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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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
PEGASUS AIRCRAFT PARTNERS II, L.P.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1111757
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(State of organization) (IRS Employer
Identification No.)
FOUR EMBARCADERO CENTER 35TH FLOOR
SAN FRANCISCO, CALIFORNIA 94111
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(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
This document consists of 21 pages.
PEGASUS AIRCRAFT PARTNERS II, L.P.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - September 30, 2003 and December 31, 2002 3
Statements of Income/(Loss) for the three months
ended September 30, 2003 and 2002 4
Statements of Income/(Loss) for the nine months
ended September 30, 2003 and 2002 5
Statements of Partners' Capital for the nine
months ended September 30, 2003 and 2002 6
Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 7
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 4. Controls and Procedures 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 18
Signature 19
Certifications 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEGASUS AIRCRAFT PARTNERS II, L.P.
BALANCE SHEETS -- SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
2003 2002
---- ----
(in thousands, except unit data)
ASSETS
Cash and cash equivalents $ 3,558 $ 4,569
Rent and other receivables - 1,370
Aircraft, net 375 890
Other assets 21 24
----------- -----------
Total Assets $ 3,954 $ 6,853
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses $ 174 $ 140
Payable to affiliates 974 974
----------- -----------
Total Liabilities 1,148 1,114
----------- -----------
PARTNERS' CAPITAL:
General Partners 28 59
Limited Partners (7,255,000 units issued and outstanding
in 2003 and 2002) 2,778 5,680
----------- -----------
Total Partners' Capital 2,806 5,739
----------- -----------
Total Liabilities and Partners' Capital $ 3,954 $ 6,853
=========== ===========
The accompanying notes are an integral part of these interim financial
statements.
3
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME/(LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ - $ 849
Gain on sale of aircraft from insurance settlement 819 -
Equity in (deficit)/earnings of MD-81 Trust - (526)
Interest 6 11
Management and re-lease fees reversal - 1,865
Other - -
----------- -----------
825 2,199
----------- -----------
EXPENSES:
Depreciation and amortization - 344
Write-downs 515 2,250
Interest - -
General and administrative 69 152
Direct lease 32 152
----------- -----------
616 2,898
----------- -----------
NET INCOME/(LOSS) $ 209 $ (699)
=========== ===========
NET INCOME/(LOSS) ALLOCATED:
To the General Partners $ 2 $ (7)
To the Limited Partners 207 (692)
----------- -----------
$ 209 $ (699)
=========== ===========
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ .03 $ (0.10)
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 7,255,000 7,255,000
=========== ===========
The accompanying notes are an integral part of these interim financial
statements.
4
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME/(LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ----
(in thousands, except unit
data and per unit amounts)
REVENUES:
Rentals from operating leases $ - $ 3,152
Gain on sale of aircraft from insurance settlement 819 -
Gain on sale of aircraft - 328
Equity in (deficit)/earnings of MD-81 Trust - (548)
Interest 41 55
Management and re-lease fees reversal - 2,330
Other - 1,865
----------- -----------
860 7,182
----------- -----------
EXPENSES:
Depreciation and amortization - 1,267
Write-downs 515 2,750
Interest - 393
General and administrative 220 429
Direct lease 126 262
----------- -----------
861 5,101
----------- -----------
NET INCOME/(LOSS) $ (1) $ 2,081
=========== ===========
NET INCOME/(LOSS) ALLOCATED:
To the General Partners $ - $ 21
To the Limited Partners (1) 2,060
------------ -----------
$ (1) $ 2,081
=========== ===========
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ - $ 0.29
=========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND OUTSTANDING 7,255,000 7,255,000
=========== ===========
The accompanying notes are an integral part of these interim financial
statements.
5
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- -------- -----
(In thousands)
Balance, January 1, 2003 $ 59 $ 5,680 $ 5,739
Net loss - (1) (1)
Distributions to partners (31) (2,901) (2,932)
----------- ----------- -----------
Balance, September 30, 2003 $ 28 $ 2,778 $ 2,806
=========== =========== ===========
Balance, January 1, 2002 $ 169 $ 16,587 $ 16,756
Net income 21 2,060 2,081
----------- ----------- -----------
Balance, September 30, 2002 $ 190 $ 18,647 $ 18,837
=========== =========== ===========
The accompanying notes are an integral part of these interim financial
statements.
6
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (1) $ 2,081
Adjustments to reconcile net income/(loss) to net
cash (used in)/provided by operating activities:
Gain on sale of aircraft from insurance settlement (819) -
Gain on sale of aircraft - (328)
Depreciation and amortization - 1,267
Equity in deficits/(earnings) of MD-81 Trust - 548
Write-downs 515 2,750
Change in assets and liabilities:
Rent and other receivables 9 100
Other assets 3 240
Accounts payable and accrued expenses 34 (99)
Accrued interest payable - (28)
Payable to affiliates - (2,302)
Deferred rental income and deposits (375)
Maintenance reserves payable - (817)
----------- -----------
Net cash (used in)/provided by operating activities (259) 3,037
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of aircraft - insurance settlement 819 -
Proceeds from sale of aircraft - note collections 1,361 -
Proceeds from sale of aircraft - 1,296
----------- -----------
Net cash provided by investing activities 2,180 1,296
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to partners (2,932) -
Repayment of note payable - (9,483)
----------- -----------
Net cash used in financing activities (2,932) (9,483)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,011) (5,150)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,569 8,444
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,558 $ 3,294
=========== ===========
The accompanying notes are an integral part of these interim financial
statements.
7
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ----
(In thousands)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the period for interest $ - $ 199
Non-Cash Activities:
Recognition of maintenance reserves on sale of aircraft as income - 1,277
Receivable arising from sale of Boeing 727-200 - 1,165
The accompanying notes are an integral part of these interim financial
statements.
8
PEGASUS AIRCRAFT PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 1. GENERAL
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the General
Partners, all adjustments necessary for a fair presentation have been included.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant assumptions and estimates relate to useful life and
recoverability of the aircraft values. Actual results could differ from such
estimates. The unaudited financial statements should be read in conjunction with
the financial statements and footnotes thereto included in the Partnership's
annual report on Form 10-K for the year ended December 31, 2002. Operating
results for the nine-month period ended September 30, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2003.
NOTE 2. AIRCRAFT
The Partnership's net investment in aircraft as of September 30, 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 (23,248) (22,733)
----------- -----------
Aircraft, net $ 375 $ 890
=========== ===========
VANGUARD AIRLINES LEASE ("VANGUARD"). In August 2001, the Trust that
owned the MD-81 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 was 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
9
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 Trust on September 30,
2002. At the time of it's 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 September 30, 2003, recovery of this amount is unlikely. The
Trust 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 Trust sold the MD-81 aircraft on October 25, 2002 for $500,000 cash
($250,000 for the Partnership for its 50% interest). The Trust retained $442,000
of maintenance reserves ($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 Partnership wrote down the
aircraft's carrying value by an additional $90,000 at September 30, 2003. 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
10
to a payment of only half the amount due. The Partnership agreed to a 50%
reduction of the maintenance reserves due for the months of September, October,
and November 2001. The Partnership also agreed to a payment of 71% of the rents
of December 2001, and January, February 2002 and no maintenance reserve payment
for these months. However, Kitty Hawk did not make 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. The Partnership received the last
installment on the Kitty Hawk Note on April 1, 2003.
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 received and a
purchase offer of the aircraft, which was not consummated. The Partnership wrote
down the aircraft's carrying value by an additional $200,000 at September 30,
2003. The Partnership is offering the aircraft for sale on an "as-is, where-is"
basis.
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, while
parked in Texas, was damaged during a hailstorm in early 2002. The Partnership
filed an insurance claim and on September 30, 2003, the Partnership received
insurance proceeds of $819,421 as compensation for the hail damage to this
aircraft. Because the decision was made not to repair the aircraft to its
pre-damage condition, the Partnership recognized a gain equal to the amount of
the proceeds and wrote down the aircraft's carrying value by an additional
$225,000 at September 30, 2003. The Partnership retains ownership of the
aircraft and the airframe and engines are being offered for sale on an "as-is,
where-is" basis.
11
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 starting in January 2001. A notice of default was
sent on February 8, 2001 and Capital Cargo returned the Boeing 727-200 on May
23, 2001. On June 14, 2001, the Partnership sued Capital Cargo for breach of its
monetary obligations and damages relating to the failure of the aircraft to meet
return conditions. On March 15, 2002, the Partnership and Capital Cargo reached
a court mediated settlement. According to the settlement, the Partnership agreed
to sell the aircraft to Capital Cargo for $2.0 million 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 reserves.
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 engines from
the A-300 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.
NOTE 3. TRANSACTIONS WITH AFFILIATES
The Management Fee, Incentive Management Fee and Re-Lease Fee payable
to the General Partners are subordinated to the limited partners receiving an 8%
annual, non-cumulative return based upon Unreturned Capital Contribution, as
Unreturned Capital Contribution is defined in the Partnership Agreement. 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.
12
Management Fees: The General Partners are entitled to receive a
quarterly subordinated base management fee in an amount generally equal to 1.5%
of gross aircraft rentals. Of this amount, 1.0% is payable to the Managing
General Partner and 0.5% is payable to the Administrative General Partner.
Management Fees of $17,000 were accrued for the three months ended March 31,
2002 and this accrual was reversed at June 30, 2002.
Incentive Management Fees: The General Partners also are entitled to
receive a quarterly subordinated incentive management fee in an amount equal to
4.5% of quarterly cash flow and sales proceeds (net of resale fees), of which
2.5% is payable to the Managing General Partner and 2.0% is payable to the
Administrative General Partner. Incentive Management Fees of $113,000 were
accrued for the three months ended March 31, 2002 and this accrual was reversed
at June 30, 2002.
Re-lease Fees: The General Partners are entitled to receive a quarterly
subordinated fee for re-leasing aircraft or renewing a lease in an amount equal
to 3.5% of the gross rentals from such re-lease or renewal for each quarter for
which such payment is made. Of this amount, 2.5% is payable to the Managing
General Partner and 1.0% is payable to the Administrative General Partner.
Re-lease Fees of $42,000 were accrued for the three months ended March 31, 2002
and this accrual was reversed at June 30, 2002.
As part of a class action settlement agreement, an affiliate of the
Administrative General Partner has agreed to pay to members of the class, fees
and distributions remitted to it by the Administrative General Partner.
Accountable General and Administrative Expenses: The General Partners
are entitled to reimbursement of certain expenses paid on behalf of the
Partnership which are incurred in connection with the administration and
management of the Partnership. There were no reimbursable expenses during the
nine months ended September 30, 2003 payable to the Administrative General
Partner.
NOTE 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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements of the Partnership and the Notes thereto. This report may
contain, in addition to historical information, Forward-Looking statements that
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 passenger and two
freighter aircraft and makes distributions to the partners out of the
Partnership's net cash flow generated by operations. The Partnership is
attempting to sell the remaining three aircraft, in an "as-is, where-is"
condition. With the sale of the final aircraft, the Partnership will continue to
hold its funds in an interest bearing money-market account. A final distribution
of the funds, net of intervening expenses and any other liabilities, is
anticipated to be made within twelve months of the final aircraft sale.
The Partnership invests working capital and cash flow from operations
prior to distributions to the partners in a fund that invests in short-term,
highly liquid investments. At September 30, 2003, the Partnership's unrestricted
cash and cash equivalents of $3,558,000 were primarily invested in such a fund.
This amount was $1,011,000 less than the Partnership's unrestricted cash and
cash equivalents at December 31, 2002 of $4,569,000. This decrease in
unrestricted cash was primarily attributable to a $2,932,000 distribution paid
to partners and to cash used in operating activities of $259,000, offset by
$2,180,000 cash from investing activities.
For the nine months ended September 30, 2003 ("2003 Period"), net cash
used in operating activities was $259,000, which was a net loss of $1,000 for
the 2003 Period adjusted by write down expense of $515,000, a gain on insurance
proceeds of $819,000 and changes in assets and liabilities, as discussed below.
Accounts payable and accrued expenses increased by 24%, or $34,000,
from $140,000 at December 31, 2002 to $174,000 at September 30, 2003, primarily
due to accrued expense for the 2003 Period that had not been paid at the end of
September 2003.
Rent and other receivables decreased by 100%, or $1,370,000, from
$1,370,000 at December 31, 2002 to zero at September 30, 2003. This decrease
came from $1,104,000 payments from Capital Cargo and $266,000 payments from
Kitty Hawk.
14
Net cash provided by investing activities for the 2003 Period was
$2,180,000, as a result of the $1,104,000 cash proceeds from the sale of the
Boeing 727 to Capital Cargo, $266,000 cash proceeds from the sale of the Boeing
727 to Kitty Hawk, and cash proceeds of $819,000 from the insurance compensation
for damage to the McDonnell Douglas DC-9 formerly leased to Aeromexico.
Partnership's capital was $2,806,000, a decrease of approximately
$2,933,000, or 51% from $5,739,000 at December 31, 2002, as a result of a net
loss of $1,000 and the July 2003, $2,932,000 distributions paid to partners.
RESULTS OF OPERATIONS
The Partnership had net income of $209,000 for the three months ended
September 30, 2003 (the "2003 Quarter") and a net loss of $1,000 for the nine
months ended September 30, 2003 (the "2003 Period"), respectively, as compared
to a net loss of $699,000 and net income of $2,081,000 for the three months and
nine months ended September 30, 2002 (the "2002 Quarter" and the "2002 Period"),
respectively. Net income during the 2003 Quarter, as compared to a net loss
during the 2002 Quarter, was principally due to lower write down expense, an
absence of depreciation and a gain on sale of aircraft during the 2003 Quarter.
The net loss for the 2003 Period, as compared to net income for the 2002 Period,
is primarily due to no rental income, partially offset by no depreciation and
larger gain on sale of aircraft, in the 2003 Period, income for the reversal of
accrued management fees and other income from maintenance reserves and security
deposits in the 2002 Period, with no corresponding amounts in the 2003 Period.
Rental income decreased by $849,000, from $849,000 for the 2002 Quarter
to zero in the 2003 Quarter, and by $3,152,000, from $3,152,000 in the 2002
Period to zero in the 2003 Period 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 and Period of the DC-10, formerly leased to Emery, and the Boeing 727,
formerly leased to TNT.
Gain on insurance proceeds increased by $819,000, from zero for the
2002 Quarter and Period to $819,000 for the 2003 Quarter and Period, due to the
proceeds received from insurance compensation for hail damage to the McDonnell
Douglas DC-9 formerly leased to Aeromexico (see Note 2 also).
Gain on the sale of aircraft decreased by $328,000, from $328,000 for
the 2002 Period to zero, for the 2003 Period. This decrease was attributable to
the gain recognized in the 2002 Period on the sale of the Boeing 727, formerly
leased to Capital Cargo, and the sale of the A-300 airframe and engines. . There
were no sales of aircraft during the 2003 Period and the 2003 and 2002 Quarters.
Equity in deficits of the MD-81 trust decreased by $526,000, from
$526,000 for the 2002 Quarter to zero for the 2003 Quarter, and by $548,000,
from $548,000 for the 2002 Period to zero for the 2003 Period, due to the sale
of the MD-81 in October 2002.
Depreciation expense decreased by $344,000, from $344,000 for the 2002
Quarter to zero for the 2003 Quarter, and by 100%, or $1,267,000, from
$1,267,000 for the 2002 Period to zero for the 2003 Period due to the off lease
status of the remaining aircraft in the 2003 Quarter.
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Interest expense decreased by $393,000, from $393,000 for the 2002
Period to zero for the 2003 Period, due to the retirement of the note in May
2002. There was no interest expense during the 2003 or 2002 Quarter.
General and administrative expenses decreased by 55%, or $83,000, from
$152,000 for the 2002 Quarter to $69,000 for the 2003 Quarter, and by 49%, or
$209,000, from $429,000 for the 2002 Period to $220,000 for the 2003 Period.
This decrease was primarily due to legal fees related to the Capital Cargo
litigation in the 2002 Quarter and Period.
Direct lease expenses decreased by 79%, or $120,000, from $152,000 for
the 2002 Quarter to $32,000 for the 2003 Quarter, and by 52%, or $136,000, from
$262,000 for the 2002 Period to $126,000 for the 2003 Period. This decrease was
due primarily to the recording of a refund due to the Partnership for insurance
premiums paid in 2002 in the 2003 Quarter and Period and lower aircraft storage
and maintenance costs in the 2002 and 2003 Quarter and Period.
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ITEM 4. CONTROLS AND PROCEDURES
The President and Chairman of the Board of Pegasus Aircraft Management
Corporation and the President of Air Transport Leasing, Inc. (collectively, the
"Certifying Officers") have evaluated the effectiveness of the Partnership's
disclosure controls and procedures as of the end of the period covered by this
report. These disclosure controls and procedures are those controls and
procedures which are designed to insure that all the information required to be
disclosed by the Partnership in all its periodic reports filed with the
Securities and Exchange Commission is recorded, processed, summarized and
reported, within the time periods specified by the Commission and that the
information is communicated to the President and Chairman of the Board of
Pegasus Aircraft Management Corporation and the President of Air Transport
Leasing, Inc. on a timely basis.
The Certifying Officers concluded, based on such evaluation, that the
Partnership's disclosure controls and procedures were suitable and effective for
the Partnership as of the end of the period covered by this report, taking into
consideration the size and nature of the Partnership's business and operations.
No significant deficiencies or material weaknesses in the controls or procedures
were detected, so no corrective actions needed to be taken.
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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)
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
32.2 Section 1350 Certification.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during
the quarter for which this report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners II, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
Administrative General Partner
Date: November 13, 2003 By: /s/ CLIFFORD B. WATTLEY
------------------------------
Clifford B. Wattley
President and Director
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