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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 September 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 --- ---
This document consists of 16 pages.
PEGASUS AIRCRAFT PARTNERS II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR
THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 2004 and December 31, 2003 3
Statements of Income/(Loss) for the three months
ended September 30, 2004 and 2003 4
Statements of Income/(Loss) for the nine months
ended September 30, 2004 and 2003 5
Statements of Partners' Capital for the nine
months ended September 30, 2004 and 2003 6
Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 4. Controls and Procedures 12
PART II OTHER INFORMATION
Item 6. Exhibits 13
Signature 14
Certifications 15
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
--------------------
PEGASUS AIRCRAFT PARTNERS II, L.P.
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BALANCE SHEETS - SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
---------------------------------------------------------------------
2004 2003
---- ----
(in thousands, except unit data)
ASSETS
------
Cash and cash equivalents $2,761 $3,446
Aircraft, net 375 375
Other assets 8 25
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Total Assets $3,144 $3,846
====== ======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Accounts payable and accrued expenses $ 114 $ 132
Payable to affiliates 535 974
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Total Liabilities 649 1,106
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PARTNERS' CAPITAL:
General Partners $ 25 $ 27
Limited Partners (7,255,000 units issued and
outstanding in 2004 and 2003) 2,470 2,713
------ ------
Total Partners' Capital 2,495 2,740
------ ------
Total Liabilities and Partners' Capital $3,144 $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 (LOSS)/INCOME AND COMPREHENSIVE (LOSS)/INCOME
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
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(unaudited)
2004 2003
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Gain on sale of aircraft from insurance
settlement $ -- $ 819
Interest 7 6
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7 825
----------- -----------
EXPENSES:
Write-downs -- 515
General and administrative 78 69
Direct lease 18 32
----------- -----------
96 616
----------- -----------
NET AND COMPREHENSIVE (LOSS)/INCOME $ (89) $ 209
=========== ===========
NET (LOSS)/INCOME ALLOCATED:
To the General Partners $ (1) $ 2
To the Limited Partners (88) 207
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$ (89) $ 209
=========== ===========
NET (LOSS)/INCOME PER LIMITED PARTNERSHIP UNIT $ (0.01) $ .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.
4
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
-----------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
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(unaudited)
2004 2003
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Gain on sales of aircraft from insurance
settlement $ -- $ 819
Interest 17 41
Other income 2 --
----------- -----------
19 860
----------- -----------
EXPENSES:
Write-downs -- 515
General and administrative 194 220
Direct lease 70 126
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264 861
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NET AND COMPREHENSIVE LOSS $ (245) $ (1)
=========== ===========
NET LOSS ALLOCATED:
To the General Partners $ (2) $ --
To the Limited Partners (243) (1)
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$ (245) $ (1)
=========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (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
-------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 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 (2) (243) (245)
------- ------- -------
Balance, September 30, 2004 $ 25 $ 2,470 $ 2,495
======= ======= =======
Balance, January 1, 2003 $ 59 $ 5,680 $ 5,739
Net loss -- (1) (1)
Distribution to partners (31) (2,901) (2,932)
------- ------- -------
Balance, September 30, 2003 $ 28 $ 2,778 $ 2,806
======= ======= =======
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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
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(unaudited)
2004 2003
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (245) $ (1)
Adjustments to reconcile net loss to net
cash used in provided by operating activities:
Gain on sale of aircraft from insurance settlement -- (819)
Write-downs -- 515
Change in assets and liabilities:
Rent and other receivables -- 9
Other assets 17 3
Accounts payable and accrued expenses (18) 34
Payable to affiliates (439) --
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Net cash used in operating activities (685) (259)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of aircraft - insurance settlement -- 819
Proceeds from sale of aircraft - note collections -- 1,361
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Net cash provided by investing activities -- 2,180
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CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to partners -- (2,932)
------- -------
Net cash used in financing activities -- (2,932)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (685) (1,011)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,446 4,569
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,761 $ 3,558
======= =======
The accompanying notes are an integral part
of these interim financial statements.
7
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 2004
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(unaudited)
Note 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, 2003. Operating
results for the nine-month period ended September 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. Pursuant to the Partnership's Limited
Partnership Agreement ("Partnership Agreement"), the amount of the distribution
was allocated to the Limited Partners' based on their Capital Account balances
prior to the final distribution.
Note 2. Aircraft
--------
The Partnership's net investment in aircraft as of September 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. 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 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 aircraft 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 and are being offered for sale.
The Partnership will seek to dispose of the remaining aircraft 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. Based
on anticipated future revenues, the Partnership has not accrued during 2003 and
2004, and 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.
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
nine months ended September 30, 2004 payable to the Administrative General
Partner.
9
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 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 September 30, 2004, the Partnership's unrestricted
cash and cash equivalents of $2,761,000 were primarily invested in such a fund.
This amount was $685,000 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 $685,000, for the nine months
ended September 30, 2004 ("2004 Period"), which was a net loss of $245,000 for
the 2004 Period adjusted by changes in assets and liabilities, as discussed
below (see Note 2 also).
Other Assets decreased by $17,000, or 68%, from $25,000 at December 31,
2003 to $8,000 at September 30, 2004, primarily due to the receipt of returned
insurance premium credits of $21,000 and the reversal of pre-paid insurance from
the 2004 Quarter of $2,000, 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 $18,000, or 14%,
from $132,000 at December 31, 2003 to $114,000 at September 30, 2004, primarily
due to payments of obligations accrued at December 31, 2003.
Payables to affiliates decreased by $439,000, or 45%, from $974,000 at
December 31, 2003 to $535,000 at September 30, 2004, due to a payment to the
General Partners of accrued management fees.
Partnership capital was $2,495,000 at September 30, 2004, a decrease of
$245,000, or 9% from $2,740,000 at December 31, 2003, due to a net loss of
$245,000 during the 2004 Period.
10
Results of Operations
- ---------------------
The Partnership's net loss was $89,000 and $245,000 for the three and
nine months ended September 30, 2004 (the "2004 Quarter" and the "2004 Period"),
respectively, as compared to net income of $209,000 for the three months ended
September 30, 2003 (the "2003 Quarter") and a net loss of $1,000 for the nine
months ended September 30, 2003 (the "2003 Period"). The Partnership's higher
net loss for the 2004 Quarter and Period, as compared to the 2003 Quarter and
Period, is primarily due to the absence, during the 2004 Quarter and Period, of
gain on sales of aircraft from insurance settlement. This was offset by lower
direct lease and general and administrative expenses, as discussed below.
Gain on sales of aircraft from insurance settlements decreased from
$819,000 for the 2003 Quarter and Period, to $0 for the 2004 Quarter and Period,
due to proceeds received from insurance compensation for hail damage to the
McDonnell Douglas DC-9 received in 2003 that did not reoccur in 2004.
General and administrative expenses increased by $9,000, or 13%, from
$69,000 for the 2003 Quarter, to $78,000 for the 2004 Quarter. This increase was
primarily due to an increase in the estimates of the transfer agent, audit and
tax and investor reporting expenses.
General and administrative expenses decreased by $26,000, or 12%, from
$220,000 for the 2003 Period, to $194,000 for the 2004 Period, respectively.
This decrease was primarily due to an overall decrease in accrued liabilities
related to general and administrative expenses.
Direct lease expenses decreased by $14,000 and $56,000, or 44% and 45%,
from $32,000 and $126,000 for the 2003 Quarter and 2003 Period, respectively, to
$18,000 and $70,000 for the 2004 Quarter and 2004 Period, respectively. This
decrease was due primarily due to lower aircraft storage and insurance costs.
11
Item 4. Controls and Procedure
----------------------
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
--------------------------
Item 6. Exhibits
(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.
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: November 12, 2004 By: /s/ CLIFFORD B. WATTLEY
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Clifford B. Wattley
President and Director
14