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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 434-3900
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Depositary Units
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: Not applicable.
This document consists of 49 pages.
Pegasus Aircraft Partners, L.P.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 2002
Table of Contents
Page
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Part I
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Item 1 Business............................................................3
Item 2 Properties..........................................................6
Item 3 Legal Proceedings...................................................6
Item 4 Submission of Matters to a Vote of Unit Holders.....................6
Part II
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Item 5 Market for Registrant's Common Partnership Capital and
Related Unitholder Matters..........................................7
Item 6 Selected Financial Data.............................................8
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................8
Item 8 Financial Statements and Supplementary Data........................14
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................29
Part III
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Item 10 Directors and Executive Officers of the Registrant.................29
Item 11 Executive Compensation.............................................30
Item 12 Security Ownership of Certain Beneficial Owners and Management.....31
Item 13 Certain Relationships and Related Transactions.....................31
Item 14 Controls and procedures............................................33
Part IV
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Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K....34
2
PART I
ITEM 1. BUSINESS
General
Pegasus Aircraft Partners, L.P. (the "Partnership" or the "Registrant")
is a limited partnership organized under the laws of the State of Delaware on
June 23, 1988. The general partners of the Partnership are Pegasus Aircraft
Management Corporation, the Managing General Partner, a California corporation
that is a wholly-owned subsidiary of Pegasus Capital Corporation, and Air
Transport Leasing, Inc., the Administrative General Partner, a Delaware
corporation that is a wholly-owned subsidiary of UBS Americas, Inc. UBS Americas
is a successor through acquisition to Paine Webber Group, Inc. (Pegasus Aircraft
Management Corporation and Air Transport Leasing, Inc. are herein collectively
referred to as the "General Partners")
On October 18, 1988, the Partnership commenced an offering of limited
partnership depositary units ("Units"). The $80,000,000 maximum offering size
was reached during the first quarter of 1989. The Partnership incurred
$8,441,000 of commissions and other expenses in connection with the sale of
these Units.
Although the Partnership was organized on June 23, 1988, the
Partnership conducted no activities and recognized no revenues, profits or
losses prior to December 21, 1988 at which time the Partnership commenced
operations. During the period between December 23, 1988 and March 22, 1989, the
Partnership acquired its portfolio of used commercial aircraft, which are
principally subject to triple net operating leases with commercial air carriers.
Two of the initial aircraft have been converted to a freighter configuration and
leased to freight companies.
Although it is anticipated that the Partnership will be liquidated
sooner, the Partnership is required to dissolve and distribute all of its assets
no later than December 31, 2012. The Partnership sold its Boeing 747 in 2000,
its MD-82 in 2001, its two Boeing 727-200 freighters and its 50% ownership for
the Partnership (McDonnell Douglas MD-81) in 2002, and is in discussions to sell
the remaining Boeing 727-200 in an "as-is, where is" condition.
Outlook for the Airline and Aircraft Leasing Industries
The US airline industry had an unprofitable year in 2002 that continued
the industry's recent trend of unprofitability. Results were adversely affected
by continuing high fuel prices through most of 2002, higher labor costs and
fewer passengers. A large number of carriers have filed for bankruptcy
protection, including United Airlines and US Airways.
The industry's results historically have been highly correlated to
general economic activity. Due to concerns regarding an economic slowdown, the
US Federal Reserve Board has reduced its key lending rate on a number of
occasions in an attempt to stimulate economic activity. It is unclear as to the
ultimate impact on the level of economic activity of these rate decreases,
however, a significant economic slowdown has had an adverse affect on air travel
and airline performance. The economic downturn has been further exacerbated by
the events of September 11, 2001, which also adversely affected air travel and
the air freight industry. Passenger and freighter aircraft leasing and equipment
sales continues to be a highly competitive business.
Aircraft Portfolio
The Partnership's net asset value at December 31, 2002 was equal to
$0.68 per Unit. This was determined in part by using the book value for the
remaining aircraft. It should be noted that this is only an estimate of value at
that date and is not necessarily representative of the value that will
ultimately be realized when the aircraft is disposed of, nor does this represent
the value that may be realized upon the disposition of a Unit.
3
The following table describes the Partnership's aircraft portfolio at
December 31, 2002:
December
Acquisi- 2002 Original Noise Cumulative Cumulative
Current Aircraft Ownership tion Realizable Delivery Abatement Flight Flight
Lessee Type Interest Costs(1) Value Date Compliance Hours(2) Cycles(2)
- ------ ---- -------- -------- ----- ---- ---------- -------- ---------
(dollar amounts in millions)
Off-Lease Boeing 727-200
Non-Advanced 100 11.7 0.1 1969 Stage III(3) 66,013 51,359
Notes:
(1) Acquisition costs do not include acquisition related fees paid to the
General Partners. The Partnership previously owned a Boeing 747, two
Boeing 727-200, a McDonnell-Douglas MD-82 and 50% interest in a
McDonnell Douglas MD-81, all of which have been sold.
The remaining aircraft is shown at the current book value, which also
approximates the General Partners' estimate of realizable value.
(2) The number of cumulative flight cycles and cumulative flight hours
shown are as of December 31, 2002.
(3) Federal Express hushkit installed.
Significant Lessees
The Partnership leased its aircraft to 3 different airlines during
2002. Revenues from each of the airlines below accounted for greater than 10% of
the total rental revenues of the Partnership during 2002:
Percent of Total
Airline Rental Revenues
------- ---------------
TNT Transport International B.V. 35%
Kitty Hawk Aircargo Inc. 65%
Safety Requirements and Aircraft Aging
In addition to registration, the FAA imposes strict requirements
governing aircraft inspection and certification, maintenance, equipment
requirements, general operating and flight rules (including limits on arrivals
and departures), noise levels, certification of personnel and record keeping in
connection with aircraft maintenance. FAA regulations establish standards for
repairs, periodic overhauls and alterations and require that the owner or
operator of an aircraft establish an airworthiness inspection program to be
carried out by certified mechanics. Pursuant to the leases and FAA regulations,
no aircraft of the Partnership may be operated without a current airworthiness
certificate.
The FAA periodically reviews Service Bulletins which are issued by the
aircraft manufacturers. These bulletins focus on safety problems that have
developed during the aircraft's operation. The FAA may incorporate these Service
Bulletins in Airworthiness Directives ("ADs"), which are mandates requiring the
airline to perform specific maintenance within a specified period of time.
Aircraft aging is a significant issue in aircraft safety regulation. In
the past, certain aviation incidents and accidents raised concerns over the
structural integrity of older aircraft. In 1989, in its "Report to Congress on
the Status of the U.S. Stage II Commercial Aircraft Fleet", the FAA stated that
"no correlation has been established between the chronological age of an
aircraft and its structural airworthiness. A more accurate assessment of the
physical "age" of an aircraft is the total number of flight cycles and flight
4
hours flown." A flight cycle is defined as one takeoff and one landing. A flight
cycle is important because of the added stress on the airframe, landing gear and
other components from repeated takeoffs, landings and pressurizations. As
different types of aircraft have different missions, and carriers fly a variety
of routes, flight cycles can vary widely among aircraft of the same
chronological age. In general, narrow-body aircraft which are used for
short-haul service will have greater cycles per year than wide-body aircraft
used for longer routes. Other factors which contribute to the aging of an
aircraft are the number of hours actually flown, the predominant environment in
which an aircraft has flown, and its actual age in years.
The FAA has adopted certain ADs for Boeing and McDonnell Douglas
aircraft models, including Boeing 727s, 737s and 747s and McDonnell Douglas
DC-9s, MD-80s and DC-10s. These ADs make mandatory the periodic replacement or
modification of structural materials, fittings and skin at certain times in the
life of an aircraft, typically when the aircraft reaches a certain number of
flight cycles or age threshold. Previously, these aircraft were subject only to
periodic inspection, and the replacement and modification of materials and parts
was done where deemed necessary. Similar ADs for Lockheed and Airbus
manufactured aircraft are expected to be proposed and adopted by the FAA. In
addition, it is widely expected that foreign civil aviation authorities,
especially in Europe and Japan, will adopt similar measures to protect the
structural integrity of older aircraft.
These aging aircraft ADs initially impacted only a limited number of
older aircraft, but additional aircraft are covered as they accumulate
time-and-service and reach the thresholds for the required modifications.
Significantly, in the case of each aircraft type, a significant majority of
replacements or modifications are mandated when a plane reaches a certain number
of flight cycles and relatively few required replacements are triggered when a
plane reaches a certain chronological age or number of flight hours.
The following table summarizes the age, flight cycle, and flight hour
thresholds for each major aircraft type under the ADs. In general, these
thresholds are based on the "economic design goal" of an aircraft, which is
typically considered to be the period of service after which an increase in
maintenance costs is expected to take place in order to assure continued
operational safety. In addition, the table provides an estimate by the FAA of
the costs of complying with all of the mandated replacements and modifications
of the ADs. It is important to note that since most of the proposed work under
the ADs is based on flight cycle thresholds, those lower-cycle aircraft which
reach the aircraft age or flight hour thresholds should incur significantly
lower AD compliance cost than the total amounts estimated below.
Aircraft Flight Flight Estimated
Aircraft Age Cycle Hour AD
Type Threshold Threshold Threshold Costs
---- --------- --------- --------- -----
(Years)
Boeing 727 20 60,000 N/A $1,100,000
Boeing 737 20 75,000 N/A 934,000
Boeing 747 20* 20,000* N/A 3,400,000
McDonnell Douglas DC-9 20 100,000 75,000 79,000
McDonnell Douglas MD-80 20 75,000 75,000 4,000
McDonnell Douglas DC-10 None 42,000 60,000 187,000
* Substantially cycle limited
Flight cycle and flight hour information with respect to the
Partnership's aircraft is included in the aircraft portfolio table included
earlier in Item 1.
In 1999, the FAA organized a two year industry task force, the Aging
Transport Systems Rulemaking Advisory Committee, to investigate non-structural,
aging aircraft systems. It cannot be determined at this time what
recommendations, if any, will be made by the task force.
5
Aircraft Noise Regulations
On November 5, 1990, Congress enacted into law the Airport Noise and
Capacity Act of 1990 (the "Act"). On September 24, 1991, the FAA issued the
final rules of implementation for the Act. The Act provided that Stage II
aircraft would be phased out from operation within United States airspace by
December 31, 1999.
Implementing regulations proposed by the FAA required each United
States operator to increase its Stage III airplane fleet to 50 percent by
December 31, 1996; to 75 percent by December 31, 1998 and to 100 percent by
December 31, 1999.
However, the Act further provided, that if by July 1, 1999, at least
85% of an air carrier's fleet complied with Stage III noise levels, the carrier
may apply for a waiver of the operational ban for the remaining aircraft in the
operator's fleet until December 31, 2003. The application for such a waiver must
be submitted to the Secretary of the Department of Transportation no later than
January 1, 1999 and must include a plan with firm orders for making all aircraft
operated by the air carrier comply with Stage III noise levels by December 31,
2003.
Stage III hushkitting and re-engineering for the Boeing 727-200
aircraft have been approved by the FAA and the Partnership's remaining Boeing
727-200 aircraft has had a Federal Express hushkits installed.
The European Commission has promulgated rules relating to aircraft
noise that would ban aircraft that are modified ("hushkitted") to achieve Stage
III noise compliance from European airspace after the year 2002. Such aircraft
cannot be added to European fleets after April of 1999. It is unclear in what
manner and if such rules will achieve full implementation.
Competition
The aircraft leasing industry is highly competitive. The Partnership
competes with aircraft manufacturers, distributors, airlines and other
operators, equipment managers, leasing companies, financial institutions and
other parties engaged in leasing, managing or remarketing aircraft, many of
which have significantly greater financial resources and greater experience than
the Partnership. Many used aircraft of a type similar to the Partnership's
aircraft are off-lease and are parked, available for sale, leases or part-out.
Also, the number of carriers using this type of equipment have declined
significantly. Many of the other aircraft are newer or in a better maintenance
status than the Partnership's aircraft.
Employees
The Partnership has no employees. The officers, directors and employees
of the General Partners and their affiliates perform services on behalf of the
Partnership. The General Partners are entitled to certain fees and
reimbursements of certain out-of-pocket expenses incurred in connection with the
performance of these management services. See Item 10 of this Report, "Directors
and Executive Officers of the Registrant," and Item 13 of this Report, "Certain
Relationships and Related Transactions," which are incorporated herein by
reference.
ITEM 2. PROPERTIES
The Partnership does not own or lease any physical properties other
than the aircraft which are discussed in Item 1 of this Report, "Business,"
which is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS
No matters were submitted to a vote of the Limited Partners of the
Partnership, through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year ended December 31, 2002.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S PARTNERSHIP CAPITAL AND RELATED UNITHOLDER
MATTERS
The Units represent the economic rights attributable to limited
partnership interests in the Partnership. There is no organized trading market
for the purchase and sale of the Units and certain measures have been adopted
and implemented to assure that no such organized trading market will develop.
As of March 1, 2003, the number of Limited Partners of record was
approximately 4,318.
The Partnership declared the following distributions to its Limited
Partners during 2002 and 2001:
Amount of
Distribution
Period Per Unit Record Date Payment Date
------ -------- ----------- ------------
1st Quarter 2002 $.00 None Paid
2nd Quarter 2002 .00 None Paid
3rd Quarter 2002 .00 None Paid
4th Quarter 2002 .50 September 30, 2002 October 25, 2002
1st Quarter 2001 $.00 None Paid
2nd Quarter 2001 .30 June 30, 2001 July 10, 2001
3rd Quarter 2001 .00 None Paid
4th Quarter 2001 .00 None Paid
Total distributions to all partners for 2002 and 2001 were declared as
follows (in thousands):
2002 2001
---- ----
Limited Partners $2,000 $1,200
General Partners 20 12
------ ------
$2,020 $1,212
====== ======
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital, or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the net income
reported by the Partnership for accounting purposes, approximately, 11%, 100%,
and 96% of the cash distributions declared for the years ended December 31,
2002, 2001, and 2000, respectively, constituted a return of capital. Also, based
on the amount of net income reported by the Partnership for accounting purposes,
approximately 74% of the cash distributions paid to the partners from inception
of the Partnership through December 31, 2002 constituted a return of capital.
Investors who participated in the Partnership closings, irrespective of the
Partnership closing in which they participated, have received distributions in
excess of their original investment of $20.00 per Unit. The total actual
economic return on capital over the Partnership's life can only be determined at
the termination of the Partnership after all cash flows, including proceeds from
the sale of the aircraft, have been realized.
As has historically been the case, the amount of future cash
distributions, if any, will be determined on a quarterly basis after an
evaluation of the Partnership's operating results and its current and expected
financial position.
7
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Partnership was derived
from the audited financial statements for the indicated periods. The information
set forth below should be read in conjunction with the Partnership's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Items 8 and 7,
respectively, of this Form 10-K Report.
As of December 31,
or Year Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per unit amounts)
Rentals from operating leases (2) $ 1,059 $ 3,340 $ 5,645 $ 7,010 $ 7,146
Net Income (Loss) 1,795(5) (445)(4) 155(3) 805 1,050
Net Income (Loss) per Limited
Partnership Unit 0.44 (0.11) (0.16) 0.20 0.26
Distributions per Limited
Partnership Unit(1) 0.50 0.30 1.00 1.60 1.60
Total Assets 2,960 6,473 19,065 26,972 27,792
Notes Payable -- -- 11,050 14,000 10,000
Partners' Capital 2,833 3,058 4,715 8,600 14,260
(1) Distribution amounts are reflected on the accrual basis. The amount of
each distribution will be determined on a quarterly basis after an
evaluation of the Partnership's operating results and its current and
expected financial position.
(2) Prior years restated to include ownership in MD81 Trust on the equity
method which resulted in a revenue reduction of $1,214 per year in
years 1999 and 1998. There was no effect on Net Income.
(3) Includes gain on sale of Boeing 747.
(4) Includes gain on sale of McDonnell Douglas MD-82.
(5) Includes gains/loss on sale of two Boeing 727-200 and gain on
liquidation of MD-81 Trust.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Financial Data" and 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 passenger aircraft and makes
distributions to the partners of net cash flows generated by operations in the
current and/or prior periods. As has historically been the case, the amount of
future cash distributions will be determined on a quarterly basis 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 December 31, 2002,
8
the Partnership's unrestricted cash and cash equivalents of $2,599,000 were
primarily invested in such a fund. This amount was $83,000 more than the
Partnership's unrestricted cash and cash equivalents at December 31, 2001 of
$2,516,000. This increase in unrestricted cash was primarily attributable to
cash from operating activities of $612,000, investing activities of $1,491,000,
offset by cash used in financing activities of $2,020,000.
Net cash provided by operating activities was $0.6 million in 2002,
$3.2 million in 2001, and $4.7 million in 2000. In the aggregate, for this three
year period, net cash provided by operating activities totaled $8.5 million.
Net cash provided by operating activities is comprised of net income or
net loss adjusted for non cash items such as depreciation, write downs and
gain/losses on sales and changes in assets and liabilities discussed below.
Rent and other receivable increased by 100%, from zero at December 31,
2001 to $261,000 at December 31, 2002, due to the note receivable from the sale
of the Boeing 727 to Kitty Hawk in December 2002. This amount is reported as a
non-cash transaction in 2002.
Payable to affiliates decreased by 100%, , from $1,751,000 at December
31, 2001 to zero at December 31, 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 December 31, 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.
Maintenance reserves payable decreased by 100% or $1,154,000 from
$1,154,000 at December 31, 2001, to zero at December 31, 2002. This decrease was
primarily due to the $681,000 maintenance reserves for the Kitty Hawk aircraft
which were taken into income in the third quarter of 2002, the $343,000
maintenance reserves collected in the prior years for the Boeing 727-200
aircraft, formerly leased to TNT, and the $130,000 maintenance reserves
collected in prior years for the MD-81 aircraft, formerly leased to Vanguard,
which were applied to the sale of the aircraft in the first quarter 2002,
partially offset by $116,000 maintenance reserves cash collected from Vanguard
and TNT.
Cash flows from investing activities were $1,491,000 for the year 2002,
which is primarily the result of $1,241,000 cash proceeds of the sale of the
Boeing 727, formerly leased to TNT, and $250,000 cash distribution from the
MD-81 Trust arising from the sale of the MD-81, formerly leased to Vanguard
Airlines.
Net investment in the MD-81 Trust decreased by 100%, or $741,000, from
$741,000 at December 31, 2001 to zero at December 31, 2002, due to the sale of
the McDonnell Douglas MD-81 in October 2002.
The McDonnell Douglas MD-81 aircraft which was under lease to Vanguard
Airlines in 2002 was owned by a trust ("MD-81 Trust") in which the Partnership
had a 50% interest. An affiliated Partnership owned the other 50% interest. As
the lease with USAir ended in June 2001, USAir returned the aircraft in July
2001 and paid rent through the return date. In August 2001, the MD-81 Trust
entered into a three-year lease of the aircraft with Vanguard Airlines, a Kansas
City, Missouri airline. The lease agreement was on a "power by the hour" basis,
at the rate of $600 per flight hour, to a maximum of $130,000 per month.
Vanguard was also responsible for funding the maintenance reserves for the
aircraft. Due to the events of September 11, 2001 and the abrupt slowdown in
passenger traffic, Vanguard only paid $442,000, of which 50% was distributed to
the Partnership and 50% to the other affiliated Partnership, from the beginning
of the lease in August 2001 through September 2002. These payments were applied
to maintenance reserves within the MD-81 Trust. After being denied a loan
guarantee for a second time by the Airline Transportation Stabilization Board,
Vanguard Airlines suspended all flights 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 the aircraft was sold on October 25,
2002.
9
The Partnership had 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 MD-81 Trust which owns the MD-81 aircraft
leased to USAirways under the equity method. In prior years, the Partnership
reported its ownership in the MD-81 Trust on a proportionately consolidated
basis. The financial results in prior years contained herein have been restated
utilizing the equity method. The aircraft had been subject to a tax benefit
transfer lease, which expired in April 2000.
Net cash used in financing activities was $2 million for the year 2002.
This amount represents cash distributions of $2 million paid to the partners in
October 2002. The cash distributions paid to partners in the year ended December
2001 and 2000 were $1.2 million and $5.7 million, respectively.
Cash distributions declared by the Partnership were $2.0 million in
2002 ($0.50 per unit), $1.2 million in 2001 ($0.30 per unit), and $4 million
($1.00 per unit) in 2000. In the aggregate, for this three year period, cash
distributions declared by the Partnership totaled $7.2 million. With the
off-lease status of the Boeing 727-200 previously leased to Sky Trek, the sale
of the Boeing 747 to TWA, the sale of the MD-82 to American Airlines, the sale
of the Boeing 727-200 to TNT, the sale of the MD-81 and the sale of the Boeing
727 previously leased to Kitty Hawk, the Partnership is generating no cash on an
operating basis.
Partnership capital was $2,833,000, a decrease of approximately
$225,000 or 7% from $3,058,000 at December 31, 2001, as a result of net income
of $1,795,000 and $2,020,000 of distributions to partners.
All the Partnership leases were paid in US dollars. Jet fuel prices are
a large component of the cost of airline and air freight operations and
therefore higher fuel prices as experienced in most of 2002 had an adverse
impact on operator finances. Additionally, the Partnership aircraft were,
typically, older, less fuel efficient aircraft than the more current designs.
Critical Accounting Policies
High-quality financial statements require rigorous application of
high-quality accounting policies. The policies discussed below are considered by
management to be critical to an understanding of the Partnership's financial
statements because their application requires significant judgment, with
financial reporting results relying on estimation about the effect of matters
that are inherently uncertain. Specific risks for these critical accounting
policies are described in the following paragraphs. For all of these policies,
management cautions that future events rarely develop exactly as forecast, and
the best estimates routinely require adjustment.
Lease Revenue Recognition:
Revenue under operating leases is recognized as rental income on a
straight line basis over the lease term.
Depreciation:
Aircraft are recorded at cost and depreciated on a straight-line basis
over the estimated life to its estimated residual value. Certain major additions
and modifications to aircraft may be capitalized. The estimates are reviewed
periodically to ensure continued appropriateness.
Aircraft Valuation:
Aircraft are periodically reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". An impairment loss is recognized
when the fair value of the expected undiscounted future cash flows of the
aircraft is less than its net book value. The fair value of the aircraft has
historically been based on independent appraisals of the aircraft and estimates
of undiscounted future cash flows. The appraisals assumed, among other things,
that the aircraft are utilized normally in an open, unrestricted and stable
market. Short-term fluctuations in the market place are disregarded and it is
assumed that there is no necessity either to dispose of a significant number of
aircraft simultaneously or to dispose of aircraft quickly. The remaining
aircraft is carried at its book value which has been written down to what is
estimated to be realizable in an "as is, where is" sale.
10
The Partnership determined the critical principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments. The Partnership identified the most critical accounting policies to
be those related to lease revenue recognition, depreciation methods and
valuation of aircraft. The Partnership also states these accounting policies in
the notes to the consolidated financial statements and at relevant sections in
this discussion and analysis.
Results of Operations
The Partnership's net income was $1,795,000 for the year 2002 (the
"2002 Period") as compared to net loss of $445,000 for the year 2001 (the "2001
Period"). The reason for the Partnership's net income for the 2002 Period
compared to net loss of 2001 was principally due to decreases in write downs and
depreciation expense and the reversal of accrued management fees in the 2002
Period, partially offset by the decrease in rental income and decreased gain on
sale of aircraft in the 2002 Period.
Rentals from operating leases decreased by 68%, or $2,281,000, from
$3,340,000 at December 31, 2001 to $1,059,000 at December 31, 2002, due
primarily to the lack of rental revenue 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.
Gain on sale of engine and equipment decreased by 99%, or $7,261,000,
from $7,317,000 for the 2001 Period to $56,000 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, and the sale of the Boeing 727 to
Kitty Hawk in the 2002 Period.
Other Income increased by 41%, or $346,000, from $848,000 for the 2001
Period to $1,194,000 in the 2002 Period, principally due to the recognition of
income from the $681,000 maintenance reserves and the $235,000 security deposit
collected from the Boeing 727-200, leased to Kitty Hawk in the 2002 Period and
the $278,000 gain on liquidation of the MD-81 Trust, 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.
Equity in deficit of the MD-81 Trust increased by 338%, or $423,000,
from a deficit of $125,000 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 period and a
write down, partially offset by the ultimate sale of the aircraft in the 2002
Period.
Depreciation decreased by 48%, or $607,000, from $1,255,000 for the
2001 Period, to $648,000 for the 2002 Period. This decrease was primarily due to
the sale of the McDonnell Douglas MD-82 aircraft to American Airlines in April
2001, and the sale of the Boeing 727 to TNT in March 2002.
Write down expense decreased by 95%, or $8,814,000, from $9,302,000 for
the 2001 period to $488,000 for the 2002 Period, due to more write down in the
2001 Period for the Boeing 727-200 aircraft, previously leased to Sky Trek, the
TNT aircraft, and the Kitty Hawk aircraft, 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 and $100,000 write down to reduce the carrying value of the
Boeing 727-200.
Management fees decreased by 100%, from $769,000 for the 2001 Period to
zero for the 2002 Period. 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.
Besides the fee reversal, no new management fees were accrued in 2002.
Interest expense decreased by 100%, from $332,000 for the 2001 Period
to zero for the 2002 Period, due to the payoff of the Partnership's bank note on
April 9, 2001.
Direct Lease expense increase by 980%, or $49,000, from $5,000 for the
2001 Period, to $54,000 for the 2002 Period. This increase was primarily due to
an increase in insurance expense in the 2002 Period and an adjustment in the
2002 Period to the expense related to the sale of the McDonnell Douglas MD82
sold to American Airlines in April 2001.
11
2001 as compared to 2000
The Partnership's net loss was $445,000 for the year 2001 (the "2001
Period") as compared to net income of $155,000 for the year 2000 (the "2000
Period"). The reason for the Partnership's net loss for the 2001 Period compared
to net income of 2000 was principally due to substantial write down of the
aircraft and a decrease in rentals from operating leases, partially offset by
the gain on sale of aircraft and decreased depreciation.
Rentals from operating leases decreased by 41%, or $2,305,000, from
$5,645,000 at December 31, 2000 to $3,340,000 at December 31, 2001, due
primarily to the lack of rental revenue from the Boeing 747 which was sold to
TWA in April 2000, the McDonnell Douglas MD-82 aircraft sold to American
Airlines in April 2001, the off-lease status of the Boeing 727, formerly leased
to Sky Trek which was returned in May 2000, and the 50% reduction in rent for
Kitty Hawk for the last three months of the year.
The Partnership recognized a gain of $7,317,000 for the 2001 Period due
to the sale of the McDonnell Douglas MD-82 aircraft to TWA during April, 2001,
compared to a gain of $1,611,000 for the 2000 Period for the sale of the Boeing
747-100 aircraft to TWA .
Other Income increased by $848,000, or 100%, in the 2001 Period, as
compared to the 2000 Period, principally due to the maintenance reserves of the
Boeing 727 being taken into income in the first quarter 2001.
Depreciation decreased by 61%, or $1,984,000, in the 2001 Period, as
compared to the 2000 Period. This decrease was primarily due to the sale of the
Boeing 747 to TWA in April 2000, the sale of the McDonnell Douglas MD-82
aircraft to American Airlines in April 2001, and the Sky Trek Boeing 727 being
off lease, which the General Partners are attempting to sell for parts or as is.
The Partnership provided a write-down aggregating $9,302,000 for the
2001 Period, to reduce the carrying value to the fair market value of three
Boeing 727-200 aircraft, one previously leased to Sky Trek, the TNT aircraft,
and the Kitty Hawk aircraft. These write downs were $1,766,000 on the Boeing
727, formerly leased to Sky Trek, $2,216,000 on the TNT aircraft, and $5,320,000
on the Kitty Hawk aircraft. There was a $950,000 write-down on the Sky Trek and
$1,157,000 write down on the TNT aircraft for the 2000 Period.
Management and re-lease fees payable to the General Partners for the
2001 Period increased by 6%, or $43,000, in comparison to the 2000 Period, which
was primarily attributable to sales proceeds from the sale of the
McDonnell-Douglas MD-82 aircraft to American Airlines during April 2001.
Interest expense decreased by 74%, or $959,000, in the 2001 Period, as
compared to the 2000 Period, due to the payoff of the Partnership's bank note on
April 9, 2001 and a reduction in interest rate.
Direct Lease expense decreased by 96%, or $116,000, in the 2001 Period,
as compared to the 2000 Period. This decrease was primarily due to an adjustment
in the 2001 Period to the expense related to the sale of the McDonnell Douglas
MD-82 to American Airlines in 2001.
Engine rental expense was $84,000 during the 2000 Period, due to the
Partnership temporarily renting two JT8D-9A engines, from an affiliate of the
Managing General Partner, for the aircraft leased to Kitty Hawk. There was no
such expense during the 2001 Period.
Inflation and Changing Prices
Market and worldwide economic conditions and changes in federal and
foreign aircraft regulations have in the past, and may in the future, impact the
airline industry and thus lease rates and aircraft values. Additionally,
inflation and changing prices, may affect future leasing rates and the eventual
selling prices of the aircraft. Higher jet fuel prices for most of 2002 and
increasing labor costs affected the airline industry profitability and that of
the Partnership's lessees.
12
Due to concerns regarding the economic slowdown, the US Federal Reserve
Board reduced its key lending rate on a number of occasions in an attempt to
stimulate economic activity. It is unclear as to the ultimate impact on the
level of economic activity of these rate changes, however, the economic slowdown
has had an adverse affect on air travel and airline performance.
Risks and Uncertainties
The events of September 11, 2001 have had a negative impact on the US
economy and the passenger airlines, including increases in airline costs such as
insurance and security, and a significant decline in passenger demand for air
travel. Also, because of reduced passenger traffic, major airlines such as
United Airlines and American Airlines accelerated the retirement of their Boeing
727-200 aircraft, which has very negatively impacted the value of the
Partnership's remaining aircraft.
Accounting Pronouncements
The Partnership has adopted the guidance in EITF Issue No. 00-1
Investor Balance Sheet and Income Statement Display under the Equity Method of
Investment in Certain Partnerships and Other Ventures (EITF 00-1) in its Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 and accounts for
its investment in the Trust which owns the MD-81 aircraft leased to US Airways
under the equity method. In prior years the Partnership had reported its
ownership in the MD-81 Trust on a proportionately consolidated basis. The
financial results in prior years contained herein have been restated utilizing
the equity method. The aircraft had been subject to a tax benefit transfer lease
which expired in April 2000.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.144 ("SFAS 144") Accounting for
the Impairment or Disposal of Long Lived Assets". SFAS 144, which is effective
for fiscal years beginning after December 15, 2001 with earlier application
encouraged, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supercedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of ", and the accounting and reporting provisions of APB 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as previously
defined in that Opinion). The implementation of this Statement was not expected
to have a material effect on the Company's financial position, results of
operations or cash flows.
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the "Act") was
enacted. Section 302 of the Act required the Securities Exchange Commission to
adopt final rules that became effective on August 29, 2002, under which the
principal executive officer and the principal financial officer, or persons
providing similar functions, of an issuer each must certify the information
contained in the issuer's quarterly and annual reports. Section 302 also
requires these officers to certify that: they are responsible for establishing,
maintaining and regularly evaluating the effectiveness of the issuer's internal
controls, they have made certain disclosures to the issuer's auditors and the
audit committee of the board of directors about the issuer's internal controls;
and they have included information in the issuer's quarterly and annual reports
about their evaluation and whether there have been significant changes in the
issuer's internal controls or in other factors that could significantly affect
internal controls subsequent to the evaluation.
In 2002, the Partnership reclassified $526,000 of expense, incurred in
2001, that was related to the MD-81 aircraft to the MD-81 Trust's equity.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
List of Financial Statements Page
----
Report of Independent Accountants ..................................... 15
Balance Sheets -- December 31, 2002 and 2001........................... 16
Statements of Income (Loss) for the years ended
December 31, 2002, 2001, and 2000................................. 17
Statements of Partners' Capital for the years ended
December 31, 2002, 2001, and 2000 ................................ 18
Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000................................. 19
Notes to Financial Statements.......................................... 21
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the financial statements and notes
thereto; (2) schedules are not required under the related instruction or; (3)
the schedules are inapplicable.
14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Pegasus Aircraft Partners, L.P.
In our opinion, the accompanying balance sheets and the related
statements of income (loss), of partners' capital and of cash flows present
fairly, in all material respects, the financial position of Pegasus Aircraft
Partners, L.P. (the "Partnership") as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 13, 2003
15
PEGASUS AIRCRAFT PARTNERS, L.P.
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
---- ----
(in thousands, except unit data)
Cash and cash equivalents $2,599 $2,516
Rent and other receivable 261 --
Aircraft, net 100 3,941
Other assets -- 16
------ ------
Total Assets $2,960 $6,473
====== ======
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses 127 124
Payable to affiliates -- 1,751
Maintenance reserves payable -- 1,154
Deferred rental income and deposits -- 386
------ ------
Total Liabilities $ 127 $3,415
====== ======
COMMITMENTS (Note 6)
PARTNERS' CAPITAL:
General Partners 32 34
Limited Partners (4,000,005 units issued and
outstanding in 2002 and 2001) 2,801 3,024
------ ------
Total Partners' Capital 2,833 3,058
------ ------
Total Liabilities and Partners' Capital $2,960 $6,473
====== ======
The accompanying notes are an integral part of these financial statements.
16
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
(in thousands, except unit data
and per unit amounts)
REVENUES:
Rentals from operating leases $ 1,059 $ 3,340 $ 5,645
Interest and other 52 81 74
Gain on sale of engine and
equipment 56 7,317 1,611
Return condition settlement -- -- 181
Management and re-lease fees
reversal 1495 -- --
Other 1,194 848 --
Equity in (deficit)/earnings of
MD-81 Trust (548) (125) 443
----------- ----------- -----------
3,308 11,461 7,954
----------- ----------- -----------
EXPENSES:
Depreciation 648 1,255 3,239
Interest -- 332 1,291
Management and re-lease fees -- 769 726
Write-downs 488 9,302 2,107
General and administrative 323 243 231
Direct lease 54 5 121
Engine rental and other -- -- 84
----------- ----------- -----------
1,513 11,906 7,799
----------- ----------- -----------
NET INCOME (LOSS) 1,795 (445) 155
=========== =========== ===========
NET INCOME (LOSS) ALLOCATED:
To the General Partners 18 (4) 800
To the Limited Partners 1,777 (441) (645)
----------- ----------- -----------
1,795 (445) 155
=========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 0.44 $ (0.11) $ (0.16)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND
OUTSTANDING 4,000,005 4,000,005 4,000,005
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
17
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
General Limited
Partners Partners Total
-------- -------- -----
(dollar amounts in thousands)
Balance, December 31, 1999 $ (710) $ 9,310 $ 8,600
Net income (loss) 800 (645) 155
Distributions declared to partners (40) (4,000) (4,040)
------- ------- -------
Balance, December 31, 2000 50 4,665 4,715
Net income (loss) (4) (441) (445)
Distributions declared to partners (12) (1,200) (1,212)
------- ------- -------
Balance, December 31, 2001 34 3,024 3,058
Net income 18 1,777 1,795
Distributions declared to partners (20) (2,000) (2,020)
------- ------- -------
Balance, December 31, 2002 $ 32 $ 2,801 $ 2,833
======= ======= =======
The accompanying notes are an integral part of these financial statements.
18
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,795 $ (445) $ 155
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 648 1,255 3,239
Write-downs 488 9,302 2,107
Gain on sale of engine and equipment (56) (7,317) (1,611)
Equity in deficit/(earnings)
of MD-81 Trust 548 125 (443)
Gain on MD-81 liquidation (278) -- --
Change in assets and liabilities:
Rent and other receivables -- 149 327
Other assets 16 (9) 43
Accounts payable and accrued expenses 3 19 (6)
Payable to affiliates (1,751) 747 513
Maintenance reserves payable (565) (546) 731
Deferred rental income and deposits (236) -- (439)
Accrued interest payable -- (105) 105
-------- -------- --------
Net cash provided by operating
activities 612 3,175 4,721
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash distributions from investment in MD-81
Trust 250 162 1,214
Proceeds from sale of engine and equipment 1,241 9,500 4,000
Capitalized aircraft improvements -- -- (1,261)
-------- -------- --------
Net cash provided by investing
activities 1,491 9,662 3,953
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable -- (11,050) (2,950)
Cash distributions paid to partners (2,020) (1,212) (5,656)
-------- -------- --------
Net cash used in financing activities (2,020) (12,262) (8,606)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 83 575 68
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,516 1,941 1,873
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,599 $ 2,516 $ 1,941
======== ======== ========
The accompanying notes are an integral part of these financial statements.
19
PEGASUS AIRCRAFT PARTNERS, L.P.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
(dollar amounts in thousands)
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid $ -- $ 437 $ 1,183
NONCASH TRANSACTIONS:
Maintenance reserves recognized upon
sale of aircraft $ 367 $ -- $ --
Maintenance reserves applied to sale of
MD-81 Trust aircraft $ 221 $ -- $ --
Security deposit recognized upon sale
of aircraft $ 150 $ -- $ 360
Note receivable arising from sale of
aircraft $ 261 $ -- $ --
The accompanying notes are an integral part of these financial statements.
20
PEGASUS AIRCRAFT PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. Significant Accounting Policies
Basis of Presentation. Pegasus Aircraft Partners, L.P. (the
"Partnership"), a Delaware limited partnership, maintains its accounting records
and prepares financial statements on the accrual basis of accounting. 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. Certain reclassifications of prior year numbers have been made to be
consistent with current year presentation.
Cash and Cash Equivalents. The Partnership invests funds not
immediately required for operations or distributions in short term, highly
liquid investments until such time as the funds are required to meet its
obligations. The short term, highly liquid investments are recorded at cost
which approximates fair market value. For purposes of the balance sheets and the
statements of cash flows, the Partnership considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Aircraft and Depreciation. The aircraft are recorded at cost, which
includes acquisition costs and the acquisition fee and the financial management
advisory fee paid upon acquisition to the General Partners. Depreciation to an
estimated salvage value (generally 10%) is computed using the straight-line
method over an estimated economic life of twelve years (five years for the
aircraft engine sold in 1997). Major improvements to aircraft are capitalized
when incurred and are depreciated, generally, over the remaining useful life of
the improvement.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
the recognition of an impairment for a long-lived asset is required when the
estimate of undiscounted future cash flows expected to be generated by the asset
is less than its carrying amount. Measurrement of an impairment loss is to be
recognized based on the fair value of the asset. The Partnership generally bases
its estimate of fair market value of the aircraft upon valuation by an
independent third party, or based on discussions of sale of the assets. SFAS 144
also requires that long-lived assets to be disposed of be reported at the lower
of the carrying amount or fair value less estimated disposal costs.
MD-81 Trust. The McDonnell Douglas MD-81 aircraft, formerly under lease
to Vanguard Airlines ("Vanguard"), was owned by a trust in which the Partnership
had a 50% interest. An affiliated Partnership owned the other 50% interest. The
Partnership had adopted the guidance in EITF Issue No. 00-1 "Investor Balance
Sheet and Income Statement Display under the Equity Method of Investment in
Certain Partnerships and Other Ventures" (EITF 00-1) in its Annual Report on
Form 10-K starting from the fiscal year ended December 31, 2000 and accounted
for its investment in the Trust which owned the MD-81 aircraft leased to
Vanguard under the equity method. In prior years, the Partnership had reported
its ownership in the MD-81 Trust on a proportionately consolidated basis. The
financial results in prior years contained herein have been restated utilizing
the equity method. The aircraft had been subject to a tax benefit transfer
lease, which expired in April 2000. In October 2002, the McDonnell Douglas MD-81
aircraft was sold which effectively terminated the Trust.
Maintenance Reserve Funds. For the year ended December 31, 2002, the
Partnership had three leases where the lessee was required to make monthly
payments to maintenance reserve funds administered by the Partnership. The
Partnership retained the collected maintenance reserves when the aircraft were
sold, or when the lessees defaulted on their lease payments.
Operating Leases. The aircraft leases, which were structured
principally as triple net leases, were accounted for as operating leases. Lease
revenues are recognized ratably over the terms of the related leases.
Deferred Rental Income. Some of the Partnership's operating leases
required rental payments to be paid monthly in advance. Deferred rental income
represented rental payments received in advance which have not been earned.
21
Income Taxes. No provision for income taxes has been made in the
financial statements since such taxes are the responsibility of the individual
partners rather than the Partnership.
Net Income or Loss Per Limited Partnership Unit. The net income or loss
per limited partnership unit is computed by dividing the net income or loss
allocated to the Limited Partners by the weighted average number of Units
outstanding during the year.
Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for
the Impairment or Disposal of Long-Lived Assets". SFAS 144, which is effective
for fiscal years beginning after December 15, 2001 with earlier application
encouraged, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of", and the accounting and reporting provisions of APB 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as previously
defined in that Opinion). The implementation of this Statement is not expected
to have a material effect on the Company's financial position, results of
operations or cash flows.
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the "Act") was
enacted. Section 302 of the Act required the Commission to adopt final rules
that became effective on August 29, 2002, under which the principal executive
officer and the principal financial officer, or persons providing similar
functions, of an issuer each must certify the information contained in the
issuer's quarterly and annual reports. Section 302 also requires these officers
to certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of the issuer's internal controls, they
have made certain disclosures to the issuer's auditors and the audit committee
of the board of directors about the issuer's internal controls; and they have
included information in the issuer's quarterly and annual reports about their
evaluation and whether there have been significant changes in the issuer's
internal controls or in other factors that could significantly affect internal
controls subsequent to the evaluation.
In 2002, the Partnership reclassified $526,000 of expense, incurred in
2001, that was related to the MD-81 aircraft to the MD-81 Trust's equity.
2. Organization of the Partnership
The Partnership was formed on June 23, 1988 for the purpose of
acquiring, leasing, and ultimately selling used commercial aircraft principally
to US airlines. The Managing General Partner of the Partnership is Pegasus
Aircraft Management Corporation, a wholly-owned subsidiary of Pegasus Capital
Corporation, and the Administrative General Partner is Air Transport Leasing,
Inc., a wholly-owned subsidiary of UBS Americas, Inc. UBS Americas is a
successor through acquisition to Paine Webber Group, Inc. (collectively, the
"General Partners").
The Partnership is required to dissolve and distribute all of its
assets no later than December 31, 2012. The Partnership had the right, subject
to certain conditions, to reinvest the proceeds from sales of aircraft occurring
prior to March 22, 1997.
Upon formation of the Partnership, the General Partners each
contributed $500 to the capital of the Partnership, and the initial Limited
Partner contributed $100 for five limited partnership depositary units
("Units"). An additional 4,000,000 Units were then sold at a price of $20.00 per
Unit, with the Partnership receiving gross offering proceeds of $80,000,000.
Title to the aircraft owned by the Partnership is held by
non-affiliated trustees of trusts of which the Partnership is the beneficiary.
The purpose of this method of holding title is to satisfy certain registration
requirements of the Federal Aviation Administration.
3. Partnership Allocations
The Partnership Agreement provides that cash flow from operations be
distributed on a quarterly basis at the General Partners' discretion, 99% to the
Limited Partners and 1% to the General Partners. Cash flow is defined in the
22
Partnership Agreement as including cash receipts from operations and interest
income earned, less expenses incurred and paid in connection with the ownership
and lease of the aircraft. Depreciation and amortization expenses are not
deducted from cash receipts in determining cash flow. Distributable proceeds
from sales of aircraft upon liquidation of the Partnership will be distributed
in accordance with the partners' capital accounts after all allocations of
income and losses.
Income and losses generally will be allocated 99% to the Limited
Partners and 1% to the General Partners. Upon the sale of aircraft, gain
generally will be allocated, first, to the General Partners in an amount equal
to the difference between their capital contributions and 1.01% of the aggregate
capital contributions of the Limited Partners, and then, 99% to the Limited
Partners, and 1% to the General Partners.
4. Aircraft
Net Investment in Aircraft
The Partnership's net carrying value of aircraft as of December 31,
2002 and 2001 consisted of the following (in thousands):
2002 2001
---- ----
Aircraft on operating leases, at cost $ -- $ 26,951
Less: Accumulated depreciation -- (12,259)
Write-downs -- (11,692)
-------- --------
$ -- $ 3,000
-------- --------
Net Investment in MD-81 Trust $ -- $ 741
-------- --------
Aircraft held for sale, at cost 11,915 11,915
Less: Accumulated depreciation (6,365) (6,365)
Write-downs (5,450) (5,350)
-------- --------
$ 100 $ 200
-------- --------
Aircraft, net $ 100 $ 3,941
======== ========
Financial Terms of Leases
Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). The Boeing 727-200 Advanced
aircraft was hushkitted, converted to a freighter and delivered to Kitty Hawk in
August, 1999. The lease agreement 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.
During 2001, Kitty Hawk determined that it was more economic to replace
one of the Pratt & Whitney JT8D-9A engines on the aircraft than to induct it
into a shop for repairs. The Partnership paid, in June 2001, $201,000 from the
Kitty Hawk engine reserves to Kitty Hawk and agreed to an engine exchange. Kitty
Hawk bore the additional cost for the replacement engine.
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 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 was completed in
December 2002 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.
23
Trans World Airlines Leases. In April 2000, the Partnership sold its
Boeing 747-100 to the lessee, TWA, for total consideration of $4,360,000. As
part of the sale, the Partnership retained deposits received from TWA,
aggregating $360,000, which had been held by the Partnership, applying them
towards the sales price for this aircraft. The Partnership recognized a net gain
of $1,611,000 on the sale of this aircraft during the second quarter 2000.
During February 1989, the Partnership acquired a McDonnell Douglas
MD-82 aircraft for a total purchase price of $21,017,000 which, as of December
31, 2000, was subject to a lease with Trans World Airlines, Inc. ("TWA")
providing for rentals of $185,000 per month for a term scheduled to expire in
September 2004. TWA missed making lease payments during December 2000, January
and February 2001. TWA filed for Chapter 11 bankruptcy protection under the
Federal Bankruptcy code in January 2001, and entered into an Asset Sale and
Purchase Agreement with American Airlines, Inc., who paid for all TWA's rents in
March 2001. On April 9, 2001, American Airlines purchased TWA's assets and also
acquired the Partnership's McDonnell Douglas MD-82 aircraft for $9.5 million.
The sale price of the aircraft was in excess of the net book value of $2.2
million, and the proceeds were applied to pay off the Partnership's debt of
approximately $8.9 million. TWA accounted for 15% of the Partnership's lease
revenue in 2001.
US Airways Group, Inc. ("USAir") Lease. During March 1989, the
Partnership acquired one half of the beneficial interest in a trust ("Trust")
that is the owner/lessor of a McDonnell Douglas MD-81 ("MD-81") for a purchase
price of $9,999,000. The remaining one-half interest in the Trust is owned by
Pegasus Aircraft Partners II, L.P., an affiliated partnership.
The MD-81 was leased to US Airways, which renewed its lease from June
1, 1998 to June 1, 2001, at the original lease rate. Rental payments were
payable quarterly, in arrears, at a rate of $304,000 (for the Partnership's
one-half interest in the aircraft. USAir also had three additional one-year
renewal options at fair market rental rates, but returned the aircraft in July,
2001 and paid rent through the return date.
Vanguard Airlines Lease ("Vanguard") Lease. 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.
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 the
maintenance reserves for the aircraft. From the beginning of the lease in August
2001 through September 30, 2002, Vanguard paid a total of $442,000, of which the
Trust paid 50% to the Partnership and 50% to an affiliated Partnership.
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.
At the time of its filing, Vanguard was 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. At December 31, 2002, recovery of this amount is unlikely. The Trust
wrote down the value of the aircraft by $1,030,000 ($515,000 for the Partnership
for its 50% interest) in the third quarter of 2002. The Trust sold the MD-81
aircraft for $500,000 ($250,000 for the Partnership for its 50% interest) on
October 25, 2002 and retained $442,000 ($221,000 for the Partnership for its 50%
interest) of maintenance reserves as part of the sale proceeds and recognized a
gain on liquidation of the equity in the Trust of $278,000.
TNT Transport International B.V. Lease. In November 1997, the
Partnership entered into an agreement to lease a Boeing 727-200 to a European
freight carrier, TNT Transport International B.V. ("TNT") for a term of four
years. The monthly rental rate was $123,500 and TNT also provided $150,000
security deposit.
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.
24
Boeing 727-200. 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 in marketing the
aircraft for sale in an "as is, where-is" condition. Major airlines such as
United Airlines and American Airlines 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 of 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 offer for
the aircraft in October 2002. The aircraft and engines are being offered for
sale on an "as is, where-is" basis.
General. Of the 5.5 aircraft the Partnership originally owned, only one
Boeing 727-200 remains. The Partnership will seek to dispose of it as soon as
possible (See "Note 7").
Significant Lessees
The Partnership leased its aircraft to three different airlines or air
freight companies during 2002. One of the three lessees paid no rent in the 2002
Period. Revenues from airlines which accounted for greater than 10% of the
Partnership's total rental revenues during 2002, 2001, and 2000 are as follows:
Percentage of Rental Revenues
Airlines 2002 2001 2000
- -------- ---- ---- ----
Trans World Airlines, Inc. - 15% 37%
US Airways Group, Inc. - 17 18
Kitty Hawk Aircargo, Inc. 65% 31 21
TNT Transport International B.V. 35 37 22
Sky Trek International Airlines, Inc. - (a) (a)
(a) Represents less than 10%.
Revenues include rentals from aircraft leased to foreign airlines or
carriers of $371,000 in 2002 and of $1,482,000 in each of the year 2001and 2000.
Proceeds from the sale of aircraft are not included in rental revenue.
5. 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
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, 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. During the years ended December 31, 2001 and
2000, the General Partners earned base management fees of $60,000 and $103,000,
respectively. 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 Fee. 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 this
amount 2.5% is payable to the Managing General Partner and 2.0% is payable to
the Administrative General Partner. During the years ended December 31, 2001 and
2000, the General Partners earned incentive management fees of $116,000 and
25
$425,000, respectively. 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 Fee. 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.
During the years ended December 31, 2001 and 2000, the General Partners earned
$593,000 and $198,000, respectively. 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 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 such reimbursable expense in each of the years ended
December 31, 2002, 2001, and 2000. The continued absence of accountable expenses
is due to the subcontracting of certain accounting services, and their cost is
included in general and administrative expenses.
Other. For the year ended December 31, 2001, the Partnership purchased
parts in connection with certain capital projects for costs totaling $203,000
from a company in which the President and Director of the Managing General
Partner had an interest. There was no such purchases for the years ended
December 31, 2002 and 2000.
For the years ended December 31, 2002, 2001, and 2000, the Partnership
paid $26,000, $22,000, and $26,358, respectively, 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.
6. Notes Payable
In January 1998, the Partnership's lender increased its borrowing
commitment from $7,500,000 to $10,000,000 and increased the interest rate from
1% to 1.25% over prime. The Partnership provided, as additional collateral, the
Boeing 727-200 aircraft leased to Continental and the Boeing 727-200 aircraft
leased to Sky Trek. The proceeds were used to fund the cargo conversion of the
aircraft delivered to TNT.
In February 1999, the lender further agreed to increase the borrowing
commitment from $10 million to $14.5 million and increase the interest rate from
1.25% to 1.5% over prime with the funds primarily being utilized for the Kitty
Hawk aircraft conversion.
For the year ended December 31, 2000, $2.95 million of the sale
proceeds from the sale of the Boeing 747 to TWA was used to reduce outstanding
debt. In January 2001, the Note, which had become due in October 2000, was
extended an additional six months to June 30, 2001. A condition of the extension
was that all cash flow in excess of certain operating expenses was to be used to
reduce the principal of the Note. On April 9, 2001, American Airlines purchased
the McDonnell Douglas MD-82 aircraft, formerly leased to TWA, for $9.5 million.
Approximately $8.9 million of the sale proceeds were used to fully pay off the
Partnership's loan balance.
7. Other
Upon the sale of the remaining aircraft and the collection of the
outstanding notes, the Partnership will liquidate pursuant to the Partnership
Agreement. At that time, the Partnership will suspend all transfers, withdraw
from regulatory filings, make a distribution and enter into a Liquidating Trust
agreement. The remaining funds will be placed in an interest-bearing escrow
account and will be disbursed, net of any liabilities that may arise. It is the
current intention of the General Partners, subject to no other contingencies
arising, to distribute the balance of any remaining escrow balance within 12
months of the establishment of the Liquidating Trust. The General Partners will
serve as the trustees of the Liquidating Trust without compensation.
26
8. Reconciliation to Income Tax Method of Accounting
The following is a reconciliation of the net income as shown in the
accompanying financial statements to the taxable income reported for federal
income tax purposes (in thousands):
2002 2001 2000
---- ---- ----
Net Income/(Loss) per financial statements $ 1,795 $ (445) $ 155
Increase (decrease) resulting from:
Depreciation 561 8,664 3,453
TBT interest income less
TBT rental expense -- 128 (573)
Difference in basis of aircraft sold (4,645) 2,184 2,428
Maintenance reserves collected and related
interests net of expenditures (801) (476) 685
Deferred rental income -- -- (33)
Purchase Option from Partnership/Write Off -- (3,118) --
Other -- (200) (76)
------- ------- -------
Taxable (loss) income per federal income tax
return $(3,090) $ 6,737 $ 6,039
======= ======= =======
The following is a reconciliation of the amount of the Partnership's
total Partnership capital as shown in the accompanying financial statements to
the tax bases of the Partnership's net assets (in thousands):
2002 2001 2000
---- ---- ----
Total Partnership capital per financial
statements $ 2,833 $ 3,058 $ 4,715
Increase (decrease) resulting from:
Commissions and expenses paid in
connection with the sale of limited
partnership units 8,441 8,441 8,441
Reserves for maintenance costs and
write-downs including Continental lease
settlement, accounted for as cost
recovery 5,449 17,221 7,919
Aircraft expenditures capitalized for
tax, net 944 (8,453) 514
Maintenance reserves collected and used
to restore aircraft net -- -- 1,344
Accumulated depreciation (5,797) (4,440) (5,986)
TBT interest income less TBT rental expense -- -- (7,191)
Maintenance reserves payable -- 1,154 1,700
Other -- -- --
-------- -------- --------
Tax bases of net assets $ 11,870 $ 16,981 $ 11,456
======== ======== ========
27
9. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value of certain financial instruments, whether or
not reported in the balance sheet. Where quoted market prices are unavailable
the values are based on estimates using present value or other valuation
techniques. The results are significantly affected by the assumptions used
including the discount rate and estimates of future cash flows. In addition,
because SFAS No. 107 excludes certain assets such as leased aircraft owned by
the Partnership from its disclosure requirements, the aggregate fair value
amounts discussed below do not purport to represent and should not be considered
representative of the underlying market value of the Partnership.
The methods and assumptions used to estimate the fair value of each
class of the financial instruments are described below.
Cash and cash equivalents, rents and other receivables. For these
balances, carrying value approximates fair value due to their short term nature.
Accounts payable and accrued expenses, payable to affiliates, and
accrued interest payable. For these balances, carrying value approximates fair
value due to their short-term nature.
10. Selected Quarterly Financial Data (unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001 (in thousands, except per unit amounts):
2001 Mar. 31 Jun. 30 Sep. 30 Dec. 31
---- ------- ------- ------- -------
Total Revenues $ 1,415 $ 9,204 $ 887 $ (45)(*)
Net Income/(Loss) $ 485 $ 6,810 $ 41 $(7,781)
Net Income/(Loss) per
General Partnership $ 5 $ 68 $ -- $ (77)
Net Income/(Loss) per
Limited Partnership $ 480 $ 6,742 $ 41 $(7,704)
Net Income/(Loss) per
Limited Partnership Unit $ 0.12 $ 1.69 $ 0.01 $ (1.93)
Note (*): In 2002, the Partnership reclassified $526 of expense, incurred in
2001, that was related to the MD-81 aircraft to the MD-81 Trust's equity. There
was no effect on Net Income.
2002 Mar. 31 Jun.30 Sep.30 Dec.31
---- ------- ------- ------- -------
Total Revenues $ 630 $ 1,755 $ 602 $ 321
Net Income/(Loss) $ 156 $ 1,535 $ (133) $ 237
Net Income/(Loss) per
General Partnership $ 1 $ 16 $ (2) $ 3
Net Income/(Loss) per
Limited Partnership $ 155 $ 1,519 $ (131) $ 234
Net Income/(Loss) per
Limited Partnership Unit $ 0.04 $ 0.38 $ (0.03) $ 0.05
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements with accountants
with respect to accounting or financial disclosure issues during 2002 or 2001 .
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no officers and directors. The General Partners
jointly manage and control the affairs of the Partnership and have general
responsibility and authority in all matters affecting its business. Richard L.
Funk resigned his position as Senior Vice President, Technical of Pegasus
Aircraft Management as of January 15, 2001 at which time Ervin Bach assumed the
position. Information concerning the directors and executive officers of the
General Partners is as follows:
Pegasus Aircraft Management Corporation
Name Positions Held
---- --------------
Richard S. Wiley President and Chairman of the Board
Carol L. Chase Executive Vice President, General Counsel and Secretary
Richard M. Oster Senior Vice President, Chief Financial Officer
Erv Bach Senior Vice President, Technical
Richard S. Wiley, age 49 is President and Chairman of the Board of the
Managing General Partner and Pegasus Capital Corporation ("PCC"), which was
formed in 1988. Prior to forming Pegasus Capital Corporation, Mr. Wiley was a
Vice President of CIS Corporation ("CIS"), a wholly-owned subsidiary of
Continental Information Systems Corporation ("Continental") for the period 1986
to 1988. Mr. Wiley originated aircraft transactions throughout the world and
sold aircraft to third-party investors. From 1985 to 1986, Mr. Wiley worked as
Treasurer of Caterpillar Capital Company in San Diego, California. From 1983 to
1985, he served as Managing General Partner and President of RAM Financial
Corporation in Houston, Texas, an equipment leasing venture capital company.
Prior to joining RAM, he worked for GATX Leasing Corporation as a District
Manager from 1980 to 1983. Mr. Wiley received a B.S. degree from the Indiana
University School of Business and an M.B.A. from the University of California,
Los Angeles.
Carol L. Chase, Esq., age 50, is Executive Vice President, General
Counsel and Secretary of the Managing General Partner and Pegasus Capital
Corporation. She is responsible for providing legal counsel for all aspects of
capital equipment leasing, financing and placement. Prior to joining Pegasus,
from 1987 to 1988, Ms. Chase was Senior Corporate Counsel at CIS where she
provided legal counsel for transactions involving aircraft and related
equipment. From 1981 to 1987, Ms. Chase was legal counsel at Transamerica
Airlines where she was responsible for the legal negotiation and documentation
for the purchase, sale, lease and finance of aircraft and aircraft-related
equipment. Ms. Chase received a B.A. degree from California State University,
Hayward and a J.D. degree from the University of California, Davis. She is a
member of the State Bar of California, the American Bar Association, and the
American Corporate Counsel Association.
Richard M. Oster, age 51, is Chief Financial Officer and Senior Vice
President Administration of the Managing General Partner . Mr. Oster, is
primarily responsible within the Pegasus companies for all corporate-wide
Finance and Administration functions that include all financial reporting,
planning and analysis, accounting, information systems, human resources and
other administrative functions. Prior to joining Pegasus, Mr. Oster served as
Senior Vice President and Chief Financial Officer of Crowley Maritime
Corporation; and prior to that, as Senior Vice President and Chief Financial
Officer of Inchcape Shipping Services. Mr. Oster is a CPA and holds a B.S. in
Business Administration from the University of North Carolina and a M.B.A. from
the Rutgers Graduate School of Business.
Erv Bach, 41, is Senior Vice President, Technical of the Managing
General Partner and Pegasus Capital Corporation. Mr. Bach has been employed in
various technical capacities with affiliates of the Managing General Partner
since 1996. From 1994 to 1996, he was Manager of Structures for Hamilton
29
Aviation, Tucson, and he held the same position with Lockheed Aeromod, Tucson,
from 1993 to 1994. From 1989 to 1993, Mr. Bach held various positions with
Evergreen Air Center, Marana, Arizona, the last being Manager of Engineering.
During 1991, Mr. Bach was employed for seven months as a structural mechanic
with Trans World Airlines, Kansas City. Mr. Bach was with the United States Air
Force from 1982 to 1989, rising to the rank of Staff Sergeant with the
responsibility of maintaining the mission worthiness of 13 Electronic Combat,
C-130s. Mr. Bach holds an Airframe and Powerplant license and attended USAF
technical and leadership schools. Mr. Bach attended Pima Community College
during 1990-91.
Air Transport Leasing, Inc.
Name Positions Held
---- --------------
Clifford B. Wattley President and Director
Stephen R. Dyer Vice President, and Director
Timothy F. Kelly Vice President, Secretary, Treasurer and Chief
Financial and Accounting Officer
Clifford B. Wattley, age 53, is President, and a Director of the
Administrative General Partner. Mr. Wattley is a Corporate Vice President with
UBS PaineWebber Inc., having joined the firm in 1986. He also was employed
previously by Paine, Webber, Jackson & Curtis from 1979 to 1980. From 1986 to
1992, Mr. Wattley participated in Paine Webber's Principal Transactions Group.
Since 1992, Mr. Wattley has been a member of the Private Investment Department.
He holds a Bachelor of Science degree in engineering from Columbia University
and a Masters in Business Administration from Harvard University.
Stephen R. Dyer, age 43, is Vice President, and a Director of the
Administrative General Partner. He joined UBS PaineWebber Inc. in June 1988 as a
Divisional Vice President and is currently a Senior Vice President and Director
of Private Investments. Prior to joining UBS PaineWebber Inc., Mr. Dyer had been
employed, since June 1987, as an Assistant Vice President in the Retail National
Products Group of L.F. Rothschild & Co. Incorporated. Prior to joining L.F.
Rothschild he was employed, beginning in January 1985, as an Associate in the
Real Estate Department of Thomson McKinnon Securities Inc. From July 1981 to
August 1983, Mr. Dyer was on the audit staff of the accounting firm of Arthur
Young & Company. He received his Bachelor of Science degree in Accounting in
1981 from Boston College and a Masters of Business Administration from Indiana
University in December 1984. Mr. Dyer is a Certified Public Accountant.
Timothy F. Kelly, age 30, is Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer of the Administrative General Partner.
Mr. Kelly has also served as a Divisional Vice President within the Private
Investments Department of UBS PaineWebber Inc. since June 2002. Mr. Kelly
previously served in the UBS PaineWebber Retirement Consulting Services
Department where he was employed since December 1997 as a Product Specialist. He
was previously employed as an Analyst for the WTR Consulting Group, from
December 1994 to December 1997. He received his Bachelor of Arts degree in
Spanish in May 1994 from Hamilton College and is a candidate for a Master of
Business Administration in Finance and Accounting from New York University in
December 2002.
Section 16 (a) Beneficial Ownership Reporting Compliance
Timothy Kelly, Chief Financial and Accounting Officer of Air Transport
Leasing, Inc., was required to file a Statement of Beneficial Ownership on Form
3 upon being appointed to that position in June 2002. Mr. Kelly failed to file
the Form 3 at that time, and filed a delinquent report on Form 5 in March 2003
to satisfy the Form 3 filing requirement. Mr. Kelly reported no beneficial
ownership of the registrant's assignee units of limited partnership interest.
ITEM 11. EXECUTIVE COMPENSATION
No compensation was paid by the Partnership to the officers and
directors of the General Partners. See Item 13 of this Report, "Certain
Relationships and Related Transactions", which is incorporated herein by
reference, for a description of the compensation and fees paid to the General
Partners and their affiliates by the Partnership during 2002.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) As of the date hereof, no person is known by the Partnership to be
the beneficial owner of more than 5% of the Units of the
Partnership. The Partnership has no directors or officers, and
neither of the General Partners of the Partnership owns any Units.
The Assignor Limited Partner for the Partnership, Pegasus Assignor
L.P.A., Inc. (an affiliate of the Managing General Partner), owns
5 Units. Additionally, as of December 31, 2002, ATL Inc., an
affiliate of the Administrative General Partner owns approximately
69,016 Units.
The names and addresses of the General Partners are as follows:
Managing General Partner:
Pegasus Aircraft Management Corporation
Four Embarcadero Center, 35th Floor
San Francisco, CA 94111
Administrative General Partner:
Air Transport Leasing, Inc.
800 Harbor Boulevard, 3rd Floor
Weehawken, NJ 07086
The General Partners, collectively, have a 1% interest in each
item of the Partnership's income, gains, losses, deductions,
credits and distributions.
(b) The following table sets forth the number of Units beneficially
owned as of March 1, 2003 by directors of the Managing General
Partner and the Administrative General Partner and by all
directors and officers of such corporations as a group:
Number
of Units
Beneficially Percent
Name Owned of Class
---- ----- --------
Managing General Partner
Richard S. Wiley 3,216 *
All directors and officers as a group
(4 persons) 3,216 *
Administrative General Partner
None
* Less than 1% of class.
(c) The Partnership knows of no arrangements, the operation of the
terms of which may at a subsequent date result in a change in
control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The General Partners and their affiliates have received, or will
receive, certain types of compensation, fees or other distributions in
connection with the operations of the Partnership. The fees and compensation
were determined in accordance with the applicable provisions of the Partnership
Agreement.
31
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 $1,495,000 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.
Following is a summary of the amounts paid, or payable, to the General
Partners and their affiliates during 2002.
Base Management Fee. The General Partners receive a quarterly
subordinated 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 Fee. The General Partners also receive a
quarterly subordinated 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 $99,000 were accrued for the three months
ended March 31, 2002 and this accrual was reversed at June 30, 2002.
Re-lease Fee. The General Partners 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 received. 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 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 such reimbursable expenses during 2002 and 2001. As
discussed in Note 5 to the Financial Statements, accountable expenses declined
due to the subcontracting of certain accounting services, and their cost is
included in general and administrative expenses.
Partnership Interest. In the aggregate, the General Partners were
entitled to receive cash distributions of $20,000 as their allocable share of
distributable cash flow for 2002. In addition, $18,000 of the Partnership's net
taxable income for 2002 was allocated to the General Partners.
32
ITEM 14. 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 disclosures 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.
33
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: (Incorporated by reference to Item 8 of
this Report, "Financial Statements and Supplementary Data").
(b) During the fourth quarter of 2002, the Partnership filed a Form
8-K on October 15, 2002, reporting a distribution of $0.50 per
Unit on October 25, 2002 to unitholders of record as of September
30, 2002. The distribution was a result of cash flow from
operations and in part funds available from the sale of the Boeing
727-200 to TNT in March 2002.
(c) Exhibits required to be filed.
Exhibit No. Description
- ----------- -----------
3.1 (a) First Amended and Restated Limited Partnership Agreement dated
September 30, 1988. Filed as Exhibit 3.1 to Pre-Effective
Amendment No. 2 to Form S-1 Registration Statement dated September
16, 1988 (Commission File No. 33-22986).*
(b) Amendment, dated as of December 26, 1990, to the First Amended and
Restated Limited Partnership Agreement dated September 30, 1988.
Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K
dated December 26, 1990.*
(c) Amendment, dated as of March 31, 1992, to the First Amended and
Restated Limited Partnership Agreement dated September 30, 1988.
Filed as Exhibit 4 to Registrant's Current Report on Form 8-K
dated April 16, 1992.*
4.1 Depositary Agreement dated December 20, 1988, by and among Pegasus
Aircraft Partners, L.P. ("Registrant"), Pegasus Aircraft
Management Corporation, a California corporation, Paine Webber
Aircraft Leasing, Inc., a Delaware corporation, Pegasus Assignor
L.P.A., Inc., a California corporation, dated April 27, 1989.
Filed as Exhibit 4.1 to the Registrant's Form 8-A on May 1, 1989
(Commission File No. 33-22986).*
10.1 (a) Lease Agreement dated as of September 26, 1988 by and between
Pegasus Capital Corporation, a California corporation ("Seller")
and Northwest Aircraft, Inc. ("Lessee") (Boeing Model 727-251
airframe, SN 20289). Filed as Exhibit 10.2(c) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988.*
(b) Lease Agreement dated as of September 26, 1988 by and between the
Seller and Northwest Airlines, Inc. ("Lessee") (Boeing Model
727-251 airframe, SN 19977). Filed as Exhibit 10.2(d) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.*
(c) Sublease Agreement dated as of September 26, 1988 by and between
Lessee and Northwest Airlines, Inc. ("Sublessee") (Boeing Model
727-251 airframe, SN 20289). Filed as Exhibit 10.2(e) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.*
34
(d) Sublease Agreement dated as of September 26, 1988 by and between
Lessee and Northwest Airlines, Inc. ("Sublessee") (Boeing Model
727-251 airframe, SN 19977). Filed as Exhibit 10.2(f) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.*
(e) Trust Agreement 258 dated as of December 23, 1988 by and between
First Security Bank of Utah, National Association in its capacity
as Owner Trustee ("Owner Trustee") and Registrant. Filed as
Exhibit 10.2(i) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988.*
(f) Trust Agreement 267 dated as of December 23, 1988 by and between
the Owner Trustee and Registrant. Filed as Exhibit 10.2(j) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.*
(g) Amendment 1 to Lease Agreement, dated May 27, 1993, between First
Security Bank of Utah, National Association as Owner Trustee and
Northwest Aircraft Inc. to amend a Lease Agreement, dated
September26, 1988, for one Boeing 727-200 aircraft, U.S.
Registration No. N258US. Filed as Exhibit 10.1(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993.*
(h) Amendment 1 to Lease Agreement, dated May 27, 1993, between First
Security Bank of Utah, National Association as Owner Trustee and
Northwest Aircraft Inc. to amend a Lease Agreement, dated
September 26, 1988, for one Boeing 727-200 aircraft, U.S.
Registration No. N267US. Filed as Exhibit 10.1(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993.*
(i) Lease Agreement dated April 15, 1994 between First Security Bank
of Utah, National Association, as Trustee, (Lessor) and Kiwi
International Airlines, Inc., (Lessee) with respect to one used
Boeing 727-251 Aircraft US Registration number N258US.*
(j) Lease Agreement dated February 15, 1994, between First Security
Bank of Utah, National Association, as Trustee, (Lessor) and Kiwi
International Airlines, Inc., (Lessee) with respect to one used
Boeing 727-251 Aircraft US Registration number N267US.*
(k) Lease Amendment No. 1 dated March 15, 1995 with respect to the
lease between First Security Bank of Utah, National Association,
as Trustee, (Lessor) and Kiwi International Airlines, Inc.,
(Lessee) in reference 10 (1) (i) dated April 15, 1994.*
(l) Lease Amendment No. 1 dated March 15, 1995 with respect to the
lease between First Security Bank of Utah, National Association,
as Trustee, (Lessor) and Kiwi International Airlines, Inc.,
(Lessee) in reference 10 (1) (j) dated February 15, 1994.*
10.2 (a) Trust Agreement 603, dated as of October 10, 1988 by and between
the Seller and Owner Trustee providing for, among other things,
the acquisition of one Boeing Model 747-143 Aircraft (the
"Aircraft"), and concurrently therewith leasing the Aircraft to
Continental Airlines, Inc. ("Lessee"). Filed as Exhibit 10.3(b) to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.*
(b) Lease Agreement 603, dated as of October 14, 1988 by and between
the Owner Trustee and Lessee. Filed as Exhibit 10.3(e) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.*
(c) Stipulation and Order, dated June 19, 1991, among Continental
Airlines, Inc., New York Airlines, Inc., Bay Air Lease I, Cirrus
Capital Corporation of Florida, Bay Air Lease III, Meridian Trust
Company, as Owner Trustee, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation,
IAL Aviation Resources, Inc., Aircraft Leasing, Inc., Pegasus
Aircraft Partners, L.P., Gilman Financial Services, Inc. and First
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 19.1(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991.*
(d) Agreed Order, dated July 3, 1991, in connection with approval of
Stipulation and Order, dated June 19, 1991, among Continental
Airlines, Inc., New York Airlines, Inc., Bay Air Lease I, Cirrus
Capital Corporation of Florida, Bay Air Lease III, Meridian Trust
Company, as Owner Trustee, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation,
IAL Aviation Resources, Inc., Aircraft Leasing, Inc., Pegasus
Aircraft Partners, L.P., Gilman Financial Services, Inc. and First
35
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 19.1(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991.*
(e) Supplemental Stipulation and Order, dated December 30, 1992, among
Continental Airlines, Inc., Bay Air Lease I, Cirrus Capital
Corporation of Florida, Bay Air Lease III, Aviation Assets I,
Aviation Assets II, Aviation Assets III, Aviation Assets IV, IAL
Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II, L.P.,
Pegasus Capital Corporation, IAL Aviation Resources, Inc., Pegasus
Aircraft Partners, L.P., Gilman Financial Services, and First
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 10.2(e) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992.*
(f) Lease termination agreement dated October 16, 1995, between
Continental Airlines, Inc. and First Security Bank of Utah, N.A.
as trustee of a trust in which Pegasus Aircraft Partners, L.P. is
the sole beneficiary with respect to the lease of the 747-143
aircraft.
10.3 (a) Trust Agreement 735, dated as of September 26, 1988 by and between
Seller and Owner Trustee providing for, among other things, the
acquisition of one Boeing Model 727-224 aircraft (the "Aircraft"),
and concurrently therewith leasing the Aircraft to Continental
Airlines, Inc. ("Lessee"). Filed as Exhibit 10.4(b) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.*
(b) Lease Agreement 735, dated as of September 26, 1988 by and between
Owner Trustee and Lessee. Filed as Exhibit 10.4(d) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988.*
(c) Stipulation and Order, dated June 19, 1991, among Continental
Airlines, Inc., New York Airlines, Inc., Bay Air Lease I, Cirrus
Capital Corporation of Florida, Bay Air Lease III, Meridian Trust
Company, as Owner Trustee, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation,
IAL Aviation Resources, Inc., Aircraft Leasing, Inc., Pegasus
Aircraft Partners, L.P., Gilman Financial Services, Inc. and First
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 19.1(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991.*
(d) Agreed Order, dated July 3, 1991, in connection with approval of
Stipulation and Order, dated June 19, 1991, among Continental
Airlines, Inc., New York Airlines, Inc., Bay Air Lease I, Cirrus
Capital Corporation of Florida, Bay Air Lease III, Meridian Trust
Company, as Owner Trustee, IAL Aircraft Acquisitions, Inc.,
Pegasus Aircraft Partners II, L.P., Pegasus Capital Corporation,
IAL Aviation Resources, Inc., Aircraft Leasing, Inc., Pegasus
Aircraft Partners, L.P., Gilman Financial Services, Inc. and First
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 19.1(b) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991.*
(e) Supplemental Stipulation and Order, dated December 30, 1992, among
Continental Airlines, Inc., Bay Air Lease I, Cirrus Capital
Corporation of Florida, Bay Air Lease III, Aviation Assets I,
Aviation Assets II, Aviation Assets III, Aviation Assets IV, IAL
Aircraft Acquisitions, Inc., Pegasus Aircraft Partners II, L.P.,
Pegasus Capital Corporation, IAL Aviation Resources, Inc., Pegasus
Aircraft Partners, L.P., Gilman Financial Services, and First
Security Bank of Utah, as Owner Trustee concerning various
aircraft and aircraft engines. Filed as Exhibit 10.3(e) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992.*
(f) Amendment No. 1 to Lease Agreement 735 dated as of February 28,
1997 between the Owner Trustee and Continental Airlines, Inc.
10.4 (a) Trust Certificate dated February 16, 1989, for the benefit of the
Registrant from New DC-9T-I, Inc., a New York Corporation and
Meridian Trust Company ("Trustee"). Filed as Exhibit 19.2(c) to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1989.*
36
(b) Lease, dated as of May 20, 1983, as supplemented by Lease
Supplement No. 1 dated May 24, 1983, between DC-9T-I, Inc., as
Lessor, and Trans World Airlines, Inc., as Lessee, pertaining to
one McDonnell Douglas DC-9-82 aircraft, U.S. Registration No.
904TW. Filed as Exhibit 10.4 (b) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1991. *
(c) Amendment Agreement, dated as of December 15, 1986, between Trans
World Airlines, Inc., as Lessee, and DC-9T-I, Inc., as Lessor.
Filed as Exhibit 10.4 (c) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991. *
(d) Amendment No. 1, dated as of May 1, 1991, to Lease dated as of May
20, 1983, each between Meridian Trust Company, as Owner Trustee
and Lessor, and Trans World Airlines, Inc., as Lessee. Filed as
Exhibit 19.1(a) to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1991.*
(e) Amendment No. 2, dated as of April 15, 1993, between Meridian
Trust Company, as Owner Trustee, and Trans World Airlines, Inc. as
Lessee.*
(f) Agreed Order, dated April 14, 1993, approving lease amendments
among Trans World Airlines, Inc., Registrant, Pegasus Aircraft
Partners II, L.P. and Pegasus Capital Corporation relating to
leases of certain aircraft.*
(g) Amendment No. 3 dated as of January 16, 1995 between Meridian
Trust Company Owner Trustee as Lessor and TWA as lessee with
respect to the lease of one McDonnell Douglas MD-82, U.S.
Registration No. N904TW.*
10.5 (a) Amended and Restated Lease No. 1, dated October 14, 1988, between
PS Group, Inc. and USAir, Inc. Filed as Exhibit 10.2.9 to Form S-1
Registration Statement, dated July 3, 1989 for Pegasus Aircraft
Partners II, L.P. (Commission File No. 33-28359).*
(b) Agreement pursuant to Section 168(f)(8) of the Internal Revenue
Code of 1954, as Amended between Pacific Southwest Airlines and
General Mills, Inc. Filed as Exhibit 19.3(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1989.*
(c) Assumption Agreement, dated March 22, 1989, among Pegasus Capital
Corporation, a California corporation ("PCC"), the Purchaser,
Concord Asset Management, Inc., a Delaware corporation ("CAMI")
and the Registrant. Filed as Exhibit 19.3(e) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1989.*
(d) Participation Agreement, dated September 21, 1989, among
Registrant, First Security Bank of Utah, a national association
(the "Owner Trustee"), CAMI and Pegasus Aircraft Partners II,
L.P., a Delaware limited partnership. Filed as Exhibit 19.2(e) to
the Quarterly Report on Form 10-Q for the quarter ended September
30, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File
No. 33-28359).*
(e) Amended and Restated Reimbursement Agreement, dated September 21,
1989, between the Registrant and CAMI. Filed as Exhibit 19.2(f) to
the Quarterly Report on Form 10-Q for the quarter ended September
30, 1989 for Pegasus Aircraft Partners II, L.P. (Commission File
No. 33-28359).*
(f) Amended and Restated Security Agreement, dated September 21, 1989,
between the Registrant and CAMI. Filed as Exhibit 19.2(h) to the
Quarterly Report on Form 10-Q for the quarter ended September 30,
1989 for Pegasus Aircraft Partners II, L.P. (Commission File No.
33-28359).*
(g) Security Agreement, dated September 21, 1989, between the
Registrant and Pegasus Aircraft Partners II, L.P. Filed as Exhibit
19.2(j) to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989 for Pegasus Aircraft Partners II, L.P.
(Commission File No. 33-28359).*
37
(h) Security Agreement, dated September 21, 1989, between Pegasus
Aircraft Partners II, L.P. and the Registrant. Filed as Exhibit
19.2(k) to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989 for Pegasus Aircraft Partners II, L.P.
(Commission File No. 33-28359).*
(i) Trust Agreement 814, dated as of March 10, 1989, among PCC, as
Beneficiary, the Registrant, as Beneficiary, and the Owner
Trustee. Filed as Exhibit 19.3(i) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1989.*
(j) First Amendment to Trust Agreement 814, dated September 21, 1989,
among Pegasus Aircraft Partners II, L.P., as Beneficiary, the
Registrant, as Beneficiary and the Owner Trustee. Filed as Exhibit
19.2(m) to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989 for Pegasus Aircraft Partners II, L.P.
(Commission File No. 33-28359).*
(k) Letter of Credit Agreement, dated as of April 30, 1992, between
First Security Bank of Utah as Owner Trustee and Philadelphia
National Bank, Incorporated, as CoreStates Bank, N.A. Filed as
Exhibit 10.1(a) to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1992.*
(l) Assumption Agreement, dated April 30, 1992, among Pegasus Aircraft
Partners, L.P. and Pegasus Aircraft Partners II, L.P. as Obligors
and Philadelphia National Bank, Incorporated, as CoreStates Bank,
N.A. Filed as Exhibit 10.1(b) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992.*
(m) Security Agreement and Assignment of lease, dated as of April 30,
1992, between First Security Bank of Utah, National Association as
Owner Trustee and Philadelphia National Bank, Incorporated, as
CoreStates Bank, N.A. Filed as Exhibit 10.1 (c) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1992. *
(n) Assignment of Collateral, dated as of April 30, 1992, between
Pegasus Aircraft Partners, L.P. and Philadelphia National Bank,
Incorporated, as CoreStates Bank, N.A. Filed as Exhibit 10.1(d) to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992. *
10.6 (a) Loan Agreement, dated April 22, 1994, between Pegasus Aircraft
Partners, L.P. and Philadelphia National Bank, Incorporated as
CoreStates Bank, N.A..*
(b) Promissory Note, dated April 22, 1994, made by Pegasus Aircraft
Partners, L.P. in favor of Philadelphia National Bank Incorporated
as CoreStates Bank, N.A.*
(c) Security Agreement and Assignment of lease between First Security
Bank of Utah, National Association as owner trustee and
Philadelphia National Bank Incorporated as CoreStates Bank, N.A.
with respect to aircraft N17010.*
(d) Assignment of beneficial interest for Pegasus Aircraft Partners,
L.P. to Philadelphia National Bank Incorporated as CoreStates
Bank, N.A. with respect to the Pegasus interest in the USAir Trust
Agreement and the Continental Trust Agreement.*
(e) Amended and restated loan agreement dated as of July 20, 1995
between Pegasus Aircraft Partners, L.P. and CoreStates Bank N.A..
11 Partnership policy Regarding Requests for Partner Lists.
19.1 Prospectus of Registrant, dated as of September 30, 1988. Filed as
Exhibit 19.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988.*
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
38
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 28, 2003
Pegasus Aircraft Partners, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
Administrative General Partner
By: /s/ CLIFFORD B. WATTLEY
Clifford B. Wattley
President and Director
By: Pegasus Aircraft Management
Corporation
Managing General Partner
By: /s/ RICHARD S. WILEY
Richard S. Wiley
President and Chairman
of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 2003.
Signature Title
/s/ RICHARD S. WILEY President and Chairman of
Richard S. Wiley the Board of Pegasus Aircraft
Management Corporation
/s/ CLIFFORD B. WATTLEY President and Director of
Clifford B. Wattley Air Transport Leasing, Inc.
/s/ STEPHEN R. DYER Vice-President and Director of
Stephen R. Dyer Air Transport Leasing, Inc.
40
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Richard S. Wiley, certify that:
1. I have reviewed this annual report on Form 10-K of Pegasus Aircraft Partners,
L.P.
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
6. The registrant's other certifying officers and I have indicated in this
annual 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: March 28, 2003
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.
41
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Clifford B. Wattley, certify that:
1. I have reviewed this annual report on Form 10-K of Pegasus Aircraft Partners,
L.P.
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
6. The registrant's other certifying officers and I have indicated in this
annual 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: March 28, 2003
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.
42