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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, 2002
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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
----------------------- -------------------
(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
------------------------- -----
(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 .
--- ---
This document consists of 22 pages.
PEGASUS AIRCRAFT PARTNERS II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER AND SIX MONTHS ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - June 30, 2002 and December 31, 2001 3
Statements of Income for the three months
ended June 30, 2002 and 2001 4
Statements of Income for the six months 5
ended June 30, 2002 and 2001
Statements of Partners' Capital for the six
months ended June 30, 2002 and 2001 6
Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 7
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of 15
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 19
Signature 20
2
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
--------------------
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
BALANCE SHEETS -- JUNE 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
-----------------------------------------------------------------
ASSETS
------
2002 2001
---- ----
(in thousands, except unit data)
Cash and cash equivalents $ 2,574 $ 8,444
Rent and other receivables 1,270 240
Aircraft, net 19,249 23,964
Other assets 12 246
------- -------
Total Assets $23,105 $32,894
======= =======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Accounts payable and accrued expenses $ 126 $ 225
Payable to affiliates 946 3,276
Maintenance reserves payable 1,686 2,315
Notes payable -- 9,483
Accrued interest payable -- 28
Deposits 811 811
------- -------
Total Liabilities 3,569 16,138
------- -------
COMMITMENTS AND CONTINGENCIES (Note 4)
PARTNERS' CAPITAL:
General Partners $ 197 $ 169
Limited Partners (7,255,000 units issued
and outstanding in 2002 and 2001) 19,339 16,587
------- -------
Total Partners' Capital 19,536 16,756
------- -------
Total Liabilities and Partners' Capital $23,105 $32,894
======= =======
The accompanying notes are an integral part of these financial statements.
3
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF INCOME
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FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
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(unaudited)
2002 2001
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ 1,118 $ 1,538
Gain on sale of aircraft -- 6,156
Equity in (deficit)/earnings of MD-81 Trust (11) 220
Interest 9 49
Management and re-lease fees reversal 2,502 --
Other -- 360
----------- -----------
3,618 8,323
----------- -----------
EXPENSES:
Depreciation and amortization 461 936
Write-downs 500 991
Management and re-lease fees -- 584
Interest 235 322
General and administrative 141 69
Direct lease 57 77
----------- -----------
1,394 2,979
----------- -----------
NET INCOME $ 2,224 $ 5,344
=========== ===========
NET INCOME ALLOCATED:
To the General Partners $ 23 $ 54
To the Limited Partners 2,201 5,290
----------- -----------
$ 2,224 $ 5,344
=========== ===========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.30 $ 0.73
=========== ===========
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.
4
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
STATEMENTS OF INCOME
--------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
-----------------------------------------------
(unaudited)
2002 2001
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ 2,303 $ 4,257
Gain on sale of aircraft 328 6,156
Equity in (deficit)/earnings of MD-81 Trust (22) 331
Interest 44 81
Management and re-lease fees reversal 2,330 --
Other -- 1,160
----------- -----------
4,983 11,985
----------- -----------
EXPENSES:
Depreciation and amortization 923 2,548
Write-downs 500 1,791
Management and re-lease fees -- 854
Interest 393 910
General and administrative 277 167
Direct lease 110 238
----------- -----------
2,203 6,508
----------- -----------
NET INCOME $ 2,780 $ 5,477
=========== ===========
NET INCOME ALLOCATED:
To the General Partners $ 28 $ 55
To the Limited Partners 2,752 5,422
----------- -----------
$ 2,780 $ 5,477
=========== ===========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.38 $ 0.75
=========== ===========
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.
5
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
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(unaudited)
General Limited
Partners Partners Total
-------- -------- -----
(dollar amounts in thousands)
Balance, January 1, 2002 $ 169 $ 16,587 $ 16,756
Net income 28 2,752 2,780
-------- -------- --------
Balance, June 30, 2002 $ 197 $ 19,339 $ 19,536
======== ======== ========
Balance, January 1, 2001 $ 218 $ 21,358 $ 21,576
Net income 55 5,422 5,477
Distributions to partners declared (15) (1,451) (1,466)
-------- -------- --------
Balance, June 30, 2001 $ 258 $ 25,329 $ 25,587
======== ======== ========
The accompanying notes are an integral part of these financial statements.
6
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, 2002 AND 2001
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(unaudited)
2002 2001
---- ----
(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,780 $ 5,477
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of aircraft (328) (6,156)
Depreciation and amortization 923 2,548
Equity in deficits/(earnings) of
MD-81 Trust 22 (331)
Write-downs 500 1,791
Change in assets and liabilities:
Rent and other receivables 100 (1,019)
Other assets 234 30
Accounts payable and accrued expenses (99) (296)
Accrued interest payable (28) (87)
Payable to affiliates (2,330) 854
Deferred rental income and deposits -- (404)
Maintenance reserves payable 648 178
------- -------
Net cash provided by operating
activities 2,422 2,585
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash distributions from investment in
MD-81 Trust -- 607
Proceeds from sale of aircraft 1,191 9,500
Capitalized aircraft improvements -- (811)
------- -------
Net cash provided by investing
activities 1,191 9,296
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable (9,483) (9,950)
------- -------
Net cash used in financing activities (9,483) (9,950)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (5,870) 1,931
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 8,444 2,297
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,574 $ 4,228
======= =======
The accompanying notes are an integral part of these financial statements.
7
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
-----------------------------------------------
(unaudited)
2002 2001
---- ----
(dollar amounts in thousands)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 199 $ 971
NONCASH TRANSACTIONS:
Distributions declared to partners but unpaid -- 1,466
Application of maintenance reserves to sale
of aircraft 1,277 --
Receivable arising from sale of Boeing 727-200 1,270 --
The accompanying notes are an integral part of these financial statements.
8
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
JUNE 30, 2002
-------------
(unaudited)
1. General
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America 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 unaudited financial statements should be read in conjunction with
the financial statements and footnotes thereto included in the Partnership's
annual report on Form 10-K for the year ended December 31, 2001. Operating
results for the six-month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002.
Statement of Financial Accounting Standards No. 144 ("SFAS 144")
"Accounting for the Impairment or Disposal of Long-Lived Assets" was implemented
by Pegasus Aircraft Partners II, L.P. beginning January 1, 2002. The
implementation of this Statement is not expected to have a material effect on
the Partnership's financial position, results of operations or cash flows.
The McDonnell Douglas MD-81 aircraft is owned by a trust ("MD-81
Trust") in which the Partnership has a 50% interest. The Partnership has adopted
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 starting the fiscal year
ended December 31, 2000 and accounts for its investment in the Trust which owns
the MD-81 aircraft under the equity method. In periods prior to December 31,
2000, the Partnership reported its ownership in the MD-81 Trust on a
proportionately consolidated basis. The aircraft had been subject to a tax
benefit transfer lease, which expired in April 2000.
2. Aircraft
The Partnership's net investment in aircraft as of June 30, 2002 and
December 31, 2001 consisted of the following (in thousands):
9
2002 2001
---- ----
Aircraft on operating leases, at cost $ 41,494 $ 49,941
Less: Accumulated depreciation (21,105) (22,556)
Write-downs (4,499) (8,567)
-------- --------
$ 15,890 $ 18,818
-------- --------
Net Investment in MD-81 Trust $ 1,274 $ 1,296
-------- --------
Aircraft held for lease or sale, at cost $ 36,001 $ 73,616
Less: Accumulated depreciation (16,636) (36,474)
Write-downs (17,280) (33,292)
-------- --------
2,085 3,850
-------- --------
Aircraft, net $ 19,249 $ 23,964
======== ========
Vanguard Airlines Lease ("Vanguard"). US Airways returned the MD-81 in
July 2001, and in August 2001, the Trust entered into a three-year lease of the
aircraft with Vanguard Airlines, a Kansas City, Missouri airline providing
passenger services to a number of U.S. cities. The lease agreement is on a
"power by the hour" basis for 36 months, starting August 27, 2001, at the rate
of $600 per flight hour, to a maximum of $130,000 per month. Vanguard is also
responsible for funding maintenance reserves. Vanguard, as have many other
airlines, has been adversely affected by events of September 11, 2001. From the
beginning of the lease in August 2001 through June 30, 2002, Vanguard has paid a
total of $442,000, of which the Trust has paid 50% to the Partnership and 50% to
an affiliated Partnership. Vanguard is in arrears to the Trust in the amount of
$1,389,000 ($694,500 to the Partnership, for its 50% interest) in rent and
reserves. Payments made have been applied towards maintenance reserves.
The Partnership has been negotiating a payment plan for rent and
maintenance reserves with Vanguard and the Vanguard lease within the Trust is
being accounted for on a cash basis. Vanguard has recently submitted a revised
request to the Airline Transportation and Stabilization Board for a loan
guarantee of $35 million of a $40 million loan. If Vanguard is unable to secure
financing, the Partnership will need to repossess the aircraft. The Partnership
will either market the aircraft to potential lessees or market it for sale.
Given the age of the aircraft and other factors, it is uncertain as to the time
it would take to remarket it or the success of the effort.
On July 30, 2002, Vanguard filed for protection under Chapter 11 of the
U.S. Bankruptcy Code (See "Note 5. Subsequent Event").
TNT Transport International B.V. ("TNT") Lease. In June 1998 the
Partnership delivered a Boeing 727-200 advanced aircraft formerly leased to
Continental (one of two Boeing 727s which were received as part of the early
termination of the Airbus A-300 lease by Continental) to a European freight
carrier, TNT, for a lease term of four years. The lease provided for monthly
rentals of $123,500 and airframe and landing gear reserves aggregating $85 per
flight hour. TNT had contracted with a third party service provider for
maintenance of the engines. TNT has provided a $150,000 security deposit. At
December 31, 2001, the Partnership wrote down the TNT aircraft to a value of
$2,241,000, based on sale discussions plus six months rent at $123,500 per
month.
10
While, pursuant to the lease, TNT had renewal options, it indicated its
intention not to renew the lease when it ended in June 2002. TNT returned the
aircraft in June 2002 and has paid a net payment of $507,000 payment in lieu of
the aircraft meeting return conditions, and rent through July 10, 2002. Due to
the large number of Boeing 727 freighters available for lease or sale, the
Partnership wrote down the aircraft by $500,000 in the second quarter of 2002.
The Partnership will retain the security deposit of $150,000 and the maintenance
reserves of $391,000.
Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). One of the Boeing 727-200s,
received from Continental as partial satisfaction of the Airbus A-300 return
conditions was converted to a freighter, hushkitted and delivered to Kitty Hawk
in November, 1999. The Partnership swapped the three JT8D-15 engines that were
returned with the aircraft for three JT8D-9A engines owned by an affiliate of
the Managing General Partner. The Partnership also received a payment of
$259,000 from the affiliate to compensate the Partnership for the relative
difference in value of the engines as determined by a third party appraiser,
resulting in a $173,000 gain. The Kitty Hawk lease is for 84 months, the lease
rate is $112,700 per month and maintenance reserves are to be paid at the rate
of $375 per flight hour. Kitty Hawk has provided a security deposit of $225,400.
Kitty Hawk filed for bankruptcy protection under Chapter 11 on May 1,
2000, but stayed current with regard to its lease payments through September
2001. For the months of October, November, and December 2001, Kitty Hawk could
not make a full payment of the monthly rent, and the Partnership agreed to a
payment of only half the amount due. The Partnership agreed to a 50% reduction
of the maintenance reserves due for the months of September, October, and
November 2001. The Partnership agreed to a payment of 71% of the rents for
December 2001, and January, February 2002 and no maintenance reserves payment
for these months. However, Kitty Hawk could not make any payment in March and
April 2002.
In 2001, the Partnership wrote down the value of the aircraft by $4.3
million to a value of $1.1 million, based on collected reserves and the
estimated value of the lease unencumbered aircraft.
The Partnership has agreed, in principle, subject to confirmation by
the Bankruptcy court and documentation, to sell the Boeing 727 leased to Kitty
Hawk, for the amount of the security deposit of $225,400, collected reserves of
$567,000, and a $750,000, 12-month note, that will bear interest at 8%. Kitty
Hawk is paying $65,241 a month and did so for May and June 2002. These payments
were recorded as rent payment, and will be applied against the $750,000 note
when it is executed. As a result, the Partnership has not accrued management
fees on these payments (See "Note 5. Subsequent Events") .
Emery Worldwide Airlines, Inc. ("Emery") Lease. The lease on the
McDonnell Douglas DC10-10 with Continental expired on September 15, 1999.
Continental continued to pay rent until the aircraft achieved the return
conditions, which was accomplished on December 16, 1999. The aircraft was stored
at a modification facility until June 2000 at which time work commenced to
convert it to a freighter for Emery Worldwide Airlines Inc. ("Emery"). The Emery
lease is for 84 months with rent of $218,000 per month. The lease also provides
for 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 $436,000. The aircraft was delivered to Emery in December
2000. At December 31, 2001, the conversion work totaled approximately $13.6
million. Emery no longer is certified by the FAA to fly the DC-10, but has
continued to pay rent. The Partnership is in negotiations with Emery for a
potential buyout of the remaining lease obligations.
11
Aerovias de Mexico, S.A. de C.V. ("Aeromexico"). One of the
Partnership's DC-9s was a total loss during a runway accident in late 2000 and
the Partnership received the benefit of insurance proceeds in the fourth quarter
of 2000. While the lease on the second aircraft expired in February 2000,
Aeromexico continued to pay for the aircraft on a month-to-month basis and
returned the aircraft in July 2001. Discussions with Aeromexico regarding the
purchase of the aircraft were unsuccessful and the Partnership is remarketing
the aircraft for sale or lease. There can be no assurance as to whether the
plane can be remarketed, the time it will take or the lease rate or sale price,
which may be achieved.
Capital Cargo International Airlines, Inc.("Capital Cargo"). Capital
Cargo failed to make its lease and reserve payments starting January 25, 2001. A
notice of default was sent on February 8, 2001 and Capital Cargo returned the
Boeing 727-200 on May 23, 2001.On June 14, 2001, the Partnership sued Capital
Cargo for breach of its monetary obligations and damages relating to the failure
of the aircraft to meet return conditions. On March 15, 2002, the Partnership
and Capital Cargo reached a court mediated settlement. According to the
settlement, the Partnership agreed to sell the aircraft leased to Capital Cargo
for $2,000,000 and the Partnership retained maintenance reserves of $1,277,000
and a $220,000 security deposit. The $2.0 million purchase price for the
aircraft will be paid through an initial payment of $625,000, which was received
in April 2002, and a twelve-month, interest-bearing note with 11 payments of
$35,000 and a balloon payment at the end. On April 5, 2002, Capital Cargo paid
$625,000 of the purchase price of $2 million for the Boeing 727 freighter. The
payment was used to reduce the Partnership's debt balance.
Airbus A-300 Aircraft. In 1998 and 1999, the Partnership leased, on a
short-term (six month minimum) basis, its two CF6-50C2 engines from the Airbus
A-300 aircraft to Viacao Aerea Sao Paulo S.A. ("VASP"), a Brazilian carrier.
VASP fell in arrears with respect to rent and maintenance reserves and the
Partnership won a judgment in court of $3.0 million for past rents and reserves.
VASP-owned property in Florida was sold by a court appointed liquidating trustee
and the Partnership received the $3.0 million judgment and $500,000 interest in
late 2001. In addition, the Partnership received, earlier in 2001, an $800,000
negotiated settlement payment for legal costs and compensation for damage to one
of the engines while leased by VASP.
In conjunction with the receipt of judgment proceeds, the Partnership
wrote down the aircraft an additional $1,865,000 as of year-end 2001 (for a
total of $2,665,000), resulting in a value of $320,000 for the airframe and
remaining engines.
In March 2002, the Partnership sold the A-300 airframe for $121,000 and
in a separate transaction, the Partnership sold the A-300 engines for $200,000.
Lockheed L-1011. Based on the amount of time the L-1011 has been
unsuccessfully offered for lease or sale and the large number of similar
aircraft available for lease or sale, the aircraft was written down from $1.7
million to a zero value in 2001. The aircraft is being offered for sale.
General. The Partnership will seek to dispose of the remaining aircraft
as soon as possible.
12
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.
Management Fees of $17,000 were accrued for the three months ended March 31,
2002 and this accrual has been reversed in the financials for the six months
ended June 30, 2002 (see discussion below).
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. Incentive Management Fees of $113,000 were
accrued for the three months ended March 31, 2002 and this accrual has been
reversed in the financials for the six months ended June 30, 2002 (see
discussion below).
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.
Re-lease Fees of $42,000 were accrued for the three months ended March 31, 2002
and this accrual has been reversed in the financials for the six months ended
June 30, 2002 (see discussion below).
The Management Fee, Incentive Management Fee and Re-Lease Fee payable
to the General Partners are subordinated to the limited partners receiving an 8%
annual, non-cumulative return based upon Unreturned Capital Contribution, as
Unreturned Capital Contribution is defined in the Partnership Agreement. As the
Partnership had not achieved this level of distribution since 2000, fees were
being accrued but not paid. Based upon Preferred Return as determined pursuant
to the Partnership Agreement and the estimated value of the Partnership's
remaining assets, a determination was made to reverse the fees accrued but
unpaid to the General Partners for fiscal year 2000 through the first quarter of
2002. As of June 30, 2002, fees previously accrued of $2,330,000 were taken into
revenue with a corresponding reduction in Payable to Affiliates. In addition,
based on anticipated future revenues, the Partnership does not expect to accrue
Management and Re-Lease Fees in future quarters.
As part of a class action settlement agreement, an affiliate of the
Administrative General Partner has agreed to pay to members of the class, fees
and distributions remitted to it by the Administrative General Partner.
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
six months ended June 30, 2002 payable to the Administrative General Partner.
Other: During the six months ended June 30, 2002, the Partnership paid
$18,000 to a maintenance facility which, until March 2002, was affiliated with
the Managing General Partner for the storage of the off-lease aircraft and
13
$40,000 for aircraft parts and services to a company owned by the President and
Director of the Managing General Partner.
4. Notes Payable
The Partnership obtained a $30 million lending facility on April 14,
2000, and an initial draw down was made of $19.5 million. The loan proceeds were
used to retire existing debt of $16.5 million, to replenish working capital and
to fund the DC10-10 conversion. The facility was later limited to $25 million
because the Aeromexico leases were not extended for two years.
Prior to March 31, 2002, the note was paid down through proceeds from
asset sales, insurance proceeds from the DC-9 incident and other cash. On March
31, 2002, the Partnership paid down the note payable by $5 million resulting in
a balance of $3,695,000. On May 1, 2002, the Partnership's remaining debt was
retired.
The Limited Partnership Agreement permits the Partnership to borrow up
to 35% (or $50,785,000) of the initial offering proceeds.
5. Subsequent Events:
After being denied for a second time for a loan guarantee from the
Airline Transportation Stabilization Board, Vanguard Airlines suspended flight
operations on July 30, 2002, dismissed all but 80 employees and filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. Under Section 1110 of
the Bankruptcy Code, Vanguard will have 60 days to affirm the lease or return
the aircraft. If the aircraft is returned, the Partnership will either market
the aircraft to potential lessees or market it for sale. Given the age of the
aircraft and other factors, it is uncertain as to the time it would take to
remarket it or the success of the effort.
Kitty Hawk's reorganization plan was approved by the bankruptcy court
in late July 2002 and the company is expected to emerge from bankruptcy on
August 30, 2002 at which time the aircraft sale will be completed.
14
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The following discussion should be read in conjunction with the
Financial Statements of the Partnership and the Notes thereto. 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 differences 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 portfolio of commercial passenger
and freighter aircraft and makes 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 for working
capital purposes. The amount of future cash distributions, if any, will be
determined periodically after an evaluation of the Partnership's operating
results and its current and expected financial position.
The Partnership invests working capital and cash flow from operations
prior to distributions to the partners in a fund that invests in short-term,
highly liquid investments. At June 30, 2002, the Partnership's unrestricted cash
and cash equivalents of $2,574,000 was primarily invested in such a fund. This
amount was $5,870,000 less than the Partnership's unrestricted cash and
equivalents at December 31, 2001 of $8,444,000. This decrease in unrestricted
cash was primarily due to payment on the principal of the note payable,
partially offset by cash proceeds from the sale of aircraft and cash provided by
operating activities.
For the six months ended June 30, 2002 ("2002 Period"), net cash
provided by operating activities was $2,422,000, comprising net income of
$2,780,000 for the 2002 Period adjusted by $923,000 of non-cash depreciation,
$328,000 gain on sale of aircraft, a write down of $500,000 and changes in
assets and liabilities, as discussed below.
Payable to affiliates decreased by 71%, or $2,330,000, from $3,276,000
at December 31, 2001 to $946,000 at June 30, 2002, principally due to the
reversal of accrued management fees for the fiscal years ending December 31,
2000, December 31, 2001 and for the quarter ending March 31, 2002. Based upon
Preferred Return as determined pursuant to the Partnership Agreement and the
estimated value of the Partnership's remaining assets, a determination was made
to reverse the fees accrued but unpaid to the General Partners for fiscal year
2000 through the first quarter of 2002.
Accounts payable and accrued expenses decreased by 44%, or $99,000,
from $225,000 at December 31, 2001 to $126,000 at June 30, 2002, due to
obligations accrued in the quarter ended March 31, 2002, subsequently paid in
the quarter ended June 30, 2002.
Rent and other receivables increased by 429%, or $1,030,000, from
$240,000 at December 31, 2001 to $1,270,000 at June 30, 2002. This increase came
from the note receivable from the Capital Cargo sale in March 2002, partially
offset by the payment of December 31, 2001 receivables from Falcon in 2002.
15
Other Assets decreased by 95%, or $234,000, from $246,000 at December
31, 2001 to $12,000 at June 30, 2002. This decrease is due to the $220,000
prepaid debt placement fees on the note payable being expensed in the 2002
Period when the note was paid off.
Accrued interest payable was $28,000 at December 31, 2001, compared to
zero at June 30, 2002. This decrease is due to the payoff of the Partnership's
note in April 2002.
Maintenance reserves payable decreased by 27%, or $629,000, from
$2,315,000 at December 31, 2001 to $1,686,000 at June 30, 2002. This decrease is
comprised of $1,277,000 of Capital Cargo's reserves that were applied towards
the sale price, offset by $648,000 of cash collections from TNT and Vanguard for
maintenance reserves.
Net cash provided by investing activities for the 2002 Quarter was
$1,191,000, as a result of the cash proceeds from the sale of the A-300, the
Boeing 727 formerly leased to Capital Cargo, and the Boeing 727 formerly leased
to Falcon.
Net investment in the MD-81 Trust decreased by 2%, or $22,000, from
$1,296,000 at December 31, 2001 to $1,274,000 at June 30, 2002, as a result of
no cash distributions and of negative equity in earnings of $22,000.
Cash used for financing activities was $9,483,000 for the 2002 Period,
which represents repayments of the note payable.
Partnership's capital was $19,536,000, an increase of approximately
$2,780,000 or 17% from $16,756,000 at December 31, 2001, as a result of net
income of $2,780,000.
The Partnership paid no distributions during the first six months of
2002. The retirement of the Partnership debt has freed cash flows for
operational needs and distributions. However, with the sale of the aircraft,
rental revenue from aircraft has declined substantially. Therefore, the
Partnership will not restore regular quarterly distributions, but will make
distributions when there is sufficient cash after a review of current and
expected future operations of the Partnership.
Results of Operations
- ---------------------
The Partnership's net income was $2,224,000 for the three months ended
June 30, 2002 (the "2002 Quarter") and $2,780,000 for the six months ended June
30, 2002 (the "2002 Period"), respectively, as compared to net income of
$5,344,000 and $5,477,000 for the three months and six months ended June 30,
2001 (the "2001 Quarter" and the "2001 Period"), respectively. This increase was
principally due to the reversal of accrued management fees for the years 2000,
2001, and the first quarter of 2002, a decrease in write downs in the 2002
Period and Quarter and an overall decrease of the operating expenses, partially
offset by a decrease in rental income in the 2002 Period and Quarter and a
higher gain on sale of aircraft in the 2001 Period and Quarter.
Rental income decreased by 27%, or $420,000, from $1,538,000 for the
2001 Quarter to $1,118,000 for the 2002 Quarter, and by 46%, or $1,954,000, from
$4,257,000 for the 2001 Period to $2,303,000 for the 2002 Period. This decrease
is principally due to the sale of the Boeing 727, formerly leased to Falcon, the
16
Boeing 727, formerly leased to Capital Cargo, and the McDonnell Douglas MD-82,
formerly leased to TWA, no rent payments from the DC-9, formerly leased to
Aeromexico, and the decrease in rent payments from Kitty Hawk
The Partnership recognized revenue of $2,330,000 for the 2002 Period
and $2,502,000 for the 2002 Quarter, respectively, which are the reversal of
accrued management fees for the years ending December 31, 2000 and 2001, and the
first quarter of 2002.
Gain on the sale of aircraft was zero and $328,000 for the 2002 Quarter
and the 2002 Period, respectively, as compared to $6,156,000 for both the 2001
Quarter and 2001 Period. This decrease was attributable to the gain recognized
from the sale of the Boeing 727, formerly leased to Capital Cargo, and the sale
of the A-300 airframe and engines in the 2002 Quarter and 2002 Period, as
compared to the sale of the McDonnell Douglas MD-82 to American Airlines in the
2001 Quarter.
Equity in earnings of the MD-81 trust decreased by 105%, or $231,000,
from earnings of $220,000 for the 2001 Quarter to a deficit of $11,000 for the
2002 Quarter, and by 107%, or $353,000, from earnings of $331,000 for the 2001
Period to a deficit of $22,000 for the 2002 Period, due to no receipts of rent
from Vanguard in the 2002 Quarter and the 2002 Period.
Other Income decreased by 100%, from $360,000 for the 2001 Quarter to
zero for the 2002 Quarter, and from $1,160,000 for the 2001 Period to zero in
the 2002 Period. This decrease was due to the maintenance reserves collected
from Falcon and taken to income in the 2001 Quarter and the receipt of payments
from VASP to settle claims and legal fees of the Partnership for the engine that
was damaged while leased to VASP in the 2001 Period and 2001 Quarter.
Interest expense decreased by 27%, or $87,000, from $322,000 for the
2001 Quarter to $235,000 for the 2002 Quarter, and by 57%, or $517,000, from
$910,000 for the 2001 Period to $393,000 for the 2002 Period, respectively, due
to the lower balance of the Partnership's debt in 2002 Quarter, and the payoff
of the loan in April 2002.
General and administrative expenses increased by 104%, or $72,000, from
$69,000 for the 2001 Quarter to $141,000 for the 2002 Quarter, and by 66%, or
$110,000, from $167,000 for the 2001 Period to $277,000 for the 2002 Period.
This increase is due primarily to an increase in legal fees related to the
Capital Cargo litigation.
Direct lease expenses decreased by 26%, or $20,000, from $77,000 for
the 2001 Quarter to $57,000 for the 2002 Quarter, and by 54%, or $128,000, from
$238,000 for the 2001 Period to $110,000 for the 2002 Period. This decrease is
due primarily to costs associated with assessing the damage to the engine, which
had been leased to VASP in the 2001 Quarter and Period. There were no such costs
in the 2002 Quarter and Period.
Depreciation and amortization expense decreased by 51%, or $475,000,
from $936,000 for the 2001 Quarter to $461,000 for the 2002 Quarter, and by 64%,
or $1,625,000, from $2,548,000 for the 2001 Period to $923,000 for the 2002
Period. This decrease is due primarily to the sale of the Boeing 727, formerly
leased to Falcon, the Boeing 727, formerly leased to Capital Cargo, and the
McDonnell Douglas MD-82 formerly leased to TWA, the off-lease status of the
DC-9, formerly leased to Aeromexico.
17
Write downs decreased by 50%, or $491,000, from $991,000 for the 2001
Quarter to $500,000 for the 2002 Quarter, and by 72%, or $1,291,000, from
$1,791,000 for the 2001 Period to $500,000 for the 2002 Period. This decrease
was due to write downs for the A-300, formerly leased to VASP, and the Boeing
727, formerly leased to Falcon in the 2001 Quarter and the 2001 Period, as
compared to less of a write down for the Boeing 727, formerly leased to TNT in
the 2002 Period and Quarter.
Management and re-lease fees payable to the General Partners decreased
by 100%, from $584,000 for the 2001 Quarter to zero for the 2002 Quarter, and
from $854,000 for the 2001 Period to zero for the 2002 Period. Based upon
Preferred Return as determined pursuant to the Partnership Agreement and the
estimated value of the Partnership's remaining assets, a determination was made
to reverse the fees accrued but unpaid to the General Partners for fiscal year
2000 through the first quarter of 2002.
Other:
Timothy F. Kelly, age 29, was appointed as Vice President, Secretary,
Treasurer and Chief Financial and Accounting Officer of the Administrative
General Partner, Air Transport Leasing, Inc. Mr. Kelly has also served as a
Divisional Vice President within the Private Investments Department of UBS
PaineWebber Inc. since June 2002. Mr. Kelly previously served in the UBS
PaineWebber Retirement Consulting Services Department where he was employed
since December 1997 as a Product Specialist. He was previously employed as an
Analyst for the WTR Consulting Group, from December 1994 to December 1997. He
received his Bachelor of Arts degree in Spanish in May 1994 from Hamilton
College and is a candidate for a Master of Business Administration in Finance
and Accounting from New York University in December 2002.
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PART II. OTHER INFORMATION
--------------------------
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Partnership filed a report on Form 8-K during the second
quarter of the fiscal year ending December 31, 2002.
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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 14, 2002 By: /s/ TIMOTHY F. KELLY
-------------------------------------
Timothy F. Kelly
Vice President, Secretary, Treasurer,
and Chief Financial and Accounting
Officer
20