposit of $190,000 and
will be obligated to fund maintenance reserves, in the aggregate, at a rate of
$325 per flight hour. The Partnership completed a C check (including replacing
time-controlled parts) at a cost of approximately $1,500,000 (before the
application of maintenance reserves to restore the aircraft of $888,000) and has
purchased a hushkit at a cost of $1,900,000. Two of the five engines purchased
in January 1997 (see Nations discussion) were installed on the aircraft and the
Partnership purchased an additional engine, at a cost of $625,000 for the
aircraft prior to delivery to Sky Trek. The Partnership provided a writedown of
$150,000 with respect to the aircraft at December 31, 1997.
TNT TRANSPORT INTERNATIONAL B.V. In November 1997, the Partnership entered
into an agreement in principle to lease the aircraft formerly leased to Nations
to a European freight carrier, TNT Transport International B.V. ("TNT") for a
term of four years. The lease would provide for monthly rentals of $123,500
(subject to a reduction of approximately 10% after two years if TNT exercises an
option to extend the lease for an additional two years beyond the original
expiration date) and airframe and landing gear reserves aggregating $85 per
flight hour. As of December 31, 1997, TNT had provided a $150,000 security
deposit. TNT also has the right to extend the lease for an additional two years
(if the above option is not exercised) at $95,000 per month. The Partnership
committed to spend approximately $2.6 million for a "C" check and cargo
conversion of the aircraft of which $1.3 million had been expended at December
31, 1997 (before the application of maintenance reserves to restore the
aircraft of $854,000). The work was performed and the aircraft parts provided by
companies affiliated with the Managing General Partner or its President and
Director. The Partnership reached an agreement in principle with its lender to
increase its borrowing facility from $7,500,000 to $10,000,000 to finance this
work. The aircraft was delivered in March 1998. (See Item 8, Footnote 12,
"Subsequent Events").
Significant Lessees
The Partnership leased its aircraft to five different airlines during
1997. Revenues from each of the airlines below accounted for greater than 10% of
the total rental revenues of the Partnership during 1997:
Airline Percent of Total Rental Revenues
------- --------------------------------
TransWorld Airlines, Inc. 58%
USAirway Group, Inc. 16%
Continental Airlines, Inc. 12%
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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
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.
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.
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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.
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 mitigating 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.
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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. Two of the Partnership's three 727-200 aircraft
have been hushkitted.
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
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.
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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 Paine Webber
Incorporated's sale and sponsorship of various limited partnership investments,
including those offered by the Partnership. The lawsuits were brought against
Paine Webber Incorporated and Paine Webber Group, Inc. (together, "Paine
Webber"), among others, by allegedly dissatisfied partnership investors. In
March 1995, after the actions were consolidated under the title In re: Paine
Webber 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 Paine Webber 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, Paine Webber 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 Paine Webber and
the Administrative General Partner misrepresented financial information about
the partnership's value and performance. The amended complaint alleged that
Paine Webber 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 Paine Webber 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, Paine Webber 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, Paine Webber agreed to pay $125
million and certain additional consideration to class members. The investors who
had objected to the settlement appealed the District Court's approval to the
United States Court of Appeals for the Second Circuit. In July 1997, the U.S.
Court of Appeals for the Second Circuit affirmed the District Court's approval
of the settlement. The District Court must still determine
12
15
the extent of attorney's fees to be awarded to Plaintiffs' counsel which will be
paid from the settlement fund, so that the remainder of the monies can be
distributed 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. Paine Webber, 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 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 sought
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 were removed to
federal court and two were transferred to the District Court for the Southern
District of New York and consolidated under the title, Mallia vs. Paine Webber,
Inc. The third action was dismissed with the consent of the parties on the
grounds that it was duplicative of the two actions were before the federal court
in New York.
In February 1996, approximately 230 plaintiffs filed an action entitled
Abbate v. Paine Webber Inc. in Sacramento, California Superior Court against
Paine Webber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleged, among other things, that Paine Webber 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 sought 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 Paine Webber Incorporated, et al, was filed in California Superior
Court and Barstad v. Paine Webber Incorporated, et al, was filed in Arizona
Superior Court. Collectively, the two additional actions are brought by
approximately 50 plaintiffs and sought compensatory damages of approximately $4
million plus punitive damages. In March 1997, the Abbate, Bandrowski and Barstad
actions were settled.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, Paine Webber and its affiliates, including
the Administrative General Partner could be entitled to indemnification from the
Partnership for expenses and liabilities in connection with the above actions.
Paine Webber and its affiliates have agreed to not seek any
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16
indemnification from the Partnership for any amounts payable in connection with
the New York Limited Partnership actions.
The General Partners believe that if indemnification is sought, the
Abbate, Bandrowski and Barstad actions will not 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. See Item 8, Note 5, "Aircraft Under Operating Leases" for a
discussion of the related litigation.
The Partnership was also involved in a litigation 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 and
engines. The parties achieved a negotiated settlement in May 1997 with the
payment by the Partnership of amounts due and the receipt by the Partnership of
certain equipment.
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. On February 25, 1998 the suit was
dismissed without prejudice and with no monetary damages awarded.
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, 1997.
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17
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.
As of March 1, 1998, the number of Limited Partners of record was
approximately 4,815.
The Partnership declared the following distributions to its Limited
Partners out of cash flow received from operations during 1997 and 1996:
Amount Of
Distribution
Period Per Unit Record Date Payment Date
------ -------- ----------- ------------
1st Quarter 1997 $.40 March 31, 1997 April 25, 1997
2nd Quarter 1997 .40 June 30, 1997 July 25, 1997
3rd Quarter 1997 .40 September 30, 1997 October 24, 1997
4th Quarter 1997 .40 December 31, 1997 January 23, 1998
1st Quarter 1996 .40 March 31, 1996 April 25, 1996
2nd Quarter 1996 .40 June 30, 1996 July 25, 1996
3rd Quarter 1996 .40 September 30, 1996 October 25, 1996
4th Quarter 1996 .40 December 31, 1996 January 24, 1997
Total distributions to all partners for 1997 and 1996 were declared as
follows (in thousands):
1997 1996
---- ----
Limited Partners $6,400 $6,400
General Partners 64 64
------ ------
$6,464 $6,464
====== ======
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%,
89%, and 88%, of the cash distributions declared for the years ended December
31, 1997,
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18
1996 and 1995, respectively, constituted a return of capital. Also, based on the
amount of net income reported by the Partnership for accounting purposes,
approximately 72% of the cash distributions paid to the partners from inception
of the Partnership through December 31, 1997 constituted a return of capital.
However, the total actual return of 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,
------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per unit amounts)
Rental Revenue $ 7,533 $ 6,604 $ 6,076(2) $ 8,527 $ 9,062
Net Income 716(2) 711 880 426 2,881
Net Income per Limited
Partnership Unit .18 .18 .22 .11 .71
Distributions per Limited
Partnership Unit(1) 1.60 1.60 1.85 1.80 1.90
Total Assets 30,512 31,158 36,611 42,619 46,727
Notes Payable 7,271 1,218 1,625 2,000 --
Partners' Equity 19,675 25,423 31,176 37,770 44,616
- ----------
(1) Distribution amounts are reflected on the accrual basis.
(2) Includes gain on sale of spare aircraft engine of $177.
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. See also Item 7 below.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The following discussion should be read in conjunction with the
"Selected Financial Data" and the Consolidated Financial Statements of the
Partnership and the Notes thereto. This report contains, in addition to
historical information, forward-looking statements that include risks and other
uncertainties. The Partnership's actual results may differ materially from
those anticipated in these forward-looking statements. Factors that might cause
such a difference include those discussed below, as well as general economic
and business conditions, competition and other factors discussed elsewhere in
this report. The Partnership undertakes no obligation to release publicly any
revisions to these Forward-Looking Statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of anticipated
or unanticipated events.
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.
16
19
Cash distributions declared by the Partnership were approximately $6.5
million in each of 1997 and 1996 ($1.60 per unit) and $7.5 million in 1995
($1.85 per Unit). Net cash provided by operating activities was $6.3 million in
1997, $5.2 million in 1996 and $6.1 million for 1995. 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 $17.6 million and
cash distributions declared by the Partnership totaled $20.5 million. Further,
during 1997, 1996 and 1995 the Partnership paid cash distributions of $6.5
million, $6.4 million and $7.7 million, respectively, totaling $20.6 million for
the three year period.
Partnership equity declined by approximately $5.7 million from December
31, 1996 to December 31, 1997 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 non-cash depreciation expense and provisions for decline in
market value of the Partnership's aircraft.
At December 31, 1997, the Partnership's liquidity was reduced due
principally to the expenditure during 1997 of $7.8 million for aircraft capital
improvements (net of the application of maintenance reserves collected) which
exceeded additional net borrowings of $6.1 million. Additionally at December 31,
1997, the Partnership was obligated to complete the cargo conversion and related
maintenance which was estimated to cost an additional $1.3 million. In January
1998, the Partnership consummated an agreement with the lender to increase the
commitment under the loan facility from $7.5 million to $10 million. The
proceeds, when drawn, will be used to fund maintenance costs previously incurred
as well as the committed amounts as of December 31, 1997.
The lease of a 727-200 advanced aircraft to Continental expires in June
1998. The Partnership is currently exploring options with respect to the
aircraft including remarketing or selling the aircraft.
Rent and other receivables, net, decreased by $238,000 from $660,000 at
December 31, 1996 to $422,000 at December 31, 1997. This decrease is primarily
the result of the continued repayments of advances and deferrals by Continental
and TWA. During 1997, the Partnership provided an allowance for uncollectible
accounts or $20,000 with respect to rent due from Nations. (See Item 8 Financial
Statements, Note 5 "Aircraft Under Operating Leases").
Prepaid expenses and other decreased by $109,000 from $135,000 at December
31, 1996 to $26,000 at December 31, 1997. The decrease is primarily due to the
reclassification of certain costs accrued at December 31, 1996 with respect to
Nations to Aircraft, net.
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20
Deferred rental income and deposits increased $306,000 from $676,000 at
December 31, 1996 to $982,000 at December 31, 1997 primarily due to the security
deposits received from Sky Trek and TNT totaling $340,000 offset by a slight
reduction in deferred income.
Payable to affiliates decreased by $77,000, from $484,000 at December 31,
1997 to $407,000 at December 31, 1997. The decrease was attributable primarily
to the payment to the Administrative General Partner of accrued unpaid fees from
prior years. 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").
In July 1995, the Partnership and the Lender completed an extension of
their existing loan commitment. Under the new agreement, the aggregate
commitment remained at $4,000,000, the Partnership's ability to borrow under the
facility was extended until May 1, 1997 and the floating interest rate charged
under the facility was reduced to the Lender's prime rate plus 0.5%. The Lender
released the Boeing 747-100 aircraft as collateral under the loan and received a
security interest in the Partnership's MD-82 aircraft leased to TWA. The
Partnership borrowed an aggregate of $2,150,000 pursuant to the loan agreement,
of which $1,218,000 was outstanding at December 31, 1996.
In February 1997, the Partnership purchased five aircraft engines from an
unaffiliated third party for $2,150,000 plus six engine cores from the former
Kiwi aircraft which required overhaul, utilizing its then existing borrowing
facility. The Lender charged the Partnership 1.50% over prime with respect to
this borrowing and increased the rate on the other borrowings to 1.50% over
prime. In April 1997, the Partnership obtained a new borrowing facility with a
different lender. Under the terms of the new agreement, the Partnership will be
able to borrow up to $7,500,000 at an interest rate of 1% over the lender's
prime rate of interest. The lender's commitment is for a term of 36 months, at
which time all principal will be due. The loan is collateralized by the
Partnership's interest in the MD-82 aircraft leased to TWA. During the loan
term, the Partnership will be required to pay interest on a monthly basis and
maintain a minimum outstanding balance of $2,000,000. The Partnership used
approximately $3.3 million of proceeds from this facility to retire the debt
previously outstanding and used an additional $3.9 million to finance hushkits
for the two former Kiwi aircraft, one of which was leased to Nations Air Express
Inc., prior to its recovery by the Partnership in September 1997, and the other
of which is leased to Sky Trek International Airlines, Inc. In late 1997, the
Partnership committed to lease the former Nations aircraft to TNT.
With the exception of the 727-200 advanced aircraft leased to Continental
which is scheduled to expire on June 30, 1998 all of the Partnership's assets
are subject to leases with remaining terms of at least 30 months. The
Partnership is currently investigating remarketing opportunities for the 727-200
advanced aircraft. If the Partnership is unable to remarket this aircraft on a
timely basis the Partnership may not be able to sustain its current distribution
rate. During 1997 the Partnership invested $9.4 million in capitalized aircrafts
improvements and maintenance checks, of which $1.7 million was funded by the
application of maintenance
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21
reserves collected from Kiwi and Nations. At December 31, 1997, the Partnership
had capital commitments of approximately $1.3 million with respect to the cargo
conversion for TNT. In January 1998, the availability under the borrowing
facility was increased from $7.5 million to $10 million. Upon the completion of
the cargo conversion and delivery of the aircraft to TNT in March 1998 all of
the Partnership's aircraft were deployed. (See Item 8, Financial Statements,
Footnote 12, "Subsequent Events").
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.
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 of which
one advance to TWA, remained outstanding at December 31, 1997.
Under the terms of the triple net leases, substantially all of the
expenses related to the operation and maintenance of the aircraft during 1997,
were paid for by the lessees or in the case of Sky trek and Nations (until the
Nations default and aircraft return), funded to a certain extent through hourly
maintenance reserves paid by them. 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. In 1997, the Partnership incurred maintenance
costs with respect to the delivery of the aircraft to Nations and Sky Trek, as
well as costs (including legal) associated with the Kiwi bankruptcy, including
recovery of the aircraft and related expenses
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.
1997 as compared to 1996
The Partnership's net income was $716,000 for the year ended December 31,
1997 ("1997 Period") as compared to $711,000 for the year ended December 31,
1996 ("1996 Period"). An increase in rental income (a full year of rent for the
747 aircraft leased to TWA was the primary reason) and the gain on sale of the
engine and the decrease in aircraft maintenance and other expenses was offset by
the increases in depreciation, provision for decline in market value of
aircraft, management and release fees and interest expense.
19
22
Rental revenue increased by $929,000 or 14% in the 1997 Period as compared
to the 1996 Period. The increase is attributable primarily to the fact that the
747 aircraft was off-lease for a portion of the 1996 Period as well as the
increase in lease rates attributable to the ex-Kiwi aircraft (the lease rate
increases were due primarily to the enhancements to the aircraft made by the
Partnership, primarily the hushkitting of the aircraft). This was partially
offset by the fact that the ex-Kiwi aircraft were off-lease for the last quarter
of the 1996 Period.
During 1997 Period, the Partnership sold a spare engine for proceeds of
$275,000 which had a depreciated cost of $98,000, resulting in a $177,000 gain.
There was no such item during the 1996 Period.
Interest income for the 1997 Period decreased by $111,000 or 50% as
compared to the 1996 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.
Depreciation and amortization increased by $812,000 or 20% for the 1997
Period as compared to the 1996 Period. The increase was attributable to the
depreciation associated with the 747 aircraft which was placed in service in
July 1996 and which was off-lease for a substantial portion of the 1996 Period,
as well as the depreciation on capital improvements to aircraft made in 1997.
During the 1997 Period the Partnership provided allowances for decline in
market value of aircraft aggregating $350,000 to reflect the impairment to
certain aircraft. An allowance of $150,000 was provided in the 1996 Period.
Management and re-lease fee payable to the General Partners for the 1997
Period increased by $156,000 or 34%, in comparison to the 1996 Period. The
increase was due primarily to an increase in rental income, which provide, the
basis on which management and re-lease fees are calculated.
General and administrative expenses decreased by $11,000 or 5% in the 1997
Period as compared to the 1996 Period which was consistent with the
Partnership's operations.
Interest expense increased by $459,000 in the 1997 Period as compared to
the 1996 Period, due principally to the increase in borrowings outstanding from
approximately $1.2 million to approximately $7.3 million during 1997. Such
borrowings were used for capital improvements to the two Boeing 727-200 non
advanced aircraft remarketed in 1997.
Direct lease expenses decreased by $4,000 or 3% in the 1997 Period as
compared to the 1996 Period. The decrease in the 1997 Period as compared to the
1996 Period was due to a decrease in insurance expense partially offset by
certain costs associated with the ex-Kiwi aircraft incurred in 1997.
20
23
Aircraft maintenance expense of $669,000 was incurred in the 1996 period,
which reflected the work completed with respect to a maintenance check performed
on the 747 aircraft prior to the delivery to TWA in July 1997. The Partnership
incurred maintenance expense of $307,000 in the 1997 Period with respect to the
aircraft (ex-Kiwi) delivered to Nations and Sky Trek.
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 expanded 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.
Management and re-lease fees payable to the General Partners for the 1996
Period decreased $239,000, or 34%, for the 1996 Period, 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. 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 remarket of 747
aircraft in the 1996 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.
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.
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.
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 the delivery to TWA in
July 1996. No such amount was incurred in the 1995 Period.
Inflation and Changing Prices
Inflation has had no material impact on the operations or financial
condition of the Partnership during 1997. 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 prices of the aircraft.
Statement 128
FASB 128 had no impact on the Partnership's computation of per unit values
in any year presented.
New Accounting Pronouncements, Issued But Not Yet Effective
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from nonower sources. The Partnership does not expect this
pronouncement to materially impact the reporting of the Partnership's results of
operations.
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25
Item 8. Financial Statements
List of Financial Statements
Page
----
Report of Independent Accountants F-2
Balance Sheets -- December 31, 1997 and 1996 F-3
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 F-4
Statements of Partners' Equity for the years ended
December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 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
26
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, 1997 and 1996, and the results of its operations and its
cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
New York, New York Coopers & Lybrand L.L.P.
March 23, 1998
F-2
27
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
---- ----
(in thousands, except unit data)
Cash and cash equivalents (Note 4) $ 1,356 $ 2,521
Restricted cash (Note 5) -- 1,627
Rent and other receivables, net (Note 5) 422 660
Aircraft, net (Note 5) 28,708 26,215
Prepaid expenses and other 26 135
-------- --------
Total Assets $ 30,512 $ 31,158
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Notes payable (Notes 7 and 12) $ 7,271 $ 1,218
Accounts payable and accrued expenses 302 73
Payable to affiliates (Note 6) 458 484
Distributions payable to partners 1,632 1,648
Maintenance reserves collected 192 1,627
Deferred rental income and deposits 982 676
Accrued interest payable -- 9
-------- --------
Total Liabilities $ 10,837 $ 5,735
======== ========
CONTINGENCIES (Notes 5, 7, 9, 11 and 12)
PARTNERS' EQUITY:
General Partners (599) (542)
Limited Partners (4,000,005 units outstanding
in 1997 and 1996) 20,274 25,965
-------- --------
Total Partners' Equity 19,675 25,423
-------- --------
Total Liabilities and Partners' Equity $ 30,512 $ 31,158
======== ========
The accompanying notes are an integral part
of these financial statements.
F-3
28
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
(in thousands, except unit data
and per unit amounts)
REVENUE:
Rentals from operating leases $ 7,533 $ 6,604 $ 6,076
Interest 111 222 293
Gain on sale of engine 177 -- --
Other income -- -- 233
------- ------- -------
7,821 6,826 6,602
------- ------- -------
EXPENSES:
Depreciation and amortization 4,872 4,060 4,105
Interest expense 595 136 202
Management and re-lease fees (Note 6) 615 459 698
Writedowns (Note 5) 350 150 400
Provision for bad debts (Note 5) 20 240 --
General and administrative (Note 6) 223 234 210
Direct lease 123 127 107
Aircraft maintenance and other 307 709 --
------- ------- -------
7,105 6,115 5,722
------- ------- -------
NET INCOME $ 716 $ 711 $ 880
======= ======= =======
NET INCOME ALLOCATED:
To the General Partners 7 7 9
To the Limited Partners 709 704 871
------- ------- -------
$ 716 $ 711 $ 880
======= ======= =======
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .18 $ .18 $ .22
======= ======= =======
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
29
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
General Limited
Partners Partners Total
-------- -------- -----
(in thousands)
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
Net income 7 709 716
Distribution to partners declared (64) (6,400) (6,464)
----- ------- -------
Balance, December 31, 1997 $(599) $20,274 $19,675
===== ======= =======
The accompanying notes are an integral part
of these financial statements.
F-5
30
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 716 $ 711 $ 880
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,872 4,060 4,105
Provision for bad debts 20 240 --
Writedowns 350 150 400
Gain on sale of engine (177) -- --
Unrestricted maintenance reserve
received from lessee 192 (100) 100
Change in assets and liabilities:
Rent and other receivables 22 332 128
Prepaid expenses and other 109 (88) (12)
Accounts payable and accrued expenses 229 (25) 22
Payable to affiliates (26) (144) 348
Deferred rental income (34) 98 81
Accrued interest payable (9) (6) (1)
------ ----- -----
Net cash provided by operating activities 6,264 5,228 6,051
------ ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of engine 275 -- --
Continental settlement, net -- -- 3,673
Capitalized aircraft improvements, net (7,813) (611) (31)
Repayment of advances by lessees 196 302 291
------ ----- -----
Net cash (used in) provided by investing
activities (7,342) (309) 3,933
------ ----- -----
The accompanying notes are an integral part
of these financial statements.
F-6
31
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfer from restricted cash $ -- $ -- $ 385
Security deposits 340 360 --
Proceeds from notes payable 7,271 -- --
Repayment of notes payable (1,218) (407) (375)
Cash distributions paid to partners (6,480) (6,432) (7,676)
---------- ---------- ----------
Net cash used in financing activities (87) (6,479) (7,666)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,165) (1,560) 2,318
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,521 4,081 1,763
---------- ---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 1,356 $ 2,521 $ 4,081
========== ========== ==========
Supplemental Schedule of Cash Flow Information:
Interest Paid $ 604 $ 142 $ 203
========== ========== ==========
Restricted maintenance reserves collected net of
maintenance drawdowns $ -- $ 492 $ 613
========== ========== ==========
Transfers from restricted cash utilized
to restore aircraft including 1997 collections 1,742 -- --
---------- ---------- ----------
NONCASH TRANSACTIONS
Distributions to partners declared but unpaid $ 1,632 $ 1,648 $ 1,616
========== ========== ==========
The accompanying notes are an integral part
of these financial statements.
F-7
32
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 and other indemnity provisions described below. Actual results
could differ from such 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 held at
December 31, 1996 (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 to a
salvage value (generally 10%) (five years for the aircraft engine sold in 1997).
Major improvements to aircraft are capitalized when incurred and are
depreciated, generally, over the remaining useful life of the improvement. The
Partnership evaluates these costs based upon changes in market conditions in
accordance with generally accepted accounting principles. Accordingly, the
Partnership records a write down 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.
F-8
33
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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 was 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 was deposited into the reserve funds and utilized in the same
manner as other payments to the funds. These reserve funds were included in
restricted cash on the balance sheets through December 31, 1996. Additionally
the Partnership entered into two leases in 1997 which required the lessor to
make maintenance reserve deposits, which can be drawn by the lessee on a basis
similar to the one described above.
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.
Lease settlement payments received in connection with the termination or
modification of a lease of an aircraft, the carrying value of which has not been
impaired, are recognized ratably over the remaining original lease in the case
of a lease termination and over the modified lease term in connection with a
lease modification.
Income Taxes No provision for income taxes has been made in the financial
statements since such taxes are the responsibility of the individual partners
rather than the Partnership.
Net Income Per Limited Partnership Unit The net income per limited
partnership unit is computed by dividing the net income allocated to the Limited
Partners by the weighted average number of Units outstanding for the period.
Statement 128 FASB 128 had no impact on the Partnerships computation of
per unit values in any year presented.
F-9
34
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
New Accounting Pronouncements, Issued But Not Yet Effective
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from nonowner sources. The Partnership does not expect
this pronouncement to materially impact the reporting of the Partnership's
results of operations.
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 Paine Webber 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 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.
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
F-10
35
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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
At December 31, 1997, the Partnership held short-term commercial paper
issued by Ford Motor Credit Company (with various maturities) with par values
aggregating $350,000, which were acquired at costs aggregating $348,000.
F-11
36
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. AIRCRAFT UNDER OPERATING LEASES
Net Investment in Aircraft
The Partnership's net investment in aircraft as of December 31, 1997 and
1996 consisted of the following (in thousands):
1997 1996
----------- ----------
Aircraft on operating leases $ 71,120 $ 67,045
Less: Accumulated depreciation (40,609) (36,095)
Writedowns (3,368) (2,934)
Net lease settlement proceeds accounted for
as cost recovery (3,673) (3,673)
Provision for maintenance cost (178) (178)
-------- --------
23,292 24,165
Aircraft held for lease(1) $ 11,555 $ 7,817
Less: Accumulated depreciation (3,839) (3,481)
Writedowns (2,300) (2,384)
-------- --------
5,416 1,952
-------- --------
Aircraft engine -- 195
Less: Accumulated depreciation -- (97)
-------- --------
-- 98
-------- --------
Aircraft, net $ 28,708 $ 26,215
======== ========
(1) At December 31, 1997, this amount represents aircraft being converted into
cargo aircraft (including expenditures made through December 31, 1997) for
delivery to TNT Transport International B.V. The aircraft was delivered in
March 1998.
F-12
37
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Rents and Other Receivables
Rents and other receivables, net were composed of the following at
December31, 1997 and 1996.
1997 1996
------ --------
Rents receivable $ 552 $ 569
Advances to lessees 128 324
Accrued interest receivable and other 2 7
------ --------
682 900
Less: Allowance for bad
debts (260) (240)
------ --------
Rents and other receivables, net $ 422 $ 660
====== ========
Financial Terms of Leases
Continental Airline Leases During December 1988, the Partnership acquired
a Boeing 727-200 advanced aircraft for a total purchase price of $8,025,000
which as of December31, 1997 was subject to a lease with Continental providing
for rentals of $75,000 per month through June30, 1998, the scheduled expiration
date.
During December 1988, the Partnership acquired a Boeing 747-100 aircraft
for a total purchase price of $17,847,000. The aircraft was originally subject
to an operating lease with Continental, the term of which was originally
scheduled to expire on April30, 1996.
In January 1995, Continental announced that it was grounding certain
aircraft, including the Boeing 747 Aircraft owned by the Partnership.
Continental discontinued utilizing the 747 Aircraft, did not make any rental
payments after January 1995 and returned the 747 Aircraft to the Partnership.
During the quarter ended September30, 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 September1, 1995 to
April30, 1996, the scheduled expiration date of the lease. Continental returned
the Aircraft and engines in the return condition required by the lease. On
October16, 1995 the Partnership received the Lease Settlement proceeds totaling
$3,906,000.
F-13
38
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 discussion of the Boeing 747 aircraft.
Trans World Airlines Leases During February 1989, the Partnership acquired
a McDonnell Douglas MD-82 aircraft for a total purchase price of $21,017,000
which as of December31, 1997 has subject to a lease with Trans World Airlines,
Inc. ("TWA") providing for rentals of $185,000 per month for a terms scheduled
to expire in September 2004.
Pursuant to a 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 through
September 1, 1998, in equal monthly installments, with interest at a fixed rate
of 9.68%. At December31, 1997 the balance of the receivable was $128,000. All
1998 payments to date have been made by TWA.
In mid-October 1994 because of operating and financial problems, TWA
announced that it would seek a global restructuring of its capital by offering
common stock for its debt securities preferred stock obligation and lease
deferrals negotiated with aircraft lessors such as the Partnership ("Exchange
Offer"). TWA and the Partnership agreed to a deferral of 50% of the original
rent scheduled for November 1994 and 75% of the original schedule from December
1994 to April 1995. Additionally, TWA and the Partnership reached an agreement
to extend the lease of the MD-82 aircraft by six years beyond the then scheduled
expiration date to October1, 2004 at the then existing 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, which commenced May1, 1995. On June30, 1995, TWA filed a prepackaged
reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On August23,
1995, the reorganization plan, which included the foregoing lease modifications,
was confirmed by the Bankruptcy Court, and TWA emerged from bankruptcy.
In July 1996, the Partnership delivered its Boeing 747-100 aircraft,
formerly leased to Continental, to TWA under a lease with a term of
approximately four years. The lease provides for a monthly rent of $180,000. The
Partnership incurred costs of approximately $1,280,000 in connection with the
redelivery, integration and maintenance of the 747 aircraft, of which $669,000
represented maintenance expense and $611,000 were capitalized expenditures. The
Partnership received a security deposit of $360,000 from TWA with respect to the
lease. TWA has entered into
F-14
39
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
a fleet restructuring program that has resulted in grounding a substantial
portion of its Boeing 747 aircraft, including the Boeing 747 leased from the
Partnership. TWA has continued to incur substantial losses and has reduced
liquidity. There can be no assurance that it will be able to meet its
obligations in the future. TWA continues to make lease payments with respect to
the aircraft.
US Airways Group, Inc. ("USAir") During March 1989, the Partnership
acquired one half of the beneficial interest in a trust ("Trust") that is the
owner/lessor of a McDonnell Douglas MD-81 ("USAir Aircraft") for a purchase
price of $9,999,000. The remaining one-half interest in the Trust is owned by
Pegasus Aircraft Partners II, L.P. an affiliated partnership.
Rental payments are payable quarterly, in arrears, at a rate of $304,000
(for the Partnership's one-half interest in the aircraft), During 1997, US Air
exercised its renewal option for a three year extension (to June2001) at the
original lease rate. US Air also has three additional one-year renewal options
at fair market rental rates. US Air may elect to purchase the aircraft at its
fair market value at the end of any renewal term.
The McDonnell Douglas MD-81 aircraft was purchased subject to a tax
benefit transfer lease ("TBT lease") which provided for the transfer of the
investment tax credits and depreciation deductions with respect to the aircraft
to a tax lessor. Under the TBT lease, the Trust, as the owner of the aircraft
and 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 $1.2
million. Through June 1996 the letter of credit agreement obligated the
Partnership to deposit $35,000 per quarter (beginning on June 1, 1992 and
originally scheduled to terminate on June 1, 1997) into a restricted account at
the bank ("Lender") which issued the current letter of credit. In July 1995, the
Partnership restructured its borrowing arrangement with the Lender, under which
the Lender released its security interest in the cash collateral account and
eliminated the requirement for future deposits to such account.
Under the operating lease, the lessee, USAir, has assumed all liabilities,
indemnities and obligations of the Trust to the tax lessor under the TBT lease
and has agreed to indemnify the Trust for any liability, indemnity or obligation
to the tax lessor under the TBT lease except for liability resulting from
breaches by the Trust of covenants under the operating lease. US Air has not
posted a
F-15
40
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
letter of credit to collateralize this obligation. As a result of the foregoing,
if the tax lessor draws on the letter of credit as a result of an action by the
lessee, the Partnership and Pegasus Aircraft Partners II, L.P., through the
Trust will be responsible for the loss to the tax lessor until and if 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.
There have been no calls on the Trust's letter of credit as of December 31,
1997.
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, each originally for a term of approximately five
years with rents payable monthly in advance at $55,000 per aircraft. The leases
were modified in 1996 and extended to December 31, 1999. The leases also
required Kiwi to pay maintenance reserves for airframe and engines, of $250 per
flight hour, which could be drawn upon by Kiwi for specific maintenance
procedures. The aircraft were delivered in April and July 1994. In connection
with the first Kiwi lease, the Partnership also acquired an additional aircraft
engine, at a cost of $195,000, which was used as a spare by Kiwi on a
utilization basis at $105 per flight hour of use. The Partnership invested an
additional $3,108,000 for maintenance, aging aircraft modifications and other
Kiwi requested modifications prior to delivery, $580,000 of which was funded by
return condition settlement payments from the prior lessee. The leases allowed
Kiwi to request that the aircraft be hushkitted by the Partnership to obtain
Stage III noise abatement status or terminate the lease.
During 1996 in part, because of the grounding of certain aircraft by the
FAA as the result of pilot handbook deficiencies and the market reaction to the
Valujet incident, Kiwi did not meet its financial goals. Kiwi requested and was
granted by the Partnership a deferral of its August 1996 rental and July 1996
maintenance payments. Kiwi was also unable to make its September rental and
August maintenance payments and was placed in default by the Partnership.
On September 30, 1996, Kiwi filed a voluntary petition for reorganization
under Chapter 11 of the Federal Bankruptcy Code ("Bankruptcy Code") and did not
make any subsequent payments. The Kiwi leases accounted for approximately 19% of
the Partnership's rental revenue in 1996 and the aircraft had net book values
aggregating approximately $4,000,000 at December 31, 1996. At December 31, 1996,
the Partnership held maintenance deposits aggregating approximately $1,627,000,
which were not sufficient to complete work required on the aircraft and the
related engines to meet lease return conditions and make the aircraft leasable.
On October 15, 1996, Kiwi ceased schedule flight
F-16
41
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
operations. The Bankruptcy Court approved Kiwi's motion to reject both leases as
of November 15, 1996. The Partnership provided an allowance for bad debts in the
amount of $240,000 relating to amounts due from Kiwi as of the bankruptcy date
and did not record any revenue beyond that date. The Partnership recovered the
aircraft and the spare engine in late 1996.
The Partnership filed a claim in Kiwi's bankruptcy case for all unpaid
items in connection with the leases as well as rejection damages. The
Partnership also filed an adversarial complaint seeking the Bankruptcy Court's
authority to utilize the maintenance reserves held ($1.6 million). In April
1997, the Partnership won a summary judgment in Bankruptcy Court permitting the
use of the collected maintenance reserves. The maintenance reserves were
reclassified from restricted cash to cash and cash equivalents and the
maintenance reserve payable was applied against expenditures made to make the
aircraft leasable. The spare engine was sold during the quarter ended March 31,
1997 for proceeds of $275,000. The Partnership was also involved in litigation
within the Kiwi bankruptcy with the company who acted as Kiwi's engine manager
regarding each party's compliance with a settlement agreement entered into to
facilitate the recovery of the aircraft. The parties achieved a negotiated
settlement in May 1997. [Settlement]
In July 1997, the Bankruptcy Court approved a proposal to purchase the
assets of Kiwi submitted by a group which includes certain of the parties that
had provided debtor-in-possession financing. Based upon the approved purchase
price, it is likely that the Partnership will have little or no recovery of its
bankruptcy claims.
NATIONS AIR EXPRESS, INC. On December 31, 1996, the Partnership delivered
a Boeing 727-200 aircraft, formerly leased to Kiwi, to Nations Air Express Inc.
("Nations") subject to a lease for a term of approximately 36 months at a lease
rate of $65,000 per month. Nations was also required to make maintenance reserve
payments of approximately $347 per flight hour (to be reduced thereafter and
used only for specific maintenance) and was obligated to complete the next phase
"C" check without reimbursement from maintenance reserves.
At the time of its delivery to Nations, because of Kiwi's noncompliance
with lease return condition provisions and the need to deliver the aircraft
quickly, the Partnership delivered the aircraft with one engine which belonged
to Pegasus Aircraft Partners II, L.P., an affiliated partnership, and two
engines which belonged to affiliates of the Managing General Partner. The
Partnership paid those entities for their share of the rents (in the aggregate
of $45,000 per month plus related reserves) while using such engines. The
Partnership purchased five rebuilt engines in January 1997 from an unaffiliated
third party, three of which were installed on the aircraft in March 1997.
Additionally, the Partnership hushkitted the aircraft at a cost of
approximately $1.9 million and simultaneously extended the lease to April 2002
and increased the monthly lease rate from $65,000
F-17
42
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
to $105,000 effective April 1997. During 1997, Nations incurred operating
problems and struggled with adequate liquidity and capitalization requirements.
Nations fell in arrears with respect to rent and maintenance reserves due and in
July 1997 began making weekly payments of rent and maintenance reserves instead
of monthly payments. In late July 1997, Nations stopped making weekly payments
and stopped flying the aircraft shortly thereafter. Nations was unable to fund a
"C" check then due and after Nations was unable to raise any additional
financing, the Partnership recovered the aircraft in September 1997. At December
31, 1997, the Partnership had unfunded maintenance reserves due from Nations
totaling $400,000 (which are not reflected on the financial statements) and had
provided an allowance for bad debts of $20,000 with respect to rents earned
prior to the recovery of the aircraft. The Partnership provided a writedown of
$200,000 with respect to this aircraft at December 31, 1997.
Sky Trek International Airlines, Inc. In February 1997, the Partnership
entered into an agreement in principle to lease the second former Kiwi 727
aircraft to a start up airline, Sky Trek International Airlines Inc. ("Sky
Trek"). The lease was executed and the aircraft was delivered in late June 1997.
The Sky Trek lease provides for rent of $95,000 per month for a term of
approximately 60 months. Sky Trek provided a lease deposit of $190,000 and will
be obligated to fund maintenance reserves, in the aggregate, at a rate of $325
per flight hour. The Partnership completed a C check (including replacing
time-controlled parts) at a cost of approximately $1,500,000 before the
application of maintenance reserves to restore the aircraft of $888,000 and has
purchased a hushkit at a cost of $1,900,000, a portion of which was funded from
the Kiwi maintenance reserves. Two of the five engines purchased in January 1997
were installed on the aircraft and the Partnership purchased a third engine
from an unaffiliated party at a cost of $625,000. The Partnership provided a
writedown of $150,000 with respect to this aircraft at December 31, 1997.
TNT Transport International B.V. In November 1997, the Partnership entered
into an agreement in principle to lease the aircraft formerly leased to Nations
to a European freight carrier, TNT Transport International B.V. ("TNT") for a
term of four years. The lease would provide for monthly rentals of $123,500
(subject to a reduction of approximately 10% after two years if TNT exercises an
option to extend the lease for an additional two years beyond the original
expiration date) and airframe and landing gear reserves aggregating $85 per
flight hour. As of December 31, 1997, TNT provided a $150,000 security deposit.
TNT also has the right to extend the lease for an additional two years (if the
above option is not exercised) at $95,000 per month. The Partnership committed
to spend approximately $2.6 million for a "C" check and cargo conversion of the
aircraft of which $1.3 million had been expended at December 31, 1997 (these
amounts before the application of maintenance reserves to restore aircraft of
$854,000). The work was performed and the aircraft parts provided by companies
affiliated with the Managing General Partner or its President and Director. The
Partnership reached an agreement in principle with its lender to increase its
borrowing facility from $7,500,000 to $10,000,000 to finance this work. The
aircraft was delivered
F-18
43
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
in March 1998. (See Item 8, Footnote 12, "Subsequent Events").
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 Sky Trek (and in the
past, Nations and Kiwi), also fund certain maintenance expenses through hourly
maintenance reserves paid monthly.
Significant Lessees
The Partnership leased its aircraft to five different airlines during 1997
(excluding TNT for which the Partnership had an agreement in principle for an
aircraft which was delivered in March 1998). Revenues from airlines which
accounted for greater than 10% of the Partnership's total rental revenues during
1997, 1996 and 1995 are as follows:
Percentage of Rental Revenues
-----------------------------
Airlines 1997 1996 1995
-------- ---- ---- ----
Trans World Airlines, Inc. 58% 49% 36%
USAir, Inc. 16 18 20
Continental Airlines, Inc. 12 14 20
Kiwi International Air Lines Inc. -- 19 23
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, 1997 (in thousands):
Year Amount
---- ------
1998 $ 7,184
1999 6,734
2000 5,720
2001 3,866
2002 2,774
Thereafter 3,755
-------
Total $30,033
=======
F-19
44
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The above schedule of future minimum rental income does not include the
rents due under the lease agreement in principle with TNT.
The Partnership operates in one industry, the leasing of used aircraft to
commercial airlines.
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, 1997, 1996, 1995, the General Partners
earned base management fees of $110,000, $93,000 and $148,000, 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, 1997, 1996 and 1995, the General Partners earned
incentive management fees of $284,000, $221,000 and $426,000, 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, 1997, 1996 and 1995, the General Partners earned $221,000, $145,000
and $124,000, respectively of re-lease fees.
Beginning January 1, 1996, the Administrative General Partner voluntarily
deferred the receipt of management fees earned by it. As part of the class
action settlement (discussed more fully in Footnote 9, "Litigation"), these fees
as well as all 1997 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, up to $50,000 per year, paid on behalf of the Partnership
which are incurred in connection with the administration and management of the
Partnership. The Administrative General Partner billed $50,000 in 1997, 1996 and
1995, respectively, for administrative services.
F-20
45
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
During 1997 and 1996, the Partnership purchased parts in connection with
certain capital projects for costs totalling $1,360,000 and $161,000,
respectively, from a Company in which the President and Director of the Managing
General Partner had an interest. No such amounts were incurred in 1995.
In connection with certain capital projects, during 1997 and 1996, the
Partnership paid $1,634,000 and $56,000, respectively, to a licensed maintenance
provider that is affiliated with the Managing General Partner (see Note 5,
"Aircraft under operating leases", for further discussion).
7. NOTES PAYABLE
In July 1995, the Partnership and the Lender completed an extension of
their existing commitment. Under the new agreement, the aggregate commitment
remained at $4,000,000, the Partnership's ability to borrow under the facility
was extended until May 1, 1997 and the floating interest rate charged under the
facility was reduced to the Lender's prime rate plus .5% . The Lender released
the Boeing 747-100 aircraft as collateral under the loan and received as
substitute collateral a perfected security interest in the Partnership's MD-82
aircraft leased to TWA. At December 31, 1996, the outstanding loan balance was
$1,218,000.
In February 1997, the Partnership purchased five aircraft engines from an
unaffiliated third party for $2,150,000 plus six engine cores from the former
Kiwi aircraft which required overhaul, utilizing its then existing borrowing
facility. The Lender charged the Partnership 1.50% over prime with respect to
this borrowing and increased the rate on the other borrowings to 1.50% over
prime. In April 1997, the Partnership obtained a new borrowing facility with a
different lender. Under the terms of the new agreement, the Partnership will be
able to borrow up to $7,500,000 at an interest rate of 1% over the lender's
prime rate of interest (9.50% at December 31, 1997). The lender's commitment is
for a term of 36 months, at which time all principal will be due. The loan is
collateralized by the Partnership's interest in the MD-82 aircraft leased to
TWA. During the loan term, the Partnership will be required to pay interest on a
monthly basis and maintain a minimum outstanding balance of $2,000,000. The
Partnership used approximately $3.3 million of proceeds from this facility to
retire the amounts previously outstanding and used an additional $3.9 million to
finance hushkits for the two former Kiwi aircraft, one of which was leased to
Nations Air Express Inc., prior to its recovery by the Partnership in September
1997, and the other of which is leased to Sky Trek International Airlines,
F-21
46
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Inc. In late 1997, the Partnership committed to lease the former Nations
aircraft to TNT Express Inc., a European cargo carrier and committed to perform
the cargo conversion. The lender agreed to increase the borrowing commitment
from $7,500,000 to $10,000,000. (See Footnote 12, "Subsequent Events").
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):
1997 1996 1995
---- ---- ----
Net income per financial statements $ 716 $ 711 $ 880
Increase (decrease) resulting from:
Depreciation 1,096 456 (2,037)
Reserves for maintenance costs and
writedowns 350 150 500
Allowance for bad debts provided for book 20 240 --
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 (932) (742) (591)
Difference in basis of aircraft engine sold 24 -- --
Maintenance reserves collected and related interest
net of expenditures 219 492 613
Deferred rental income (34) (39) 218
Other 66 (53) 43
------- ------- -------
Taxable income per federal income tax return $ 1,525 $ 1,729 $ 3,299
======= ======= =======
F-22
47
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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):
1997 1996 1995
---- ---- ----
Total Partnership equity per financial statements $ 19,675 $ 25,423 $ 31,176
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 writedowns including
Continental lease settlement, accounted for as
cost recovery 9,520 9,170 9,020
Allowance for bad debts 260 240 --
Aircraft expenditures capitalized for tax, net 514 514 --
Distributions payable to partners 1,632 1,648 1,616
Deferred rental income 282 179 218
Maintenance reserves collected and used to
restore aircraft net 1,654 -- --
Accumulated depreciation (19,491) (20,611) (21,067)
TBT interest income less TBT rental expense (3,955) (3,023) (2,281)
Maintenance reserves payable 192 1,627 1,255
Other (13) 58 (8)
---------- ---------- ----------
Tax bases of net assets $ 18,711 $ 23,666 $ 28,370
========== ========== ==========
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 Paine Webber
Incorporated's sale and sponsorship of various limited partnership investments,
including those offered by the Partnership. The lawsuits were brought against
Paine Webber Incorporated and Paine Webber Group, Inc. (together, "Paine
Webber"), among others, by allegedly dissatisfied partnership investors. In
March 1995, after the actions were consolidated under the title In re: Paine
Webber 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 Paine Webber 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, Paine Webber 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
F-23
48
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 Paine Webber and
the Administrative General Partner misrepresented financial information about
the partnership's value and performance. The amended complaint alleged that
Paine Webber 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 Paine Webber 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, Paine Webber 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, Paine Webber agreed to pay $125
million and additional consideration to class members. The investors who had
objected to the settlement have appealed the District Court's approval to the
United States Court of Appeals for the Second Circuit. In July 1997, the U.S.
Court of Appeals for the Second Circuit affirmed the District Court's approval
of the settlement. The District Court must still determine the extend of
attorney's fees to be awarded to plaintiffs' counsel which will be paid from the
Settlement Fund, so that the remainder of monies can be distributed 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. Paine Webber, 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 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 sought
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 were
F-24
49
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
removed to federal court and two were transferred to the District Court and
consolidated under the title, Mallia vs. Paine Webber, Inc. The third action was
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. Paine Webber Inc. in Sacramento, California Superior Court against
Paine Webber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleged, among other things, that Paine Webber 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 sought 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 Paine Webber Incorporated, et al, was filed in California Superior
Court and Barstad v. Paine Webber Incorporated, et al, was filed in Arizona
Superior Court. Collectively, the two additional actions are brought by
approximately 50 plaintiffs and sought compensatory damages of approximately $4
million plus punitive damages. In March 1997, the Abbate, Bandrowski and Barstad
actions were settled.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, Paine Webber and its affiliates, including
the Administrative General Partner could be entitled to indemnification from the
Partnership for expenses and liabilities in connection with the above actions.
Paine Webber 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 believe that if indemnification is sought, the
Abbate, Bandrowski and Barstad actions will not have a material effect on the
Partnership's financial position and results of operations.
F-25
50
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The Partnership was also involved in a litigation 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 and
engines. The parties achieved a negotiated settlement in May 1997 with the
payment by the Partnership of amounts due and the receipt by the Partnership of
certain equipment.
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. On February 25, 1998 the suit was
dismissed without prejudice and with no monetary damages awarded.
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 unavailable
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, Rents and other receivables. For these balances,
carrying value approximates fair value due to their 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.
Accounts payable and accrued expenses payable to affiliates, and accrued
interest payable. For these balances, carrying value approximates fair value due
to their short term nature.
F-26
51
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 1997
11. IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. This could result in
a system failure or miscalculations in the year 2000 causing disruptions of
operations of the Partnership, its lessees or general partners.
The Partnership has already reviewed and identified its computer software
that are subject to Year 2000 risk. Accordingly, the Partnership has commenced
the remediation of all software not Year 2000 compliant. Remediation and testing
of such systems will be completed in advance of Year 2000. The costs of such
remediation is expensed as incurred and will not be material to the
Partnership's financial position or results of operations.
The Partnership has also initiated communication with lessees and vendors
to determine the extent to which the Partnership is vulnerable to those third
parties' failure to remediate their own Year 2000 issues. The Partnership has
not yet completed its communication with its lessees and vendors. As a result,
the Partnership cannot determine at this time the extent, if any, the
Partnership may be exposed to financial risk from the inability of the Company's
lessees and business partners to remediate their own Year 2000 issues.
12. SUBSEQUENT EVENTS
In January 1998, the Partnership consummated an agreement to increase the
committed amount of the loan facility for $7,500,000 to $10,000,000. In
connection with the increase the Partnership provided, as additional collateral,
the Boeing 727-200 aircraft leased to Continental and the Boeing 727-200
aircraft leased to Sky Trek. Additionally, the interest rate was increased from
1% over prime to 1.25% over prime. The Partnership utilized a portion of the
amount available to fund the cargo conversion for TNT.
F-27
52
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 1997 or 1996.
PART III
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
Carol L. Chase Senior Vice President, General Counsel and Secretary
Richard L. Funk Senior Vice President, Technical
Robert M. Brown Senior Vice President
Richard S. Wiley, age 44, 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.
23
53
Carol L. Chase, Esq., age 45, 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.
Robert M. Brown, 39, joined PCC in 1988 and is involved in aircraft
acquisition, finance and leasing. His primary responsibility is the structuring
of debt transactions which accommodate the PCC trading and long-term investing
activities. Previously, he served as Vice President, Aircraft Sales, and as
Regional Marketing Director during the offerings of the Partnership and an
affiliated partnership. Prior to joining PCC, Mr. Brown was District Manager
with the Chrysler Corporation. He holds a BA degree from Dartmouth College and
an MBA from the University of Washington.
Richard L. Funk, 60, joined PCC in 1992 and is responsible for the
technical aspects of aircraft marketing, including delivery and redelivery of
aircraft to airlines worldwide. From 1990 to 1992, he served as a technical
marketing consultant to the aviation industry and from 1987 to 1990 he was
President of Avtek Industries, Inc., an aircraft, missile, and electronic
components manufacturer which he founded. From 1984 to 1986 he was President and
Chief Operating Officer of Standard Aero Western, Inc., a commercial airline
maintenance facility. From 1979 to 1982, he was Senior Vice President of
Engineering and Maintenance at World Airways, Inc. From 1963 to 1979 he held
various positions with United Air Lines, Inc., including Manager of Airframe
Maintenance for a period of six years.
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
24
54
Gerald F. Goertz, Jr., age 40, is Chairman of the Board of Directors of
the Administrative General Partner. Mr. Goertz joined Paine Webber Incorporated
in December 1990 and holds the position of Senior Vice President and Director of
Specialized Investment Services. Prior to joining Paine Webber 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 48, is President and a Director of the
Administrative General Partner. Mr. Wattley is a Corporate Vice President with
Paine Webber 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 Paine Webber'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 38, is a Vice President, Assistant Secretary and a
Director of the Administrative General Partner. He joined Paine Webber
Incorporated in June 1988 as a Divisional Vice President and is currently a
Corporate Vice President and Director of Private Investments. Prior to joining
Paine Webber 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 42, is a Vice President, Secretary, Treasurer
and Chief Financial and Accounting Officer of the Administrative General
Partner. He joined Paine Webber Incorporated in May 1994 as a Corporate Vice
President. Prior to joining Paine Webber 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.
25
55
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
1997.
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, 1997, 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 March1, 1998, by directors of the Managing General
Partner and the Administrative General Partner and by all directors
and officers of such corporations as a group:
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56
Number
of Units
Beneficially Percent
Name Owned of Class
---- ----- --------
Managing General Partner
Richard S. Wiley 3,216 *
All directors and officers
as a group (4 persons) 3,216 *
Administrative General Partner
None
* 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 1997.
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 1997,
the General Partners earned base management fees of $110,000.
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 1997,
the General Partners earned incentive management fees of $284,000.
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 1997 the General
Partners earned re-lease fees of $221,000.
27
57
Beginning January 1, 1996, the Administrative General Partner voluntarily
deferred the receipt of management fees and re-lease fees earned by it. As part
of the class action settlement (discussed more fully in footnote 9,
"Litigation"), these fees as well as all 1997 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 1997, all of which was paid or
is payable to the Administrative General Partner.
During 1997, the Partnership purchased parts in connection with certain
capital projects for costs totaling $1,360,000 from a company in which the
President and Director of the Managing General Partner had an interest. In
connection with certain capital projects during 1997 the Partnership paid
$1,634,000 to a licensed maintenance provider that is affiliated with the
Managing General Partner.
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 1997. In addition, $15,000 of the Partnership's
net taxable income for 1997 was allocated to the General Partners.
28
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 1997, the Partnership filed a report
on Form 8-K dated November24, 1997 reporting the resignation of
two officers and directors of the Managing General Partner and the
election of two new senior officers of the Managing General
Partner.
(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.*
29
59
4.1 Depositary Agreement dated December 20, 1988, by and
among Pegasus Aircraft Partners, L.P. ("Registrant"),
Pegasus Aircraft Management Corporation, a California
corporation, Paine Webber 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, 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.*
30
60
(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 September26, 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 September26, 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.*
(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.*
31
61
(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
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.
32
62
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.*
(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.*
33
63
(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 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).*
34
64
(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).*
(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).*
35
65
(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.*
(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.*
36
66
(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.*
37
67
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 ___, 1998
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
38
68
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 ___, 1998.
Signature Title
- --------- -----
/s/ Richard S. Wiley President and Chairman of
- -------------------- the Board of Pegasus Aircraft
Richard S. Wiley Management Corporation
/s/ Gerald F. Goertz, Jr. Chairman of the Board of
- ----------------------- Air Transport Leasing, Inc.
Gerald F. Goertz, Jr.
/s/ Clifford B. Wattley President and Director of
- ----------------------- Air Transport Leasing, Inc.
Clifford B. Wattley
/s/ Stephen R. Dyer Vice President, Assistant
- ---------------------- Secretary and Director of
Stephen R. Dyer Air Transport Leasing, Inc.
39
69
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 ___, 1998
Pegasus Aircraft Partners, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
Administrative General Partner
By:
--------------------
Clifford B. Wattley
President and Director
By:
--------------------
Joseph P. Ciavarella
Vice President, Treasurer,
Secretary and Chief Financial
and Accounting Officer
By: Pegasus Aircraft Management Corporation
Managing General Partner
By:
--------------------
Richard S. Wiley
President and Chairman
of the Board
40
70
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 ___, 1998.
Signature Title
- --------- -----
- ---------------------- President and Chairman of
Richard S. Wiley the Board of Pegasus Aircraft
Management Corporation
- ---------------------- Chairman of the Board of
Gerald F. Goertz, Jr. Air Transport Leasing, Inc.
- ---------------------- President and Director of
Clifford B. Wattley Air Transport Leasing, Inc.
- ---------------------- Vice President, Assistant
Stephen R. Dyer Secretary and Director of
Air Transport Leasing, Inc.
41
71
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.
42