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, 2000
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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 AND SIX MONTHS ENDED JUNE 30, 2000
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - June 30, 2000 and December 31, 1999 3
Statements of Income for the three months
ended June 30, 2000 and 1999 4
Statements of Income for the six months
ended June 30, 2000 and 1999 5
Statements of Partners' Capital for the six months
ended June 30, 2000 and 1999 6
Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 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 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
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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, 2000 (UNAUDITED) AND DECEMBER 31, 1999
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ASSETS
2000 1999
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(in thousands, except unit data)
Cash and cash equivalents $ 3,523 $ 2,300
Restricted cash -- 371
Rent receivable 381 196
Aircraft, net 41,258 44,491
Other assets 1,077 805
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Total Assets $ 46,239 $ 48,163
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accrued interest payable $ 108 $ --
Accounts payable and accrued expenses 1,731 494
Payable to affiliates 1,367 969
Deferred rental income and deposits 1,338 1,475
Maintenance reserves payable 1,575 2,311
Distributions payable to partners 2,199 2,199
Notes payable 19,500 16,530
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Total Liabilities 27,818 23,978
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COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
PARTNERS' CAPITAL:
General Partners $ (854) $ (796)
Limited Partners (7,255,000 units issued and
outstanding in 2000 and 1999) 19,275 24,981
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Total Partners' Capital 18,421 24,185
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Total Liabilities and Partners' Capital $ 46,239 $ 48,163
======== ========
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, 2000 AND 1999
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(unaudited)
2000 1999
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(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ 2,589 $ 2,928
Interest 34 35
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2,623 2,963
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EXPENSES:
Depreciation and amortization 1,736 2,277
Write-downs 1,400 --
Management and re-lease fees 192 233
Interest 561 284
General and administrative 130 79
Direct lease 80 49
Return condition settlement 51 --
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4,150 2,922
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NET INCOME (LOSS) $ (1,527) $ 41
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NET INCOME (LOSS) ALLOCATED:
To the General Partners $ (15) $ --
To the Limited Partners (1,512) 41
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$ (1,527) $ 41
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NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (.21) $ .01
=========== ===========
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, 2000 AND 1999
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(unaudited)
2000 1999
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(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ 5,241 $ 6,036
Interest 48 63
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5,289 6,099
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EXPENSES:
Depreciation and amortization 3,422 4,483
Write-downs 1,400 --
Management and re-lease fees 398 484
Interest 981 532
General and administrative 222 149
Direct lease 182 105
Return condition settlement 51 --
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6,656 5,753
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NET INCOME (LOSS) $ (1,367) $ 346
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NET INCOME (LOSS) ALLOCATED:
To the General Partners $ (14) $ 3
To the Limited Partners (1,353) 343
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$ (1,367) $ 346
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NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (.19) $ .05
=========== ===========
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' CAPITAL
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FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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(unaudited)
General Limited
Partners Partners Total
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(dollar amounts in thousands)
Balance, January 1, 2000 $ (796) $ 24,981 $ 24,185
Net loss (14) (1,353) (1,367)
Distributions to partners declared (44) (4,353) (4,397)
-------- -------- --------
Balance, June 30, 2000 $ (854) $ 19,275 $ 18,421
======== ======== ========
Balance, January 1, 1999 $ (868) $ 35,068 $ 34,200
Net income 3 343 346
Distributions to partners declared (59) (5,804) (5,863)
-------- -------- --------
Balance, June 30, 1999 $ (924) $ 29,607 $ 28,683
======== ======== ========
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, 2000 AND 1999
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(unaudited)
2000 1999
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(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,367) $ 346
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,422 4,483
Write-downs 1,400 --
Change in assets and liabilities:
Rent and other receivables (185) 26
Other assets (272) 17
Accounts payable and accrued expenses 1,237 (7)
Payable to affiliates 398 (98)
Accrued interest payable 108 94
Deferred rental income and deposits (137) (86)
Maintenance reserves payable 45 273
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Net cash provided by operating activities 4,649 5,048
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (2,370) (826)
Decrease (increase) in restricted cash 371 (364)
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Net cash used in investing activities (1,999) (1,190)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 2,970 2,500
Cash distributions paid to partners (4,397) (5,863)
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Net cash used in financing activities (1,427) (3,363)
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,223 495
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,300 2,863
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,523 $ 3,358
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 863 $ 434
Non-cash investing activities:
Application of maintenance reserves payable
to the carrying value of aircraft $ 781 $ --
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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NOTES TO FINANCIAL STATEMENTS
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JUNE 30, 2000
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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. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. The most significant
assumptions and estimates relate to useful life and recoverability of the
aircraft values. Actual results could differ from such estimates. 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,
1999. (Operating results for the three and six month periods ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
2. Aircraft
The Partnership's net investment in aircraft as of June 30, 2000 and
December 31, 1999 consisted of the following (in thousands):
2000 1999
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Aircraft on operating leases, at cost $ 97,291 $ 96,525
Less: Accumulated depreciation (58,008) (54,586)
Write-downs (7,710) (7,710)
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$ 31,573 $ 34,229
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Aircraft held for lease, at cost $ 67,525 $ 65,921
Less: Accumulated depreciation (34,877) (34,877)
Write-downs* (12,848) (10,667)
Lease Settlement accounted
for under the cost recovery method (10,115) (10,115)
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9,685 10,262
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Aircraft, net $ 41,258 $ 44,491
======== ========
* $781,000 of maintenance reserves applied to the carrying value of aircraft
have been grouped with write-downs in the table
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
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carrier, for rents of $2,200 per day, plus an hourly rental of $225 per engine
hour, with a minimum of 4 hours per cycle. The Partnership and VASP extended the
lease 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 were the same as the first engine lease. Both
engine leases were scheduled to expire in June 1999.
At December 31, 1999, VASP was in arrears with respect to scheduled
rent payments, for a total of $838,000, and $1,265,000 in arrears with respect
to maintenance reserve payments. VASP failed to pay rent on the engines and
after being unable to come to agreement with VASP, the Partnership filed suit in
Brazil and Florida. (See Note 5 to the unaudited Financial Statements,
"Litigation"). The Partnership wrote down the carrying value of the aircraft and
engines by $1.4 million in the 2nd quarter of 2000. Also, $781,000 of collected
maintenance reserves related to the aircraft's engines were applied against the
carrying value of the aircraft, so that the carrying value approximates the
estimated current market value.
During the first quarter of 1999, one of the engines on lease to VASP
failed. As part of the Florida legal action, this engine was repossessed in
Florida in June, 1999. It was sent to a General Electric repair facility in
California, where, given the May 2000 judgement received in Florida, a detailed
analysis of its condition can now be conducted. The serviceable engine is being
re-marketed for re-lease. The Partnership continues to re-market this aircraft
for lease or sale, although given the fact that the airframe requires a heavy
maintenance check, it is more likely to be sold than leased. (See Note 5 to the
unaudited Financial Statements, "Litigation").
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 a Boeing 727-200 non-advanced aircraft. 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. The Partnership has
agreed in principle to an early termination of the lease at the occasion of the
next "C" check, anticipated to be September, 2001, at which time the Partnership
will evaluate its options related to performing a "C" check and the remarketing
of the aircraft.
Due to its failure to pay rents in the fourth quarter of 1998, Falcon
was placed on non-accrual status beginning October 1, 1998. For the period
January 1, 2000 through June 30, 2000, Falcon owed $570,000 in rent and
approximately $132,000 in maintenance reserves. For the period January 1, 2000
through June 30, 2000, Falcon paid approximately $253,000 in rent and $54,000 in
maintenance reserves. Of the total amount of arrearages, only $95,000 has been
accrued and is included in rent receivable on the balance sheet. Falcon has
provided a security deposit of $95,000 with respect to this lease.
Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). The Boeing 727-200 was
converted to a freighter, hushkitted and delivered to Kitty Hawk in November,
1999. The lease with Kitty Hawk is for 84 months, the lease rate is $112,700 per
month and maintenance reserves are paid at the rate of $375 per flight hour,
with engine reserves to be increased if the flight hour/cycle ratio falls below
1.5 to 1. Kitty Hawk has provided a security deposit of $225,400. The
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Partnership has incurred costs of approximately $4.7 million related to the
cargo conversion and hushkitting.
Kitty Hawk, Inc. (the parent company of Kitty Hawk Aircargo, Inc.)
issued a press release on April 11, 2000 disclosing a potential major write-down
in the value of its fleet of L-1011's, lack of compliance with certain debt
covenants which may require the expenditure of $35 million to cure, an inability
to meet a May 15th interest payment on senior secured notes and the fact that
their auditor's opinion will include a going-concern modification. Kitty Hawk
filed for protection under Chapter 11 of the U.S. Bankruptcy Code on May 1,
2000, but, with Bankruptcy Court approval, has made all payments due to the
Partnership as of June 30, 2000.
Continental Airlines, Inc. The extended lease on the McDonnell Douglas
DC10-10 with Continental expired on September 15, 1999. Work necessary for the
aircraft to meet the lease return conditions was done at Continental's expense
at a maintenance facility. Continental continued to pay rent until the aircraft
achieved the lease requirements for its return, which took place on December 16,
1999. The aircraft was being stored until June, 2000 at which time it entered a
modification facility to be converted to a freighter for Emery Worldwide
Airlines Inc. ("Emery"). The conversion work is estimated to cost $12.6 million.
The Partnership provided a deposit of $790,000 to the third party modification
center which will perform the conversion. The Partnership and Emery have signed
a lease which provides for 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. The Partnership had incurred
approximately $2 million of the conversion costs as of June 30, 2000.
Aerovias de Mexico, S.A. de C.V. ("Aeromexico"). The leases for the two
McDonnell-Douglas DC-9's leased to Aeromexico expired in February, 2000. The
Partnership is in negotiations with Aeromexico on the extension of both leases
and Aeromexico has been paying on a month-to-month basis while lease extensions
are under discussion.
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 $38,000
and $77,000 of base management fees during the three and six months ended June
30, 2000, 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 $76,000
and $163,000 of incentive management fees during the three and six months ended
June 30, 2000, 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
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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 $78,000 and $158,000 of re-lease fees during
the three and six months ended June 30, 2000, respectively.
Payment on a current basis of the above fee is subordinated to the
limited partners receiving 8% annual non-cumulative cash distributions based
upon original contributed capital (as defined in the Partnership Agreement).
Fees not paid on a current basis are accrued. Since 1996, as part of a class
action settlement, an affiliate of the Administrative General Partner places
fees and distributions remitted to it by the Administrative General Partner into
an account for the benefit of the class action members.
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, 2000 payable to the Administrative General
Partner.
During the six months ended June 30, 2000 the Partnership paid $650,000
to a maintenance facility affiliated with the Managing General Partner for work
performed on certain aircraft. The Partnership also paid $162,000 for aircraft
parts to a company which is partially owned by an affiliate of the Managing
General Partner.
4. Notes Payable
The Partnership closed on a new, $30 million, lending facility with a
different lender, on April 14, 2000 and an initial draw down was made of $19.5
million, which is the balance at June 30, 2000. The facility is limited to $25
million unless the Aeromexico leases are extended for two years. The proceeds
were used to retire existing debt of $16.53 million and to replenish working
capital. The term of the loan is six years, with interest only payments the
first twelve months. The principal is required to be repaid in equal quarterly
installments over the next 60 months. Proceeds from the sale of aircraft must be
applied to principal reduction and the subsequent required principal payments
will be reset over the remaining term. The Partnership paid a 1.0% commitment
fee and the interest rate is 225 basis points over a major money center bank's
prime rate. The lender has a mortgaged interest in all aircraft, except the 50%
interest in the USAirways MD-81 aircraft. The loan agreement requires that
the Partnership maintain working capital equal to or in excess of maintenance
reserves payable and have these amounts available for payment to the lessees.
The facility will also be used to fund the DC10-10 conversion.
5. Litigation
As set forth in Note 2 to the unaudited Financial Statements, the
Partnership sued Viacao Aerea Sao Paulo S.A. ("VASP") in Miami, Florida and
Brazil to repossess its engines and to collect the monies that were due under
the lease agreements.
The Brazilian proceedings required posting of a letter of credit and
segregation by the Partnership of $371,000 in a restricted cash account. The
letter of credit has expired and the cash is no longer restricted.
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The Brazilian Court ruled in May, 1999 that the Partnership could
repossess the engine in Brazil, although that ruling was stayed until September
3, 1999, after the completion of all of VASP's appeals. The Partnership has
returned the engine to the United States and is remarketing it for lease.
Following a trial in Florida in December 1999 and January 2000 the
Partnership received a judgment entered on May 5, 2000, against VASP. The Court
also reserved jurisdiction to determine the Partnership's losses because of
damage to the one engine. That engine is now at a California repair facility
where it will be disassembled for inspection. The General Partners will
thereafter determine whether it is worthwhile to repair the engine or sell its
individual parts, and whether to pursue an additional damage award.
The Florida judgment has not yet proven collectible as VASP appears to
have ceased all business activity in Florida. VASP assets located by the
Partnership in Florida have been liened by a creditor who received an earlier
judgment. This, in the opinion of the Partnership's counsel, makes any
collection in Florida unlikely. The Partnership is attempting to domesticate the
Florida judgment against VASP in Brazil, in an attempt to collect from assets
located there.
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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 or to meet
requirements of the loan agreement or other contingencies.
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, 2000, the Partnership's unrestricted cash
and cash equivalents of $3,523,000 were primarily invested in such a fund. This
amount was $1,223,000 more than the Partnership's unrestricted cash and
equivalents at December 31, 1999 of $2,300,000. This increase in unrestricted
cash was due to cash provided by operating activities and the proceeds from
notes payable exceeding the quarterly cash distributions paid to the partners
and capitalized expenditures for aircraft during the six months ended June 30,
2000.
Rent receivable increased by $185,000 from $196,000 at December 31,
1999, to $381,000 at June 30, 2000. This increase resulted from receivables for
monthly lease payments from three lessees at June 30, 2000 compared to
receivables from two lessees at December 31, 1999.
Although TWA had a cash position of $194 million at June 30, 2000 and
reported a slightly narrower loss during the second quarter of 2000 versus the
prior year's quarter, given TWA's historical financial difficulties, its ongoing
financial losses are of concern. A default or deferral of lease payments on the
part of TWA, or Kitty Hawk, or any other lessee, may affect quarterly
distributions. TWA and Kitty Hawk accounted for 21% and 13%, resepectively, of
the Partnership's lease revenue during the first six months of 2000. Kitty Hawk
was current on all payments due to the Partnership as of June 30, 2000, but
filed for Chapter 11 bankruptcy protection on May 1, 2000.
Other assets increased $272,000 from $805,000 at December 31, 1999, to
$1,077,000 at June 30, 2000. This increase was primarily due to the commitment
fee paid in connection with the new loan facility. (See Note 4 to the unaudited
Financial Statements, "Notes Payable").
Accrued interest payable was $108,000 at June 30, 2000, due to interest
accrued related to the new note payable (a difference in payment dates between
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the new and old facilities). (See Note 4 to the unaudited Financial Statements,
"Notes Payable"). There was no accrued interest payable at December 31, 1999.
Accounts payable and accrued expenses increased by $1,237,000 from
$494,000 at December 31, 1999, to $1,731,000 at June 30, 2000, primarily due to
capital expenditures accrued for work performed on the McDonnell Douglas DC10-10
aircraft during the six months ended June 30, 2000, as discussed in Note 2 to
the unaudited Financial Statements.
The payable to affiliates increased by $398,000 from $969,000 at
December 31, 1999, to $1,367,000 at June 30, 2000, due to additional management
and release fees being incurred, but not paid, during the six months ended June
30, 2000.
Deferred rental income and deposits were $1,338,000 at June 30, 2000,
as compared to $1,475,000 at December 31, 1999. The decrease was primarily
attributable to the recognition of amounts previously received in connection
with the A-300 Lease Settlement.
Maintenance reserves payable were $1,575,000 at June 30, 2000, as
compared to $2,311,000 at December 31, 1999. The decrease was primarily due to
$781,000 of reserves being applied against the carrying value of the A-300
aircraft, as discussed below.
Notes payable were $19,500,000 at June 30, 2000, as compared to
$16,530,000 at December 31, 1999, due to additional proceeds from a new lender,
as discussed below. If the lending facility is limited to $25 million instead of
$30 million, the Partnership may need to temporarily suspend distributions in
order to fully fund the DC10-10 conversion.
During the three months ended June 30, 2000, the Partnership paid
distributions relating to the first quarter of 2000 at the rate of $0.30 per
Unit. As has historically been the case, the amount of future cash distributions
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 at $0.30 per Unit for the second quarter of 2000 was paid in July,
2000.
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, 100% of the cash
distributions paid to the partners for the three months ended June 30, 2000
constituted a return of capital. Also, based on the amount of net income
reported by the Partnership for accounting purposes, approximately 86% of the
cash distributions paid to the partners from the inception of the Partnership
through June 30, 2000 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 Partnership closed on a new, $30 million, lending facility with a
different lender, on April 14, 2000 and an initial draw down was made of $19.5
million, which is the balance at June 30, 2000. The facility is limited to $25
million unless the Aeromexico leases are extended for two years. The proceeds
were used to retire existing debt of $16.53 million and to replenish working
capital. The term of the loan is six years, with interest only payments the
first twelve months. The principal is required to be repaid in equal quarterly
installments over the next 60 months. Proceeds from the sale of aircraft must be
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applied to principal reduction and the subsequent required principal payments
will be reset over the remaining term. The Partnership paid a 1.0% commitment
fee and the interest rate is 225 basis points over a major money center bank's
prime rate. The lender has a mortgaged interest in all aircraft, except the 50%
interest in the USAirways MD-81 aircraft. The loan agreement requires that the
Partnership maintain working capital equal to or in excess of maintenance
reserves payable and have these amounts available for payment to the lessees.
The facility will also be used to fund the DC10-10 conversion.
During the first six months of 2000, the Partnership invested
approximately $2.4 million in capitalized aircraft improvements, mainly related
to the McDonnell Douglas DC10-10 conversion (as discussed below) and the
overhaul and repair of an engine for the Boeing 727-200 aircraft leased to
Falcon.
The McDonnell Douglas DC10-10 formerly leased to Continental was
returned on December 16, 1999. The aircraft was being stored until June, 2000 at
which time it entered a modification facility to be converted to a freighter for
Emery Worldwide Airlines Inc. ("Emery"). The conversion work is estimated to
cost $12.6 million. 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. The Partnership had incurred
approximately $2 million of the conversion costs as of June 30, 2000.
Litigation
----------
See Note 5 to the unaudited Financial Statements, "Litigation" for an
update on certain legal proceedings.
Results of Operations
---------------------
The Partnership's net loss was $1,527,000 and $1,367,000 for the
quarter and six months ended June 30, 2000 (the "2000 Quarter" and "2000
Period"), respectively, as compared to net income of $41,000 and $346,000 for
the quarter and six months ended June 30, 1999 (the "1999 Quarter" and "1999
Period"), respectively.
The Partnership's net income for the 2000 Period and 2000 Quarter
decreased as compared to the 1999 Period and 1999 Quarter principally due to a
$1,400,000 write-down of the A-300 aircraft. Also contributing to this decrease
was a decrease in rental income, as well as an increase in interest, general and
administrative and direct lease expense. This was partially offset by decreases
in depreciation and amortization expense and management and re-lease fees.
Rental income decreased by $339,000 and $795,000, or 12% and 13%,
respectively, in the 2000 Quarter and 2000 Period, as compared to the 1999
Quarter and 1999 Period, principally due to the absence of rental income related
to the DC10-10 aircraft and a decrease in rental income related to the Boeing
727-200 aircraft on lease to Falcon. This was partially offset by an increase in
rental income related to the Boeing 727-200 aircraft on lease to Kitty Hawk.
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Interest income decreased $15,000, or 24%, for the 2000 Period, in
comparison to the 1999 Period, primarily due to lower cash balances and lower
interest income on such cash balances during the first quarter 2000.
Depreciation and amortization decreased $541,000 and $1,061,000, or
24%, for both the 2000 Quarter and 2000 Period, respectively, in comparison to
the 1999 Quarter and 1999 Period, due primarily to the A-300 and DC10-10
aircraft not being depreciated in the 2000 Quarter and 2000 Period and a
decrease in depreciation related to the Boeing 727-200 aircraft on lease to
Kitty Hawk.
The Partnership provided a write-down of $1,400,000 on the A-300
aircraft and $781,000 of maintenance reserves related to the aircraft's engines
were applied against the carrying value of the aircraft in order to reduce its
value to an approximation of market value at June 30, 2000. There were no
write-downs during the 1999 Period.
Management and re-lease fees payable to the General Partners decreased
$41,000 and $86,000, or 18%, for both the 2000 Quarter and 2000 Period,
respectively, in comparison to the 1999 Quarter and 1999 Period, which was
primarily attributable to lower rental revenue in the 2000 Quarter and 2000
Period, which serves as the basis for certain fees.
Interest expense for the 2000 Quarter and 2000 Period increased by
$277,000 and $449,000 or 98%, and 84%, respectively, in comparison to the 1999
Quarter and 1999 Period due to increases in the note balance and interest rate.
General and administrative expenses increased by $51,000 and $73,000,
or 65% and 49%, respectively, in the 2000 Quarter and 2000 Period, in comparison
to the 1999 Quarter and 1999 Period. This increase is primarily due to an
increase in legal fees related to the VASP litigation, as well as increases in
audit and tax and appraisal fees. Partially offsetting these increases are
decreases in transfer agent and investor report fees.
Direct lease expenses increased by $31,000 and $77,000, or 63% and 73%,
respectively, in the 2000 Quarter and 2000 Period, as compared to the 1999
Quarter and 1999 Period, due primarily to increases in maintenance expense
related to several aircraft and insurance expense related to the DC-10-10
aircraft.
Return condition settlement expense of $51,000 was recognized during
the 2000 Period, resulting from a return condition settlement agreement with
Continental Airlines, Inc., relating to the aircraft on lease to Kitty Hawk.
There was no corresponding expense in the 1999 Period.
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PART II. OTHER INFORMATION
--------------------------
ITEM 1. Legal Proceedings
-----------------
As set forth in Note 2 to the unaudited Financial Statements, the
Partnership sued Viacao Aerea Sao Paulo S.A. ("VASP") in Miami, Florida and
Brazil to repossess its engines and to collect the monies that were due under
the lease agreements.
The Brazilian proceedings required posting of a letter of credit and
segregation by the Partnership of $371,000 in a restricted cash account. The
letter of credit has expired and the cash is no longer restricted.
The Brazilian Court ruled in May, 1999 that the Partnership could
repossess the engine in Brazil, although that ruling was stayed until September
3, 1999, after the completion of all of VASP's appeals. The Partnership has
returned the engine to the United States and is remarketing it for lease.
Following a trial in Florida in December 1999 and January 2000 the
Partnership received a judgment entered on May 5, 2000, against VASP. The Court
also reserved jurisdiction to determine the Partnership's losses because of
damage to the one engine. That engine is now at a California repair facility
where it will be disassembled for inspection. The General Partners will
thereafter determine whether it is worthwhile to repair the engine or sell its
individual parts, and whether to pursue an additional damage award.
The Florida judgment has not yet proven collectible as VASP appears to
have ceased all business activity in Florida. VASP assets located by the
Partnership in Florida have been liened by a creditor who received an earlier
judgment. This, in the opinion of the Partnership's counsel, makes any
collection in Florida unlikely. The Partnership is attempting to domesticate the
Florida judgment against VASP in Brazil, in an attempt to collect from assets
located there.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27. Financial Data Schedule (in electronic format only).
(b) Reports on Form 8-K
The Partnership filed a Form 8-K on April 27, 2000, reporting
another distribution at the lowered rate and a new lending
facility, under Item 5, Other Events.
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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 10, 2000 By: /s/ CARMINE FUSCO
-----------------
Carmine Fusco
Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer
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