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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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-18387
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PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1111757
----------------------- -------------------
(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
------------------------- -----
(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
This document consists of 36 pages.
PEGASUS AIRCRAFT PARTNERS II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 2002 and
December 31, 2001 3
Statements of Loss for the three months
ended September 30, 2002 and 2001 4
Statements of Income for the nine months 5
ended September 30, 2002 and 2001
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 16
Financial Condition and Results of Operations
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 22
Signature 23
Certifications 24
2
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
--------------------
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
BALANCE SHEETS -- SEPTEMBER 30, 2002 (UNAUDITED) AND DECEMBER 31, 2001
----------------------------------------------------------------------
ASSETS
------
2002 2001
---- -----
(in thousands, except unit data)
Cash and cash equivalents $ 3,294 $ 8,444
Rent and other receivables 1,165 240
Aircraft, net 16,129 23,964
Other assets 6 246
------- -------
Total Assets $20,594 $32,894
======= =======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Accounts payable and accrued expenses $ 126 $ 225
Payable to affiliates 974 3,276
Maintenance reserves payable 221 2,315
Notes payable -- 9,483
Accrued interest payable -- 28
Deferred rental income and deposits 436 811
------- -------
Total Liabilities 1,757 16,138
------- -------
COMMITMENTS AND CONTINGENCIES (Note 4)
PARTNERS' CAPITAL:
General Partners $ 190 $ 169
Limited Partners (7,255,000 units issued and
outstanding in 2002 and 2001) 18,647 16,587
------- -------
Total Partners' Capital 18,837 16,756
------- -------
Total Liabilities and Partners' Capital $20,594 $32,894
======= =======
The accompanying notes are an integral part
of these financial statements.
3
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
STATEMENTS OF LOSS
------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
------------------------------------------------------
(unaudited)
2002 2001
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ 849 $ 1,735
Interest 11 32
Interest on VASP judgment -- 555
VASP judgment -- 2,991
Return condition settlement -- 688
Equity in (deficit)/earnings of MD-81 Trust (526) 148
Other 1,865 141
----------- -----------
2,199 6,290
----------- -----------
EXPENSES:
Depreciation and amortization 344 462
Write-downs 2,250 5,803
Management and re-lease fees -- 151
Interest -- 258
General and administrative 152 57
Direct lease 152 566
----------- -----------
2,898 7,297
----------- -----------
NET LOSS $ (699) $ (1,007)
=========== ===========
NET LOSS ALLOCATED:
To the General Partners $ (7) $ (11)
To the Limited Partners (692) (996)
----------- -----------
$ (699) $ (1,007)
=========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (0.10) $ (0.14)
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 7,255,000 7,255,000
=========== ===========
The accompanying notes are an integral part
of these financial statements.
4
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF INCOME
--------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
-----------------------------------------------------
(unaudited)
2002 2001
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ 3,152 $ 5,992
Gain on sale of aircraft 328 6,156
Interest 55 101
Interest on VASP judgment -- 567
VASP judgment and settlement -- 3,791
Return condition settlements -- 688
Management and re-lease fees reversal 2,330 --
Equity in (deficit)/earnings of MD-81 Trust (548) 479
Other 1,865 501
----------- -----------
7,182 18,275
----------- -----------
EXPENSES:
Depreciation and amortization 1,267 3,010
Write-downs 2,750 7,594
Management and re-lease fees -- 1,005
Interest 393 1,168
General and administrative 429 224
Direct lease 262 804
----------- -----------
5,101 13,805
----------- -----------
NET INCOME $ 2,081 $ 4,470
=========== ===========
NET INCOME ALLOCATED:
To the General Partners $ 21 $ 44
To the Limited Partners 2,060 4,426
----------- -----------
$ 2,081 $ 4,470
=========== ===========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.29 $ 0.61
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 7,255,000 7,255,000
=========== ===========
The accompanying notes are an integral part
of these financial statements.
5
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
-----------------------------------------------------
(unaudited)
General Limited
Partners Partners Total
-------- -------- -----
(dollar amounts in thousands)
Balance, January 1, 2002 $ 169 $ 16,587 $ 16,756
Net income 21 2,060 2,081
-------- -------- --------
Balance, September 30, 2002 $ 190 $ 18,647 $ 18,837
======== ======== ========
Balance, January 1, 2001 $ 218 $ 21,358 $ 21,576
Net income 44 4,426 4,470
Distributions to partners declared (15) (1,451) (1,466)
-------- -------- --------
Balance, September 30, 2001 $ 247 $ 24,333 $ 24,580
======== ======== ========
The accompanying notes are an integral part
of these financial statements.
6
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF CASH FLOWS
------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
-----------------------------------------------------
(unaudited)
2002 2001
---- ----
(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,081 $ 4,470
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of aircraft (328) (6,156)
Depreciation and amortization 1,267 3,010
Equity in deficits/(earnings) of
MD-81 Trust 548 (479)
Write-downs 2,750 7,594
Change in assets and liabilities:
Rent and other receivables 100 244
VASP Receivable -- (3,434)
Other assets 240 65
Accounts payable and accrued expenses (99) (305)
Accrued interest payable (28) (91)
Payable to affiliates (2,302) 982
Deferred rental income and deposits (375) (533)
Maintenance reserves payable (817) 146
-------- --------
Net cash provided by operating
activities 3,037 5,513
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash distribution from investment in
MD-81 Trust -- 755
Proceeds from sale of aircraft 1,296 9,500
Capitalized aircraft improvements -- (829)
-------- --------
Net cash provided by investing
activities 1,296 9,426
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distribution to partners -- (1,466)
Repayment of note payable (9,483) (10,513)
-------- --------
Net cash used in financing activities (9,483) (11,979)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (5,150) 2,960
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,444 2,297
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,294 $ 5,257
======== ========
The accompanying notes are an integral part
of these financial statements.
7
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
-----------------------------------------------------
(unaudited)
2002 2001
---- ----
(dollar amounts in thousands)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 199 $ 1,220
NONCASH TRANSACTIONS:
Maintenance reserves recognized upon sale
of aircraft 1,277 --
Receivable arising from sale of Boeing 727-200 1,165 --
The accompanying notes are an integral part
of these financial statements.
8
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 2002
------------------
(unaudited)
1. General
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the General
Partners, all adjustments necessary for a fair presentation have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant assumptions and estimates relate to useful life and
recoverability of the aircraft values. Actual results could differ from such
estimates. The unaudited financial statements should be read in conjunction with
the financial statements and footnotes thereto included in the Partnership's
annual report on Form 10-K for the year ended December 31, 2001. Operating
results for the 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 II, L.P. beginning January 1, 2002. The
implementation of this Statement is not expected to have a material effect on
the Partnership's financial position, results of operations or cash flows.
The McDonnell Douglas MD-81 aircraft is owned by a trust ("MD-81
Trust") in which the Partnership has a 50% interest. The Partnership 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 with 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 5. "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
---- ----
Aircraft on operating leases, at cost $ 41,494 $ 49,941
Less: Accumulated depreciation (21,449) (22,556)
Write-downs (4,952) (8,567)
---------- ----------
$ 15,093 $ 18,818
--------- ---------
Net Investment in MD-81 Trust $ 471 $ 1,296
--------- ---------
Aircraft held for lease or sale, at cost $ 36,001 $ 73,616
Less: Accumulated depreciation (16,636) (36,474)
Write-downs (18,800) (33,292)
---------- ----------
565 3,850
--------- ---------
Aircraft, net $ 16,129 $ 23,964
========= =========
Vanguard Airlines Lease ("Vanguard"). US Airways returned the MD-81 in
July 2001, and in August 2001, the Trust entered into a three-year lease of the
aircraft with Vanguard Airlines, a Kansas City, Missouri airline providing
passenger services to a number of U.S. cities.
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) and wrote down the
value of the investment in the MD-81 Trust to $471,000 in the third quarter of
2002 which represents the sale value of the aircraft of $250,000 plus the
$221,000 maintenance reserves collected from Vanguard. As of October 25, 2002,
the aircraft was sold (see Note 5. "Subsequent Events")
TNT Transport International B.V. ("TNT") Lease. In June 1998 the
Partnership delivered a Boeing 727-200 advanced aircraft, converted to a
freighter and formerly leased to Continental (one of two Boeing 727s which were
received as part of the early termination of the Airbus A-300 lease by
Continental) to a European freight carrier, TNT, for a lease term of four years.
The lease provided for monthly rentals of $123,500 and airframe and landing gear
reserves aggregating $85 per flight hour. TNT contracted with a third party
10
service provider for maintenance of the engines and provided a $150,000 security
deposit. At December 31, 2001, the Partnership wrote down the TNT aircraft to a
value of $2,241,000, based on sale discussions plus six months rent at $123,500
per month.
While, pursuant to the lease, TNT had renewal options, it returned the
aircraft in June 2002 and paid a net payment of $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 lease or sale, the Partnership
wrote down the aircraft by $500,000 in the second quarter of 2002.
In the third quarter of 2002, the Partnership took the $150,000
security deposit from TNT, the $391,000 maintenance reserves collected from TNT,
and the $507,000 payment in lieu of the aircraft meeting return conditions into
income. The Partnership also wrote down the aircraft's value by an additional
$1,315,000. The aircraft and engines are being offered for sale on an "as-is,
where-is" basis.
Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). One of the Boeing 727-200s,
received from Continental as partial satisfaction of the Airbus A-300 return
conditions was converted to a freighter, hushkitted and delivered to Kitty Hawk
in November, 1999. The Kitty Hawk lease was for 84 months, the lease rate was
$112,700 per month and maintenance reserves were to be paid at the rate of $375
per flight hour. Kitty Hawk provided a security deposit of $225,400.
Kitty Hawk filed for bankruptcy protection under Chapter 11 on May 1,
2000, but stayed current with regard to its lease payments through September
2001. For the months of October, November, and December 2001, Kitty Hawk could
not make a full payment of the monthly rent, and the Partnership agreed to a
payment of only half the amount due. The Partnership agreed to a 50% reduction
of the maintenance reserves due for the months of September, October, and
November 2001. The Partnership also agreed to a payment of 71% of the rents for
December 2001, and January and February 2002 and no maintenance reserves
payments 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 was
completed in October 2002 with lease payments made from May 2002 through
September 2002 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 (see Note 5.
"Subsequent Events").
In 2001, the Partnership wrote down the value of the aircraft by $4.3
million to a value of $1.1 million, based on collected reserves and the
estimated value of the lease unencumbered aircraft.
The partnership wrote down in the third quarter of 2002 the value of
the aircraft by $453,000 to a value of $425,000, based on the remaining balance
of the note at the end of September 2002.
Emery Worldwide Airlines, Inc. ("Emery") Lease. The lease on the
McDonnell Douglas DC10-10 with Continental Airlines expired on September 15,
1999. Continental continued to pay rent until the aircraft achieved the return
conditions, which was accomplished on December 16, 1999. The aircraft was stored
11
at a modification facility until June 2000 at which time work commenced to
convert it to a freighter for Emery Worldwide Airlines Inc. ("Emery"). The Emery
lease is for 84 months with rent of $218,000 per month. The lease also provides
for a two-year renewal at $200,000 per month, followed by three additional
two-year renewal options at the then fair market rental. Emery provided a
security deposit of $436,000. The aircraft was delivered to Emery in December
2000. At December 31, 2001, the conversion work totaled approximately $13.6
million. Emery has grounded the DC-10 and has agreed to relinquish its flight
certification to the FAA in December 2002, but has continued to pay rent.
The Partnership and Emery reached a Return and Early Termination
Agreement on October 24, 2002 (see Note 5. "Subsequent Event").
Capital Cargo International Airlines, Inc.("Capital Cargo"). Capital
Cargo failed to make its lease and reserve payments relating to a Boeing 727-200
freighter starting on January 25, 2001. A notice of default was sent on February
8, 2001 and Capital Cargo returned the Boeing 727-200 on May 23, 2001. On June
14, 2001, the Partnership sued Capital Cargo for breach of its monetary
obligations and damages relating to the failure of the aircraft to meet return
conditions. On March 15, 2002, the Partnership and Capital Cargo reached a court
mediated settlement. According to the settlement, the Partnership agreed to sell
the aircraft leased to Capital Cargo for $2,000,000 and the Partnership retained
maintenance reserves of $1,277,000 and a $220,000 security deposit. The $2.0
million purchase price for the aircraft will be paid through an initial payment
of $625,000, which was received in April 2002, and a twelve-month,
interest-bearing note with 11 payments of $35,000 and a balloon payment of
$1,050,000 at the end.
Airbus A-300 Aircraft. In 1998 and 1999, the Partnership leased, on a
short-term (six month minimum) basis, its two CF6-50C2 engines from the Airbus
A-300 aircraft to Viacao Aerea Sao Paulo S.A. ("VASP"), a Brazilian carrier.
VASP fell in arrears with respect to rent and maintenance reserves and the
Partnership won a judgment in court of $3.0 million for past rents and reserves.
VASP-owned property in Florida was sold by a court appointed liquidating trustee
and the Partnership received the $3.0 million judgment and $500,000 interest in
late 2001. In addition, the Partnership received, earlier in 2001, an $800,000
negotiated settlement payment for legal costs and compensation for damage to one
of the engines while leased by VASP. The Partnership wrote down the aircraft an
additional $1,865,000 as of year-end 2001 (for a total of $2,665,000), resulting
in a value of $320,000 for the airframe and remaining engines. In March 2002,
the Partnership sold the A-300 airframe for $121,000 and in a separate
transaction, the Partnership sold the A-300 engines for $200,000.
DC-9 Aircraft. One of the Partnership's McDonnell Douglas DC-9's 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 rent. The aircraft, while parked in
Texas, was damaged during a hailstorm earlier in the year 2002. The Partnership
has filed an insurance claim and the General Partners believe there is adequate
insurance in place to compensate for the damage. The aircraft and engines are
being offered for sale on an "as is, where-is" basis.
Lockheed L-1011 Aircraft. Based on the amount of time the L-1011 has
been unsuccessfully offered for lease or sale and the large number of similar
aircraft available for lease or sale, the aircraft was written down from $1.7
12
million to a zero value in 2001. The aircraft is being offered for sale on an
"as-is, where-is" basis.
Engines: The Partnership still has in its possession three Pratt &
Whitney JT8D-9A from the Boeing 727 airframe that was sold to Falcon Express in
December 2001. The engines are being offered for sale on an "as-is, where-is"
basis. Based on a sale offer in October 2002 (see Note 5. "Subsequent Events"),
the Partnership wrote down their value to $75,000 in the third quarter of 2002.
The engines were sold on October 28, 2002 (see Note 5."Subsequent Events").
General. The Partnership will seek to dispose of the remaining aircraft
and engines as soon as possible, although there can be no assurance as to when
the sales will be completed.
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 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.
13
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, 2002 payable to the Administrative General
Partner.
Other: During the nine months ended September 30, 2002, the Partnership
paid $40,000 to a maintenance facility which, until March 2002, was affiliated
with the Managing General Partner for the storage of the off-lease aircraft and
$49,000 for aircraft parts and services to a company owned by the President and
Director of the Managing General Partner.
4. Notes Payable
The Partnership obtained a $30 million lending facility on April 14,
2000, and an initial draw down was made of $19.5 million. The facility was later
limited to $25 million because the Aeromexico leases were not extended for two
years. Additional funds were borrowed primarily for the DC 10-10 freighter
conversion. Partial payments on the note were made through proceeds of asset
sales, insurance from the DC-9 incident and other sources. On March 31, 2002,
the Partnership paid down the note payable by $5 million resulting in a balance
of $3,695,000. On May 1, 2002, the remaining debt was retired.
5. Subsequent Events:
Kitty Hawk's reorganization plan was approved by the bankruptcy court
in late July 2002 and the Partnership signed the Purchase Agreement with Kitty
Hawk on October 1, 2002. According to the terms of the Purchase Agreement, Kitty
Hawk agreed to buy the aircraft for a note of $750,000, against which Kitty Hawk
has already paid $65,000 a month since May 2002. Kitty Hawk's note payments of
$65,000 per month are scheduled through April 2003.
On October 25, 2002, the Partnership and its affiliated Partnership,
Pegasus Aircraft Partners, L.P., sold the MD-81 for $500,000 ($250,000 for the
Partnership for its 50% interest).
On October 24, 2002, the Partnership agreed with Emery to terminate the
lease and accept the return of the DC 10-10F for a termination fee of
$11,925,000, which included $436,000 security deposit previously collected from
Emery.
The Partnership distributed $1.50 per Unit on October 31, 2002 to Unit
holders of record as of September 30, 2002. Funds for the distribution were from
working capital as well as the Emery termination payment. An 8K report was filed
on October 31, 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 $1.06 per original
$20 Unit after the October 31, 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
14
valuation does not necessarily represent the benefit an investor will realize if
an investor continues to hold Units through the life of the program.
In October 2002, the Partnership offered to sell the three Pratt &
Whitney JT8D engines for $75,000 from the aircraft frame that was sold to Falcon
Express in 2001. The sale was completed on November 6, 2002.
15
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- --------------
The following discussion should be read in conjunction with the
Financial Statements of the Partnership and the Notes thereto. This report may
contain, in addition to historical information, Forward-Looking statements that
involve risks and other uncertainties. The Partnership's actual results may
differ materially from those anticipated in these Forward-Looking statements.
Factors that might cause such differences include those discussed below, as well
as general economic and business conditions, competition and other factors
discussed elsewhere in this report. The Partnership undertakes no obligation to
release publicly any revisions to these Forward-Looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
anticipated or unanticipated events.
Liquidity and Capital Resources
- -------------------------------
The Partnership owns and manages a portfolio of commercial passenger
and freighter aircraft and makes distributions to the partners of net cash flow
generated by operations. In certain situations, the Partnership may retain cash
flow from operations to finance authorized capital expenditures or for working
capital purposes. The amount of future cash distributions, if any, will be
determined periodically after an evaluation of the Partnership's operating
results and its current and expected financial position.
The Partnership invests working capital and cash flow from operations
prior to distributions to the partners in a fund that invests in short-term,
highly liquid investments. At September 30, 2002, the Partnership's unrestricted
cash and cash equivalents of $3,294,000 was primarily invested in such a fund.
This amount was $5,150,000 less than the Partnership's unrestricted cash and
equivalents at December 31, 2001 of $8,444,000. This decrease in unrestricted
cash was primarily due to payment on the principal of the note payable,
partially offset by cash proceeds from the sale of aircraft and cash provided by
operating activities.
For the nine months ended September 30, 2002 ("2002 Period"), net cash
provided by operating activities was $3,037,000, comprised of net income of
$2,081,000 for the 2002 Period adjusted by $1,267,000 of non-cash depreciation,
$328,000 gain on sale of aircraft, a write down of $2,750,000 and changes in
assets and liabilities, as discussed below.
Payable to affiliates decreased by 70%, or $2,302,000, from $3,276,000
at December 31, 2001 to $974,000 at September 30, 2002, principally due to the
reversal of accrued management fees for the fiscal years ending December 31,
2000, December 31, 2001 and for the quarter ending March 31, 2002. Based upon
Preferred Return as determined pursuant to the Partnership Agreement and the
estimated value of the Partnership's remaining assets, a determination was made
to reverse the fees accrued but unpaid to the General Partners for fiscal year
2000 through the first quarter of 2002.
Accounts payable and accrued expenses decreased by 44%, or $99,000,
from $225,000 at December 31, 2001 to $126,000 at September 30, 2002, due to
payments of obligations accrued at December 31, 2001.
16
Rent and other receivables increased by 385%, or $925,000, from
$240,000 at December 31, 2001 to $1,165,000 at September 30, 2002. This increase
results from the note receivable from the Capital Cargo sale in March 2002,
partially offset by the payment of December 31, 2001 receivables from Falcon in
2002.
Other Assets decreased by 98%, or $240,000, from $246,000 at December
31, 2001 to $6,000 at September 30, 2002. This decrease is principally due to
the $220,000 prepaid debt placement fees on the note payable being expensed in
the 2002 Period when the note was paid off.
Accrued interest payable decreased by 100%, from $28,000 at December
31, 2001 to zero at September 30, 2002. This decrease is due to the payoff of
the Partnership's note in May 2002.
Notes Payable decreased by 100%, from $9,483,000 at December 31, 2001
to zero at September 30, 2002, due to the payoff of the loan in May 2002.
Maintenance reserves payable decreased by 90%, or $2,094,000, from
$2,315,000 at December 31, 2001 to $221,000 at September 30, 2002. This decrease
is comprised of $1,277,000 of Capital Cargo's reserves that were applied towards
the sale price, the $567,000 of Kitty Hawk's reserves, and $898,000 of TNT's
reserves that were taken into income, offset by $648,000 of cash collections
from TNT and Vanguard.
Deferred rental income and deposits decreased by 46%, or $375,000, from
$811,000 at December 31, 2001 to $436,000 at September 30, 2002. This decrease
comprised of $225,000 of Kitty Hawk's deposit and $150,000 of TNT's deposit that
were taken into income in the third quarter 2002.
Net cash provided by investing activities for the 2002 Period was
$1,296,000, as a result of the cash proceeds from the sale of the A-300, the
Boeing 727 formerly leased to Capital Cargo, and the Boeing 727 formerly leased
to Falcon.
Net investment in the MD-81 Trust decreased by 64%, or $825,000, from
$1,296,000 at December 31, 2001 to $471,000 at September 30, 2002, as a result
of no cash distributions, depreciation expense of $33,000, a write down of
$515,000 to the value of the aircraft in the third quarter 2002, and an
adjustment of $277,000 to the net value of the investment.
Cash used for financing activities was $9,483,000 for the 2002 Period,
which represents repayments of the note payable.
Partnership's capital was $18,837,000, an increase of approximately
$2,081,000 or 12% from $16,756,000 at December 31, 2001, as a result of net
income of $2,081,000.
Results of Operations
- ---------------------
The Partnership's net loss was $699,000 for the three months ended
September 30, 2002 (the "2002 Quarter") as compared to net loss of $1,007,000
for the three months ended September 30, 2001 (the "2001 Quarter"). This
decrease in net loss was due to the recognition of income from the maintenance
17
reserves and security deposits collected from TNT and Kitty Hawk and lesser
write down expense in the 2002 Quarter, partially offset by a decrease in rental
income and a deficit in earnings of the MD-81 Trust.
The Partnership's net income was $2,081,000 for the nine months ended
September 30, 2002 (the "2002 Period"), as compared to net income of $4,470,000
for the nine months ended September 30, 2001 (the "2001 Period"). This decrease
was principally due to the receipts of the VASP judgment and interest and a
payment from Aeromexico in lieu of the aircraft meeting return conditions in the
2001 Quarter, a higher gain on sale of aircraft in the 2001 Period and Quarter,
a decrease in rental income in the 2002 Period and Quarter, and a deficit in
earnings of the MD-81 Trust, partially offset by the reversal of accrued
management fees for the years 2000, 2001, and the first quarter of 2002, a
decrease in write downs in the 2002 Period and Quarter and an overall decrease
of the operating expenses.
Rental income decreased by 51%, or $886,000, from $1,735,000 for the
2001 Quarter to $849,000 for the 2002 Quarter, and by 47%, or $2,840,000, from
$5,992,000 for the 2001 Period to $3,152,000 for the 2002 Period. This decrease
is principally due to the sale of the Boeing 727, formerly leased to Falcon, the
Boeing 727, formerly leased to Capital Cargo, and the McDonnell Douglas MD-82,
formerly leased to TWA in the 2001 Period, no rent payments from the DC-9,
formerly leased to Aeromexico, the end of the lease of the Boeing 727 to TNT in
June 2002, and the decrease in rent payments from Kitty Hawk in the 2002 Period
..
Income from reversal of accrued management fees for the years ending
December 31, 2000 and 2001, and the first quarter of 2002 were $2,330,000 for
the 2002 Period. There was no such income in the 2002 Quarter and in the 2001
Period and 2001 Quarter.
Gain on the sale of aircraft decreased by 95%, or $5,828,000, from
$6,156,000 from the 2001 Period to $328,000 for the 2002 Period. This decrease
was attributable to the gain recognized from the sale of the Boeing 727,
formerly leased to Capital Cargo, and the sale of the A-300 airframe and engines
in the 2002 Period, as compared to the sale of the McDonnell Douglas MD-82 to
American Airlines in the 2001 Period. There was no gain on sale of aircraft in
either the 2001 Quarter or the 2002 Quarter.
Equity in earnings of the MD-81 trust decreased by 455%, or $674,000,
from earnings of $148,000 for the 2001 Quarter to a deficit of $526,000 for the
2002 Quarter, and 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, due to no receipts of rent
from Vanguard in the 2002 Quarter and the 2002 Period, and a write down of the
value of the aircraft in the 2002 Quarter.
Interest income on VASP Judgment was $555,000 in the 2001 Quarter and
$567,000 in the 2001 Period due to the interest earned on the VASP Judgment and
settlement in 2001. There was no such income in the 2002 Quarter and Period.
VASP Judgment awarded to the Partnership was $2,991,000 in the 2001
Quarter and $3,791,000 in the 2001 Period, which included the $800,000
settlement for the damaged engine. There was no such income in the 2002 Quarter
and 2002 Period.
18
Return Condition Settlement was $688,000 in both the 2001 Quarter and
the 2001 Period, which was the payment received from Aeromexico in lieu of
meeting return conditions of the DC-9 in July 2001. There was no such income in
the 2002 Quarter and the 2002 Period.
Other Income increased by 1,223%, from $141,000 for the 2001 Quarter to
$1,865,000 for the 2002 Quarter, and by 272%, or $1,364,000, from $501,000 for
the 2001 Period to $1,865,000 for the 2002 Period. This increase was due to the
maintenance reserves and security deposits collected from TNT and Kitty Hawk
taken into income in the 2002 Quarter and 2002 Period, as compared to less
maintenance reserves collected from Falcon and taken to income in the 2001
Quarter.
Interest expense decreased by 100%, from $258,000 for the 2001 Quarter
to zero for the 2002 Quarter, and by 66%, or $775,000, from $1,168,000 for the
2001 Period to $393,000 for the 2002 Period, respectively, due to the payoff of
the loan in May 2002.
General and administrative expenses increased by 167%, or $95,000, from
$57,000 for the 2001 Quarter to $152,000 for the 2002 Quarter, and by 92%, or
$205,000, from $224,000 for the 2001 Period to $429,000 for the 2002 Period.
This increase is due primarily to an increase in legal fees related to the
Capital Cargo litigation and the Kitty Hawk bankruptcy plan.
Direct lease expenses decreased by 73%, or $414,000, from $566,000 for
the 2001 Quarter to $152,000 for the 2002 Quarter, and by 67%, or $542,000, from
$804,000 for the 2001 Period to $262,000 for the 2002 Period. This decrease is
due primarily to costs incurred in the 2001 Quarter and Period, relating to the
MD-81 aircraft for work relating to transitioning it to its lease with Vanguard
Airlines. There were no such costs in the 2002 Quarter and Period.
Depreciation and amortization expense decreased by 26%, or $118,000,
from $462,000 for the 2001 Quarter to $344,000 for the 2002 Quarter, and by 58%,
or $1,743,000, from $3,010,000 for the 2001 Period to $1,267,000 for the 2002
Period. This decrease is due primarily to the sale of the Boeing 727, formerly
leased to Falcon, the Boeing 727, formerly leased to Capital Cargo, and the
McDonnell Douglas MD-82 formerly leased to TWA, the off-lease status of the
DC-9, formerly leased to Aeromexico and the Boeing 727, formerly leased to TNT
until June 2002.
Write downs decreased by 61%, or $3,553,000, from $5,803,000 for the
2001 Quarter to $2,250,000 for the 2002 Quarter, and by 64%, or $4,844,000, from
$7,594,000 for the 2001 Period to $2,750,000 for the 2002 Period. This decrease
was due to write downs for the A-300, formerly leased to VASP, and the Boeing
727, formerly leased to Falcon in the 2001 Quarter and the 2001 Period, as
compared to less of a write down in the 2002 Quarter and Period. In the 2002
Quarter, there were write downs of $1,316,000 for the Boeing 727, formerly
leased to TNT, a write down of $277,000 of the investment in the MD-81 Trust, a
write down of $453,000 for the Boeing 727 leased to Kitty Hawk, and a write down
of $204,000 for the three Pratt & Whitney JT8D engines from the Boeing airframe
that was sold to Falcon Express in 2001. In addition, for the 2002 Period, there
was a write down of $500,000 for the Boeing 727, formerly leased to TNT.
Management and re-lease fees expense payable to the General Partners
decreased by 100%, from $151,000 for the 2001 Quarter to zero for the 2002
Quarter, and from $1,005,000 for the 2001 Period to zero for the 2002 Period.
19
Based upon Preferred Return as determined pursuant to the Partnership Agreement
and the estimated value of the Partnership's remaining assets, a determination
was made to reverse the fees accrued but unpaid to the General Partners for
fiscal year 2000 through the first quarter of 2002.
20
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.
21
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 31, 2002
reporting under Item 5 "Other Events".
22
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 14, 2002 By: /s/ CLIFFORD B. WATTLEY
-----------------------
Clifford B. Wattley
President and Director
23
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 II, 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
24
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 II, L.P.
25
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 II, 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
26
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 II, L.P.
27