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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-18387
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PEGASUS AIRCRAFT PARTNERS II, L.P.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-1111757
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(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
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(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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This document consists of 30 pages.
1
PEGASUS AIRCRAFT PARTNERS II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - March 31, 2003 and December 31, 2002 3
Statements of Income/(Loss) for the three months
ended March 31, 2003 and 2002 4
Statements of Partners' Capital for the three
months ended March 31, 2003 and 2002 5
Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 6
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of 14
Financial Condition and Results of Operations
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 17
Signature 18
Certifications 19
2
PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
--------------------
PEGASUS AIRCRAFT PARTNERS II, L.P.
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BALANCE SHEETS -- MARCH 31, 2003 (UNAUDITED) AND DECEMBER 31, 2002
------------------------------------------------------------------
ASSETS
------
2003 2002
---- ----
(in thousands, except unit data)
Cash and cash equivalents $5,809 $4,569
Rent and other receivables 65 1,370
Aircraft, net 890 890
Other assets 24 24
------ ------
Total Assets $6,788 $6,853
====== ======
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Accounts payable and accrued expenses $ 193 $ 140
Payable to affiliates 974 974
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Total Liabilities 1,167 1,114
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PARTNERS' CAPITAL:
General Partners $ 58 $ 59
Limited Partners (7,255,000 units issued and
outstanding in 2003 and 2002) 5,563 5,680
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Total Partners' Capital 5,621 5,739
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Total Liabilities and Partners' Capital $6,788 $6,853
====== ======
The accompanying notes are an integral part of these financial statements.
3
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF INCOME/(LOSS)
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FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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(unaudited)
2003 2002
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ -- $ 1,185
Gain on sale of aircraft -- 328
Equity in deficits of MD-81 Trust -- (11)
Interest 22 35
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22 1,537
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EXPENSES:
Depreciation and amortization -- 462
Management and re-lease fees -- 172
Interest -- 158
General and administrative 71 136
Direct lease 69 53
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140 981
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NET INCOME/(LOSS) $ (118) $ 556
=========== ===========
NET INCOME/(LOSS) ALLOCATED:
To the General Partners $ (1) $ 5
To the Limited Partners (117) 551
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$ (118) $ 556
=========== ===========
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ (0.02) $ 0.08
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 7,255,000 7,255,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF PARTNERS' CAPITAL
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FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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(unaudited)
General Limited
Partners Partners Total
-------- -------- -----
(dollar amounts in thousands)
Balance, January 1, 2003 $ 59 $ 5,680 $ 5,739
Net loss (1) (117) (118)
-------- -------- --------
Balance, March 31, 2003 $ 58 $ 5,563 $ 5,621
======== ======== ========
Balance, January 1, 2002 $ 169 $ 16,587 $ 16,756
Net income 5 551 556
-------- -------- --------
Balance, March 31, 2002 $ 174 $ 17,138 $ 17,312
======== ======== ========
The accompanying notes are an integral part of these financial statements.
5
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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(unaudited)
2003 2002
---- ----
(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (118) $ 556
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of aircraft -- (328)
Depreciation and amortization -- 462
Equity in deficits of MD-81 Trust -- 11
Change in assets and liabilities:
Rent and other receivables 9 100
Other assets -- 37
Accounts payable and accrued expenses 53 44
Accrued interest payable -- (11)
Payable to affiliates -- 172
Maintenance reserves payable -- 77
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Net cash (used in)/provided by
operating activities (56) 1,120
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of aircraft 1,296 261
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Net cash provided by investing
activities 1,296 261
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable -- (5,788)
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Net cash used in financing
activities -- (5,788)
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,240 (4,407)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,569 8,444
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,809 $ 4,037
======= =======
The accompanying notes are an integral part of these financial statements.
6
PEGASUS AIRCRAFT PARTNERS II, L.P.
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STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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(unaudited)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid $ -- $ 156
NONCASH TRANSACTIONS:
Recognition of maintenance reserves on sale
of aircraft as income -- 1,277
Receivable arising from sale of Boeing 727-200 -- 2,000
Receivable arising from sale of A-300 -- 200
The accompanying notes are an integral part of these financial statements.
7
PEGASUS AIRCRAFT PARTNERS II, L.P.
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NOTES TO FINANCIAL STATEMENTS
-----------------------------
MARCH 31, 2003
--------------
(unaudited)
1. General
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the General
Partners, all adjustments necessary for a fair presentation have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant assumptions and estimates relate to useful life and
recoverability of the aircraft values. Actual results could differ from such
estimates. The unaudited financial statements should be read in conjunction with
the financial statements and footnotes thereto included in the Partnership's
annual report on Form 10-K for the year ended December 31, 2002. Operating
results for the three-month period ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003.
2. Aircraft
The Partnership's net investment in aircraft as of March 31, 2003 and
December 31, 2002 consisted of the following (in thousands):
2003 2002
---- ----
Aircraft held for sale, at cost $ 49,860 $ 49,860
Less: Accumulated depreciation (26,237) (26,237)
Write-downs (22,733) (22,733)
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Aircraft, net $ 890 $ 890
======== ========
Vanguard Airlines Lease ("Vanguard"). US Airways returned the MD-81 in
July 2001, and in August 2001, the Trust that owned the aircraft 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
8
2001 through September 30, 2002, Vanguard had paid a total of $442,000, of which
the Trust had paid 50% to the Partnership and 50% to an affiliated Partnership.
Vanguard, as have 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 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. 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 March 31, 2003, recovery of this amount is
unlikely. The Partnership wrote down the value of the aircraft by $1,030,000 for
the Trust ($515,000 for the Partnership for its 50% interest) in the third
quarter of 2002.
The Partnership sold the MD-81 aircraft on October 25, 2002 for
$942,000, $500,000 cash ($250,000 for the Partnership for its 50% interest) and
$442,000 of maintenance reserves retained as part of the sales proceeds which
represented ($221,000 for the Partnership for its 50% interest).
TNT Transport International B.V. ("TNT") Lease. In June 1998, the
Partnership delivered a Boeing 727-200 advanced aircraft formerly leased to
Continental and which had been converted to a freighter to a European freight
carrier, TNT Transport International B.V. ("TNT"), for a lease term of four
years. The lease provided for monthly rentals of $123,500 and airframe and
landing gear reserves aggregating $85 per flight hour. TNT contracted with a
third party service provider for maintenance of the engines and provided a
$150,000 security deposit.
TNT returned the aircraft at the end of the lease in June 2002 and paid
$507,000 in lieu of the aircraft meeting return conditions, and rent through
July 10, 2002. Due to the large number of Boeing 727 freighters available for
sale or lease, the Partnership wrote down the aircraft by $500,000 in the second
quarter of 2002.
In the third quarter of 2002, the Partnership took the $150,000
security deposit and the $391,000 maintenance reserves collected from TNT and
the $507,000 payment in lieu of the aircraft meeting return conditions,
originally booked to maintenance reserves into income. The Partnership also
wrote down the aircraft's value by $1,315,000. The aircraft and engines are
being offered for sale on an "as-is, where-is" basis.
Kitty Hawk Aircargo, Inc. ("Kitty Hawk"). One of the Boeing 727-200s,
received from Continental as partial satisfaction of the Airbus A-300 return
condition was converted to a freighter, hushkitted and delivered to Kitty Hawk
in November, 1999. The lease with Kitty Hawk was for 84 months, the lease rate
was $112,700 per month and maintenance reserves were to be paid at the rate of
$375 per flight hour. Kitty Hawk also provided a security deposit of $225,400.
Kitty Hawk filed for bankruptcy protection under Chapter 11 on May 1,
2000, but stayed current with regard to its lease payments through September
2001. For the months of October, November, and December 2001, Kitty Hawk could
not make a full payment of the monthly rent, and the Partnership agreed to a
payment of only half the amount due. The Partnership agreed to a 50% reduction
9
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, February 2002 and no maintenance reserves payment
for these months. However, Kitty Hawk did not made any payment in March and
April 2002.
In 2001, the Partnership wrote down the value of the aircraft by $4.3
million to a value of $1.1 million, based on collected reserves and the
estimated value of the lease unencumbered aircraft. In 2002, the Partnership
wrote down the value of the aircraft by an additional $453,000 based on the
estimated realizable value of the aircraft.
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 aircraft was sold to Kitty Hawk in October
2002 with lease payments made from May 2002 through September 2002 being applied
to the note. The remainder of the note was paid at the rate of $65,000 per month
from November 2002 through April 2003 (See Note 5."Subsequent Event").
Emery Worldwide Airlines, Inc. ("Emery") Lease. In June 2000, work
commenced to convert the DC-10-10 to a freighter for Emery Worldwide Airlines
Inc. ("Emery"). The Emery lease was for 84 months with rent of $218,000 per
month. The lease also provided for a two-year renewal at $200,000 per month,
followed by three additional two-year renewal options at the then fair market
rental. Emery provided a security deposit of $436,000. The aircraft was
delivered to Emery in December 2000. At December 31, 2001, the conversion work
totaled approximately $13.6 million.
Due to Federal Aviation Administration certification issues, Emery
grounded the DC-10 but had continued to pay rent. The Partnership and Emery
reached a Return and Early Termination Agreement on October 24, 2002, where the
Partnership accepted the early termination of the lease for a fee of $11,925,000
which included $436,000 security deposit previously received from Emery. The
DC-10 aircraft was returned to the Partnership and is being offered for sale on
an "as-is, where-is" basis. In December 2002, the Partnership wrote down the
aircraft by $14,268,000 based on the early termination fees receivd and a
purchase offer of the aircraft, which was not consummated.
DC-9 Aircraft. One of the Partnership's McDonnell Douglas DC-9s was
formerly leased to Aeromexico. The lease expired in February 2000, but
Aeromexico continued to pay rent for the aircraft on a month-to-month basis and
returned the aircraft in July 2001. In August 2001, Aeromexico paid $688,000 in
return condition settlements and $56,500 of remaining rent. The aircraft, whiled
parked in Texas, was damaged during a hailstorm in early 2002. The Partnership
has filed an insurance claim and the General Partners believe there is adequate
insurance in place to compensate for the damage. The aircraft and engines are
being offered for sale on an "as-is, where-is" basis.
Capital Cargo International Airlines, Inc.("Capital Cargo"). Capital
Cargo had leased a Boeing 727-200 freighter. Capital Cargo failed to make its
lease and reserve payments since January 25, 2001. A notice of default was sent
on February 8, 2001 and Capital Cargo returned the Boeing 727-200 on May 23,
2001. On June 14, 2001, the Partnership sued Capital Cargo for breach of its
monetary obligations and damages relating to the failure of the aircraft to meet
return conditions. On March 15, 2002, the Partnership and Capital Cargo reached
a court mediated settlement. According to the settlement, the Partnership agreed
10
to sell the aircraft to Capital Cargo for $2,000,000 and the Partnership
retained maintenance reserves of $1,277,000 and a $220,000 security deposit. The
$2.0 million purchase price for the aircraft was paid through an initial payment
of $625,000, which was received in April 2002, and a twelve-month note with 11
payments of $35,000 and a balloon payment of $1,050,000 received in February
2003 which paid off the note in full. The note bore interest in favor of the
Partnership.
Airbus A-300 Aircraft. In 1998 and 1999, the Partnership leased, on a
short-term (six month minimum) basis, its two CF6-50C2 engines from the Airbus
A-300 aircraft to Viacao Aerea Sao Paulo S.A. ("VASP"), a Brazilian carrier.
VASP fell in arrears with respect to rent and maintenance reserves and the
Partnership won a judgment in court of $3.0 million for past rents and reseves.
VASP-owned property in Florida was sold by a court appointed liquidating trustee
and the Partnership received a $3.0 million judgment and $500,000 interest in
late 2001. In addition, the Partnership received, earlier in 2001, an $800,000
negotiated settlement payment for legal costs and compensation for damage to one
of the engines. In March 2002, the Partnership sold the A-300 airframe for
$121,000 and in a separate transaction, the Partnership sold the A-300 engines
for $200,000.
Lockheed L-1011. Based on the amount of time the L-1011 had been
unsuccessfully offered for lease or sale and the large number of similar
aircraft available for lease or sale, the aircraft was written down from $1.7
million to a zero value in 2001. The aircraft was sold for $75,000 in November
2002.
General. The Partnership will seek to dispose of the remaining aircraft
and engines as soon as possible in an "as-is, where-is" condition, although
there can be no assurance as to when the sales will be completed.
3. Transactions With Affiliates
The Management Fee, Incentive Management Fee and Re-Lease Fee payable
to the General Partners are subordinated to the limited partners receiving an 8%
annual, non-cumulative return based upon Unreturned Capital Contribution, as
Unreturned Capital Contribution as defined in the Partnership Agreement. As the
Partnership had not achieved this level of distribution since 2000, fees were
being accrued but not paid. Based upon the amount of the Preferred Return as
determined pursuant to the Partnership Agreement and the estimated value of the
Partnership's remaining assets, a determination was made to reverse the fees
accrued but unpaid to the General Partners for fiscal years 2000 through the
first quarter of 2002. In June 2002, fees previously accrued of $2,330,000 were
taken into revenue with a corresponding reduction in Payable to Affiliates. In
addition, based on anticipated future revenues, the Partnership does not expect
to accrue Management and Re-Lease Fees in future quarters.
Management Fees: The General Partners are entitled to receive a
quarterly subordinated base management fee in an amount generally equal to 1.5%
of gross aircraft rentals. Of this amount, 1.0% is payable to the Managing
General Partner and 0.5% is payable to the Administrative General Partner.
Management Fees of $17,000 were accrued for the three months ended March 31,
2002 and this accrual was reversed at June 30, 2002.
Incentive Management Fees: The General Partners also are entitled to
receive a quarterly subordinated incentive management fee in an amount equal to
4.5% of quarterly cash flow and sales proceeds (net of resale fees), of which
11
2.5% is payable to the Managing General Partner and 2.0% is payable to the
Administrative General Partner. Incentive Management Fees of $113,000 were
accrued for the three months ended March 31, 2002 and this accrual was reversed
at June 30, 2002.
Re-lease Fees: The General Partners are entitled to receive a quarterly
subordinated fee for re-leasing aircraft or renewing a lease in an amount equal
to 3.5% of the gross rentals from such re-lease or renewal for each quarter for
which such payment is made. Of this amount, 2.5% is payable to the Managing
General Partner and 1.0% is payable to the Administrative General Partner.
Re-lease Fees of $42,000 were accrued for the three months ended March 31, 2002
and this accrual was reversed at June 30, 2002.
As part of a class action settlement agreement, an affiliate of the
Administrative General Partner has agreed to pay to members of the class, fees
and distributions remitted to it by the Administrative General Partner.
Accountable General and Administrative Expenses: The General Partners
are entitled to reimbursement of certain expenses paid on behalf of the
Partnership which are incurred in connection with the administration and
management of the Partnership. There were no reimbursable expenses during the
three months ended March 31, 2003 payable to the Administrative General Partner.
4. Notes Payable
The Partnership obtained a $30 million lending facility on April 14,
2000, and an initial draw down was made of $19.5 million. The loan proceeds were
used to retire existing debt of $16.5 million, to replenish working capital and
to fund the DC10-10 conversion. The facility was later limited to $25 million
because the Aeromexico leases were not extended for two years. The term of the
loan was 6 years, with interest payments only for the first twelve months.
Thereafter, principal was required to be repaid in equal quarterly installments
over 60 months with the first payment due in July 2001. Proceeds from the sale
of aircraft were required to be applied to principal reduction and the
subsequent required principal payments were reset over the remaining term. The
interest rate was 225 basis points over a major money center bank's prime rate.
The lender had a mortgaged interest in all aircraft except the 50% interest in
the MD-81 aircraft. The loan agreement required that the Partnership maintain
working capital equal to or in excess of maintenance reserves payable and have
these amounts available for payment to the lessees.
On May 1, 2002, the Partnership used the proceeds of asset sales and
the VASP settlement to retire the remaining debt.
5. Subsequent Events
The Partnership received the last installment payment on the Kitty Hawk
Note on April 1, 2003.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
- -------------
The following discussion should be read in conjunction with the
Financial Statements of the Partnership and the Notes thereto. This report may
contain, in addition to historical information, Forward-Looking statements that
involve risks and other uncertainties. The Partnership's actual results may
differ materially from those anticipated in these Forward-Looking statements.
Factors that might cause such differences include those discussed below, as well
as general economic and business conditions, competition and other factors
discussed elsewhere in this report. The Partnership undertakes no obligation to
release publicly any revisions to these Forward-Looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
anticipated or unanticipated events.
Liquidity and Capital Resources
The Partnership owns and manages one commercial and two freighter
aircraft and makes distributions to the partners of net cash flow generated by
operations. In certain situations, the Partnership may retain cash flow from
operations to finance authorized capital expenditures for working capital
purposes or for debt service. The amount of future cash distributions, if any,
will be based on 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 a fund that invests in short-term,
highly liquid investments. At March 31, 2003, the Partnership's unrestricted
cash and cash equivalents of $5,809,000 was primarily invested in such a fund.
This amount was $1,240,000 more than the Partnership's unrestricted cash and
equivalents at December 31, 2002 of $4,569,000. This increase in unrestricted
cash was primarily due to the receipts of the monthly payments from January 2003
through March 2003 of the Capital Cargo and the Kitty Hawk notes, and the final
payment of $1,050,000 on the Capital Cargo's note in February 2003.
For the quarter ended March 31, 2003, net cash used in operating
activities was $56,000, which was comprised of a net loss of $118,000 for the
2003 Quarter adjusted by $53,000 of changes in accounts payable and accrued
expense, and $9,000 interest received for the Notes receivable, as discussed
below.
Accounts payable and accrued expenses increased by 38%, or $53,000,
from $140,000 at December 31, 2002 to $193,000 at March 31, 2003, due to accrued
expense for the quarter that had not been paid at the end of March 2003.
Net cash provided by investing activities for the 2003 Quarter was
$1,296,000, as a result of the $1,104,000 cash proceeds from the sale of the
Boeing 727 to Capital Cargo and $192,000 cash proceeds from the sale of the
Boeing 727 to Kitty Hawk.
Rent and other receivables decreased by 95%, or $1,305,000, from
$1,370,000 at December 31, 2002 to $65,000 at March 31, 2003. This decrease came
from $1,104,000 payments from Capital Cargo and $201,000 payments from Kitty
Hawk ($192,000 for principal, $9,000 for interest).
13
There was no cash used for financing activities for the 2003 Quarter.
Partnership's capital was $5,621,000 at March 31, 2003, a decrease of
approximately $118,000 or 2% from $5,739,000 at December 31, 2002, as a result
of a net loss of $118,000.
The Partnership paid no distributions during the first quarter of 2003
and does not expect to pay a distribution for the first quarter of 2003,
historically paid in April.
Results of Operations
The Partnership's net loss was $118,000 for the three months ended
March 31, 2003 ("2003 Quarter") as compared to net income of $556,000 for the
quarter ended March 31, 2002 ("2002 Quarter").
The Partnership's net loss for the 2003 Quarter as compared to net
income for the 2002 Quarter was principally due to no rental income, no gain on
sale of aircraft in the 2003 Quarter, partially offset by no depreciation
expense, no management expense, and no interest expense in the 2003 Quarter.
Rental income decreased by $1,185,000 or 100%, from $1,185,000 for the
2002 Quarter to zero in the 2003 Quarter, principally due to the sale in 2002 of
the Boeing 727 formerly leased to Kitty Hawk, and the off-lease status in the
2003 Quarter of the DC-10, formerly leased to Emery, and the Boeing 727,
formerly leased to TNT.
Gain on sale of aircraft and engines decreased by $328,000, or 100%,
from $328,000 for the 2002 Quarter to zero for the 2003 Quarter. This decrease
was attributable to the gain recognized in the 2002 Quarter from the sale of the
A-300 airframe and engines. There was no sale of aircraft in the 2003 Quarter.
Equity in deficits of the MD-81 Trust decreased by $11,000, or 100%,
from $11,000 in the 2002 Quarter to zero in the 2003 Quarter, due to the sale of
the MD-81 in the October 2002.
Interest expense decreased by $158,000, or 100%, from $158,000 for the
2002 Quarter to zero for the 2003 Quarter due to the retirement of the note in
May 2002.
Depreciation decreased by $462,000, or 100%, from $462,000 for the 2002
Quarter to zero for the 2003 Quarter, due to the off lease status of the
remaining aircraft in the 2003 Quarter.
Management and re-lease fees payable to the General Partners decreased
by 100%, from $172,000 for the 2002 Quarter to zero for the 2003 Quarter. Based
upon the Preferred Return as determined pursuant to the Partnership Agreement
and the estimated value of the Partnership's remaining assets, a determination
was made to reverse the fees accrued but unpaid to the General Partners for the
fiscal year 2000 through the first quarter of 2002.
General and administrative expenses decreased by $65,000, or 48%, from
$136,000 for the 2002 Quarter to $71,000 for the 2003 Quarter due primarily to
legal fees related to the Capital Cargo litigation incurred in the 2002 Quarter.
14
Direct lease expenses increased by $16,000, or 30%, from $53,000 for
the 2002 Quarter to $69,000 in the 2003 Quarter due primarily to $45,000 storage
expense for the DC-10, formerly leased to Emery.
15
ITEM 4. Controls and Procedures
-----------------------
In the 90-day period before filing of this report, the President and
Chairman of the Board of Pegasus Aircraft Management Corporation and the
President of Air Transport Leasing, Inc. (collectively, the "Certifying
Officers") have evaluated the effectiveness of the Partnership's disclosure
controls and procedures. These disclosure controls and procedures are those
controls and procedures which are designed to insure that all the information
required to be disclosed by the Partnership in all its periodic reports filed
with the Securities and Exchange Commission is recorded, processed, summarized
and reported, within the time periods specified by the Commission and that the
information is communicated to the President and Chairman of the Board of
Pegasus Aircraft Management Corporation and the President of Air Transport
Leasing, Inc. on a timely basis.
The Certifying Officers, concluded, based on the evaluation, that the
Partnership's disclosure controls and procedures are suitable and effective for
the Partnership, taking into consideration the size and nature of the
Partnership's business and operations. No significant deficiencies or material
weaknesses in the controls or procedures were detected, so no corrective actions
needed to be taken. Subsequent to the date when the disclosure controls and
procedures were evaluated, there have not been any significant changes in the
Partnership's disclosure controls or procedures or in other factors that could
significantly affect such controls or procedures.
16
PART II. OTHER INFORMATION
--------------------------
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Partnership did not file any reports on Form 8-K during the
first quarter of the fiscal year ending December 31, 2003.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners II, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
Administrative General Partner
Date: May 9, 2003 By: /s/ CLIFFORD B. WATTLEY
-----------------------
Clifford B. Wattley
President and Director
18
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Richard S. Wiley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus Aircraft
Partners II, L.P.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
19
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 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 II, L.P.
20
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Clifford B. Wattley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus Aircraft
Partners II, L.P.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
21
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
By: /s/ CLIFFORD B. WATTLEY
-----------------------
Clifford B. Wattley
President and Director of Air Transport Leasing, Inc.
Administrative General Partner of Pegasus Aircraft Partners II, L.P.
22