FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-18387
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Pegasus Aircraft Partners II, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 84-1111757
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(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.
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This document consists of 24 pages.
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Pegasus Aircraft Partners II, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998
Table of Contents
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Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - June 30, 1998
and December 31, 1997 3
Statements of Income for the three
months ended June 30, 1998
and 1997 4
Statements of Income for the six
months ended June 30, 1998
and 1997 5
Statements of Partners' Equity for the
six months ended June 30, 1998
and 1997 6
Statements of Cash Flows for the six
months ended June 30, 1998 and
1997 7
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Part II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
2
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Part I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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BALANCE SHEETS -- JUNE 30, 1998 AND DECEMBER 31, 1997
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(unaudited)
1998 1997
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(in thousands, except unit data)
ASSETS
------
Cash and cash equivalents $ 5,520 $ 5,705
Rent and other receivables, net 260 444
Aircraft, net (Note 2) 53,157 52,098
Other assets 821 26
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Total Assets $ 59,758 $ 58,273
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LIABILITIES AND PARTNERS' EQUITY
--------------------------------
LIABILITIES:
Lease settlement reserve $ 3,000 $ 3,000
Accounts payable and accrued expenses 373 123
Payable to affiliates (Note 3) 470 211
Maintenance reserves collected 1,265 591
Notes payable 10,000 4,751
Deferred income and deposits 2,544 2,584
Distributions payable to partners 2,914 2,943
Accrued interest payable 78 --
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Total Liabilities 20,644 14,203
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COMMITMENTS (Note 5)
PARTNERS' EQUITY:
General Partners (1,058) (1,008)
Limited Partners (7,255,000 units outstanding) 40,172 45,078
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Total Partners' Equity 39,114 44,070
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Total Liabilities and Partners' Equity $ 59,758 $ 58,273
======== ========
The accompanying notes are an integral part
of these financial statements.
3
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF INCOME
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FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
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(unaudited)
1998 1997
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(in thousands, except unit data and per unit amounts)
REVENUE:
Rentals from operating leases $ 2,897 $ 3,005
Interest 41 148
Other income 7 --
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2,945 3,153
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EXPENSES:
Depreciation and amortization 1,996 1,786
Write-downs 20 --
Management and re-lease fees (Note 3) 238 239
Interest 178 116
General and administrative (Note 3) 108 83
Direct lease 76 156
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2,616 2,380
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NET INCOME $ 329 $ 773
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 3 $ 7
To the Limited Partners 326 766
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$ 329 $ 773
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NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .05 $ .11
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 7,255,000 7,255,000
========== ==========
The accompanying notes are an integral part
of these financial statements.
4
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF INCOME
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FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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(unaudited)
1998 1997
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(in thousands, except unit data and per unit amounts)
REVENUE:
Rentals from operating leases $ 6,225 $ 5,768
Interest 95 301
Other income 127 --
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6,447 6,069
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EXPENSES:
Depreciation and amortization 4,046 3,319
Write-downs 380 --
Management and re-lease fees (Note 3) 489 459
Interest 293 231
General and administrative (Note 3) 185 182
Direct lease 147 228
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5,540 4,419
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NET INCOME $ 907 $ 1,650
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NET INCOME ALLOCATED:
To the General Partners $ 9 $ 16
To the Limited Partners 898 1,634
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$ 907 $ 1,650
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .13 $ .23
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 7,255,000 7,255,000
========== ==========
The accompanying notes are an integral part
of these financial statements.
5
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF PARTNERS' EQUITY
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FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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(unaudited)
General Limited
Partners Partners Total
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(in thousands)
Balance, January 1, 1998 $ (1,008) $ 45,078 $ 44,070
Net income 9 898 907
Distributions to partners declared (59) (5,804) (5,863)
-------- -------- --------
Balance, June 30, 1998 $ (1,058) $ 40,172 $ 39,114
======== ======== ========
Balance, January 1, 1997 $ (904) $ 55,444 $ 54,540
Net income 16 1,634 1,650
Distributions to partners declared (59) (5,803) (5,862)
-------- -------- --------
Balance, June 30, 1997 $ (947) $ 51,275 $ 50,328
======== ======== ========
The accompanying notes are an integral part
of these financial statements.
6
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF CASH FLOWS
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FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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(unaudited)
1998 1997
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(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 907 $ 1,650
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,046 3,319
Write-downs 380 --
Change in assets and liabilities:
Rent and other receivables 32 (204)
Other assets (5) (16)
Accounts payable and accrued expenses 251 34
Payable to affiliates 258 (208)
Accrued interest payable 78 2
Deferred income and deposits (40) (891)
Maintenance reserves collected 674 233
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Net cash provided by operating activities 6,581 3,919
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CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit for aircraft modifications (790) --
Capitalized aircraft improvements (6,195) (2,148)
Accounts payable - aircraft -- 303
Proceeds from the sale or exchange of equipment 710 --
Repayment of advances by lessees 152 173
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Net cash used in investing activities (6,123) (1,672)
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The accompanying notes are an integral part
of these financial statements.
7
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF CASH FLOWS (Continued)
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FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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(unaudited)
1998 1997
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CASH FLOWS FROM FINANCING ACTIVITIES:
Security deposits -- 145
Transfer from restricted cash -- 2,275
Application of maintenance reserves
payable to restore aircraft -- (2,036)
Application of maintenance reserves
payable for maintenance -- (28)
Proceeds from note payable 5,249 --
Cash distributions paid to partners (5,892) (5,833)
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Net cash used in financing activities (643) (5,477)
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NET DECREASE IN CASH AND
CASH EQUIVALENTS (185) (3,230)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 5,705 12,831
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 5,520 $ 9,601
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 211 $ 228
======== ========
The accompanying notes are an integral part
of these financial statements.
8
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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NOTES TO FINANCIAL STATEMENTS
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JUNE 30, 1998
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(unaudited)
1. GENERAL
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The accompanying unaudited interim financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of the General Partners, necessary to fairly present the financial
position of the Partnership as of June 30, 1998 and the results of its
operations, changes in partners' equity and cash flows for the six months then
ended.
These financial statements should be read in conjunction with the
Significant Accounting Policies and other Notes to Financial Statements included
in the Partnership's annual audited financial statements for the year ended
December 31, 1997.
New Accounting Pronouncement: 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 non-owner sources. The adoption
of this pronouncement did not impact the reporting of the Partnership's results
of operations.
2. AIRCRAFT
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The Partnership's net investment in aircraft as of June 30, 1998 and
December 31, 1997 consisted of the following (in thousands):
1998 1997
---- ----
Aircraft on operating leases, at cost $ 109,646 $ 103,990
Less: Accumulated depreciation (59,439) (55,513)
Write-downs (8,204) (8,143)
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$ 42,003 $ 40,334
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Aircraft held for lease, at cost $ 46,744 $ 46,934
Less: Accumulated depreciation (18,899) (18,839)
Write-downs (6,019) (5,659)
Amounts received including value
of aircraft in Lease Settlement accounted
for under the cost recovery method (10,115) (10,115)
Reserves for maintenance (557) (557)
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11,154 11,764
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Aircraft, net $ 53,157 $ 52,098
========= =========
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Continental Airline Leases: The Partnership owns a McDonnell Douglas
DC-10-10 aircraft which is subject to an operating lease with Continental
Micronesia providing for rentals of $150,000 per month through June 30, 1998.
The Partnership and Continental have signed a lease amendment that extends the
lease from July 1, 1998 through September 15, 1999 at a monthly lease rate of
$138,500.
Upon the expiration of the extended lease, the Partnership will convert
the aircraft to a freighter pursuant to an aircraft modification agreement for
delivery to Emery Worldwide Airlines Inc. ("Emery"). The Partnership and Emery
have signed a lease which provides for 84 months rent at $218,000 per month. The
lease also provides a two-year renewal option at $200,000 per month, and three
additional two-year renewal options at the then fair market rental. Emery has
provided a security deposit aggregating $218,000 at June 30, 1998. The
Partnership provided a deposit of $790,000 to the third party modification
center, which is included in other assets on the balance sheet as of June 30,
1998. The current workscope under the aircraft modification agreement requires
the investment of approximately $8.0 million, subject to escalation, by the
Partnership. The Partnership also estimates expending another $1.0 million to
meet the lease delivery conditions.
The lease of the Boeing 727-200 advanced aircraft leased to Continental
expired January 31, 1998 and the aircraft was returned to the Partnership. The
Partnership and Continental continue discussing each party's obligation with
respect to the return condition of the aircraft under the lease. The Partnership
has entered into a lease of the aircraft for a term of four years to TNT
Transport International B.V. ("TNT") a foreign cargo carrier and has converted
the aircraft to cargo configuration, including a low gross weight hushkit. (See
TNT discussion below).
TNT Transport International B.V.: The Partnership entered into a lease
for the Boeing 727-200 advanced aircraft formerly leased to Continental with 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
reduction of approximately 10% after two years if TNT exercises an option to
extend the lease for an additional two years beyond the original expiration
date) and airframe and landing gear reserves aggregating $85 per flight hour.
TNT has contracted with a third party service provider for 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 after the fourth year (if the above
option is not exercised) at $95,000 per month. The Partnership has invested
approximately $5.7 million for a low gross weight hushkit and cargo conversion
of the aircraft, and the purchase of JT8D-7B engines net of proceeds of $520,000
for the sale of a JT8D-7B engine from this aircraft, which resulted in a $20,000
write-down. The work was performed and certain of the aircraft parts were
provided by companies affiliated with the Managing General Partner or its
President and Director. The aircraft was delivered to TNT in June 1998.
Airbus A-300 Aircraft: In December 1997, the Partnership leased, on a
short-term (six month minimum) basis, one of the engines from the Airbus A-300
aircraft to Viacao Aerea Sao Paulo S.A. ("VASP"), a Brazilian carrier, for rents
of $2,200 per day, plus maintenance reserves of $225 per engine hour or cycle,
whichever is greater.
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During June 1998, the Partnership entered into an Engine Exchange
Agreement and Bill of Sale with an affiliate of the Managing General Partner.
Pursuant to this agreement the Partnership received cash in the amount of
$190,000 and a General Electric CF6-50C2 engine in exchange for a General
Electric CF6-50C2 engine from the Airbus A-300 aircraft. The amount of the
payment was determined through a third party appraisal of the engines.
Lockheed L-1011 Aircraft: At June 30, 1998 the L-1011 aircraft had an
estimated market value and book value of approximately $1.7 million (net book
value of $5.5 million adjusted for the $3 million return condition settlement
accounted for on the cost recovery basis and the unearned portion of the L-1011
Lease Prepayment reflected as deferred income). In addition, in the first
quarter of 1998 a write-down of $360,000 was taken to reflect the estimated
market value of the aircraft. The Partnership is currently in discussions for
the sale of the Lockheed L-1011 aircraft to an unrelated party.
3. TRANSACTIONS WITH AFFILIATES
----------------------------
Base Management Fees. The General Partners are entitled to receive a
quarterly subordinated base management fee in an amount generally equal to 1.5%
of gross aircraft rentals, net of re-lease fees paid. Of this amount, 1.0% is
payable to the Managing General Partner and 0.5% is payable to the
Administrative General Partner. The General Partners earned a total of $42,000
and $85,000 of base management fees during the three and six months ended June
30, 1998, respectively.
Incentive Management Fees. The General Partners also are entitled to
receive a quarterly subordinated incentive management fee in an amount equal to
4.5% of quarterly cash flow and sales proceeds (net of resale fees), of which
2.5% is payable to the Managing General Partner and 2.0% is payable to the
Administrative General Partner. The General Partners earned a total of $110,000
and $239,000 of incentive management fees during the three and six months ended
June 30, 1998, respectively.
Re-lease Fees. The General Partners are entitled to 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 made. Of this amount, 2.5% is payable to the Managing
General Partner and 1.0% is payable to the Administrative General Partner. The
General Partners earned a total of $85,000 and $164,000 of re-lease fees during
the three and six months ended June 30, 1998, respectively.
All of the above fees are subordinated to the limited partners
receiving an 8% annual non-cumulative return based upon original contributed
capital.
Accountable General and Administrative 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
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management of the Partnership. Such reimbursable expenses amounted to $0 and
$19,000 during the three and six months ended June 30, 1998, respectively, all
of which was payable to the Administrative General Partner.
During the six months ended June 30, 1998 the Partnership paid
$1,165,000 to a maintenance facility affiliated with the Managing General
Partner for work performed on certain aircraft, including the cargo conversion.
The Partnership also paid $1,463,000 for aircraft parts to a company owned by
the President and Director of the Managing General Partner and two former
officers and directors.
During June 1998, the Partnership entered into an Engine Exchange
Agreement and Bill of Sale with an affiliate of the Managing General Partner.
Pursuant to this agreement the Partnership received cash in the amount of
$190,000 and a General Electric CF6-50C2 engine in exchange for a General
Electric CF6-50C2 engine from the Airbus A-300 aircraft. The amount of the
payment was determined through a third party appraisal of the engines.
4. LITIGATION
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The Partnership, along with the Managing General Partner,
Administrative General Partner and PaineWebber Incorporated, has been named as a
defendant in a lawsuit entitled Paul Mallia, et al. v. PaineWebber, Inc., et
al., pending before the United States District Court for the Southern District
of New York, and relating to the sale and sponsorship of various limited
partnership investments, including the Partnership and an affiliated partnership
("the Pegasus Partnerships"). Although the lawsuit was originally filed in 1995,
the Pegasus Partnerships were served with process after a consolidated amended
complaint was filed in May 1998. The complaint asserts claims under the
Racketeer Influenced and Corrupt Organizations Act, as well as state law claims
for common law fraud, conspiracy, violations of section 27.01 of the Texas
Business and Commerce Code, fraud in the inducement, negligent
misrepresentation, negligence, breach of fiduciary duty, violations of the Texas
Securities Act, and violations of the Texas Deceptive Trade Practices Act, on
behalf of those investors who bought interests in the Pegasus Partnerships and
in other limited partnerships and investments. The plaintiffs seek unspecified
damages, including attorneys' fees, reimbursement for all sums invested by them
in the partnerships, exemplary damages, and treble damages. The Partnerships
have not yet filed an answer to the complaint. Discovery has begun, and is
scheduled to be completed in early 1999. The General Partners cannot determine
the impact, if any, of the litigation on the Partnership.
The Partnership has filed a claim in the Bankruptcy Court for unpaid
rents and other damages related to the rejection by Kiwi of the leases. Given
the sale of Kiwi's assets as approved by the Court, it is unlikely that the
Partnership will obtain any recovery.
5. COMMITMENTS
-----------
Upon the expiration of the extended lease with Continental, as
discussed in Note 2, the Partnership will convert the aircraft to a freighter
pursuant to an aircraft modification agreement for delivery to Emery Worldwide
Airlines, Inc. ("Emery"). The Partnership and Emery have signed a lease
agreement which provides for 84 months rent at $218,000 per month, and three
additional two-year renewal options at the then fair market rental. Emery has
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provided a security deposit aggregating $218,000. The Partnership paid a deposit
of $790,000 to the third party modification center, which is included in other
assets on the balance sheet as of June 30, 1998. The current workscope under the
aircraft modification agreement requires the investment of approximately $8.0
million, subject to price escalation. The Partnership estimates expending an
additional $1.0 million to meet the delivery conditions under the lease with
Emery.
The Partnership is committed in 1999, to fund the hushkit for the
Boeing 727-200 advanced aircraft leased to Capital Cargo International Airlines,
Inc. ("Capital"), which is expected to cost approximately $3 million.
The Partnership has drawn down all funds available under its current
borrowing facility. In all, the Partnership has capital commitments of $12
million and has commenced discussions with its lender to increase the amounts
available under the existing borrowing facility. To the extent that the
Partnership is unable to increase its loan facilities or obtain additional
borrowings, the Partnership may have to utilize cash from operations to finance
these obligations, potentially reducing distributions to partners.
13
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Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
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
these Forward-Looking Statements 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 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.
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 June 30, 1998, the
Partnership's unrestricted cash and cash equivalents of $5,520,000 was primarily
invested in such a fund. This amount was $185,000 less than the Partnership's
unrestricted cash and equivalents at December 31, 1997 of $5,705,000. This
decrease in unrestricted cash was attributable to the amount by which cash
distribution to partners and capitalized aircraft improvements exceeded cash
generated by operating activities, collection of advances to lessees, proceeds
from notes payable, and the unapplied maintenance reserves, (see Footnote 2,
"Aircraft" and Footnote 4 "Litigation") during the six months ended June 30,
1998.
Rent and other receivables, net, decreased $184,000 from $444,000 at
December 31, 1997 to $260,000 at June 30, 1998. This decrease resulted primarily
from the continued repayment of the advances by TWA. In addition, the receivable
from Capital Cargo International Airlines, Inc. was fully paid at June 30, 1998.
The Partnership's leases with TWA for the Lockheed L-1011 and McDonnell
Douglas MD-82 aircraft were modified and extended during April 1993. Upon
execution of the lease amendments, the Partnership advanced $1,300,000 to TWA to
finance certain major maintenance procedures which had been performed on the two
aircraft. TWA has agreed to repay these amounts to the Partnership over the
applicable remaining lease terms in equal monthly installments with interest at
a fixed rate of 450 basis points over the equivalent term U.S. treasury
obligations (9.68% and 9.70% for the initial advances). At June 30, 1998, the
total balance of the advances to TWA aggregated approximately $90,000.
Other assets increased $795,000 from $26,000 at December 31, 1997 to
$821,000 at June 30, 1998. This increase is primarily due to the payment of a
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deposit, to a third party, to secure a facility for the modifications to the
DC10-10 to convert it to a cargo aircraft in late 1999.
The payable to affiliates increased $259,000 to $470,000 at June 30,
1998 from $211,000 at December 31, 1997. The increase was predominantly due to
fees for the fourth quarter of 1997, and the first quarter of 1998, which were
expensed but unpaid at June 30, 1998.
Deferred rental income and deposits were $2,544,000 at June 30, 1998 as
compared to $2,584,000 at December 31, 1997. The decrease was primarily
attributable to the recognition of amounts previously received in connection
with the A-300 Lease Settlement and the L-1011 Lease Prepayment. The Partnership
is currently in discussions for the sale of the Lockheed L-1011 aircraft to an
unrelated party. The Partnership continues to actively re-market for lease or
sale, the A-300 aircraft which is currently off lease.
During the three months ended June 30, 1998, the Partnership paid cash
distributions pertaining to the first quarter of 1998. The quarterly
distribution represented an annualized rate equal to 8.0% of contributed capital
($.40 per Unit).
The amount of each distribution will be determined on a quarterly basis
after an evaluation of the Partnership's operating results and its current and
expected financial position. The amount of recent distributions has exceeded
cash generated from operations for the particular quarter. The Partnership has
utilized cash generated in prior periods to achieve the level of distributions
made. The distribution for the second quarter of 1998 was paid in July, 1998 at
an annualized rate equal to 8.0% of contributed capital ($.40 per Unit).
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the amount of net
income reported by the Partnership for accounting purposes, approximately 89% of
the cash distributions paid to the partners for the quarter ended June 30, 1998
constituted a return of capital. Also, based on the amount of net income
reported by the Partnership for accounting purposes, approximately 83% of the
cash distributions paid to the partners from the inception of the Partnership
through June 30, 1998 constituted a return of capital. However, the total actual
return on capital over the Partnership's life can only be determined at the
termination of the Partnership after all cash flows, including proceeds from the
sale of the aircraft, have been realized.
The L-1011 and the A-300 aircraft remained off-lease during 1998. In
early 1998, the Partnership received informal offers to sell both these
aircraft. Based upon the offers received, the Partnership recognized write-downs
aggregating approximately $1.4 million to recognize the decrease in value of
these aircraft at December 31, 1997. Additionally, the Partnership provided a
write-down of $360,000 with respect to the L-1011 aircraft in the first quarter
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of 1998. However, if the aircraft are sold, the Partnership may elect either to
utilize such proceeds, to the extent permitted under the Partnership Agreement,
to invest (along with the $3,000,000 L-1011 return condition settlement received
in 1996) in additional used aircraft subject to lease or may utilize such
amounts in other capital expenditures or distributions to the limited partners.
Continental Micronesia has agreed to extend the lease of the DC10-10
for an additional fifteen months (through September 15, 1999) at a lease rate of
$138,500 per month. Upon the expiration of the extended lease, the Partnership
will convert the aircraft to a freighter pursuant to an aircraft modification
agreement with a third party for ultimate delivery to Emery Worldwide Airlines
Inc. ("Emery"). The Partnership and Emery have signed an 84 month lease, which
provides for rents of $218,000 per month. The lease also provides a two-year
renewal at a monthly lease rate of $200,000, followed by three additional
two-year renewal options at the then fair market rental. Emery provided a
security deposit of $218,000 at June 30, 1998. The current workscope under the
aircraft modification agreement requires the investment of approximately $8.0
million, subject to escalation, by the Partnership. The Partnership also
estimates expending an additional $1.0 million to meet the lease delivery
conditions. Additionally, the Partnership is committed to fund in 1999, the
hushkit for the Boeing 727 leased to Capital Cargo International, Inc.
("Capital"), which is expected to cost approximately $3 million.
In early 1998, Continental returned one 727-200 ADV aircraft, the lease
of which expired January 31, 1998. The Partnership and Continental continue
discussing each party's obligation with respect to the return condition of the
aircraft under the lease. Continental's position is that the airframe exceeded
return condition requirements and that the engines met the aggregate return
condition requirements. The Partnership believes that the engines failed to meet
return conditions and agree generally regarding the airframe. The ultimate
resolution is unknown at this time.
In all, the Partnership has estimated commitments of $12 million. The
Partnership has drawn all available funds under its $10 million borrowing
facility and the principal balance at June 30, 1998 is $10 million. The Limited
Partnership Agreement permits the Partnership to borrow up to 35% of the
original offering proceeds ($50,785,000). The Partnership has commenced
discussions with the lender to increase the amount available under the borrowing
facility. However, there can be no assurance that the Partnership will be able
to obtain additional borrowings. The amount of additional borrowing will depend,
in part, on the value of the Partnership's collateral. The Partnership may have
to utilize cash from operations to finance such cost, thus potentially reducing
distributions to partners.
Litigation
- ----------
See "Note 4 Litigation" for an update on certain legal proceedings.
RESULTS OF OPERATIONS
- ---------------------
The Partnership's net income was $329,000 and $907,000 for the quarter
and six months ended June 30, 1998 (the "1998 Quarter" and "1998 Period",
respectively) as compared to $773,000 and $1,650,000 for the quarter and six
months ended June 30, 1997 (the "1997 Quarter" and "1997 Period", respectively).
16
<PAGE>
The Partnership's net income for the 1998 Period and 1998 Quarter
decreased as compared to the 1997 Period and 1997 Quarter principally due to the
write-downs related to the JT8D-7B engine and the L-1011 aircraft based upon
current market conditions and increased interest expense related to the
additional draw down on the Note Payable.
Rental income decreased by $108,000 or 4% in the 1998 Quarter, and
increased $457,000 or 8% in the 1998 Period as compared to the 1997 Quarter and
1997 Period. Rental income decreased during the 1998 Quarter, compared to the
1997 Quarter, due to an absence of the amortization of the L-1011 deferred
income in the 1998 Quarter, and higher revenues earned during the 1997 Quarter
on the Boeing 727 aircraft formerly leased to Continental which expired on
January 31, 1998. The increase in rental income during the 1998 Period, as
compared to the 1997 Period, was principally due to the rental income
attributable to the Falcon lease, Capital lease and the A-300 engine lease with
Viacao Aerea Sao Paulo S.A., all of which were off-lease for all or a portion of
the 1997 Period. The increase in rental income was offset by a corresponding
increase in depreciation.
Interest income decreased $107,000 and $206,000, or 72%, and 68%,
respectively, for the 1998 Quarter and 1998 Period in comparison to the 1997
Quarter and 1997 Period. This was due to a decrease in cash reserves for
expenditures throughout 1997 and 1998, for capitalized aircraft improvements,
and for the continued reduction in advances due from lessees due to their
scheduled repayments.
During the 1998 Period, the Partnership realized a gain of $116,000,
which is included in Other Income, representing the difference between the book
value of the Partnership's claim in the 1991 Continental bankruptcy and the
amount realized.
Depreciation and amortization expense increased $210,000 and $727,000,
or 12%, and 22%, respectively, for the 1998 Quarter and 1998 Period in
comparison to the 1997 Quarter and 1997 Period. This is due primarily to the
depreciation associated with the Falcon and Capital aircraft (including
capitalized aircraft improvements made in 1997) which were off-lease for all or
substantially all of the 1997 Quarter and 1997 Period. Additionally, capitalized
improvements to the TNT aircraft were depreciated in 1998, upon the completion
of a cargo conversion and the delivery of this aircraft. The Partnership does
not recognize depreciation on off-lease aircraft.
During the first quarter of 1998, the Partnership provided for a
write-down aggregating $360,000 to recognize the impairment of the value of the
L-1011 aircraft. No such amount was provided in the first quarter of 1997.
Additionally, during the 1998 Quarter, the Partnership provided for a $20,000
write-down in connection with the sale of the JT8D-7B engine from the TNT
Transport International B.V., Boeing 727-200 advanced aircraft.
Management and re-lease fees decreased by $1,000 or 1% during the 1998
Quarter, but increased $30,000 or 7% during the 1998 Period in comparison to the
1997 Quarter and 1997 Period. The decrease in the 1998 Quarter was primarily due
to the corresponding decrease in rental income, which serves as the basis upon
which management and re-lease fees are calculated. The increase in the 1998
17
<PAGE>
Period was commensurate with the corresponding increase in rental income for the
1998 Period, which serves as the basis upon which management and re-lease fees
are calculated.
Interest expense for the 1998 Quarter and 1998 Period increased by
$62,000 and $62,000 or 53%, and 27%, respectively, in comparison to the 1997
Quarter and 1997 Period due to an increase in the Note Payable.
General and administrative expenses increased by $25,000 and $3,000 or
30%, and 2%, respectively, in the 1998 Quarter and 1998 Period. This increase is
primarily due to the increase in transfer agent fees, and audit & tax fees,
partially offset by the decrease in legal fees.
Direct lease expenses decreased by $80,000 and $81,000 or 51%, and 36%,
respectively, in the 1998 Quarter and 1998 Period as compared to the 1997
Quarter and 1997 Period due primarily to the Kiwi related expenses incurred in
the 1997 Quarter and 1997 Period. (There were no such items in the 1998 Quarter
and 1998 Period.)
18
<PAGE>
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
The Partnership, along with the Managing General Partner, Administrative General
Partner and PaineWebber Incorporated, has been named as a defendant in a lawsuit
entitled Paul Mallia, et al. v. PaineWebber, Inc., et al., pending before the
United States District Court for the Southern District of New York, and relating
to the sale and sponsorship of various limited partnership investments,
including the Partnership and an affiliated partnership ("the Pegasus
Partnerships"). Although the lawsuit was originally filed in 1995, the Pegasus
Partnerships were served with process after a consolidated amended complaint was
filed in May 1998. The complaint asserts claims under the Racketeer Influenced
and Corrupt Organizations Act, as well as state law claims for common law fraud,
conspiracy, violations of section 27.01 of the Texas Business and Commerce Code,
fraud in the inducement, negligent misrepresentation, negligence, breach of
fiduciary duty, violations of the Texas Securities Act, and violations of the
Texas Deceptive Trade Practices Act, on behalf of those investors who bought
interests in the Pegasus Partnerships and in other limited partnerships and
investments. The plaintiffs seek unspecified damages, including attorneys' fees,
reimbursement for all sums invested by them in the partnerships, exemplary
damages, and treble damages. The Partnerships have not yet filed an answer to
the complaint. Discovery has begun, and is scheduled to be completed in early
1999. The General Partners cannot determine the impact, if any, of the
litigation on the Partnership.
The Partnership has filed a claim in the Bankruptcy Court for unpaid rents and
other damages related to the rejection, by Kiwi, of the lease. Given the sale of
Kiwi's assets as approved by the Court, it is unlikely that the Partnership will
obtain any recovery.
Item 5. Other Information
-----------------
On May 15, 1998 Joseph P. Ciavarella, Vice President, Treasurer and Chief
Financial Officer of the Administrative General Partner resigned.
On May 15, 1998, Paul L. Novello was named Vice President, Chief Financial
Officer, Secretary and Treasurer of the Administrative General Partner.
Paul L. Novello, age 45, is a Vice President, Chief Financial Officer, Secretary
and Treasurer of the Administrative General Partner. He joined PaineWebber
Incorporated in March 1994 and currently holds the position of Corporate Vice
President. Prior to joining PaineWebber Incorporated, Mr. Novello was employed
as a consultant to Chase Manhattan Bank's Corporate International Real Estate
Department. Prior to that time, Mr. Novello was employed by Stratagem Group,
Inc. as a Vice President of Acquisitions and Investments. From 1981 to 1989, Mr.
Novello was employed by Shearson Lehman Hutton and its predecessor E.F. Hutton
and Co. in the Direct Investments Department. From 1976 to 1981, Mr. Novello was
employed by Revlon, Inc. He holds a Bachelor of Arts degree in economics from
Rutgers University and a Masters in Business Administration from Rutgers
University.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits and Reports to be files:
27. Financial Data Schedule (in electronic format only).
99.1 Policy Regarding Requests for Partner Lists.
(b) Reports on Form 8-K
The Partnership did not file a report on Form 8-K during the
second quarter of the fiscal year ending December 31, 1998.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners II, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
A General Partner
Date: August 14, 1998 By: /s/ Paul L. Novello
-------------------
Paul L. Novello
Vice President, Chief Financial Officer,
Officer, Secretary and Treasurer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMTION EXTRACTED FROM FORM 10-Q FOR
THE PERIOD ENDED JUNE 30, 1998 OF PEGASUS AIRCRAFT PARTNERS II, LP AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,520,000
<SECURITIES> 0
<RECEIVABLES> 900,000
<ALLOWANCES> (640,000)
<INVENTORY> 0
<CURRENT-ASSETS> 6,601,000
<PP&E> 156,390,000
<DEPRECIATION> (103,233,000) <F3>
<TOTAL-ASSETS> 59,758,000
<CURRENT-LIABILITIES> 10,644,000
<BONDS> 10,000,000
0
0
<COMMON> 0
<OTHER-SE> 39,114,000 <F2>
<TOTAL-LIABILITY-AND-EQUITY> 59,758,000
<SALES> 0
<TOTAL-REVENUES> 6,447,000
<CGS> 0
<TOTAL-COSTS> 5,062,000
<OTHER-EXPENSES> 185,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293,000
<INCOME-PRETAX> 907,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 907,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 907,000
<EPS-PRIMARY> .13 <F1>
<EPS-DILUTED> 0
<FN>
<F1>REPRESENTS NET INCOME PER LIMITED PARTNERSHIP UNIT OUTSTANDING.
<F2>REPRESENTS AGGREGATE PARTNERSHIP CAPITAL.
<F3>INCLUDES PROVISIONS FOR WRITEDOWNS AND CERTAIN OTHER RESERVES.
</FN>
</TABLE>
Exhibit 99.1
Pegasus Aircraft Partners II, L.P. (the "Partnership")
Policy Regarding Requests for Partner Lists
-------------------------------------------
This is to inform you that, in accordance with the provisions of the Delaware
Revised Uniform Limited Partnership Act (the "Act"), and without limiting its
rights under the Partnership Agreement or the Act, as each may be amended from
time to time, the Administrative General Partner of the Partnership has
established standards applicable to requests for lists of Limited Partners.
These standards were established in order to support the following objectives:
(1) that the lists not be used for an improper or inappropriate purpose or in a
way that might be detrimental to the Partnership or the Limited Partners; (2)
that the Limited Partners be given sufficient information and opportunity to
decide how they should react in response to any solicitation or other
communication addressed to them; and (3) that the Partnership and the Limited
Partners not face an increased risk of adverse tax consequences as a direct or
indirect result of any such solicitation or communication.
The Administrative General Partner requires any request to be made in writing by
a record holder of limited partner interests with standing to request the list,
to comply strictly with all applicable requirements of law and the Partnership
Agreement, to state the purpose for which the request is made with sufficient
specificity to enable the Administrative General Partner to make the
determinations specified above, and to include an undertaking under oath by the
person requesting the list and the persons or entities on whose behalf it is
requested (1) to hold the list in strict confidence, and not to give any
information derived from the list to any third party for any purpose whatsoever
(other than a mailing house with corresponding obligations of confidentiality),
(2) to reimburse the Partnership for costs reasonably incurred in connection
with the request and for the list, including confirming compliance with the
undertakings required hereby and (3) to submit to the jurisdiction of the courts
of the State of Delaware in any dispute arising in connection with such request
and to appoint and maintain RL&F Service Corp., One Rodney Square, Tenth Floor,
Wilmington, New Castle County, Delaware 19801 (whose reasonable fees and
expenses will be paid by the Partnership) as such person's or entity's agent in
the State of Delaware for acceptance of legal process in connection herewith. In
addition, in the case of requests made for the purpose of soliciting tenders of
the Limited Partners' interests or units in the Partnership or soliciting
proxies or consents from Limited Partners or facilitating, assisting or
supporting any such solicitation, the Administrative General Partner will, if
and to the extent required by applicable law and the Partnership Agreement, make
lists available or agree to disseminate such solicitations on behalf of
requesting Limited Partners only upon receipt of an undertaking under oath by
the person requesting the list and the persons or entities on whose behalf it is
requested (1) to conduct the solicitation in accordance with the requirements of
the Securities Exchange Act of 1934 and the rules of the Securities and Exchange
Commission thereunder, including full disclosure of all material facts and (2)
2
<PAGE>
to provide a copy of any such solicitation materials to the Administrative
General Partner no later than the mailing of such materials to the Limited
Partners. It is the view of the Administrative General Partner that the federal
securities laws require that any tender offer for limited partner interests or
units in the Partnership include rights of proration and withdrawal rights,
irrespective of the number of interests or units sought. In accordance with the
Partnership Agreement, the Administrative General Partner reserves the right to
refrain from transferring limited partner interests or units for any reason,
including if the Administrative General Partner, based upon advice from counsel,
concludes that such acquisition would increase the risk of adverse tax
consequences to the Partnership or the Limited Partners.
The Administrative General Partner shall endeavor to respond with reasonable
promptness to any such request and reserves its rights to request such further
assurances as may be necessary in order to enable it to make any of the
determinations specified above and to enforce this Policy on a case-by-case
basis as it deems in the best interests of the Partnership and its Limited
Partners.
3
