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, 1999
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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 21 pages.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - June 30, 1999 and December 31, 1998 3
Statements of Income for the three months
ended June 30, 1999 and 1998 4
Statements of Income for the six months
ended June 30, 1999 and 1998 5
Statements of Partners' Equity for the six months
ended June 30, 1999 and 1998 6
Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
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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, 1999 AND DECEMBER 31, 1998
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(unaudited)
ASSETS
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1999 1998
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(in thousands, except unit data)
Cash and cash equivalents $ 3,358 $ 2,863
Restricted cash 364 --
Rent and other receivables, net 465 491
Aircraft, net (Notes 2, 4 and 6) 43,601 47,258
Other assets 794 811
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Total Assets $ 48,582 $ 51,423
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LIABILITIES AND PARTNERS' EQUITY
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LIABILITIES:
Accrued interest payable $ 94 $ --
Accounts payable and accrued expenses 99 106
Payable to affiliates (Note 3) 494 592
Deferred rental income and deposits 1,812 1,898
Maintenance reserves payable 1,969 1,696
Distributions payable to partners 2,931 2,931
Notes payable (Note 4) 12,500 10,000
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Total Liabilities 19,899 17,223
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COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6)
PARTNERS' EQUITY:
General Partners $ (924) $ (868)
Limited Partners (7,255,000 units issued and
outstanding) 29,607 35,068
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Total Partners' Equity 28,683 34,200
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Total Liabilities and Partners' Equity $ 48,582 $ 51,423
======== ========
The accompanying notes are an integral part of these financial statements.
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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, 1999 AND 1998
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(unaudited)
1999 1998
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(In thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ 2,928 $ 2,897
Interest 35 41
Other income -- 5
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2,963 2,943
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EXPENSES:
Depreciation and amortization 2,277 1,996
Write-downs -- 20
Management and re-lease fees (Note 3) 233 238
Interest 284 178
General and administrative (Note 3) 79 106
Direct lease 49 76
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2,922 2,614
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NET INCOME $ 41 $ 329
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NET INCOME ALLOCATED:
To the General Partners $ -- $ 3
To the Limited Partners 41 326
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$ 41 $ 329
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NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .01 $ .05
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WEIGHTED AVERAGE NUMBER OF
LIMITED PARTNERSHIP UNITS
ISSUED AND OUTSTANDING 7,255,000 7,255,000
========== ==========
The accompanying notes are an integral part of these financial statements.
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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, 1999 AND 1998
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(unaudited)
1999 1998
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(in thousands, except unit data
and per unit amounts)
REVENUES:
Rentals from operating leases $ 6,036 $ 6,225
Interest 63 95
Other -- 121
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6,099 6,441
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EXPENSES:
Depreciation and amortization 4,483 4,046
Write-downs -- 380
Management and re-lease fees (Note 3) 484 489
Interest 532 293
General and administrative (Note 3) 149 179
Direct lease 105 147
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5,753 5,534
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NET INCOME $ 346 $ 907
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NET INCOME ALLOCATED:
To the General Partners $ 3 $ 9
To the Limited Partners 343 898
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$ 346 $ 907
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NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .05 $ .13
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WEIGHTED AVERAGE NUMBER OF
LIMITED PARTNERSHIP UNITS
ISSUED AND OUTSTANDING 7,255,000 7,255,000
========== ==========
The accompanying notes are an integral part of these financial statements.
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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, 1999 AND 1998
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(unaudited)
General Limited
Partners Partners Total
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(in thousands)
Balance, January 1, 1999 $ (868) $ 35,068 $ 34,200
Net income 3 343 346
Distributions to partners declared (59) (5,804) (5,863)
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Balance, June 30, 1999 $ (924) $ 29,607 $ 28,683
======== ======== ========
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
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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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, 1999 AND 1998
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(unaudited)
1999 1998
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(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 346 $ 907
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,483 4,046
Write-downs -- 380
Change in assets and liabilities:
Rent and other receivables 26 32
Other assets 17 (5)
Accounts payable and accrued expenses (7) 251
Payable to affiliates (98) 258
Accrued interest payable 94 78
Deferred rental income and deposits (86) (40)
Maintenance reserves 273 674
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Net cash provided by operating activities 5,048 6,581
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CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit for aircraft modification -- (790)
Capitalized aircraft improvements (826) (6,195)
Proceeds from the sale or exchange of equipment -- 710
Repayment of advances by lessees -- 152
Increase in restricted cash (364) --
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Net cash used in investing activities (1,190) (6,123)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 2,500 5,249
Cash distributions paid to partners (5,863) (5,892)
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Net cash used in financing activities (3,363) (643)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 495 (185)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,863 5,705
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,358 $ 5,520
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 434 $ 211
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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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NOTES TO FINANCIAL STATEMENTS
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JUNE 30, 1999
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(unaudited)
1. General
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the General Partners, all adjustments
necessary for a fair presentation have been included. For further information,
refer to the financial statements and footnotes thereto included in the
Partnership's annual report on Form 10-K for the year ended December 31, 1998.
Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
New Accounting Pronouncement: 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, 2000 (January 1, 2001 for the Partnership). FAS 133 relates to the
reporting of all derivative instruments, and as the Partnership has not and does
not anticipate dealing in derivatives or in hedging activities, this
pronouncement is not expected to impact the Partnership's earnings or financial
position.
2. Aircraft
The Partnership's net investment in aircraft as of June 30, 1999 and
December 31, 1998 consisted of the following (in thousands):
1999 1998
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Aircraft on operating leases, at cost $110,976 $110,149
Less: Accumulated depreciation (66,293) (62,050)
Write-downs (7,960) (8,058)
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$ 36,723 $ 40,041
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Aircraft held for lease, at cost $ 46,744 $ 46,744
Less: Accumulated depreciation (19,334) (19,093)
Write-downs (10,417) (10,319)
Lease Settlement accounted
for under the cost recovery method (10,115) (10,115)
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6,878 7,217
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Aircraft, net $ 43,601 $ 47,258
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Airbus A-300 Aircraft. In December 1997, the Partnership leased, on a
short-term (six month minimum) basis, one of the General Electric CF6-50C2
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 (subject to adjustment depending on the hour/cycle ratio).
The Partnership and VASP extended the lease first to December 1998 and then to
June 1999. In December 1998, the Partnership and VASP entered into an agreement
for the lease of the second engine from the A-300 aircraft, the terms of which
are the same as the first engine lease. Both engine leases expired in June 1999.
The Partnership continues to re-market this aircraft for lease or sale.
Due to arrearages in rent and maintenance reserve payments, VASP was
placed on non-accrual status as of January 1, 1999. VASP made one payment of
$134,635 in the first quarter of 1999, but at June 30, 1999, VASP was in arrears
with respect to scheduled rent payments, for a total of approximately $878,000
and approximately $1,418,000 in arrears with respect to maintenance reserve
payments. The Partnership has a receivable for $233,000 of past due rent, is
also holding a $400,000 security deposit from VASP and received $614,000 of
maintenance reserve payments on the first engine.
After being unable to come to an agreement with VASP with respect to a
plan for curing the arrearages, the Partnership filed suit in Brazil to recover
the equipment from VASP. An additional suit was filed in Federal Court in
Florida to recover the first engine and to recover amounts owed for both
engines. Under an order of the Florida Court, the first engine was recovered and
shipped to an engine repair facility to evaluate the damage that occurred during
the first quarter while it was being utilized by VASP. (see Note 5,
"Litigation", for further discussion).
The Partnership will explore remarketing options for these engines,
which may include re-installing them on and remarketing the A-300 aircraft.
there can be no assurance as to the ability to do so, the time it would take and
the lease rate or sales price that might be achieved.
Falcon Air Express, Inc. In December 1996, the Partnership entered into
a lease agreement with Falcon Air Express, Inc. ("Falcon"), a charter airline,
with respect to the Boeing 727-200 non-advanced aircraft formerly leased to
Kiwi. The lease is for a term of 60 months and provides for a monthly rental of
$95,000. Falcon provided a security deposit of $95,000. The lease also requires
Falcon to fund, on a monthly basis, maintenance reserves of $317 per flight
hour.
Due to its failure to pay rents in the fourth quarter of 1998, Falcon
was placed on non-accrual status beginning October 1, 1998. At June 30, 1999,
Falcon was in arrears to the Partnership, with respect to scheduled rent
payments, of $570,000 and $121,000 in arrears with respect to maintenance
reserve payments. Of these amounts, the Partnership has recorded a receivable
for $95,000 of past due rent and is also holding a $95,000 security deposit from
Falcon.
Continental Airlines, Inc. Although the lease on the Boeing 727-200
advanced aircraft expired in late May 1999, Continental continued to pay rent
and returned the aircraft in July 1999. The Partnership has leased the aircraft
to Kitty Hawk Aircargo, Inc. as a freighter. See discussion in Note 6
"Commitments" below.
9
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Lockheed L-1011 aircraft. The Partnership is currently remarketing the
aircraft.
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 $43,000
and $89,000 of base management fees during the three and six months ended June
30, 1999, 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 $109,000
and $227,000 of incentive management fees during the three and six months ended
June 30, 1999, 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 $81,000 and $168,000 of re-lease fees during
the three and six months ended June 30, 1999, 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
management of the Partnership. There were no reimbursable expenses during the
three and six months ended June 30, 1999 payable to the Administrative General
Partner.
During the six months ended June 30, 1999 the Partnership paid $22,000
to a maintenance facility affiliated with the Managing General Partner for work
performed on certain aircraft. The Partnership also paid $481,000 for aircraft
parts to a company which is owned by the President and Director of the Managing
General Partner.
4. Notes Payable
the Partnership has a loan of $12.5 million at an interest rate of
1.25% over prime. The Partnership has provided a mortgage to the bank relative
to certain aircraft and has guaranteed the repayment of the indebtedness. This
loan is due in December, 1999. the Partnership is in discussions with different
lenders to replace the current facility and increase the size of the facility
(see Note 6 "Commitments" below). If unable to renegotiate the term or refinance
the loan, the Partnership may need to reduce or suspend distributions.
10
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5. Litigation
As a result of failed negotiations with VASP, the Partnership sued in
the 19th Civil Court of the Central District of the City of Sao Paulo, Brazil in
May to gain possession of the two CF6-50C2 engines that had been leased to VASP.
The court ordered VASP to return the engines and VASP did take one engine out of
service and is storing it in Sao Paulo. The second engine, which had been
damaged, had been sent by VASP to an engine repair facility in Florida, where it
had been stored. VASP appealed the court ruling and won a stay of the order. The
Partnership has contested the stay and is awaiting a decision. As part of the
Brazilian Court action, the Partnership posted a bank guarantee with the Court.
To obtain the bank guarantee of 397,469.20 Brazilian reals (approximately
$242,260 USD as of May 11, 1999), the Partnership was required to obtain a
letter of credit which the bank required be collaterallized with $364,000 of
restricted cash.
The Partnership subsequently sued in the Circuit Court of the 11th
Judicial Circuit in and for Miami-Dade County, Florida to gain possession of the
engine at the engine repair facility and for unpaid rents, maintenance reserves,
engine repair costs and legal expenses. Through a court order, the Partnership
gained possession of the second engine and has shipped it to an engine repair
facility in California for a determination of the extent of the damage. On July
23, 1999 VASP filed an answer to the complaint, generally denying the
allegations, and specifically alleging that Florida courts should not exercise
jurisdiction because of the ongoing Brazilian litigation. Florida counsel has
advised that a trial date against VASP cannot be requested until August 12,
1999.
6. Commitments
At the end of the extended lease, for the DC-10-10 aircraft with
Continental Micronesia, the Partnership will convert the aircraft to a freighter
pursuant to an aircraft modification agreement for delivery to Emery Worldwide
Airlines Inc.("Emery"). The work scope under the aircraft modification agreement
requires the investment of approximately $11.8 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 and
Emery have signed an agreement, which provides for a lease of 84 months with
rent of $218,000 per month. The lease also provides a two-year renewal at
$200,000 per month, followed by three additional two-year renewal options at
the then fair market rental. Emery provided a security deposit of $218,000.
In 1998, the Partnership entered into discussions with Kitty Hawk
Aircargo, Inc. ("Kitty Hawk") for the lease of a Boeing 727-200 aircraft, upon
the expiration of the current lease of that aircraft with Continental, which
expired in May, 1999. The aircraft was returned in July, 1999, with Continental
paying rent in the interim period. The lease would require the Partnership to
hushkit and convert the aircraft to a freighter at an estimated cost of $5.0
million. The lease agreement would provide for a lease of 84 months with rent
of $112,700 per month. Kitty Hawk has provided a security deposit of $56,000.
The Partnership has estimated commitments of $17.8 million in total (of
this amount, $790,000 is on deposit with the DC 10-10 conversion facility, with
the conversion currently scheduled to commence in late May, 2000). The estimated
cost of the DC 10-10 conversion has been increased from the previously reported
$9.0 million based on the experience of an affiliate of the Managing General
11
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General Partner which has recently converted a DC 10-10 to a freighter. The
Partnership would need to increase its borrowing facility in order to have
sufficient funds for the Kitty Hawk and Emery lease requirements. The
Partnership has drawn all available funds under its $12.5 million borrowing
facility and the principal balance at June 30, 1999 is $12.5 million. The
Limited Partnership Agreement permits the Partnership to borrow up to 35% (or
$50,785,000) of the original offering proceeds. It is the intent of the General
Partners to obtain financing utilizing the Kitty Hawk and Emery leases to fund
the conversions to freighter configuration of the planes. However, if the
Partnership is unable to secure additional borrowing capacity to fund these
commitments the Partnership may elect to sell the DC 10-10 aircraft.
Alternatively, the Partnership may have to utilize cash from operations to
finance such commitments, thus potentially reducing or suspending distributions
to partners.
12
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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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 a fund that invests in short-term,
highly liquid investments. At June 30, 1999, the Partnership's unrestricted cash
and cash equivalents of $3,358,000 were primarily invested such a fund. This
amount was $495,000 more than the Partnership's unrestricted cash and
equivalents at December 31, 1998 of $2,863,000. This increase in unrestricted
cash was equal to the amount by which cash provided by operating activities and
the proceeds from notes payable exceeded the combined total of the quarterly
cash distributions paid to the partners and capitalized expenditures for
aircraft during the six months ended June 30, 1999.
At June 30, 1999 the Partnership was holding $364,000 in restricted
cash, which was required as collateral, to obtain a letter of credit in
connection with legal action against VASP. See Note 5 "Litigation."
Rent and other receivables, net, decreased $26,000 from $491,000 at
December 31, 1998 to $465,000 at June 30, 1999. This decrease resulted from the
continued repayment of deferred rentals by Capital Cargo.
TWA announced a wider than anticipated loss in the first quarter of
1999. While TWA has recently announced new labor agreements and has dramatically
improved its service and upgraded its fleet, TWA's ongoing financial losses are
of concern. A default or deferral of lease payments on the part of TWA or
Falcon, or any other lessee, as well as the Partnership's ability to refinance
and increase its borrowing facility, may affect quarterly distributions. TWA
accounted for 18% of the Partnership's lease revenue during the first six months
of 1999.
Other assets decreased $17,000 from $811,000 at December 31, 1998 to
$794,000 at June 30, 1999. This decrease was primarily due to a decrease in
prepaid expenses.
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The payable to affiliates decreased $98,000 from $592,000 at December
31, 1998 to $494,000 at June 30, 1999, due to the payment of management fees in
excess of management and release fees incurred for the six months ending June
30, 1999.
Deferred rental income and deposits were $1,812,000 at June 30, 1999 as
compared to $1,898,000 at December 31, 1998. The decrease was primarily
attributable to the recognition of amounts previously received in connection
with the A-300 Lease Settlement, partially offset by an increase in the
recognition of deferred rent related to the Capital Cargo lease.
During the three months ended June 30, 1999, the Partnership paid cash
distributions pertaining to the first quarter of $2,931,000. The quarterly
distribution represented an annualized rate equal to 8.0% of contributed capital
($.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. A similar distribution for the
second quarter of 1999 was paid on July 27, 1999. The Partnership has utilized
cash generated in prior periods to sustain the current distribution rate.
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 99% of
the cash distributions paid to the partners for the three months ended June 30,
1999 constituted a return of capital. Also, based on the amount of net income
reported by the Partnership for accounting purposes, approximately 84% of the
cash distributions paid to the partners from the inception of the Partnership
through June 30, 1999 constituted a return of capital. However, the total actual
return on capital over the Partnership's life can only be determined at the
termination of the Partnership after all cash flows, including proceeds from the
sale of the aircraft, have been realized.
In February 1999, the Partnership consummated an agreement to increase
the committed amount of the loan facility from $10 million to $12.5 million and
the interest rate from 1% to 1.25% over prime. The Partnership has provided a
mortgage to the bank relative to certain aircraft and has guaranteed the
repayment of the indebtedness. The Partnership has utilized the additional
commitment amount to replenish working capital, which was drawn down to pay for
the hushkit installed on the aircraft leased to Capital Cargo International
Airlines, Inc. ("Capital Cargo"). This loan is due in December, 1999. If the
Partnership is unable to renegotiate or refinance the loan it may need to reduce
or suspend distributions.
Continental Micronesia 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 September 30, 1998. The current work scope under
14
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the aircraft modification agreement requires the investment of approximately
$11.8 million, subject to escalation, by the Partnership. The Partnership also
estimates expending an additional $1.0 million to meet the lease delivery
conditions under the lease with Emery.
During first six months of 1999, the Partnership invested $826,000 in
aircraft capitalized improvements, mainly related to the hushkit on the aircraft
leased to Capital Cargo and the DC 10-10 aircraft conversion.
In early 1998, Continental Airlines, Inc. ("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. This aircraft
is currently on lease to TNT.
The Partnership has entered into a lease with Kitty Hawk Aircargo, Inc.
("Kitty Hawk") for the lease of a Boeing 727-200 aircraft, formerly leased to
Continental,. The lease requires the Partnership to hushkit and convert the
aircraft to a freighter at an estimated cost of $5.0 million and provides for 84
months of rent at $112,700 per month. Kitty Hawk has provided a security deposit
of $56,000.
The Partnership has estimated commitments of $17.8 million in total (of
this amount, $790,000 is on deposit with the DC 10-10 conversion facility, with
the conversion currently scheduled to commence in late May, 2000). The estimated
cost of the DC 10-10 conversion has been increased from the previously reported
$9.0 million based on the experience of an affiliate of the Managing General
Partner which has recently converted a DC 10-10 to a freighter. The Partnership
would need to increase its borrowing facility in order to have sufficient funds
for the Kitty Hawk and Emery lease requirements. The Partnership has drawn
all available funds under its $12.5 million borrowing facility and the principal
balance at June 30, 1999 is $12.5 million. The Limited Partnership Agreement
permits the Partnership to borrow up to 35% (or $50,785,000) of the original
offering proceeds. It is the intent of the General Partners to obtain financing
utilizing the Kitty Hawk and Emery leases to fund the conversions to freighter
configuration of the planes. However, if the Partnership is unable to secure
additional borrowing capacity to fund these commitments the Partnership may need
to sell the DC 10-10 aircraft. Alternatively, the Partnership may have to
utilize cash from operations to finance such commitments, thus potentially
reducing or suspending distributions to partners.
Litigation
- ----------
See Note 5 "Litigation" for an update on certain legal proceedings.
Results of Operations
- ---------------------
The Partnership's net income was $41,000 and $346,000 for the quarter
and six months ended June 30, 1999 (the "1999 Quarter" and "1999 Period"),
respectively, as compared to $329,000 and $907,000 for the quarter and six
months ended June 30, 1998 (the "1998 Quarter" and "1998 Period"), respectively.
The Partnership's net income for the 1999 Period and 1999 Quarter
decreased as compared to the 1998 Period and 1998 Quarter principally due to a
decrease in rental, interest and other income, as well as an increase in
15
<PAGE>
interest and depreciation expense. This was partially offset by decreases in
write-downs, direct lease and general and administrative expenses.
Rental income decreased $189,000 or 3% in the 1999 Period as compared
to the 1998 Period, principally due to decreases in the rental income
attributable to the A-300 engines leased to VASP and the aircraft leased to
Falcon. Also contributing to this decrease was the absence of amortization
related to the L-1011 deferred income. These were partially offset by an
increase in the rental income from the aircraft leased to Capital Cargo and the
rental income from the aircraft leased to TNT, which was off-lease for most of
the 1998 Period.
Interest income decreased $6,000 and $32,000, or 15%, and 34%,
respectively, for the 1999 Quarter and 1999 Period in comparison to the 1998
Quarter and 1998 Period, primarily due to the complete repayment, in 1998, of
the advances due from lessees, resulting from 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 $281,000 and $437,000,
or 14%, and 11%, respectively, for the 1999 Quarter and 1999 Period in
comparison to the 1998 Quarter and 1998 Period. This was due primarily to the
depreciation associated with the TNT and Capital aircraft (including capitalized
aircraft improvements made in 1999), as well as additional depreciation
associated with the second engine leased to VASP.
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 1999.
Additionally, during the second quarter of 1998, 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.
Interest expense for the 1999 Quarter and 1999 Period increased by
$106,000 and $239,000 or 60%, and 82%, respectively, in comparison to the 1998
Quarter and 1998 Period due to an increases in the note balance and interest
rate.
General and administrative expenses decreased by $27,000 and $30,000 or
25%, and 17%, respectively, in the 1999 Quarter and 1999 Period. This decrease
is primarily due to decreases in transfer agent fees and audit & tax fees,
partially offset by an increase in legal fees.
Direct lease expenses decreased by $27,000 and $42,000 or 36%, and 29%,
respectively, in the 1999 Quarter and 1999 Period as compared to the 1998
Quarter and 1998 Period due primarily to decreases in maintenance and insurance
expenses, partially offset by an increase in trustee fees.
16
<PAGE>
IMPACT OF YEAR 2000 ISSUE
- -------------------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. This
could result in a failure of the information technology systems (IT systems) and
other equipment containing imbedded technology (non-IT systems) in the Year
2000, causing disruption of operation of the Partnership, its lessees or
vendors.
The Partnership does not own its own software, but is reliant upon
software owned by the General Partners or third party vendors. The General
Partners and third party vendors are either currently Year 2000 compliant or
have instituted plans to be so. The costs to the Partnership associated with
addressing the Year 2000 issue, including developing and implementing the above
stated plan will be nominal and will be expensed as incurred.
The plan for addressing third party critical dependencies includes:
identification of third party critical dependencies including lessees, vendors
and financial institutions; circulation to all applicable third parties of a
written request for their plans and progress in addressing the Year 2000 issue;
evaluation of responses; and development of contingency plans to address risks
of non-compliance by third parties. The Partnership has completed the
identification of critical dependencies and the circulation for requests for
Year 2000 compliance status and the receipt of responses.
While the Partnership expects to have no interruption of its operations
as a result of internal IT and non-IT systems, uncertainties remain about the
affect of third party critical dependencies who may not be Year 2000 compliant.
The Partnership is not aware of any significant Year 2000 systems
issues with respect to the airworthiness of aircraft, however, should such an
issue result in Airworthiness Directives or other manufacturer recommended
maintenance, the implementation and the majority of the cost of such
implementation would be the responsibility of the aircraft lessee. Any resulting
costs to the Partnership cannot be estimated at this time.
Non-compliance on the part of a lessee could result in lost revenue for
the lessee and an inability to make lease payments to the Partnership.
Non-compliance by the lessee's financial institution could also affect the
ability to process lease payments. The Partnership has attempted to mitigate
such risks by inquiring of each lessee about its Year 2000 plans, including
whether they have addressed the issue with their financial institution.
The Partnership's lessees face the potential risk of non-compliance by
the air traffic control systems throughout the world. A disruption in the
operations of some or all of the air traffic control systems may cause
disruption to the operations of the Partnership's lessees, which may adversely
affect their ability to generate revenue.
A possible scenario would be that a number of lessees are unable to
operate and generate revenues and as a result unable to make lease payments. The
Partnership is unable to estimate the likelihood or the magnitude of the
resulting lost revenue at this time. Should this occur, the Partnership would
17
<PAGE>
attempt to repossess aircraft from non-compliant lessees and place the aircraft
with compliant lessees. No assurances can be given that the Partnership would be
able to re-lease such aircraft at favorable terms or at all. If a significant
number of aircraft could not be re-leased at favorable terms or at all, or their
re-lease is delayed, the Partnership's business, financial condition and results
of operations would be adversely affected.
18
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 1. Legal Proceedings
-----------------
As a result of failed negotiations with VASP, the Partnership sued in
the 19th Civil Court of the Central District of the City of Sao Paulo, Brazil in
May to gain possession of the two CF6-50C2 engines that had been leased to VASP.
The court ordered VASP to return the engines and VASP did take one engine out of
service and is storing it in Sao Paulo. The second engine, which had been
damaged, had been sent by VASP to an engine repair facility in Florida, where it
had been stored. VASP appealed the court ruling and won a stay of the order. The
Partnership has contested the stay and is awaiting a decision. As part of the
Brazilian Court action, the Partnership posted a bank guarantee with the Court.
To obtain the bank guarantee of 397,469.20 Brazilian reals (approximately
$242,260 USD as of May 11, 1999), the Partnership was required to obtain a
letter of credit, which the bank required, be collaterallized with $364,000 of
restricted cash.
The Partnership subsequently sued in the Circuit Court of the 11th
Judicial Circuit in and for Miami-Dade County, Florida to gain possession of the
engine at the engine repair facility and for unpaid rents, maintenance reserves,
engine repair costs and legal expenses. Through a court order, the Partnership
gained possession of the second engine and has shipped it to an engine repair
facility in California for a determination of the extent of the damage. On July
23, 1999 VASP filed an answer to the complaint, generally denying the
allegations, and specifically alleging that Florida courts should not exercise
jurisdiction because of the ongoing Brazilian litigation. Florida counsel has
advised that a trial date against VASP cannot be requested until August 12,
1999.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) None
27. Financial Data Schedule (in electronic format only).
(b) The Partnership did not file any reports on Form 8-K during
the second quarter of the fiscal year ending December 31,
1999.
19
<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.
Administrative General Partner
Date: August 11, 1999 By: /s/ CARMINE FUSCO
-----------------
Carmine Fusco
Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1999 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,358,000
<SECURITIES> 0
<RECEIVABLES> 465,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,981,000
<PP&E> 157,720,000
<DEPRECIATION> 114,119,000 <F3>
<TOTAL-ASSETS> 48,582,000
<CURRENT-LIABILITIES> 7,399,000
<BONDS> 12,500,000
0
0
<COMMON> 0
<OTHER-SE> 28,683,000 <F2>
<TOTAL-LIABILITY-AND-EQUITY> 48,582,000
<SALES> 0
<TOTAL-REVENUES> 6,099,000
<CGS> 0
<TOTAL-COSTS> 5,072,000
<OTHER-EXPENSES> 149,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 532,000
<INCOME-PRETAX> 346,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 346,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 346,000
<EPS-BASIC> 0.05 <F1>
<EPS-DILUTED> 0
<FN>
<F1>REPRESENTS NET INCOME PER LIMITED PARTNERSHIP UNIT OUTSTANDING.
<F2>REPRESENTS AGGREGATE PARTNERSHIP CAPITAL.
<F3>INCLUDES PROVISIONS FOR WRITE-DOWNS AND CERTAIN OTHER RESERVES.
</FN>
</TABLE>
