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 (after general working capital reserves) will be distributed to all partners.
Outlook for the Airline and Aircraft Leasing Industries
The US airline industry had a profitable year in 1998 that continued the industry's profitability trend. A major expense item for operators of aircraft is the cost of fuel and it was very low in 1998. The industry's results have in the past been highly correlated to general economic activity, however, the industry did experience weakened results in the fourth quarter, a period of relatively strong economic activity.
As to the supply and demand for aircraft, the industry took on and continues to take on a record number of new aircraft that will likely put pressure on profitability and will lead to further retirements of older aircraft, such as those owned by the Partnership. The number of used widebody (two aisle) aircraft such as the Partnership's Boeing 747-100 that are available for sale or lease has increased. The full implementation of Stage III noise standards by year end 1999 will also likely lead to additional older Stage II aircraft being retired.
Trans World Airlines, Inc. which accounted for 52% of the Partnership's revenues in 1998 announced its tenth consecutive unprofitable year. While TWA is replacing older aircraft with newer, more fuel efficient aircraft, its inability to achieve sustained profitability is of concern.
The General Partners believe that installing hushkits to achieve Stage III noise compliance and the conversion of one of its Boeing 727-200 aircraft to a freighter will enhance the Partnership's portfolio. Passenger aircraft and freighter aircraft leasing continues to be a highly competitive business and the Partnership's lessees also continue to face significant challenges.
Recent Partnership Developments
Immediately below is a table which shows the December 1998 appraised value of the Partnership's aircraft to be approximately $41.7 million, or 51% 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 in part on these appraised values, the Partnership's net asset value at December 31, 1998 was equal to $7.36 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.
Aircraft Portfolio
The following table describes the Partnership's aircraft portfolio at December 31, 1998:
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, net of retirements, in the respective aircraft which aggregated approximately $12.9 million, of which $1.5 million was made in 1998, and $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 1998 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. A discount rate of 10% was utilized and inflation was assumed to be 2.5% per annum. The appraised value of the Boeing 727-200 Advanced aircraft was $9.0 million and assumes a $4.3 million freighter conversion (as discussed in Note 5 of the Financial Statements).
(3) Lease expiration dates do not include renewal options unless already exercised.
(4) The number of cumulative flight cycles and cumulative flight hours shown are as of December 31, 1998, with the exception of the McDonnell Douglas MD-81 leased to US Airways Group, Inc., which is as of January 25, 1999.
(5) The Boeing 747-100 currently complies with Stage III requirements if it is flown with certain operating restrictions.
(6) The remaining one-half beneficial interest is owned by Pegasus Aircraft Partners II, L.P., an affiliated partnership.
(7) The aircraft was subject to a lease with Continental Airlines, Inc. through August 18, 1998. Continental returned this aircraft in October 1998, and made rental payments through the return date. The Partnership has committed to hushkit and convert this aircraft to a freighter, at a budgeted cost of $4.3 million, for delivery to Kitty Hawk Aircargo, Inc.
(8) Hushkit installed.
A description of the principal financial terms of the leases is discussed further in Item 8.
Significant Lessees
The Partnership leased its aircraft to five different airlines during 1998. Revenues from each of the airlines below accounted for greater than 10% of the total rental revenues of the Partnership during 1998:
Percent of Total Airline Rental Revenues ------- ----------------
TransWorld Airlines, Inc. 52% USAirway Group, Inc. 15% TNT Transport International B.V 14% Sky Trek International Airlines, Inc. 11%
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 II 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. In addition, it is widely expected that foreign civil aviation authorities, especially in Europe and Japan, will adopt similar measures to protect the structural integrity of older aircraft.
These aging aircraft ADs will initially impact only a limited number of older aircraft, but additional aircraft will be covered as they accumulate time-and-service and reach the thresholds for the required modifications. Significantly, in the case of each aircraft type, a significant majority of replacements or modifications are mandated when a plane reaches a certain number of flight cycles and relatively few required replacements are triggered when a plane reaches a certain chronological age or number of flight hours.
The following table summarizes the age, flight cycle, and flight hour thresholds for each major aircraft type under the ADs. In general, these thresholds are based on the "economic design goal" of an aircraft, which is typically considered to be the period of service after which an increase in maintenance costs is expected to take place in order to assure continued operational safety. In addition, the table provides an estimate by the FAA of the costs of complying with all of the mandated replacements and modifications of the ADs. It is important to note that since most of the proposed work under the ADs is based on flight cycle thresholds, those lower-cycle aircraft which reach the aircraft age or flight hour thresholds should incur significantly lower AD compliance cost than the total amounts estimated below.
Aircraft Flight Flight Estimated Aircraft Age Cycle Hour AD Type Threshold Threshold Threshold Costs - -------- --------- --------- --------- --------- (Years)
Boeing 727 20 60,000 N/A $1,100,000 Boeing 737 20 75,000 N/A 934,000 Boeing 747 20* 20,000* N/A 3,400,000 McDonnell Douglas DC-9 20 100,000 75,000 79,000 McDonnell Douglas MD-80 20 75,000 75,000 4,000 McDonnell Douglas DC-10 None 42,000 60,000 187,000
* Substantially cycle limited
Flight cycle and flight hour information with respect to the Partnership's aircraft are included in the aircraft portfolio table included earlier in item 1.
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 Boeing 727-200 aircraft have had the major calendar modifications performed as required.
The FAA has recently issued an AD relating to certain Boeing 727 freighter conversions that requires strengthening of certain floor beams and the installation of restraint systems in the cargo area. The General Partners estimate the cost of compliance will not exceed $100,000 per aircraft. For discussion of the cost of compliance see TNT Transport International B.V., and Kitty Hawk Aircargo, Inc. in Footnote 5 to the Financial Statements.
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 II aircraft will be phased out from operation within United States airspace by December 31, 1999.
Implementing regulations proposed by the FAA would require each United States operator to increase its Stage III airplane fleet to 50 percent by December 31, 1996; to 75 percent by December 31, 1998 and to 100 percent by December 31, 1999.
However, the Act further provides, that if by July 1, 1999, at least 85% of an air carrier's fleet complies with Stage III 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 III noise levels by December 31, 2003.
Stage III 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 III noise levels if it is flown with certain operating restrictions. Alternatively, the engines can be upgraded with existing technology to provide for compliance with Stage III requirements.
Two of the Partnership's three 727-200 aircraft have been hushkitted and the Partnership has committed to hushkitting the third Stage II Boeing 727-200 aircraft.
The European Commission has promulgated rules relating to aircraft noise that would ban aircraft that are modified ("hushkitted") to achieve Stage III noise compliance from European airspace after the year 2002. Such aircraft cannot be added to European fleets after April of 1999. It is unclear in what manner and if such rules will achieve full implementation.
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.
ITEM 2.
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.
ITEM 3. LEGAL PROCEEDINGS
The Partnership has filed a claim in the Bankruptcy Court for unpaid rents and other damages related to the rejection by Kiwi International Airlines, Inc. ("Kiwi") of its leases for two Boeing 727-200 aircraft. Given the sale of Kiwi's operating assets as approved by the Court, it is remote that the Partnership will obtain any recovery. Based on a petition by creditors, the case has been converted to a Chapter 7 liquidation and a Trustee has been appointed by the court.
On March 10, 1999, the Trustee appointed in Kiwi's bankruptcy proceedings made a demand for the return of payments approximating $1,276,000 to an affiliate of the Managing General Partner, the Partnership and an affiliated Partnership (see discussion herein under "Kiwi International Airlines, Inc. - Bankruptcy") on the basis that these payments were made by Kiwi in the ninety days prior to Kiwi's filing of its voluntary bankruptcy petition and were therefore preferential. The payments relate to seven aircraft, only two of which are owned by the Partnership. Management has notified the Trustee of the existence of a Stipulation and Consent Order, dated April 22, 1997, which provides for waiver and relinquishment by Kiwi of any potential preference claims it might have against the Partnership.
The General Partners, on the advice of counsel, believe that the claim will be withdrawn.
The parties in the Mallia lawsuit (as set forth in the Partnership's September 30, 1998 quarterly report on Form 10-Q incorporated by reference herein) have settled. Although Paine Webber could seek indemnification from the Partnership, the General Partners believe this possibility is remote.
ITEM 4.
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, 1998.
PART II
ITEM 5.
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, 1999, the number of Limited Partners of record was approximately 4,685.
The Partnership declared the following distributions to its Limited Partners out of cash flow received from operations during 1998 and 1997:
Amount of Distribution Period Per Unit Record Date Payment Date ------ ------------ ----------- ------------
1st Quarter 1998 $.40 March 31, 1998 April 25, 1998 2nd Quarter 1998 .40 June 30, 1998 July 23, 1998 3rd Quarter 1998 .40 September 30, 1998 October 28, 1998 4th Quarter 1998 .40 December 31, 1998 January 27, 1999 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
Total distributions to all partners for 1998 and 1997 were declared as follows (in thousands):
1998 1997 ---- ----
Limited Partners $6,400 $6,400 General Partners 65 64 ------ ------ $6,465 $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 84%, 89%, and 89%, of the cash distributions declared for the years ended December 31, 1998, 1997 and 1996, respectively, constituted a return of capital. Also, based on the amount of net income reported by the Partnership for accounting purposes, approximately 73% of the cash distributions paid to the partners from inception of the Partnership through December 31, 1998 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.
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, -------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands, except per unit amounts)
Rental Revenue $ 8,360 $ 7,533 $ 6,604 $ 6,076(3) $ 8,527 Net Income 1,050 716(2) 711 880 426 Net Income per Limited Partnership Unit 0.26 0.18 0.18 0.22 0.11 Distributions per Limited Partnership Unit(1) 1.60 1.60 1.60 1.85 1.80 Total Assets 27,792 30,512 31,158 36,611 42,619 Notes Payable 10,000 7,271 1,218 1,625 2,000 Partners' Equity 14,260 19,675 25,423 31,176 37,770
(1) Distribution amounts are reflected on the accrual basis. 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.
(2) Includes gain on sale of spare aircraft engine of $177.
(3) Such amount excludes lease settlement proceeds accounted for under the cost recovery method.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 may contain, 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 the Forward-Looking Statements, if any, to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events.
Liquidity and Capital Resources
The Partnership owns and manages a diversified portfolio of leased commercial aircraft and makes quarterly distributions to the partners of net cash flow generated by operations. In certain situations, the Partnership may retain cash flow from operations to finance authorized capital expenditures.
Cash distributions declared by the Partnership were approximately $6.5 million in each of 1998, 1997 and 1996 ($1.60 per unit). Net cash provided by operating activities was $6.3 million in 1998, $6.3 million in 1997 and $5.2 million in 1996. In the aggregate, for this three year period net cash provided by operating activities totaled $17.8 million and cash distributions declared by the Partnership totaled $19.4 million.
Partnership equity declined by approximately $5.4 million from December 31, 1997 to December 31, 1998 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.
The Partnership invests working capital and cash flow from operations prior to its distribution to the partners in short-term, highly liquid investments or a fund that invests in such instruments. At December 31, 1998, the Partnership's unrestricted cash and cash equivalents of $2,129,000 was primarily held in an interest bearing money market account. This amount was $773,000 more than the Partnership's unrestricted cash and cash equivalents at December 31, 1997 of $1,356,000. This increase in unrestricted cash was primarily attributable to the amount by which cash generated by operating activities, collection of advances to lessees, proceeds from notes payable, and the unapplied maintenance reserves, exceeded cash distribution to partners and capitalized aircraft improvements, during the year ended December 31, 1998.
At December 31, 1998, the Partnership's liquidity was improved due principally to the consummation, in January 1998, of an agreement with the lender to increase the commitment under the loan facility from $7.5 million to $10 million. The Partnership provided, as additional collateral, the Boeing 727-200 aircraft formerly leased to Continental Airlines, Inc. ("Continental") and the Boeing 727-200 aircraft leased to Sky Trek International Airlines, Inc. ("Sky Trek"). The proceeds were used to fund the cargo conversion of the aircraft delivered to TNT Transport International B.V. ("TNT").
In February 1999, the Partnership consummated an agreement to increase the committed amount of the loan facility from $10 million to $14.5 million and increase the interest rate from 1.25 % to 1.5% over prime. (See Footnote 11, "Subsequent Event"). The Partnership has pledged all of its aircraft as collateral, for this loan facility. The Partnership will utilize the additional borrowings to fund the hushkit and cargo conversion of the Boeing 727-200 advanced aircraft formerly leased to Continental, which was returned in October 1998, for delivery to Kitty Hawk Aircargo, Inc. ("Kitty Hawk"), discussed below. This loan is due in April, 2000. If the Partnership is unable to renegotiate or refinance the loan it will be forced to reduce or suspend distributions.
Rent and other receivables, net, increased by $54,000 from $422,000 at December 31, 1997 to $476,000 at December 31, 1998. This increase is primarily due to rents due from Sky Trek, partially offset by the continued repayments of advances and deferrals by TWA. During 1997, the Partnership provided an allowance for uncollectible accounts of $20,000 with respect to rent due from Nations Air Express, Inc. ("Nations"). (See Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
List of Financial Statements Page ----
Report of Independent Accountants .......................................... 17
Balance Sheets -- December 31, 1998 and 1997................................ 18
Statements of Income for the years ended December 31, 1998, 1997 and 1996....................................... 19
Statements of Partners' Equity for the years ended December 31, 1998, 1997 and 1996....................................... 20
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996....................................... 21
Notes to Financial Statements............................................... 23
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Limited Partners of Pegasus Aircraft Partners, L.P.
In our opinion, the accompanying balance sheets and the related statements of income and partners' equity and of cash flows present fairly, in all material respects, the financial position of Pegasus Aircraft Partners, L.P. (the "Partnership") as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP New York, New York March 17, 1999
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997 ---- ---- (in thousands, except unit data)
Cash and cash equivalents (Note 4) $ 2,129 $ 1,356 Rent and other receivables, net (Note 5) 476 422 Aircraft, net (Note 5) 25,161 28,708 Prepaid expenses and other assets 26 26 -------- -------- Total Assets $ 27,792 $ 30,512 ======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES: Notes payable (Notes 7 and 11) $ 10,000 $ 7,271 Accounts payable and accrued expenses 97 302 Payable to affiliates (Note 6) 431 458 Distributions payable to partners 1,616 1,632 Maintenance reserves collected 350 192 Deferred rental income and deposits 1,038 982 -------- -------- Total Liabilities $ 13,532 $ 10,837 ======== ========
COMMITMENTS AND CONTINGENCIES (Notes 5, 7 and 9)
PARTNERS' EQUITY: General Partners (653) (599) Limited Partners (4,000,005 units outstanding in 1998 and 1997) 14,913 20,274 -------- -------- Total Partners' Equity 14,260 19,675 -------- --------
Total Liabilities and Partners' Equity $ 27,792 $ 30,512 ======== ========
The accompanying notes are an integral part of these financial statements.
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- (in thousands, except unit data and per unit amounts)
REVENUE: Rentals from operating leases $ 8,360 $ 7,533 $ 6,604 Interest and other 76 111 222 Gain on sale of engine and equipment 18 177 -- ---------- ---------- ---------- 8,454 7,821 6,826 ---------- ---------- ----------
EXPENSES: Depreciation and amortization 5,273 4,872 4,060 Interest expense 929 595 136 Management and re-lease fees (Note 6) 682 615 459 Write-downs (Note 5) 204 350 150 Provision for bad debts (Note 5) -- 20 240 General and administrative (Note 6) 241 223 234 Direct lease 75 123 127 Aircraft maintenance and other -- 307 709 ---------- ---------- ---------- 7,404 7,105 6,115 ---------- ---------- ---------- NET INCOME $ 1,050 $ 716 $ 711 ========== ========== ==========
NET INCOME ALLOCATED: To the General Partners 11 7 7 To the Limited Partners 1,039 709 704 ---------- ---------- ---------- $ 1,050 $ 716 $ 711 ========== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.26 $ 0.18 $ 0.18 ========== ========== ==========
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.
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
General Limited Partners Partners Total -------- -------- ----- (in thousands)
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
Net income 11 1,039 1,050
Distribution to partners declared (65) (6,400) (6,465) -------- -------- --------
Balance, December 31, 1998 $ (653) $ 14,913 $ 14,260 ======== ======== ========
The accompanying notes are an integral part of these financial statements.
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- (in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,050 $ 716 $ 711 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,273 4,872 4,060 Provision for bad debts -- 20 240 Write-downs 204 350 150 Gain on sale of engine and equipment (18) (177) -- Change in assets and liabilities: Rent and other receivables (182) 22 332 Prepaid expenses and other -- 109 (88) Accounts payable and accrued expenses (205) 229 (25) Payable to affiliates (27) (26) (144) Maintenance reserves collected 158 192 (100) Deferred rental income and deposits 56 (34) 98 Accrued interest payable -- (9) (6) ------- ------- ------- Net cash provided by operating activities 6,309 6,264 5,228 ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of engine and equipment 18 275 -- Capitalized aircraft improvements, net (1,930) (7,813) (611) Repayment of advances by lessees 128 196 302 ------- ------- ------- Net cash used in investing activities (1,784) (7,342) (309) ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES: Security deposits -- 340 360 Proceeds from notes payable 2,729 7,271 -- Repayment of notes payable -- (1,218) (407) Cash distributions paid to partners (6,481) (6,480) (6,432) ------- ------- ------- Net cash used in financing activities (3,752) (87) (6,479) ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 773 (1,165) (1,560)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,356 2,521 4,081 ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,129 $ 1,356 $ 2,521 ======= ======= =======
The accompanying notes are an integral part of these financial statements.
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- (in thousands)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest Paid $ 915 $ 604 $ 142 Restricted maintenance reserves collected net of maintenance drawdowns $ -- $ -- $ 492 Transfers from restricted cash utilized to restore aircraft including 1997 collections -- 1,742 --
NONCASH TRANSACTIONS: Distributions to partners declared but unpaid $ 1,616 $ 1,632 $ 1,648
The accompanying notes are an integral part of these financial statements.
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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.
Aircraft and Depreciation. The aircraft are recorded at cost, which includes acquisition costs and the acquisition fee and the financial management advisory fee paid upon acquisition to the General Partners. Depreciation is computed using the straight-line method over an estimated economic life of twelve years (five years for the aircraft engine sold in 1997) to a salvage value (generally 10%). Major improvements to aircraft are capitalized when incurred and are depreciated, generally, over the remaining useful life of the improvement. The Partnership evaluates the carrying value of the aircraft based upon changes in market and other physical and economic conditions and will record write-downs to recognize a loss in the value of the aircraft when management believes that, based on expected future cash flows, the recoverability of the Partnership's investment has been impaired. Proceeds received in lease settlements or terminations are accounted for under the cost recovery method when and to the extent that, based upon third party appraisals and market conditions, there has been a diminution to the carrying value of the aircraft.
Tax Benefit Transfer Lease. The McDonnell Douglas MD-81 aircraft under lease to USAirways Group, Inc. ("USAir") was purchased subject to a tax benefit transfer lease which provided for the transfer of the investment tax credits and depreciation deductions with respect to the 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. The Partnership has two leases where the lessee is required to make monthly payments to maintenance reserve funds administered by the Partnership. The Partnership may be 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. Excess costs over the reserve are the lessees' responsibility.
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, have been 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.
New Accounting Pronouncements
In March 1998, the Partnership adopted 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 adoption of this pronouncement did not impact the reporting of the Partnership's results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Partnership). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The adoption of this pronouncement is not expected to impact the Partnership's earnings or statement of financial position.
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. The net proceeds of any future sales of aircraft (after general working capital reserves) will be distributed to all 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 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, 1998, all cash was held in an interest bearing money market account. 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.
5. Aircraft Under Operating Leases
Net Investment in Aircraft
The Partnership's net carrying value of aircraft as of December 31, 1998 and 1997 consisted of the following (in thousands):
1998 1997 ---- ----
Aircraft on operating leases, at cost $ 75,902 $ 71,120 Less: Accumulated depreciation (43,979) (40,609) Write-downs (4,799) (3,368) Net lease settlement proceeds accounted for as cost recovery (3,673) (3,673) Reserve for maintenance cost (178) (178) -------- -------- $ 23,273 $ 23,292 -------- --------
Aircraft held for lease, at cost $ 8,251 $ 11,555 Less: Accumulated depreciation (5,529) (3,839) Write-downs (834) (2,300) -------- -------- 1,888 5,416 -------- -------- Aircraft, net $ 25,161 $ 28,708 ======== ========
Rents and Other Receivables
Rents and other receivables, net, were composed of the following at December 31, 1998 and 1997 (in thousands):
1998 1997 ---- ----
Rents receivable $ 476 $ 552 Advances to lessees -- 128 Accrued interest receivable and other -- 2 -------- -------- 476 682 Less: Allowance for bad debts -- (260) -------- -------- Rents and other receivables, net $ 476 $ 422 ======== ========
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 was subject to a lease with Continental Airlines, Inc. ("Continental"), providing for rentals of $75,000 per month through June 30, 1998, the scheduled expiration date. The Partnership and Continental agreed to a short extension of the lease to August 18, 1998 at the same rate of $75,000 per month. Continental returned this aircraft in October 1998 and made rental payments through the return date.
In 1998, the Partnership entered into an agreement with Kitty Hawk Aircargo, Inc. ("Kitty Hawk") for the lease of the Boeing 727-200 Advanced aircraft formerly leased to Continental. Kitty Hawk is a Dallas, Texas based operator of more than 100 freighter aircraft. The lease requires the Partnership to hushkit and convert the aircraft to a freighter at an estimated cost of $4.3 million. The lease agreement provides for 84 months rent at $117,800 per month. Kitty Hawk has provided a security deposit of $56,000 during 1998, and was
required to increase the deposit to $236,000 in February 1999. The cost of complying with the recently issued AD relating to freighter conversions is included in the estimated conversion cost.
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 December 31, 1998 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 fully repaid the $750,000 to the Partnership through September 1, 1998, in equal monthly installments, with interest at a fixed rate of 9.68%.
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 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, acquired in 1988 for $17,847,000 and 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 Boeing 747-100 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. TWA has continued to make lease payments with respect to the aircraft.
TWA was current on its lease payments in 1998 and made final repayment of the funds advanced by the Partnership however, TWA reported its tenth consecutive annual loss in 1998. Although TWA had a cash position of $314 million at September 30, 1998, given TWA's historical financial difficulties, the ongoing losses increase the possibility of default or deferral of lease payments by TWA, which accounted for 52% of the Partnership's lease revenue in 1998.
US Airways Group, Inc. ("USAir") Lease. During March 1989, the Partnership acquired one half of the beneficial interest in a trust ("Trust") that is the owner/lessor of a McDonnell Douglas MD-81 ("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, USAir exercised its renewal option for a three year extension (to June, 2001) at the original lease rate. USAir also has three additional one-year renewal options at fair market rental rates. USAir 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 on 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. USAir has not posted a letter of credit to collateralize this obligation. As a result of the foregoing, if the tax lessor draws on the letter of credit as a result of 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, 1998.
Kiwi International Air Lines, Inc. - Bankruptcy. The Partnership owns two Boeing 727-200 non-advanced aircraft, originally acquired on December 1988 for $6,308,000 per aircraft. In February 1994 and April 1994, the Partnership entered into leases with Kiwi International Airlines, Inc. ("Kiwi"), each originally for a term of approximately five years with rents payable monthly in advance at $55,000 per aircraft. The leases were modified in 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 prior return condition settlement payments. 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 crash, 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 scheduled 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 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 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 operating 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. Based on a petition by creditors, the case has been converted to a Chapter 7 liquidation and a Trustee has been appointed by the court.
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 were not accrued due to the uncertainty of collectability) and had provided 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 write-down of $200,000 with respect to the aircraft at December 31, 1997. (See also TNT Transport International B.V., below).
Sky Trek International Airlines, Inc. In 1997, the Partnership entered into an agreement to lease the second former Kiwi 727 aircraft to a start up airline, Sky Trek International Airlines Inc. ("Sky Trek"). 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 is 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 write-down of $150,000 with respect to the aircraft at December 31, 1997.
At December 31, 1998 Sky Trek was 4.5 months in arrears to the Partnership, totaling $428,000 and $229,000, with respect to rent and maintenance reserve obligations, respectively. As a result of Sky Trek's arrearages, the Partnership placed Sky Trek on non-accrual status beginning October 1, 1998. Also, as of December 31, 1998, a write-down of $100,000 was taken to reduce the carrying value of the aircraft leased to Sky Trek to estimated realizable amounts.
Sky Trek continues to struggle with liquidity and continues to search for a capital infusion. In December 1998, at the request of the General Partners, Sky Trek began paying its lease and maintenance reserve obligations on a weekly basis. Prior arrearages will need to be addressed in an overall recapitalization plan of Sky Trek. If Sky Trek is unsuccessful in raising additional capital, the Partnership will likely need to repossess the aircraft and search for a new lessee. There can be no assurance as to the timeliness or success of such a remarketing effort.
TNT Transport International B.V. Lease. In November 1997, the Partnership entered into an agreement 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 provides for monthly rentals of $123,500 (subject to a subsequent rent reduction of approximately 10% after two years if TNT exercises an option, during the lease term, 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. TNT has contracted with a third party service provider for the maintenance of the engines. TNT has provided a $150,000 security deposit. TNT also has the right to extend the lease for an additional two years at the end of the initial lease term (if the above option is not exercised) at $95,000 per month.
The Partnership invested approximately $3.2 million for a "C" check and cargo conversion of the aircraft (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 increased its borrowing facility from $7,500,000 to $10,000,000 to finance this work. The aircraft was delivered to TNT in March 1998.
In the third quarter of 1998, due to the conversion of this aircraft to a freighter, the Partnership wrote-off the remaining net book value of the interior, determined through a third party appraisal, which resulted in an impairment expense of $104,000.
TNT is responsible for the first $50,000 of cost in complying with the newly issued freighter conversion AD. Costs in excess of this amount are initially paid for by TNT. At the end of the lease, TNT will be reimbursed by the Partnership for a portion of the AD compliance cost based on a formula set forth in the Partnership agreement, not to exceed $250,000. The reimbursed cost will be capitalized and amortized over 10 years on a straight line basis. The amortization will begin at the time of conversion.
The European Commission has promulgated rules relating to aircraft noise that would ban aircraft that are modified ("hushkitted") to achieve Stage III noise compliance from European airspace after the year 2002. Such aircraft cannot be added to European fleets after April of 1999. It is unclear in what manner and if such rules will achieve full implementation.
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 TNT (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 1998. Revenues from airlines which accounted for greater than 10% of the Partnership's total rental revenues during 1998, 1997 and 1996 are as follows:
Percentage of Rental Revenues ----------------------------- Airlines 1998 1997 1996 - -------- ---- ---- ----
Trans World Airlines, Inc. 52% 58% 49% US Airways Group, Inc. 15 16 18 Continental Airlines, Inc. (1) 12 14 Kiwi International Air Lines Inc. (1) (1) 19 TNT Transport International B.V 14 (1) (1) Sky Trek International Airlines, Inc. 11 (1) (1)
(1) Represents less than 10%.
The percentages for 1996 include revenues generated by aircraft leased to Kiwi for which an allowance for bad debts was provided.
Revenues include rentals from aircraft leased to foreign airlines or carriers of $1,143,000 in 1998.
Future Minimum Rental Income
The following is a schedule by year of future minimum rental income under the leases as of December 31, 1998 (in thousands):
1999 $ 8,216 2000 7,208 2001 5,356 2002 2,929 2003 2,220 Thereafter 1,891 ------- Total $27,820 =======
The Partnership operates in one industry, the leasing of used aircraft to commercial passenger and freight airlines.
Future minimum rents include a total of $3,987, related to lessees on non-accrual status.
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. 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, 1998, 1997 and 1996, the General Partners earned base management fees of $124,000, $110,000 and $93,000, respectively.
Incentive Management Fee. 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, 1998, 1997 and 1996, the General Partners earned incentive management fees of $308,000, $284,000 and $221,000, 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, 1998, 1997 and 1996, the General Partners earned $250,000, $221,000 and $145,000, respectively of re-lease fees.
Beginning January 1, 1996, as part of the 1996 and 1997 class action settlement, the Administrative General Partner remits to an affiliate, all management fees as well as all 1997 and future fees and distributions received by the Administrative General Partner, for deposit into 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. The Administrative General Partner billed $12,500 in 1998 and $50,000 in 1997 and 1996, respectively, for administrative services. The decline in accountable expenses is due to the subcontracting of certain accounting services, and their cost is included in general and administrative expenses.
Other. During 1998, 1997 and 1996, the Partnership purchased parts in connection with certain capital projects for costs totaling $1,067,616, $1,360,000 and $161,000, respectively, from a Company in which the President and Director of the Managing General Partner had an interest.
In connection with certain capital projects, during 1998, 1997 and 1996, the Partnership paid $638,775, $1,634,000 and $56,000, respectively, to a licensed maintenance provider that is affiliated with the Managing General Partner.
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 was 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 is 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, 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.
In January 1998, the lender increased the borrowing commitment from $7,500,000 to $10,000,000 and increased the interest rate from 1% to 1.25% over prime. The Partnership provided, as additional collateral, the Boeing 727-200 aircraft leased to Continental and the Boeing 727-200 aircraft leased to Sky Trek. The proceeds were used to fund the cargo conversion of the aircraft delivered to TNT. At December 31, 1998, the interest rate was 9.00%. In February 1999, the lender agreed to increase the borrowing commitment from $10 million to $14.5 million and increase the interest rate from 1.25% to 1.5% over prime, all of which is due in April 2000. (See Footnote 11, "Subsequent Event").
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):
1998 1997 1996 ---- ---- ----
Net income per financial statements $ 1,050 $ 716 $ 711 Increase (decrease) resulting from: Depreciation 2,478 1,096 456 Reserves for maintenance costs and write-downs 204 350 150 Allowance for bad debts provided for book (261) 20 240 Aircraft expenditures capitalized for tax, net -- -- 514 TBT interest income less TBT rental expense (1,200) (932) (742) Difference in basis of aircraft engine sold (8) 24 -- Maintenance reserves collected and related interest net of expenditures 215 219 492 Deferred rental income -- (34) (39) Other 74 66 (53) ------- ------- ------- Taxable income per federal income tax return $ 2,552 $ 1,525 $ 1,729 ======= ======= =======
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):
1998 1997 1996 ---- ---- ---- Total Partnership equity per financial statements $ 14,260 $ 19,675 $ 25,423 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 write-downs including Continental lease settlement, accounted for as cost recovery 9,484 9,520 9,170 Allowance for bad debts -- 260 240 Aircraft expenditures capitalized for tax, net 514 514 514 Distributions payable to partners 1,600 1,632 1,648 Deferred rental income 145 282 179 Maintenance reserves collected and used to restore aircraft net 1,905 1,654 -- Accumulated depreciation (16,781) (19,491) (20,611) TBT interest income less TBT rental expense (5,132) (3,955) (3,023) Maintenance reserves payable 350 192 1,627 Other 11 (13) 58 -------- -------- -------- Tax bases of net assets $ 14,797 $ 18,711 $ 23,666 ======== ======== ========
9. Litigation
The Partnership has filed a claim in the Bankruptcy Court for unpaid rents and other damages related to the rejection by Kiwi International Airlines, Inc. ("Kiwi") of its leases for two Boeing 727-200 aircraft. Given the sale of Kiwi's operating assets as approved by the Court, it is remote that the Partnership will obtain any recovery. Based on a petition by creditors, the case has been converted to a Chapter 7 liquidation and a Trustee has been appointed by the court.
On March 10, 1999, the Trustee appointed in Kiwi's bankruptcy proceedings made a demand for the return of payments approximating $1,276,000 to an affiliate of the Managing General Partner, the Partnership and an affiliated Partnership (see discussion herein under "Kiwi International Airlines, Inc. - Bankruptcy") on the basis that these payments were made by Kiwi in the ninety days prior to Kiwi's filing of its voluntary bankruptcy petition and were therefore preferential. The payments relate to seven aircraft, only two of which are owned by the Partnership. Management has notified the Trustee of the existence of a Stipulation and Consent Order, dated April 22, 1997, which provides for waiver and relinquishment by Kiwi of any potential preference claims it might have against the Partnership.
The General Partners, on the advice of counsel, believe that the claim will be withdrawn.
The parties in the Mallia lawsuit (as set forth in the Partnership's September 30, 1998 quarterly report on Form 10-Q incorporated by reference herein) have settled. Although Paine Webber could seek indemnification from the Partnership, the General Partners believe this possibility is remote.
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.
11. Subsequent Event
In February 1999, the Partnership consummated an agreement to increase the committed amount of the loan facility from $10 million to $14.5 million and increase the interest rate from 1.25 % to 1.5% over prime. The Partnership has pledged all of its aircraft as collateral in connection with the increased loan commitment. The Partnership will utilize the additional borrowings to fund the hushkit and cargo conversion of the Boeing 727-200 advanced aircraft formerly leased to Continental, which was returned in October 1998, for delivery to Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). At December 31, 1998, the interest rate was 9.00%. This loan is due in April 2000. If the Partnership is unable to renegotiate or refinance the loan, it will be forced to reduce or suspend distributions.
ITEM 9.
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 1998 or 1997.
PART III
ITEM 10.
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 Robert M. Brown Senior Vice President Richard L. Funk Senior Vice President, Technical
Richard S. Wiley, age 45, is President and Chairman of the Board of the Managing General Partner and Pegasus Capital Corporation ("PCC"), 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.
Carol L. Chase, Esq., age 46, 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, 40, 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, 61, 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 Carmine Fusco Vice President, Secretary, Treasurer and Chief Financial and Accounting Officer
Gerald F. Goertz, Jr., age 41, 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 49, 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 39, is 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 Senior 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.
Carmine Fusco, age 30, is Vice President, Secretary, Treasurer and Chief Financial and Accounting Officer of the Administrative General Partner, he also serves as an Assistant Vice President within the Private Investments Department of PaineWebber Incorporated. Mr. Fusco had previously been employed as a Financial Valuation Consultant in the Business Valuation Group of Deloitte & Touche, LLP from January 1997 to August 1998. He was employed as a Commodity Fund Analyst in the Managed Futures Department of Dean Witter Reynolds Incorporated, from October 1994 to November 1995. Prior to joining Dean Witter, Mr. Fusco was a Mutual Fund Accountant with the Bank of New York Company Incorporated. He received his Bachelor of Science degree in Accounting and Finance in May 1991 from Rider University and a Master of Business Administration from Seton Hall University in June 1996.
ITEM 11.
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 1998.
ITEM 12.
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, 1998, ATL Inc., an affiliate of the Administrative General Partner owns approximately 69,016 Units as the result of legal settlements with various limited partners.
The names and addresses of the General Partners are as follows:
Managing General Partner:
Pegasus Aircraft Management Corporation Four Embarcadero Center, 35th Floor San Francisco, CA 94111
Administrative General Partner:
Air Transport Leasing, Inc. 1200 Harbor Boulevard, 5th Floor Weehawken, NJ 07087
The General Partners, collectively, have a 1% interest in each item of the Partnership's income, gains, losses, deductions, credits and distributions.
(b) The following table sets forth the number of Units beneficially owned as of March 1, 1999, by directors of the Managing General Partner and the Administrative General Partner and by all directors and officers of such corporations as a group:
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.
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 1998.
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 1998, the General Partners earned base management fees of $124,000.
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 1998, the General Partners earned incentive management fees of $308,000.
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 1998 the General Partners earned re-lease fees of $250,000.
Beginning January 1, 1996, as part of the 1996 and 1997class action settlement, the Administrative General Partner remits to an affiliate, all management fees as well as all 1997 and future fees and distributions received by the Administrative General Partner, for deposit into 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 $12,500 during 1998, all of which was paid or is payable to the Administrative General Partner. As discussed in Note 6 to the Financial Statements, accountable expenses declined due to the subcontracting of certain accounting services, and their cost is included in general and administrative expenses.
During 1998, the Partnership purchased parts in connection with certain capital projects for costs totaling $1,067,616 from a company in which the President and Director of the Managing General Partner had an interest. In connection with certain capital projects during 1998 the Partnership paid $638,775 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 $65,000 as their allocable share of distributable cash flow for 1998. In addition, $11,000 of the Partnership's net taxable income for 1998 was allocated to the General Partners.
PART IV
ITEM 14.
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 1998, the Partnership did not file any reports on Form 8-K.
(c) Exhibits required to be filed.
Exhibit No. Description - ----------- -----------
3.1 (a) First Amended and Restated Limited Partnership Agreement dated September 30, 1988. Filed as Exhibit 3.1 to Pre-Effective Amendment No. 2 to Form S-1 Registration Statement dated September 16, 1988 (Commission File No. 33-22986).*
(b) Amendment, dated as of December 26, 1990, to the First Amended and Restated Limited Partnership Agreement dated September 30, 1988. Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated December 26, 1990.*
(c) Amendment, dated as of March 31, 1992, to the First Amended and Restated Limited Partnership Agreement dated September 30, 1988. Filed as Exhibit 4 to Registrant's Current Report on Form 8-K dated April 16, 1992.*
4.1 Depositary Agreement dated December 20, 1988, by and among Pegasus Aircraft Partners, L.P. ("Registrant"), Pegasus Aircraft Management Corporation, a California corporation, 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.*
(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 September 26, 1988, for one Boeing 727-200 aircraft, U.S. Registration No. N267US. Filed as Exhibit 10.1(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.*
(i) Lease Agreement dated April 15, 1994 between First Security Bank of Utah, National Association, as Trustee, (Lessor) and Kiwi International Airlines, Inc., (Lessee) with respect to one used Boeing 727-251 Aircraft US Registration number N258US.*
(j) Lease Agreement dated February 15, 1994, between First Security Bank of Utah, National Association, as Trustee, (Lessor) and Kiwi International Airlines, Inc., (Lessee) with respect to one used Boeing 727-251 Aircraft US Registration number N267US.*
(k) Lease Amendment No. 1 dated March 15, 1995 with respect to the lease between First Security Bank of Utah, National Association, as Trustee, (Lessor) and Kiwi International Airlines, Inc., (Lessee) in reference 10 (1) (i) dated April 15, 1994.*
(l) Lease Amendment No. 1 dated March 15, 1995 with respect to the lease between First Security Bank of Utah, National Association, as Trustee, (Lessor) and Kiwi International Airlines, Inc., (Lessee) in reference 10 (1) (j) dated February 15, 1994.*
10.2 (a) Trust Agreement 603, dated as of October 10, 1988 by and between the Seller and Owner Trustee providing for, among other things, the acquisition of one Boeing Model 747-143 Aircraft (the "Aircraft"), and concurrently therewith leasing the Aircraft to Continental Airlines, Inc. ("Lessee"). Filed as Exhibit 10.3(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.*
(b) Lease Agreement 603, dated as of October 14, 1988 by and between the Owner Trustee and Lessee. Filed as Exhibit 10.3(e) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.*
(c) Stipulation and Order, dated June 19, 1991, among Continental Airlines, Inc., New York Airlines, Inc., Bay Air Lease I, Cirrus Capital Corporation of Florida, Bay Air Lease III, Meridian Trust Company, as Owner Trustee, IAL Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation, IAL Aviation Resources, Inc., Aircraft Leasing, Inc., Pegasus Aircraft Partners, L.P., Gilman Financial Services, Inc. and First Security Bank of Utah, as Owner Trustee concerning various aircraft and aircraft engines. Filed as Exhibit 19.1(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.*
(d) Agreed Order, dated July 3, 1991, in connection with approval of Stipulation and Order, dated June 19, 1991, among Continental Airlines, Inc., New York Airlines, Inc., Bay Air Lease I, Cirrus Capital Corporation of Florida, Bay Air Lease III, Meridian Trust Company, as Owner Trustee, IAL Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation, IAL Aviation Resources, Inc., Aircraft Leasing, Inc., Pegasus Aircraft Partners, L.P., Gilman Financial Services, Inc. and First Security Bank of Utah, as Owner Trustee concerning various aircraft and aircraft engines. Filed as Exhibit 19.1(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.*
(e) Supplemental Stipulation and Order, dated December 30, 1992, among Continental Airlines, Inc., Bay Air Lease I, Cirrus Capital Corporation of Florida, Bay Air Lease III, Aviation Assets I, Aviation Assets II, Aviation Assets III,
Aviation Assets IV, IAL Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation, IAL Aviation Resources, Inc., Pegasus Aircraft Partners, L.P., Gilman Financial Services, and First Security Bank of Utah, as Owner Trustee concerning various aircraft and aircraft engines. Filed as Exhibit 10.2(e) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.*
(f) Lease termination agreement dated October 16, 1995, between Continental Airlines, Inc. and First Security Bank of Utah, N.A. as trustee of a trust in which Pegasus Aircraft Partners, L.P. is the sole beneficiary with respect to the lease of the 747-143 aircraft.
10.3 (a) Trust Agreement 735, dated as of September 26, 1988 by and between Seller and Owner Trustee providing for, among other things, the acquisition of one Boeing Model 727-224 aircraft (the "Aircraft"), and concurrently therewith leasing the Aircraft to Continental Airlines, Inc. ("Lessee"). Filed as Exhibit 10.4(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.*
(b) Lease Agreement 735, dated as of September 26, 1988 by and between Owner Trustee and Lessee. Filed as Exhibit 10.4(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.*
(c) Stipulation and Order, dated June 19, 1991, among Continental Airlines, Inc., New York Airlines, Inc., Bay Air Lease I, Cirrus Capital Corporation of Florida, Bay Air Lease III, Meridian Trust Company, as Owner Trustee, IAL Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation, IAL Aviation Resources, Inc., Aircraft Leasing, Inc., Pegasus Aircraft Partners, L.P., Gilman Financial Services, Inc. and First Security Bank of Utah, as Owner Trustee concerning various aircraft and aircraft engines. Filed as Exhibit 19.1(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.*
(d) Agreed Order, dated July 3, 1991, in connection with approval of Stipulation and Order, dated June 19, 1991, among Continental Airlines, Inc., New York Airlines, Inc., Bay Air Lease I, Cirrus Capital Corporation of Florida, Bay Air Lease III, Meridian Trust Company, as Owner Trustee, IAL Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation, IAL Aviation Resources, Inc., Aircraft Leasing, Inc., Pegasus Aircraft Partners, L.P., Gilman Financial Services, Inc. and First Security Bank of Utah, as Owner Trustee concerning various aircraft and aircraft engines. Filed as Exhibit 19.1(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.*
(e) Supplemental Stipulation and Order, dated December 30, 1992, among Continental Airlines, Inc., Bay Air Lease I, Cirrus Capital Corporation of Florida, Bay Air Lease III, Aviation Assets I, Aviation Assets II, Aviation Assets III, Aviation Assets IV, IAL Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation, IAL Aviation Resources, Inc., Pegasus Aircraft Partners, L.P., Gilman Financial Services, and First Security Bank of Utah, as Owner Trustee concerning various aircraft and aircraft engines. Filed as Exhibit 10.3(e) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.*
(f) Amendment No. 1 to Lease Agreement 735 dated as of February 28, 1997 between the Owner Trustee and Continental Airlines, Inc.
10.4 (a) Trust Certificate dated February 16, 1989, for the benefit of the Registrant from New DC-9T-I, Inc., a New York Corporation and Meridian Trust Company ("Trustee"). Filed as Exhibit 19.2(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.*
(b) Lease, dated as of May 20, 1983, as supplemented by Lease Supplement No. 1 dated May 24, 1983, between DC-9T-I, Inc., as Lessor, and Trans World Airlines, Inc., as Lessee, pertaining to one McDonnell Douglas DC-9-82 aircraft, U.S. Registration No. 904TW. Filed as Exhibit 10.4 (b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. *
(c) Amendment Agreement, dated as of December 15, 1986, between Trans World Airlines, Inc., as Lessee, and DC-9T-I, Inc., as Lessor. Filed as Exhibit 10.4 (c) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. *
(d) Amendment No. 1, dated as of May 1, 1991, to Lease dated as of May 20, 1983, each between Meridian Trust Company, as Owner Trustee and Lessor, and Trans World Airlines, Inc., as Lessee. Filed as Exhibit 19.1(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991.*
(e) Amendment No. 2, dated as of April 15, 1993, between Meridian Trust Company, as Owner Trustee, and Trans World Airlines, Inc. as Lessee.*
(f) Agreed Order, dated April 14, 1993, approving lease amendments among Trans World Airlines, Inc., Registrant, Pegasus Aircraft Partners II, L.P. and Pegasus Capital Corporation relating to leases of certain aircraft.*
(g) Amendment No. 3 dated as of January 16, 1995 between Meridian Trust Company Owner Trustee as Lessor and TWA as lessee with respect to the lease of one McDonnell Douglas MD-82, U.S. Registration No. N904TW.*
10.5 (a) Amended and Restated Lease No. 1, dated October 14, 1988, between PS Group, Inc. and USAir, Inc. Filed as Exhibit 10.2.9 to Form S-1 Registration Statement, dated July 3, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File No. 33-28359).*
(b) Agreement pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954, as Amended between Pacific Southwest Airlines and General Mills, Inc. Filed as Exhibit 19.3(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.*
(c) Assumption Agreement, dated March 22, 1989, among Pegasus Capital Corporation, a California corporation ("PCC"), the Purchaser, Concord Asset Management, Inc., a Delaware corporation ("CAMI") and the Registrant. Filed as Exhibit 19.3(e) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.*
(d) Participation Agreement, dated September 21, 1989, among Registrant, First Security Bank of Utah, a national association (the "Owner Trustee"), CAMI and Pegasus Aircraft Partners II, L.P., a Delaware limited partnership. Filed as Exhibit 19.2(e) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File No. 33-28359).*
(e) Amended and Restated Reimbursement Agreement, dated September 21, 1989, between the Registrant and CAMI. Filed as Exhibit 19.2(f) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File No. 33-28359).*
(f) Amended and Restated Security Agreement, dated September 21, 1989, between the Registrant and CAMI. Filed as Exhibit 19.2(h) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File No. 33-28359).*
(g) Security Agreement, dated September 21, 1989, between the Registrant and Pegasus Aircraft Partners II, L.P. Filed as Exhibit 19.2(j) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File No. 33-28359).*
(h) Security Agreement, dated September 21, 1989, between Pegasus Aircraft Partners II, L.P. and the Registrant. Filed as Exhibit 19.2(k) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File No. 33-28359).*
(i) Trust Agreement 814, dated as of March 10, 1989, among PCC, as Beneficiary, the Registrant, as Beneficiary, and the Owner Trustee. Filed as Exhibit 19.3(i) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989.*
(j) First Amendment to Trust Agreement 814, dated September 21, 1989, among Pegasus Aircraft Partners II, L.P., as Beneficiary, the Registrant, as Beneficiary and the Owner Trustee. Filed as Exhibit 19.2(m) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File No. 33-28359).*
(k) Letter of Credit Agreement, dated as of April 30, 1992, between First Security Bank of Utah as Owner Trustee and Philadelphia National Bank, Incorporated, as CoreStates Bank, N.A. Filed as Exhibit 10.1(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.*
(l) Assumption Agreement, dated April 30, 1992, among Pegasus Aircraft Partners, L.P. and Pegasus Aircraft Partners II, L.P. as Obligors and Philadelphia National Bank, Incorporated, as CoreStates Bank, N.A. Filed as Exhibit 10.1(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.*
(m) Security Agreement and Assignment of lease, dated as of April 30, 1992, between First Security Bank of Utah, National Association as Owner Trustee and Philadelphia National Bank, Incorporated, as CoreStates Bank, N.A. Filed as Exhibit 10.1 (c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. *
(n) Assignment of Collateral, dated as of April 30, 1992, between Pegasus Aircraft Partners, L.P. and Philadelphia National Bank, Incorporated, as CoreStates Bank, N.A. Filed as Exhibit 10.1(d) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. *
10.6 (a) Loan Agreement, dated April 22, 1994, between Pegasus Aircraft Partners, L.P. and Philadelphia National Bank, Incorporated as CoreStates Bank, N.A..* (b) Promissory Note, dated April 22, 1994, made by Pegasus Aircraft Partners, L.P. in favor of Philadelphia National Bank Incorporated as CoreStates Bank, N.A.*
(c) Security Agreement and Assignment of lease between First Security Bank of Utah, National Association as owner trustee and Philadelphia National Bank Incorporated as CoreStates Bank, N.A. with respect to aircraft N17010.*
(d) Assignment of beneficial interest for Pegasus Aircraft Partners, L.P. to Philadelphia National Bank Incorporated as CoreStates Bank, N.A. with respect to the Pegasus interest in the USAir Trust Agreement and the Continental Trust Agreement.*
(e) Amended and restated loan agreement dated as of July 20, 1995 between Pegasus Aircraft Partners, L.P. and CoreStates Bank N.A..
11 Partnership policy Regarding Requests for Partner Lists.
19.1 Prospectus of Registrant, dated as of September 30, 1988. Filed as Exhibit 19.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.*
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 29, 1999
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/ CARMINE FUSCO Carmine Fusco Vice President, Secretary, Treasurer and Chief Financial and Accounting Officer
By: Pegasus Aircraft Management Corporation Managing General Partner
By: /s/ RICHARD S. WILEY Richard S. Wiley President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 29, 1999.
Signature Title - --------- -----
/s/ RICHARD S. WILEY President and Chairman of Richard S. Wiley the Board of Pegasus Aircraft Management Corporation
/s/ GERALD F. GOERTZ, JR. Chairman of the Board of Gerald F. Goertz, Jr. Air Transport Leasing, Inc.
/s/ CLIFFORD B. WATTLEY President and Director of Clifford B. Wattley Air Transport Leasing, Inc.
/s/ STEPHEN R. DYER Vice President, Assistant Stephen R. Dyer Secretary and Director of Air Transport Leasing, Inc.