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 March 31, 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 19 pages.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - March 31, 1999 and December 31, 1998 3
Statements of Income for the three months
ended March 31, 1999 and 1998 4
Statements of Partners' Equity for the three
months ended March 31, 1999 and 1998 5
Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
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 -- MARCH 31, 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 $ 4,363 $ 2,863
Rent and other receivables, net (Note 4) 469 491
Aircraft, net (Notes 2, 4 and 6) 45,798 47,258
Other assets 798 811
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Total Assets $ 51,428 $ 51,423
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LIABILITIES AND PARTNERS' EQUITY
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LIABILITIES:
Accounts payable and accrued expenses $ 87 $ 106
Payable to affiliates (Note 3) 562 592
Maintenance reserves payable 1,908 1,696
Notes payable (Note 4) 12,500 10,000
Deferred rental income and deposits 1,866 1,898
Distributions payable to partners 2,931 2,931
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Total Liabilities 19,854 17,223
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COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6)
PARTNERS' EQUITY:
General Partners $ (894) $ (868)
Limited Partners (7,255,000 units outstanding) 32,468 35,068
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Total Partners' Equity 31,574 34,200
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Total Liabilities and Partners' Equity' $ 51,428 $ 51,423
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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 MARCH 31, 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 $ 3,108 $ 3,327
Interest 28 55
Other -- 116
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3,136 3,498
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EXPENSES:
Depreciation and amortization 2,206 2,050
Write-downs (Note 5) -- 360
Management and re-lease fees (Note 3) 251 250
Interest 248 119
General and administrative (Note 3) 70 74
Direct lease 56 67
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2,831 2,920
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NET INCOME $ 305 $ 578
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NET INCOME ALLOCATED:
To the General Partners $ 3 $ 6
To the Limited Partners 302 572
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$ 305 $ 578
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NET INCOME PER LIMITED PARTNERSHIP UNIT $ .04 $ .08
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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 PARTNERS' EQUITY
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FOR THE THREE MONTHS ENDED MARCH 31, 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 3 302 305
Distributions to partners declared (29) (2,902) (2,931)
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Balance, March 31, 1999 $ (894) $ 32,468 $ 31,574
======== ======== ========
Balance, January 1, 1998 $ (1,008) $ 45,078 $ 44,070
Net income 6 572 578
Distributions to partners declared (29) (2,902) (2,931)
-------- -------- --------
Balance, March 31, 1998 $ (1,031) $ 42,748 $ 41,717
======== ======== ========
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 CASH FLOWS
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FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
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(unaudited)
1999 1998
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 305 $ 578
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,206 2,050
Write-downs -- 360
Change in assets and liabilities:
Rent and other receivables 22 (23)
Other assets 13 6
Accounts payable and accrued expenses (19) 20
Payable to affiliates (30) 242
Interest payable -- 37
Deferred rental income and deposits (32) (337)
Maintenance reserves 212 221
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Net cash provided by operating activities 2,677 3,154
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CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit for aircraft modification -- (790)
Capitalized aircraft improvements (746) (701)
Repayment of advances by lessees -- 71
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Net cash used in investing activities (746) (1,420)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Security deposit -- 259
Proceeds from notes payable 2,500 --
Cash distributions paid to partners (2,931) (2,961)
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Net cash used in financing activities (431) (2,702)
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,500 (968)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,863 5,705
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,363 $ 4,737
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Supplemental schedule of cash flow information:
Interest paid $ 246 $ 80
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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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NOTES TO FINANCIAL STATEMENTS
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MARCH 31, 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 month period ended March 31, 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, 1999 (January 1, 2000 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 Statement
of financial position.
7
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2. Aircraft
The Partnership's net investment in aircraft as of March 31, 1999 and
December 31, 1998 consisted of the following (in thousands):
1999 1998
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Aircraft on operating leases $110,895 $110,149
Less: Accumulated depreciation (64,136) (62,050)
Write-downs (7,959) (8,058)
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$ 38,800 $ 40,041
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Aircraft held for lease $ 46,744 $ 46,744
Less: Accumulated depreciation (19,214) (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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6,998 7,217
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Aircraft, net $ 45,798 $ 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 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 to December 1998. 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 and extended the term of such lease. Both engine leases are
scheduled to expire 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 March 31, 1999, VASP was in
arrears with respect to scheduled rent payments, for a total of $601,000 and
$656,000 in arrears with respect to maintenance reserve payments. The
Partnership has a receivable for $233,000 of past due rent and is also holding a
$400,000 security deposit from VASP.
After being unable to come to an agreement with VASP with respect to a
plan for curing the arrearages, the Partnership has filed suit in Brazil to
recover equipment from VASP (see Note 5, "Litigation", for further discussion).
After failing to achieve a negotiated payment plan for engine rents and
maintenance reserves, the Partnership filed suit against VASP (as discussed in
Note 5) for the return of the engines. The Partnership is exploring remarketing
options for these engines, which may include re-installing them on and
remarketing the A-300 aircraft. If the Partnership remarkets the engines or the
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.
8
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During the first quarter of 1999, one of the engines on lease to VASP
failed. The General Partners are evaluating the engine's status and feasability
of repairing it.
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.
Falcon has made all scheduled rent and maintenance reserve payments in
1999, and has paid $100,000 of its maintenance reserve arrearages. 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 March 31, 1999, Falcon was in
arrears to the Partnership, with respect to scheduled rent payments, of $380,000
and $179,000 in arrears with respect to maintenance reserve payments. The
Partnership has recorded a receivable for $95,000 of past due rent and is also
holding a $95,000 security deposit from Falcon.
The Partnership is in discussions with Falcon regarding the
establishment of an interest bearing note in favor of the Partnership for the
remaining arrearages. Falcon has become significantly leveraged and there can be
no assurance that Falcon will meet its future obligations. If Falcon were to
fall in arrears in the future, the Partnership may need to repossess the
aircraft and if the Partnership remarkets the aircraft, there can be no
assurance as to the ability to do so, the time it would take and the lease rate
that might be achieved.
Continental Airlines, Inc. The lease on the Boeing 727-200 advanced
aircraft expires in late May. The Partnership is in discussions with Kitty Hawk
Aircargo, Inc. for the lease of the aircraft as a freighter. See discussion in
Note 6 "Commitments" below. If unable to secure financing for the conversion,
the Partnership would likely attempt to remarket the aircraft in a passenger
configuration, although there can be no assurance as to the timeliness and rate
that would be received from such a remarketing effort.
3. Transactions With Affiliates
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. 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 $46,000 of base management fees during the three months
ended March 31, 1999.
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 $118,000 of
incentive management fees during the three months ended March 31, 1999.
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
9
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General Partner and 1.0% is payable to the Administrative General Partner. The
General Partners earned $87,000 of re-lease fees during the three months ended
March 31, 1999.
All of the above fees are subordinated to the limited partners
receiving an 8% annual non-cumulative return based upon original contributed
capital (as adjusted per the Partnership agreement).
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 months ended March 31, 1999 payable to the Administrative General Partner.
During the quarter ended March 31, 1999, the Partnership paid $401,000
for aircraft parts to a company which is owned by the President and Director of
the Managing General Partner and two of its former officers and directors.
4. Notes Payable
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 will utilize the additional
borrowings to replenish working capital, which was drawn down to pay for the
hushkit for the aircraft on lease to Capital Cargo International Airlines, Inc.
("Capital Cargo"). This loan is due in December, 1999. If the Partnership is
unable to renegotiate the term or refinance the loan, it will be forced to
reduce or suspend distributions.
5. Litigation
In May 1999, after failing to achieve a negotiated payment plan for
engine rents and maintenance reserves, a lawsuit was filed on behalf of the
Partnership in the 19th Civil Court of the Central District of the City of Sao
Paulo, Brazil to compel the return by VASP of the two GE CF6-50C2 engines leased
to VASP. While it appears that VASP is cooperating in the return of the engines,
the Court is requiring the Partnership to post a letter of credit in the amount
of 397,469.20 Brazilian Reals (approximately $242,260 USD as of May 11, 1999)
prior to compelling the return of the engines. It appears as if a second legal
action will be necessary to attempt to force the payment of past due amounts and
secure funds necessary for the repair of the damaged engine.
On March 10, 1999, the Trustee appointed in Kiwi's bankruptcy
proceedings made a demand for the return of payments approximating $1,276,000 to
an affiliate of the Managing General Partner, the Partnership and an affiliated
Partnership on the basis that these payments were made by Kiwi in the ninety
days prior to Kiwi's filing of its voluntary bankruptcy petition and were
therefore preferential. The payments relate to seven aircraft, only two of which
are owned by the Partnership. Management notified the Trustee of the existence
of a Stipulation and Consent Order, dated April 22, 1997, which provides for,
amongst other items, a waiver and relinquishment by Kiwi of any potential
preference claims it might have against the Partnership. On April 8, 1999, the
claim was withdrawn.
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6. Commitments
Upon the expiration 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 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 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
expires in May, 1999. The lease would require the Partnership to hushkit and
convert the aircraft to a freighter at an estimated cost of $4.3 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 $13.3 million in total.
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 March 31, 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 forego the lease with Kitty Hawk, as
well as possibly sell the DC 10-10 aircraft. Further, the Partnership may have
to utilize cash from operations to finance such commitments, thus potentially
reducing or suspending distributions to partners.
11
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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 involve 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 leased
commercial and freighter 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 March 31, 1999, the Partnership's unrestricted
cash and cash equivalents of $4,363,000 was primarily invested such a fund. This
amount was $1,500,000 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 three months ended March 31, 1999.
Rent and other receivables, net, decreased $22,000 from $491,000 at
December 31, 1998 to $469,000 at March 31, 1999. This decrease resulted from the
continued repayment of deferred rentals by Capital Cargo.
TWA reported another annual loss for the year ending December 31, 1998.
Although TWA had a cash position of $252 million at December 31, 1998 and
announced that its loss in the first quarter of 1999 was its smallest in ten
years, given TWA's historical financial difficulties, the continuing loss is of
concern. A default or deferral of lease payments on the part of TWA, (or by VASP
or Falcon) or any other lessee, as well as the remarketing of the Continental
Boeing 727-200, may affect quarterly distributions. TWA accounted for 18% of the
Partnership's lease revenue in the first quarter of 1999.
Other assets decreased $13,000 from $811,000 at December 31, 1998 to
$798,000 at March 31, 1999. This decrease was primarily due to a decrease in
prepaid expenses.
The payable to affiliates decreased $30,000 from $592,000 at December
31, 1998 to $562,000 at March 31, 1999, due to the payment of management fees in
excess of management and release fees incurred for the quarter ending March 31,
1999.
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Deferred rental income and deposits were $1,866,000 at March 31, 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 and the L-1011 Lease Prepayment, partially
offset by an increase in the recognition of deferred rent related to the Capital
Cargo lease.
During the three months ended March 31, 1999, the Partnership paid cash
distributions pertaining to the fourth 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
first quarter of 1999 was paid on April 27, 1999.
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 90% of
the cash distributions paid to the partners for the three months ended March 31,
1999 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 March 31, 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 will be forced 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 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
During first quarter of 1999, the Partnership invested $746,000 in
aircraft capitalized improvements, mainly related to the hushkit on the aircraft
leased to Capital Cargo and the DC 10-10 aircraft conversion.
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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.
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
expires in May, 1999. Discussions indicate that the lease would require the
Partnership to hushkit and convert the aircraft to a freighter at an estimated
cost of $4.3 million and 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 $13.3 million in total.
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 March 31, 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 forego the lease with Kitty Hawk, as
well as possibly sell the DC 10-10 aircraft. Further, 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 $305,000 for the three months ended
March 31, 1999 ("1999 Quarter") as compared to $578,000 for the quarter ended
March 31, 1998 ("1998 Quarter").
The Partnership's net income for the 1999 Quarter decreased as compared
to the 1998 Quarter principally due to a decrease in rental, interest and other
income, as well as an increase in interest and depreciation expense. This was
partially offset by decreases in write-downs, direct lease and general and
administrative expenses.
Rental income decreased by $219,000, or 7%, in the 1999 Quarter as
compared to the 1998 Quarter, principally due to a decrease in the rental income
attributable to the A-300 engines leased to VASP and the absence of amortization
of the L-1011 deferred income. These were partially offset by the rental income
from the aircraft leased to TNT, which was off-lease for most of the 1998
Quarter.
Interest income decreased $27,000, or 49%, for the 1999 Quarter in
comparison to the 1998 Quarter, primarily due to the complete repayment, in
1998, of the advances due from lessees, resulting from their scheduled
repayments.
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During the 1998 Quarter, the Partnership realized a gain of $116,000,
reported as other income, which represented the difference between the book
value of the Partnership's claim in the Continental bankruptcy and the amount
realized. There was no comparable gain during the 1999 Quarter.
Depreciation and amortization expense increased $156,000, or 8%, for
the 1999 Quarter in comparison to the 1998 Quarter 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 on lease to VASP.
During the 1998 Quarter, the Partnership provided for write-downs
aggregating $360,000 to recognize the impairment of the value of certain
aircraft. No such amounts were provided in the 1999 Quarter.
Interest expense for the 1999 Quarter increased by $129,000, or 108%,
in comparison to the 1998 Quarter due to increases in the note balance and
interest rate.
Direct lease expenses decreased by $11,000 or 16% in the 1999 Quarter
as compared to the 1998 Quarter due primarily to a decrease in maintenance
expenses partially offset by an increase in insurance expense.
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 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
15
<PAGE>
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
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.
16
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 1. Legal Proceedings
-----------------
In May 1999, after failing to achieve a negotiated payment plan for
engine rents and maintenance reserves, a lawsuit was filed on behalf of the
Partnership in the 19th Civil Court of the Central District of the City of Sao
Paulo, Brazil to compel the return by VASP of the two GE CF6-50C2 engines leased
to VASP. While it appears that VASP is cooperating in the return of the engines,
the Court is requiring the Partnership to post a letter of credit in the amount
of 397,469.20 Brazilian Reals (approximately $242,260 USD as of May 11, 1999)
prior to compelling the return of the engines. It appears as if a second legal
action will be necessary to attempt to force the payment of past due amounts and
secure funds necessary for the repair of the damaged engine.
On March 10, 1999, the Trustee appointed in Kiwi's bankruptcy
proceedings made a demand for the return of payments approximating $1,276,000 to
an affiliate of the Managing General Partner, the Partnership and an affiliated
Partnership on the basis that these payments were made by Kiwi in the ninety
days prior to Kiwi's filing of its voluntary bankruptcy petition and were
therefore preferential. The payments relate to seven aircraft, only two of which
are owned by the Partnership. Management notified the Trustee of the existence
of a Stipulation and Consent Order, dated April 22, 1997, which provides for,
amongst other items, a waiver and relinquishment by Kiwi of any potential
preference claims it might have against the Partnership. On April 8, 1999, the
claim was withdrawn.
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 first quarter of the fiscal year ending December 31, 1999.
17
<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: May 12, 1999 By: /s/ CARMINE FUSCO
-----------------
Carmine Fusco
Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1999 OF PEGASUS AIRCRAFT PARTNERS, LP, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4363000
<SECURITIES> 0
<RECEIVABLES> 600000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5630000
<PP&E> 157639000
<DEPRECIATION> 111841000 <F3>
<TOTAL-ASSETS> 51428000
<CURRENT-LIABILITIES> 7354000
<BONDS> 12500000
0
0
<COMMON> 0
<OTHER-SE> 31574000 <F2>
<TOTAL-LIABILITY-AND-EQUITY> 51428000
<SALES> 0
<TOTAL-REVENUES> 3136000
<CGS> 0
<TOTAL-COSTS> 2513000
<OTHER-EXPENSES> 70000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 248000
<INCOME-PRETAX> 305000
<INCOME-TAX> 0
<INCOME-CONTINUING> 305000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305000
<EPS-PRIMARY> 0.04 <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>
