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, 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 0-17712
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PEGASUS AIRCRAFT PARTNERS, L.P.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-1099968
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(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
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(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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This document consists of 33 pages.
PEGASUS AIRCRAFT PARTNERS, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 2002 and
December 31, 2001 3
Statements of Income/(Loss) for the three months
ended September 30, 2002 and 2001 4
Statements of Income for the nine months ended
September 30, 2002 and 2001 5
Statements of Partners' Capital for the nine months
ended September 30, 2002 and 2001 6
Statements of Cash Flows for the nine months ended
` September 30, 2002 and 2001 7
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 14
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Certifications 21
2
PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
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PEGASUS AIRCRAFT PARTNERS, L.P.
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BALANCE SHEETS -- SEPTEMBER 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
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2002 2001
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(in thousands, except unit data)
ASSETS
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Cash and cash equivalents $4,228 $2,516
Aircraft, net 718 3,941
Other assets -- 16
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Total Assets $4,946 $6,473
====== ======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Accounts payable and accrued expenses 109 124
Payable to affiliates -- 1,751
Maintenance reserves payable 221 1,154
Deferred rental income and deposits -- 386
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Total Liabilities $ 330 $3,415
====== ======
PARTNERS' CAPITAL:
General Partners 49 34
Limited Partners (4,000,005 units issued and 4,567 3,024
outstanding in 2002 and 2001)
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Total Partners' Capital 4,616 3,058
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Total Liabilities and Partners' Capital $4,946 $6,473
====== ======
The accompanying notes are an integral part of these financial statements.
3
PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF INCOME/(LOSS)
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FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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(unaudited)
2002 2001
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(in thousands, except unit
data and per unit amounts)
REVENUE:
Rentals from operating leases $ 196 $ 724
Interest 15 15
Equity in (deficit)/earnings of MD-81 Trust (526) 148
Other Income 917 --
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602 887
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EXPENSES:
Depreciation and amortization 130 262
Write-downs 488 --
Management and re-lease fees -- 53
General and administrative 117 77
Direct lease -- 454
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735 846
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NET INCOME/(LOSS) $ (133) $ 41
=========== ===========
NET INCOME/(LOSS) ALLOCATED:
To the General Partners $ (2) $ --
To the Limited Partners (131) 41
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$ (133) $ 41
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NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ (0.03) $ 0.01
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 4,000,005 4,000,005
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF INCOME
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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(unaudited)
2002 2001
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(in thousands, except unit
data and per unit amounts)
REVENUE:
Rentals from operating leases $ 864 $ 2,793
Gain on sale of aircraft 91 7,317
Interest 43 69
Management and re-lease fees reversal 1,495 --
Equity in (deficit)/earnings of MD-81 Trust (548) 479
Other 917 848
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2,862 11,506
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EXPENSES:
Depreciation and amortization 520 994
Write-downs 488 1,447
Management and re-lease fees -- 727
General and administrative 257 184
Interest -- 332
Direct lease 39 486
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1,304 4,170
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NET INCOME $ 1,558 $ 7,336
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NET INCOME ALLOCATED:
To the General Partners $ 15 $ 73
To the Limited Partners 1,543 7,263
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$ 1,558 $ 7,336
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NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.39 $ 1.82
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 4,000,005 4,000,005
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF PARTNERS' CAPITAL
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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(unaudited)
General Limited
Partners Partners Total
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(dollar amounts in thousands)
Balance, January 1, 2002 $ 34 $ 3,024 $ 3,058
Net income 15 1,543 1,558
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Balance, September 30, 2002 $ 49 $ 4,567 $ 4,616
======== ======== ========
Balance, January 1, 2001 $ 50 $ 4,665 $ 4,715
Net income 73 7,263 7,336
Distributions declared to partners (12) (1,200) (1,212)
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Balance, September 30, 2001 $ 111 $ 10,728 $ 10,839
======== ======== ========
The accompanying notes are an integral part of these financial statements.
6
PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF CASH FLOWS
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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(unaudited)
2002 2001
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(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,558 $ 7,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of aircraft (91) (7,317)
Depreciation and amortization 520 994
Write-downs 488 1,447
Equity in (deficit)/earnings of MD-81 Trust 548 (479)
Change in assets and liabilities
Rent and other receivable -- 82
Other assets 16 5
Accounts payable and accrued expenses (15) 14
Accrued interest payable -- (105)
Payable to affiliates (1,751) 704
Deferred rental income and deposits (236) --
Maintenance reserves payable (566) (719)
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Net cash provided by operating activities 471 1,962
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of aircraft 1,241 9,500
Cash distributions from investments in
MD-81 Trust -- 755
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Net cash provided by investing activities 1,241 10,255
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid to partners -- (1,212)
Repayment of note payable -- (11,050)
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Net cash used in financing activities -- (12,262)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,712 (45)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,516 1,941
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,228 $ 1,896
======== ========
The accompanying notes are an integral part of these financial statements.
7
PEGASUS AIRCRAFT PARTNERS, L.P.
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STATEMENTS OF CASH FLOWS
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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(unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ 437
Non cash activities:
Maintenance reserves recognized upon sale
of aircraft 367 --
Security deposit recognized upon sale of
aircraft 150 --
The accompanying notes are an integral part of these financial statements.
8
PEGASUS AIRCRAFT PARTNERS, L.P.
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NOTES TO FINANCIAL STATEMENTS
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SEPTEMBER 30, 2002
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(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 nine-month period ended September 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 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 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. The Partnership's interest
in the MD-81 Trust was sold on October 25, 2002 (see Note 4 "Subsequent
Events").
2. Aircraft
The Partnership's net investment in aircraft as of September 30, 2002
and December 31, 2001 consisted of the following (in thousands):
9
2002 2001
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Aircraft on operating leases, at cost $ 13,981 $ 26,951
Less: Accumulated depreciation (7,015) (12,259)
Write-downs (6,541) (11,692)
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$ 425 $ 3,000
======== =========
Net Investment in MD-81 Trust $ 193 $ 741
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Aircraft held for lease, at cost 11,915 11,915
Less: Accumulated depreciation (6,365) (6,365)
Write-downs (5,450) (5,350)
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$ 100 $ 200
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Aircraft, net $ 718 $ 3,941
======== =========
Vanguard Airlines, Inc. ("Vanguard") Lease. US Airways returned the
McDonnell Douglas 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.
Vanguard, as many other airlines, has been adversely affected by events
of September 11, 2001. After being denied a loan guarantee for a second time by
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. Vanguard rejected the
lease and returned the MD-81 aircraft to the Partnership on September 30, 2002
and it is being marketed for sale in an "as-is" condition. While the Partnership
will file a claim in the bankruptcy, any recovery is unlikely.
The lease agreement had been 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 was also responsible for funding
maintenance reserves. From the beginning of the lease in August 2001 through
September 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 wrote down the value of the aircraft by $1,030,000 for
the Trust ($515,000 for the Partnership for its 50% interest) in the third
quarter of 2002. As of October 25, 2002, the aircraft was sold (See Note 4.
"Subsequent Events").
Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). One of the Boeing 727-200s
was converted to a freighter, hushkitted and delivered to Kitty Hawk. The Kitty
Hawk lease was for 84 months, the lease rate was $117,800 per month and
maintenance reserves were to be paid at the rate of $375 per flight hour. Kitty
Hawk provided a security deposit of $236,000.
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
10
not make a full payment of the monthly rent, and the Partnership agreed to a
payment of only half of the amount due. The Partnership also agreed to a 50%
reduction of the maintenance reserves due for the months of September, October,
and November 2001. The Partnership also agreed to a payment of 71% of the rents
of December 2001 and January and February 2002 and no maintenance reserves for
these months. However, Kitty Hawk could not make any payment in March and April
2002. The Partnership agreed in May 2002 to a sale of the aircraft to Kitty Hawk
for a $750,000 note, subject to documentation and approval of the Bankruptcy
court. The lease was reinstated with a per month lease rate of $65,000,
beginning in May 2002. The sale of the aircraft to Kitty Hawk is anticipated to
be completed by year-end with lease payments made from May 2002 through the
completion of the sale being applied to the note. The remainder of the note is
scheduled to be paid with payments of $65,000 per month through April 2003.
The Partnership wrote down in the third quarter of 2002 the value of
the aircraft by $388,000 to a value of $425,000, based on the remaining balance
of the note at the end of September 2002.
TNT Transport International B.V. Lease. The TNT lease ended on March
24, 2002 and the Partnership sold the aircraft to TNT in the first quarter of
2002. The Partnership received cash proceeds of $1,241,000 and also retained, as
part of the sale, TNT's maintenance reserves of $367,000 and the security
deposit of $150,000.
Boeing 727-200 Aircraft. The Boeing 727-200, formerly leased to
Discovery Airlines (Sky Trek), was returned in March 2000. The Partnership has
been unsuccessful in marketing the aircraft to a new lessee and for sale in an
"as is, where-is" condition. Major airlines such as United and American
accelerated the retirement of this aircraft type after the decline in passenger
traffic caused by the events of September 11, 2001. Therefore, there are a large
number of aircraft, many younger in age or better condition, that are parked and
there are a limited number of operators. During the second quarter 2001, the
Partnership recognized $848,000 of paid-in maintenance reserves as income and
wrote down the aircraft's value by $1,766,000 to $200,000. During the third
quarter of 2002, the Partnership wrote down the aircraft's value to $100,000
based on the sale offer of the engines of the aircraft in October 2002 (see Note
4. "Subsequent Events"). The aircraft and engines are being offered for sale on
an "as-is, where-is" basis.
General. After the sale of the MD-81 in October 2002 and the sale of
the engines of the Boeing 727-200 in November 2002 (see Note 4. "Subsequent
Events") and if the sale to Kitty Hawk aircraft is consummated, of the
Partnership's original 5.5 aircraft, the only aircraft the Partnership will own
will be the Boeing 727 . The Partnership will seek to dispose of the remaining
aircraft as soon as possible.
3. Transactions With Affiliates
The Management Fee, Incentive 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 years 2000 through the first quarter
of 2002. In June 2002, fees previously accrued of $1,495,000 were taken into
11
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.
Base Management Fees: The General Partners are entitled to receive a
quarterly subordinated base management fee in an amount generally equal to 1.5%
of gross aircraft rentals, net of re-lease fees paid. Of this amount, 1.0% is
payable to the Managing General Partner and 0.5% is payable to the
Administrative General Partner. Management Fees of $8,000 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 flows and sales proceeds (net of resale fees). Of this
amount, 2.5% is payable to the Managing General Partner and 2.0% is payable to
the Administrative General Partner. Incentive Management Fees of $99,000 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 $18,000 were accrued for the three months ended March 31, 2002
and this accrual was reversed at June 30, 2002.
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 paid to the
Administrative General Partner in the three or nine months ending September 30,
2002.
Other: During the nine months ended September 30, 2002, the Partnership
paid $19,000 to a maintenance facility for the storage of the off-lease
aircraft. Until March 2002, the maintenance facility was affiliated with the
Managing General Partner.
4. Subsequent Event:
A special distribution of $0.50 per Unit was paid on October 25, 2002
to Unit holders of record as of September 30, 2002. Funds for the distribution
are from rental payments, asset sales and working capital. An 8K report was
filed on October 15, 2002 to disclose this distribution. With this distribution,
based on an estimate of value for the remaining aircraft, the per Unit estimated
value as reported in the December 31, 2001 10-K has been revised to $0.71 per
original $20 Unit after the October 25, 2002 distributions. There can be no
assurance that the Partnership would receive the values for the aircraft used in
this estimated valuation if sold today or in the future. Also, the estimated
valuation does not necessarily represent the benefit an investor will realize if
an investor continues to hold Units through the life of the program.
12
On October 25, 2002, the Partnership and its affiliated Partnership,
Pegasus Aircraft Partner II, L.P., sold the MD-81 for $500,000 ($250,000 for the
Partnership for its 50% interest).
On October 28, 2002, the Partnership entered into a Letter of Intent to
sell the three Pratt & Whitney JT8D-7B engines of the ex-Discovery Boeing
727-200 passenger plane for $100,000. Closing of the transactions is dependent
on a records inspection and final documentation.
13
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
include risks and other uncertainties. The Partnership's actual results may
differ materially from those anticipated in these Forward-Looking statements.
Factors that might cause such a difference include those discussed below, as
well as general economic and business conditions, competition and other factors
discussed elsewhere in this report. The Partnership undertakes no obligation to
release publicly any revisions to the 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 and one half commercial passenger
aircraft (50% ownership of the MD-81 Trust) and one freighter aircraft and
distributes to the partners cash flow generated by operations or asset sales in
the current and/or prior periods. In certain situations, the Partnership may
retain cash flow from operations to finance authorized capital expenditures, or
for general working capital purposes. The amount of future cash distributions
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 its distributions to the partners in short-term, highly liquid
investments or a fund that invests in such instruments. At September 30, 2002,
the Partnership's unrestricted cash and cash equivalents of $4,228,000 were
primarily invested in such a fund. This amount was $1,712,000 more than the
Partnership's unrestricted cash and cash equivalents at December 31, 2001 of
$2,516,000. This increase in unrestricted cash was attributable to cash from
operating activities of $471,000 and proceeds of aircraft sales of $1,241,000.
There were no cash financing activities during the nine months ended September
30, 2002.
For the nine months ended September 30, 2002 ("2002 Period"), net cash
provided by operating activities was $471,000, comprised of net income of
$1,558,000 for the 2002 Period adjusted by $520,000 of non-cash depreciation,
$91,000 gain on sale of aircraft, write downs of $488,000, equity in deficit of
the MD-81 Trust of $548,000, and changes in assets and liabilities, as discussed
below.
Payable to affiliates decreased by 100%, from $1,751,000 at December
31, 2001 to zero at September 30, 2002, due to the reversal of accrued
management fees for the fiscal years ending December 31, 2000, December 31, 2001
and for the first quarter of 2002, and the payment of remaining 1999 fees in
August 2002. Based upon Preferred Return as determined pursuant to the
Partnership Agreement and the estimated value of the Partnership's remaining
assets, a decision was made to reverse the fees accrued but unpaid to the
General Partners for fiscal year 2000 through the first quarter of 2002.
Deferred rental income and security deposit decreased by 100%, from
$386,000 at December 31, 2001, to zero at September 30, 2002. This decrease was
due to $150,000 of TNT's security deposit being applied to the proceeds of the
sale of the Boeing 727-200 aircraft in the first quarter of 2002, and $236,000
of the Kitty Hawk's deposit being taken into income in the third quarter of
2002.
14
Maintenance reserves payable decreased by 81% or $933,000 from
$1,154,000 at December 31, 2001, to $221,000 at September 30, 2002. This
decrease was primarily due to the $367,000 maintenance reserves for the TNT
aircraft which were applied to the sale of the aircraft in the first quarter of
2002, and the $681,000 maintenance reserves for the Kitty Hawk aircraft which
were taken into income in the third quarter of 2002, partially offset by
maintenance reserves collected from Vanguard and TNT.
Cash flows from investing activities were $1,241,000 for the 2002
Period, which is the result of cash proceeds of the sale of the Boeing 727,
formerly leased to TNT.
Net investment in the MD-81 Trust decreased by 74%, or $548,000, from
$741,000 at December 31, 2001 to $193,000 at September 30, 2002, due to a
deficit in equity interest of $ 548,000. This deficit is due to the non payment
of rent from Vanguard in 2002 and a write down of $1,030,000 for the Trust
($515,000 for the Partnership for its 50% interest) of the aircraft in the third
quarter 2002.
Partnership capital was $4,616,000, an increase of approximately
$1,558,000 or 51% from $3,058,000 at December 31, 2001, as a result of net
income of $1,558,000.
Results of Operations
The Partnership's net income was $1,558,000 for the nine months ended
September 30, 2002 (the "2002 Period") as compared to net income of $7,336,000
for the nine months ended September 30, 2001 (the "2001 Period"), respectively.
This decrease was principally due to the deficit in equity in the MD-81 Trust,
the decrease in rental income in the 2002 Period, more gain on sales of aircraft
in the 2001 Period, partially offset by the reversal of accrued management fees
for the years 2000, 2001, and the first quarter of 2002, a decrease in
depreciation expense, a decrease in direct lease expense, less write downs and
no interest expense in the 2002 period.
The Partnership's net loss was $133,000 for the three months ended
September 30, 2002 (the "2002 Quarter") as compared to net income of $41,000 for
the three months ended September 30, 2001 (the "2001 Quarter"), respectively.
This decrease was due to the deficit in equity in the MD-81 Trust, the decrease
in rental income and the write down expense in the 2002 Quarter, partially
offset by the Kitty Hawk's security deposit and maintenance reserves taken into
income in the 2002 Quarter, the decrease of depreciation expense and no direct
lease expense in the 2002 Quarter.
Rentals from operating leases decreased by 69%, or $1,929,000, from
$2,793,000 for the 2001 Period to $864,000 for the 2002 Period, and by 73%, or
$528,000, from $724,000 for the 2001 Quarter to $196,000 for the 2002 Quarter.
This decrease is due primarily to the lack of rental revenue in the 2002 Period
from the McDonnell Douglas MD-82 aircraft sold to American Airlines in April
2001, the reduction in rent payment from Kitty Hawk, and the decrease in rental
income due to the sale of the Boeing 727 to TNT in March 2002.
15
Income from reversal of accrued management fees were $1,495,000 for the
2002 Period. This was the reversal, in the second quarter of 2002, of accrued
management fees for the years ending December 31, 2000 and 2001, and the first
quarter of 2002. There was no such income in the 2002 Quarter and in the 2001
Period and Quarter.
Gain on sale of aircraft decreased by 99%, or $7,226,000, from
$7,317,000 for the 2001 Period to $91,000 for the 2002 Period (the sale of the
McDonnell Douglas MD-82 aircraft to American Airlines in the 2001 Period versus
the sale of the Boeing 727 to TNT in the 2002 Period). There was no aircraft
sale in the 2002 Quarter and in the 2001 Quarter.
Equity in earnings of the MD-81 Trust decreased by 214%, or $1,027,000,
from earnings of $479,000 for the 2001 Period to a deficit of $548,000 for the
2002 Period, and by 455%, or $674,000, from earnings of $148,000 for the 2001
Quarter to a deficit of $526,000 for the 2002 Quarter, due to no receipts of
rent from Vanguard in the 2002 Period and the 2002 Quarter, and a write down of
the aircraft in the 2002 Quarter.
Other Income increased by 8%, or $69,000, from $848,000 for the 2001
Period to $917,000 to the 2002 Period, and by 100%, or $917,000, from zero in
the 2001 Quarter to $917,000 in the 2002 Quarter. This increase was due to the
recognition of income from the maintenance reserves collected from the Boeing
727-200, leased to Kitty Hawk in the 2002 Quarter, which was more than the
recognition of income from the maintenance reserves collected from the Boeing
727-200, formerly leased to Sky Trek, in the 2001 Period. There was no such
income in the 2001 Quarter.
Depreciation decreased by 48%, or $474,000, from $994,000 for the 2001
Period to $520,000 for the 2002 Period, and by 50%, or $132,000, from $262,000
for the 2001 Quarter to $130,000 for the 2002 Quarter. This decrease was
primarily due to the sale of the McDonnell Douglas MD-82 to American Airlines in
April 2001, and the sale of the Boeing 727 to TNT in March 2002.
Write down expense decreased by 66%, or $959,000, from $1,447,000 for
the 2001 Period to $488,000 for the 2002 Period, respectively, due to more write
down in the 2001 Period to reduce the carrying value to an approximation of the
salvage value of the Boeing 727-200 aircraft, previously leased to Sky Trek, as
compared to $388,000 write down in the 2002 Period to reduce the carrying value
of the Boeing 727-200 aircraft, leased to Kitty Hawk to the remaining balance of
the sale price of the aircraft and $100,000 write down to reduce the carrying
value of the Boeing 727-200 to its sale value.
Write down expense increased by 100%, from zero for the 2001 Quarter to
$488,000 for the 2002 Quarter, respectively, due to $388,000 write down in the
2002 Quarter of the Boeing 727-200 aircraft, leased to Kitty Hawk, to the
remaining balance of the sale price of the aircraft and $100,000 write down of
the Boeing 727-200 to its sale value.
Management fees decreased by 100%, from $727,000 for the 2001 Period to
zero for the 2002 Period, and from $53,000 for the 2001 Quarter to zero for the
2002 Quarter. 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 years 2000 through the first quarter of 2002.
16
There was no interest expense in the 2002 Period and the 2002 Quarter,
as compared to $332,000 in the 2001 Period and zero in the 2001 Quarter, due to
the retirement of the Partnership's bank note on April 9, 2001.
Direct Lease expense decreased by 92%, or $447,000, from $486,000 for
the 2001 Period to $39,000 for the 2002 Period, and by 100%, from $454,000 for
the 2001 Quarter to zero for the 2002 Quarter. This decrease was due to the
inspection and maintenance of the MD-81 aircraft prior to its lease to Vanguard
Airlines in August 2001.
17
ITEM 4. Controls and Procedures
-----------------------
In the 90-day period before filing of this report, 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. 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 the evaluation, that the
Partnership's disclosure controls and procedures are suitable and effective for
the Partnership, 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. Subsequent to the date when the disclosure controls and
procedures were evaluated, there have not been any significant changes in the
Partnership's disclosure controls or procedures or in other factors that could
significantly affect such controls or procedures.
18
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 on October 15, 2002
reporting under Item 5 "Other Events".
19
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, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
Administrative General Partner
Date: November 14, 2002 By: /s/ CLIFFORD B. WATTLEY
--------------------- -----------------------
Clifford B. Wattley
President and Director
20
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Richard S. Wiley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus Aircraft
Partners, L.P.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
21
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ RICHARD S. WILEY
--------------------
Richard S. Wiley
President and Chairman of the Board
of Pegasus Aircraft Management Corporation,
General Partner of Pegasus Aircraft Partners, L.P.
22
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Clifford B. Wattley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus Aircraft
Partners, L.P.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
23
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: /s/ CLIFFORD B. WATTLEY
-----------------------
Clifford B. Wattley
President and Director of Air Transport Leasing, Inc.
Administrative General Partner of Pegasus Aircraft Partners, L.P.
24