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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, 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 .
--- ---
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 JUNE 30, 2004
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - June 30, 2004 and December 31, 2003 3
Statements of Income/(Loss) for the three months
ended June 30, 2004 and 2003 4
Statements of Income/(Loss) for the six months
ended June 30, 2004 and 2003 5
Statements of Partners' Capital for the six
months ended June 30, 2004 and 2003 6
Statements of Cash Flows for the six months
ended June 30, 2004 and 2003 7
Notes to Financial Statements 8
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 - JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
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2004 2003
---- -----
(in thousands, except unit data)
ASSETS
------
Cash and cash equivalents $3,274 $3,446
Aircraft, net 375 375
Other assets 10 25
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Total Assets $3,659 $3,846
====== ======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Accounts payable and accrued expenses $ 100 $ 132
Payable to affiliates 974 974
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Total Liabilities 1,074 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) 2,559 2,713
------ ------
Total Partners' Capital 2,585 2,740
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Total Liabilities and Partners' Capital $3,659 $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) AND COMPREHENSIVE INCOME/(LOSS)
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FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
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(unaudited)
2004 2003
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Interest $ 5 $ 12
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5 12
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EXPENSES:
General and administrative 55 79
Direct lease 32 25
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87 104
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NET AND COMPREHENSIVE INCOME/(LOSS) $ (82) $ (92)
=========== ===========
NET INCOME/(LOSS) ALLOCATED:
To the General Partners $ (1) $ (1)
To the Limited Partners (81) (91)
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$ (82) $ (92)
=========== ===========
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ (0.01) $ (0.01)
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 7,255,000 7,255,000
=========== ===========
The accompanying notes are an integral part
of these interim financial statements.
4
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF INCOME/(LOSS) AND COMPREHENSIVE INCOME/(LOSS)
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FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
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(unaudited)
2004 2003
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Interest $ 10 $ 34
Other income 2 --
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12 34
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EXPENSES:
General and administrative 115 150
Direct lease 52 94
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167 244
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NET AND COMPREHENSIVE INCOME/(LOSS) $ (155) $ (210)
=========== ===========
NET INCOME/(LOSS) ALLOCATED:
To the General Partners $ (1) $ (2)
To the Limited Partners (154) (208)
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$ (155) $ (210)
=========== ===========
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ (0.02) $ (0.03)
=========== ===========
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.
5
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF PARTNERS' CAPITAL
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FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
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(unaudited)
General Limited
Partners Partners Total
-------- -------- -----
In thousands)
Balance, January 1, 2004 $ 27 $ 2,713 $ 2,740
Net loss (1) (154) (155)
------- ------- -------
Balance, June 30, 2004 $ 26 $ 2,559 $ 2,585
======= ======= =======
Balance, January 1, 2003 $ 59 $ 5,680 $ 5,739
Net loss (2) (208) (210)
Distribution to partners (29) (2,902) (2,931)
------- ------- -------
Balance, June 30, 2003 $ 28 $ 2,570 $ 2,598
======= ======= =======
The accompanying notes are an integral part
of these interim 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, 2004 AND 2003
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(unaudited)
2004 2003
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (155) $ (210)
Adjustments to reconcile net income/(loss) to net
cash used in provided by operating activities:
Change in assets and liabilities:
Other assets 15 (6)
Accounts payable and accrued expenses (32) 18
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Net cash used in operating activities (172) (198)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 1,370
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Net cash provided by investing activities -- 1,370
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NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (172) 1,172
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,446 4,569
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,274 $ 5,741
======= =======
The accompanying notes are an integral part
of these interim financial statements.
7
PEGASUS AIRCRAFT PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(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 six-month period ended June 30, 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 within twelve
months of the final aircraft sale. The final distribution will be allocated to
the Limited Partners with positive balances in their Capital Accounts (as
defined in the Partnership's Limited Partnership Agreement) in proportion to how
their positive balance bears to the sum of all Capital Accounts with positive
balances.
Note 2. Aircraft
--------
The Partnership's net investment in aircraft as of June 30, 2004 and
December 31, 2003 consisted of the following (in thousands):
2004 2003
---- ----
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
======== ========
8
Boeing 727-200 Advanced Aircraft. The aircraft was returned at the end
of the lease in June 2002, the return condition payment was taken into revenue
and the aircraft and engines has been offered for sale on an "as-is, where-is"
basis. During the year ended December 31, 2003, the Partnership wrote down the
aircraft's carrying value by an additional $90,000 to its estimated realizable
value.
DC-10-10 Freighter. The McDonnell Douglas DC-10 aircraft was returned
to the Partnership in December 2002, the return condition payment was taken into
revenue and the aircraft and engines has been offered for sale on an "as-is,
where-is" basis. The Partnership wrote down the aircraft's carrying value by an
additional $200,000 during the year ended December 31, 2003 to its estimated
realizable value.
DC-9 Aircraft. The McDonnell Douglas DC-9 was returned to the
Partnership in July 2001, the return condition payment was taken into revenue
and the aircraft and engines has been offered for sale on an "as-is, where-is"
basis. 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 to its estimated realizable value.
General. In the sale of its aircraft, the Partnership is essentially
competing in the market for used aircraft and aircraft parts. After September
11, 2001, a large number of aircraft of a similar type to that of the
Partnership's aircraft were removed from service. 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, Incentive 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.
9
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, 2004 payable to the Administrative General Partner.
Note 4. Subsequent Event.
On July 22, 2004, Pegasus Aircraft Partners II, L.P. paid $236,218 and
$203,896 to Pegasus Aircraft Management Corporation and Air Transport Leasing,
Inc, respectively, for accrued management, incentive management and release
fees.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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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 June 30, 2004, the Partnership's unrestricted cash
and cash equivalents of $3,274,000 were primarily invested in such a fund. This
amount was $172,000 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 $172,000, for the six months
ended June 30, 2004 ("2004 Period"), which was a net loss of $155,000 for the
2004 Period adjusted by changes in assets and liabilities, as discussed below.
Other Assets decreased by $15,000, or 60%, from $25,000 at December 31,
2003 to $10,000 at June 30, 2004, primarily due to the receipt of returned
insurance premium credits of $21,000, which was partially offset by an increase
in the insurance premium receivable of $6,000 during the 2004 Period.
Accounts payable and accrued expenses decreased by $32,000, or 24%,
from $132,000 at December 31, 2003 to $100,000 at June 30, 2004, primarily due
to payments of obligations accrued at December 31, 2003.
Partnership capital was $2,585,000 at June 30, 2004, a decrease of
$155,000, or 6% from $2,740,000 at December 31, 2003, due to a net loss of
$155,000 during the 2004 Period.
11
Results of Operations
- ---------------------
The Partnership's net loss was $82,000 and $155,000 for the three and
six months ended June 30, 2004 (the "2004 Quarter" and the "2004 Period"),
respectively, as compared to a net loss of $92,000 and $210,000 for the three
and six months ended June 30, 2003 (the "2003 Quarter" and the "2003 Period"),
respectively. The Partnership's higher net loss for the 2003 Quarter and Period,
as compared to the 2004 Quarter and Period, is primarily due to lower direct
lease and general and administrative expenses, as discussed below.
General and administrative expenses decreased by $24,000 and $35,000,
or 30% and 23%, from $79,000 and $150,000 for the 2003 Quarter and 2003 Period,
respectively, to $55,000 and $115,000 for the 2004 Quarter and 2004 Period,
respectively. This decrease was primarily due to an overall decrease in accrued
liabilities related to general and administrative expenses.
Direct lease expenses increased by $7,000, or 28%, from $25,000 for the
2003 Quarter to $32,000 for the 2004 Quarter. This increase was due primarily to
an increase in insurance premiums in the 2004 Period. The increase in insurance
premiums for the 2004 Period is due to less insurance premium credits being
recognized in the 2004 Period than in the 2003 Period.
Direct lease expenses decreased by $42,000, or 45%, from $94,000 for
the 2003 Period to $52,000 for the 2004 Period. This decrease was due primarily
due to lower aircraft storage costs.
12
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.
13
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)
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.
14
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 13, 2004 By: /s/ CLIFFORD B. WATTLEY
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Clifford B. Wattley
President and Director
15