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 September 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 ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 2000 and
December 31, 1999 3
Statements of Income for the three months
ended September 30, 2000 and 1999 4
Statements of Income for the nine months
ended September 30, 2000 and 1999 5
Statements of Partners' Capital for the nine months
ended September 30, 2000 and 1999 6
Statements of Cash Flows for the nine months
ended September 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 -- SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
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ASSETS
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2000 1999
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(in thousands, except unit data)
Cash and cash equivalents $ 3,674 $ 2,300
Restricted cash -- 371
Rent receivable 196 196
Aircraft, net 41,560 44,491
Other assets 1,052 805
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Total Assets $ 46,482 $ 48,163
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LIABILITIES AND PARTNERS' CAPITAL
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LIABILITIES:
Accrued interest payable $ 126 $ --
Accounts payable and accrued expenses 578 494
Payable to affiliates 1,564 969
Deferred rental income and deposits 1,279 1,475
Maintenance reserves payable 1,936 2,311
Distributions payable to partners -- 2,199
Notes payable 22,660 16,530
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Total Liabilities 28,143 23,978
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COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
PARTNERS' CAPITAL:
General Partners (855) (796)
Limited Partners (7,255,000 units issued
and outstanding in 2000 and 1999) 19,194 24,981
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Total Partners' Capital 18,339 24,185
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Total Liabilities and Partners' Capital $ 46,482 $ 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 SEPTEMBER 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 $ 2,659 $ 2,873
Interest 44 22
Gain on sale of engines and equipment -- 173
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2,703 3,068
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EXPENSES:
Depreciation and amortization 1,736 1,933
Management and re-lease fees 197 246
Interest 640 294
General and administrative 110 79
Direct lease 102 62
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2,785 2,614
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NET (LOSS) INCOME $ (82) $ 454
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NET (LOSS) INCOME ALLOCATED:
To the General Partners $ (1) $ 177
To the Limited Partners (81) 277
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$ (82) $ 454
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NET (LOSS) INCOME PER LIMITED
PARTNERSHIP UNIT $ (0.01) $ 0.04
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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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
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(unaudited)
2000 1999
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(in thousands, except unit
data and per unit amounts)
REVENUE:
Rentals from operating leases $ 7,900 $ 8,909
Interest 92 85
Gain on sale of engines and equipment -- 173
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7,992 9,167
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EXPENSES:
Depreciation and amortization 5,158 6,416
Write-downs 1,400 --
Management and re-lease fees 595 730
Interest 1,621 826
General and administrative 332 228
Direct lease 284 167
Return condition settlement 51 --
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9,441 8,367
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NET (LOSS) INCOME $ (1,449) $ 800
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NET (LOSS) INCOME ALLOCATED:
To the General Partners $ (15) $ 180
To the Limited Partners (1,434) 620
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$ (1,449) $ 800
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NET (LOSS) INCOME PER LIMITED
PARTNERSHIP UNIT $ (0.20) $ 0.09
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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' CAPITAL
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FOR THE NINE MONTHS ENDED SEPTEMBER 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 (15) (1,434) (1,449)
Distributions to partners declared (44) (4,353) (4,397)
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Balance, September 30, 2000 $ (855) $ 19,194 $ 18,339
======== ======== ========
Balance, January 1, 1999 $ (868) $ 35,068 $ 34,200
Net income 180 620 800
Distributions to partners declared (88) (8,706) (8,794)
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Balance, September 30, 1999 $ (776) $ 26,982 $ 26,206
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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 NINE MONTHS ENDED SEPTEMBER 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 (loss) income $(1,449) $ 800
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Gain on sale of engines and equipment -- (173)
Depreciation and amortization 5,157 6,416
Write-downs 1,400 --
Change in assets and liabilities:
Rent and other receivables -- 35
Other assets (247) (3)
Accounts payable and accrued expenses 84 10
Payable to affiliates 595 148
Accrued interest payable 126 99
Deferred rental income and deposits (196) 19
Maintenance reserves payable 406 393
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Net cash provided by operating activities 5,876 7,744
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (4,407) (3,903)
Proceeds from the sale of engines and equipment -- 259
Decrease (increase) in restricted cash 371 (368)
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Net cash used in investing activities (4,036) (4,012)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 6,130 5,310
Cash distributions paid to partners (6,596) (8,794)
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Net cash used in financing activities (466) (3,484)
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,374 248
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,300 2,863
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,674 $ 3,111
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,473 $ 720
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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SEPTEMBER 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. The
accompanying unaudited financial statements should be read in conjuction with
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 nine month periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
The Partnership intends to adopt the guidance in EITF Issue No. 00-1
Investor Balance Sheet and Income Statement Display under the Equity Method of
Investments in Certain Partnerships and Other Ventures (EITF 00-1) in its Annual
Report on Form 10-K for the fiscal year ending December 31, 2000 and will
account for its investment in the Trust which owns the MD-81 aircraft leased to
US Airways under the equity method. The Partnership will also provide the
information required by SAB 74. If the equity method had been adopted in the
accompanying financial statements, revenue from operating leases for the nine
months ended September 30, 2000 would be $6,989,000, and depreciation and
amortization would be $4,580,000. Revenue from operating leases for the nine
months ended September 30, 1999 would be $7,998,000, and depreciation and
amortization would be $5,838,000. If the equity method had been adopted, net
income for each of the nine month periods would be unchanged. Equity in earnings
of the MD-81 Trust for the respective periods was $333,000 for both 2000 and
1999, which would have been included in the revenue portion of the income
statement, causing no change to the reported net income.
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2. Aircraft
The Partnership's net investment in aircraft as of September 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 (59,743) (54,586)
Write-downs (7,710) (7,710)
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$ 29,838 $ 34,229
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Aircraft held for lease, at cost $ 69,562 $ 65,921
Less: Accumulated depreciation (34,877) (34,877)
Write-downs* (22,963) (20,782)
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11,722 10,262
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Aircraft, net $ 41,560 $ 44,491
======== ========
* $781,000 of maintenance reserves applied to the carrying value of aircraft
and $10,115,000 lease settlement accounted for under the cost recovery
method 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
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 second 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 repair facility in California and
subsequently to a repair facility in Canada, where, given the May 2000 judgement
received in Florida, a detailed analysis of its condition is being conducted.
The serviceable engine was repossessed and 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.
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
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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 September 30, 2000, Falcon owed $855,000 in rent and
approximately $310,000 in maintenance reserves. For the period January 1, 2000
through September 30, 2000, Falcon paid approximately $420,000 in rent and
$187,000 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.
During first quarter of 2000, the Partnership invested $661,000 in
capitalized aircraft improvements, mainly related to the overhaul and repair of
an engine for the Boeing 727-200 aircraft leased to Falcon.
Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). A 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
Partnership has incurred costs of approximately $4.7 million related to the
cargo conversion and hushkitting.
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 September 30, 2000. Kitty Hawk has submitted a plan
of reorganization with the Court, although such a plan has not been approved.
McDonnell Douglas DC 10-10. 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 a term 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 $4 million of cumulative conversion costs as of September 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 and
Aeromexico has been paying on a month-to-month basis. (See Note 6 to the
unaudited Financial Statements, "Subsequent Events").
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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 $39,000
and $116,000 of base management fees during the three and nine months ended
September 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 $78,000
and $241,000 of incentive management fees during the three and nine months ended
September 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
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 $80,000 and $238,000 of re-lease fees during
the three and nine months ended September 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 nine months ended September 30, 2000 payable to the Administrative
General Partner.
During the nine months ended September 30, 2000 the Partnership paid
$653,000 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 on April
14, 2000 and an initial draw down was made of $19.5 million. The balance was
$22.66 million at September 30, 2000. The facility is limited to $25 million
because the Aeromexico leases were not 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. Thereafter, principal is required to be repaid in equal quarterly
installments over 60 months with the first payment due in April 2001. 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.
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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 is also being 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.
A judgment against VASP was entered in Florida on May 5, 2000 for
unpaid engine rents, reserves and interest. Pursuant to a court order, the
serviceable engine, located in Brazil, has been repossessed and is being
re-marketed. A receiver was appointed in October 2000 over three properties
owned by VASP in Florida. The Partnership's attorney advises the Partnership
should receive the first proceeds, net of receiver expenses, of the sale of the
properties until its judgment is satisfied. The Partnership's Brazilian
attorneys advise that it is their expectation that the repossession lawsuit
there will be finalized by the judge in the near term.
6. Subsequent Events
On October 6, 2000, one of the Partnership's two DC-9's leased to
Aeromexico skidded off a runway while landing. Extensive damage was caused to
the aircraft and the aircraft has been declared a total loss. The General
Partners believe there is sufficient insurance to compensate the Partnership for
its economic loss. When insurance proceeds are received, they will be primarily
used to reduce the Partnership's indebtedness. Aeromexico is obligated to
continue to pay rent on the aircraft until insurance proceeds are received.
Aeromexico and the Partnership have agreed to an extension of the lease on the
DC-9 that was not damaged, until January 30, 2001.
Due to Aeromexico's decision not to extend the leases on the
Partnership's two DC-9's for two years, but instead for 8 months in one case and
10 months in another (prior to the damage caused to one of the aircraft as
described above), the lending facility is limited to $25 million instead of $30
million. Due to this limitation, the Partnership suspended distributions in
October 2000 in order to fully fund the DC10-10 conversion. 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, including debt service payments.
Shareholders of US Airways Group Inc. ("US Airways") have voted to
accept a merger proposal from UAL Corp., the parent company of United Airlines,
Inc. The Partnership owns 50% of a MD-81 aircraft leased to US Airways. No
change in the aircraft lease is expected if the merger is consummated.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
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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 September 30, 2000, the Partnership's unrestricted
cash and cash equivalents of $3,674,000 were primarily invested in such a fund.
This amount was $1,374,000 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 nine months ended September
30, 2000.
Although TWA had a cash position of $157 million at September 30, 2000
and reported a smaller loss during the third 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%, respectively, of
the Partnership's lease revenue during the first nine months of 2000. Kitty Hawk
was current on all payments due to the Partnership as of September 30, 2000, but
filed for Chapter 11 bankruptcy protection on May 1, 2000.
Other assets increased $247,000 from $805,000 at December 31, 1999, to
$1,052,000 at September 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 $126,000 at September 30, 2000, due to
interest accrued related to the new note payable (a difference in payment dates
between 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 $84,000 from
$494,000 at December 31, 1999, to $578,000 at September 30, 2000, primarily due
to capital expenditures accrued for work performed on the McDonnell Douglas
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DC10-10 aircraft during the quarter ended September 30, 2000, as discussed in
Note 2 to the unaudited Financial Statements.
The payable to affiliates increased by $595,000 from $969,000 at
December 31, 1999, to $1,564,000 at September 30, 2000, due to additional
management and release fees being incurred, but not paid, during the nine months
ended September 30, 2000.
Deferred rental income and deposits were $1,279,000 at September 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 $1,936,000 at September 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 in Note 2 to the unaudited Financial Statements.
Partially offsetting this decrease were continuing maintenance reserve payments
received from lessees.
Notes payable were $22,660,000 at September 30, 2000, as compared to
$16,530,000 at December 31, 1999, due to additional proceeds from a new lender,
as discussed below.
Due to Aeromexico's decision not to extend the leases on the
Partnership's two DC-9's for two years, but instead for 8 months in one case and
10 months in another, the lending facility is limited to $25 million instead of
$30 million. Due to this limitation, the Partnership suspended distributions in
October 2000 in order to provide funds for the DC10-10 conversion.
On October 6, 2000, one of the Partnership's two DC-9's leased to
Aeromexico skidded off a runway while landing. Extensive damage was caused to
the aircraft and the aircraft has been declared a total loss. Aeromexico is
obligated to continue to pay rent on the aircraft until insurance proceeds are
received. Aeromexico and the Partnership have agreed to an extension of the
lease on the DC-9 that was not damaged, until January 30, 2001.
(See Note 6 to the unaudited Financial Statements, "Subsequent Events").
During the three months ended September 30, 2000, the Partnership paid
distributions relating to the second 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, including
debt service payments. There was no distribution paid in October 2000 related to
the third quarter of 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, approximately 86% of
the cash distributions paid to the partners from the inception of the
Partnership through September 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.
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During the first nine months of 2000, the Partnership invested
approximately $4.4 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 $4 million of the conversion costs as of September 30, 2000.
Litigation
----------
See Item I herein "Legal Proceedings" for an update on certain legal
proceedings.
Results of Operations
---------------------
The Partnership's net loss was $82,000 and $1,449,000 for the quarter
and nine months ended September 30, 2000 (the "2000 Quarter" and "2000 Period"),
respectively, as compared to net income of $454,000 and $800,000 for the quarter
and nine months ended September 30, 1999 (the "1999 Quarter" and "1999 Period"),
respectively.
The Partnership's net income for the 2000 Period decreased as compared
to the 1999 Period principally due to a $1,400,000 write-down of the A-300
aircraft and an increase in interest expense. The Partnership's net income for
the 2000 Quarter decreased as compared to the 1999 Quarter principally due to an
increase in interest expense. Also contributing to these decreases for the 2000
Period and Quarter was a decrease in rental income, as well as an increase in
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 $214,000 and $1,009,000, or 7% and 11%,
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.
Interest income increased by $22,000 and $7,000, or 100% and 8%,
respectively, in the 2000 Quarter and 2000 Period, in comparison to the 1999
Quarter and 1999 Period, primarily due to higher cash balances and higher
interest income on such cash balances during the third quarter 2000.
During the 1999 Period, the Partnership swapped the three JT8D-15
engines that were returned with the Boeing 727-200 aircraft recently returned by
Continental Airlines for three JT8D-9A engines owned by an affiliate of the
Managing General Partner. The Partnership realized a gain of $173,000 related to
the swap in the 1999 Period. There was no corresponding gain in the 2000 Period.
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Depreciation and amortization decreased by $197,000 and $1,258,000, or
10% and 20%, respectively, in the 2000 Quarter and 2000 Period, 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 decrease in depreciation related to the Boeing 727-200 aircraft
was due to an increased life after capital improvements, causing depreciation to
be amortized over a longer period.
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 fee expenses to the General Partners decreased
by $49,000 and $135,000, or 20% and 18%, respectively, in the 2000 Quarter and
2000 Period, 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
$346,000 and $795,000, or 118% and 96%, 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 $31,000 and $104,000,
or 39% and 46%, 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, appraisal and investor report fees. Partially offsetting these
increases was a decrease in transfer agent fees.
Direct lease expenses increased by $40,000 and $117,000, or 65% and
70%, 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.
A judgment against VASP was entered in Florida on May 5, 2000 for
unpaid engine rents, reserves and interest. Pursuant to a court order, the
serviceable engine, located in Brazil, has been repossessed and is being
re-marketed. A receiver was appointed in October 2000 over three properties
owned by VASP. The Partnership's attorney advises the Partnership should receive
the first proceeds, net of receiver expenses, of the sale of the properties
until its judgment is satisfied. The Partnership's Brazilian attorneys advise
that it is their expectation that the repossession lawsuit there will be
finalized by the judge in the near term.
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 October 5, 2000, reporting
the suspension of cash distributions for at least the quarter
ending September 30, 2000 (payable in October, 2000), 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: November 13, 2000 By: /s/ CARMINE FUSCO
-----------------
Carmine Fusco
Vice President, Secretary,
Treasurer and Chief Financial
and Accounting Officer
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