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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 March 31, 2004
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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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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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This document consists of 17 pages.
PEGASUS AIRCRAFT PARTNERS II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - March 31, 2004 and December 31, 2003 3
Statements of Income/(Loss) for the three months
ended March 31, 2004 and 2003 4
Statements of Partners' Capital for the three
months ended March 31, 2004 and 2003 5
Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 4. Controls and Procedures 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 14
Signature 15
Certifications 16
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
--------------------
PEGASUS AIRCRAFT PARTNERS II, L.P.
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BALANCE SHEETS - MARCH 31, 2004 (UNAUDITED) AND DECEMBER 31, 2003
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2004 2003
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(in thousands, except unit data)
ASSETS
Cash and cash equivalents $3,397 $3,446
Aircraft, net 375 375
Other assets 4 25
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Total Assets $3,776 $3,846
====== ======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses $ 135 $ 132
Payable to affiliates 974 974
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Total Liabilities 1,109 1,106
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PARTNERS' CAPITAL:
General Partners $ 26 $ 27
Limited Partners (7,255,000 units issued and
outstanding in 2004 and 2003) 2,641 2,713
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Total Partners' Capital 2,667 2,740
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Total Liabilities and Partners' Capital $3,776 $3,846
====== ======
The accompanying notes are an integral part
of these interim financial statements.
3
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF INCOME/(LOSS)
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FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
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(unaudited)
2004 2003
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(in thousands, except unit
data and per unit amounts)
REVENUES:
Interest $ 5 $ 22
Other income 2 --
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7 22
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EXPENSES:
General and administrative 60 71
Direct lease 20 69
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80 140
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NET INCOME/(LOSS) $ (73) $ (118)
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NET INCOME/(LOSS) ALLOCATED:
To the General Partners $ (1) $ (1)
To the Limited Partners (72) (117)
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$ (73) $ (118)
=========== ===========
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ (.01) $ (0.02)
=========== ===========
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 interim financial statements.
4
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF PARTNERS' CAPITAL
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FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
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(unaudited)
General Limited
Partners Partners Total
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(In thousands)
Balance, January 1, 2004 $ 27 $ 2,713 $ 2,740
Net loss (1) (72) (73)
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Balance, March 31, 2004 $ 26 $ 2,641 $ 2,667
======= ======= =======
Balance, January 1, 2003 $ 59 $ 5,680 $ 5,739
Net loss (1) (117) (118)
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Balance, March 31, 2003 $ 58 $ 5,563 $ 5,621
======= ======= =======
The accompanying notes are an integral part of
these interim financial statements.
5
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
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(unaudited)
2004 2003
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (73) $ (118)
Adjustments to reconcile net income/(loss) to net
cash used in provided by operating activities:
Change in assets and liabilities:
Rent and other receivables -- 9
Other assets 21 --
Accounts payable and accrued expenses 3 53
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Net cash used in operating activities (49) (56)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 1,296
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Net cash provided by investing activities -- 1,296
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NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (49) 1,240
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,446 4,569
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,397 $ 5,809
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The accompanying notes are an integral part of
these interim financial statements.
6
PEGASUS AIRCRAFT PARTNERS II, L.P.
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NOTES TO FINANCIAL STATEMENTS
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MARCH 31, 2004
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(unaudited)
Note 1. General
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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, 2003. Operating
results for the three-month period ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2004.
Pegasus Aircraft Partners II, L.P. is attempting to sell the remaining
aircraft in an "as-is, where-is" condition. With the sale of the final aircraft,
the Partnership will continue to hold its funds in an interest bearing
money-market account. A final distribution of the funds, net of intervening
expenses and any other liabilities, is anticipated to be made upon the final
aircraft sale.
Note 2. Aircraft
--------
The Partnership's net investment in aircraft as of March 31, 2004 and
December 31, 2003 consisted of the following (in thousands):
2004 2003
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Aircraft held for sale, at cost $ 49,860 $ 49,860
Less: Accumulated depreciation (26,237) (26,237)
Write-downs (23,248) (23,248)
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Aircraft, net $ 375 $ 375
======== ========
TNT Transport International B.V. ("TNT") Lease. In June 1998, the
Partnership delivered a Boeing 727-200 advanced aircraft formerly leased to
Continental and which had been converted to a freighter to a European freight
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carrier, TNT Transport International B.V. ("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 contracted with a
third party service provider for maintenance of the engines and provided a
$150,000 security deposit.
TNT returned the aircraft at the end of the lease in June 2002 and paid
$507,000 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
sale or lease, the Partnership wrote down the aircraft by $500,000 in the second
quarter of 2002.
In the third quarter of 2002, the Partnership took into income the
$150,000 security deposit and the $391,000 maintenance reserves collected from
TNT and the $507,000 payment in lieu of the aircraft meeting return conditions,
originally booked to maintenance reserves. The Partnership also wrote down the
aircraft's value by $1,315,000. During the year ended December 31, 2003, the
Partnership wrote down the aircraft's carrying value by an additional $90,000.
The aircraft and engines are being offered for sale on an "as-is, where-is"
basis.
Emery Worldwide Airlines, Inc. ("Emery") Lease. In June 2000, work
commenced to convert the DC-10-10 to a freighter for Emery Worldwide Airlines
Inc. ("Emery"). The Emery lease was for 84 months with rent of $218,000 per
month. The lease also provided 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.
Due to Federal Aviation Administration certification issues, Emery
grounded the DC-10 but had continued to pay rent. The Partnership and Emery
reached a Return and Early Termination Agreement on October 24, 2002, where the
Partnership accepted the early termination of the lease for a fee of $11,925,000
which included $436,000 security deposit previously received from Emery. The
DC-10 aircraft was returned to the Partnership. In December 2002, the
Partnership wrote down the aircraft by $14,268,000 based on the early
termination fees received and a purchase offer for the aircraft, which was not
consummated. The Partnership wrote down the aircraft's carrying value by an
additional $200,000 during the year ended December 31, 2003. The Partnership is
offering the aircraft for sale on an "as-is, where-is" basis.
DC-9 Aircraft. One of the Partnership's McDonnell Douglas DC-9s was
formerly leased to Aeromexico. The lease expired in February 2000, but
Aeromexico continued to pay rent for the aircraft on a month-to-month basis and
returned the aircraft in July 2001. In August 2001, Aeromexico paid $688,000 in
return condition settlements and $56,500 of remaining rent. The aircraft, while
parked in Texas, was damaged during a hailstorm in early 2002. The Partnership
filed an insurance claim and on September 30, 2003, the Partnership received
insurance proceeds of $819,421 as compensation for the hail damage to this
aircraft. Because the decision was made not to repair the aircraft to its
pre-damage condition, the Partnership recognized the proceeds as revenue and
wrote down the aircraft's carrying value by an additional $225,000 during the
year ended December 31, 2003. The Partnership retains ownership of the aircraft
and the airframe and engines are being offered for sale on an "as-is, where-is"
basis.
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General. In the sale of its aircraft, the Partnership is essentially
competing in the market for used aircraft. The Partnership will seek to dispose
of the remaining aircraft and engines as soon as possible in an "as-is,
where-is" condition, although there can be no assurance as to when the sales or
dispositions will be completed.
Note 3. Transactions With Affiliates
----------------------------
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 the amount of the 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 years 2000 through the
first quarter of 2002. In June 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.
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 was reversed at June 30, 2002.
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 was reversed
at June 30, 2002.
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 was reversed at June 30, 2002.
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
three months ended March 31, 2004 payable to the Administrative General Partner.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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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 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, if any, 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 one commercial passenger aircraft and
two freighter aircraft, which are off-lease. The Partnership is attempting to
sell the remaining three aircraft, in an "as-is, where-is" condition. With the
sale of the final aircraft, the Partnership will continue to hold its funds in
an interest bearing money-market account. A final distribution of the funds, net
of intervening expenses and any other liabilities, is anticipated to be made
within twelve months of the final aircraft sale.
The Partnership invests working capital and cash flow from operations
prior to its distribution to the partners in a fund that invests in short-term,
highly liquid investments. At March 31, 2004, the Partnership's unrestricted
cash and cash equivalents of $3,397,000 were primarily invested in such a fund.
This amount was $49,000 less than the Partnership's unrestricted cash and cash
equivalents at December 31, 2003 of $3,446,000. This decrease in unrestricted
cash was primarily attributable to cash used in operating activities.
Net cash used in operating activities was $49,000, for the three months
ended March 31, 2004 ("2004 Quarter"), which was a net loss of $73,000 for the
2004 Quarter adjusted by changes in assets and liabilities, as discussed below.
Other Assets decreased by $21,000, or 84%, from $25,000 at December 31,
2003 to $4,000 at March 31, 2004, primarily due to the receipt of returned
insurance premium credits of $21,000.
Accounts payable and accrued expenses decreased by $3,000, or 2.3%,
from $132,000 at December 31, 2003 to $135,000 at March 31, 2004, primarily due
to payments of obligations accrued at December 31, 2003.
Partnership's capital was $2,667,000 at March 31, 2004, a decrease of
approximately $73,000, or 2.7% from $2,741,000 at December 31, 2003, due to a
net loss of $73,000 during the 2004 Quarter.
10
Results of Operations
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The Partnership's net loss was $73,000 for the three months ended March
31, 2004 (the "2004 Quarter") as compared to $118,000 net loss for the three
months ended March 31, 2003 (the "2003 Quarter"). The Partnership's higher net
loss for the 2003 Quarter, as compared to the 2004 Quarter, is primarily due to
lower direct lease and general and administrative expenses, as discussed below.
General and administrative expenses decreased by $11,000, or 15%, from
$71,000 for the 2003 Quarter to $60,000 for the 2004 Quarter. This decrease was
primarily due to an overall decrease in accrued liabilities related to general
and administrative expenses.
Direct lease expenses decreased by $49,000, or 71%, from $69,000 for
the 2003 Quarter to $20,000 for the 2004 Quarter. This decrease was due
primarily due to lower aircraft storage and maintenance costs as well as a
decrease in insurance premiums in the 2004 Quarter.
11
Item 4. Controls and Procedures
-----------------------
The President and Chairman of the Board of Pegasus Aircraft Management
Corporation and the President of Air Transport Leasing, Inc. (collectively, the
"Certifying Officers") have evaluated the effectiveness of the Partnership's
disclosure controls and procedures as of the end of the period covered by this
report. These disclosure controls and procedures are those controls and
procedures which are designed to insure that all the information required to be
disclosed by the Partnership in all its periodic reports filed with the
Securities and Exchange Commission is recorded, processed, summarized and
reported, within the time periods specified by the Commission and that the
information is communicated to the President and Chairman of the Board of
Pegasus Aircraft Management Corporation and the President of Air Transport
Leasing, Inc. on a timely basis.
The Certifying Officers concluded, based on such evaluation, that the
Partnership's disclosure controls and procedures were suitable and effective for
the Partnership as of the end of the period covered by this report, taking into
consideration the size and nature of the Partnership's business and operations.
No significant deficiencies or material weaknesses in the controls or procedures
were detected, so no corrective actions needed to be taken.
12
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
32.2 Section 1350 Certification.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter for which this report is filed.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners II, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
Administrative General Partner
Date: May 13, 2004 By: /s/ CLIFFORD B. WATTLEY
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Clifford B. Wattley
President and Director
14