10-Q 1 f94595ae10vq.txt 10-Q 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 0-17712 PEGASUS AIRCRAFT PARTNERS, L.P. ------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 84-1099968 --------- ----------- (State of organization) (IRS Employer Identification No.) FOUR EMBARCADERO CENTER 35TH FLOOR SAN FRANCISCO, CALIFORNIA 94111 ------------------------- ----- (Address of principal (Zip Code) executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 434-3900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ]. This document consists of 19 pages. PEGASUS AIRCRAFT PARTNERS, L.P. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2003 TABLE OF CONTENTS

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PEGASUS AIRCRAFT PARTNERS, L.P. BALANCE SHEETS -- SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002

The accompanying notes are an integral part of these interim financial statements. 3 PEGASUS AIRCRAFT PARTNERS, L.P. STATEMENTS OF INCOME/(LOSS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)

The accompanying notes are an integral part of these interim financial statements. 4 PEGASUS AIRCRAFT PARTNERS, L.P. STATEMENTS OF INCOME/(LOSS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)

The accompanying notes are an integral part of these interim financial statements. 5 PEGASUS AIRCRAFT PARTNERS, L.P. STATEMENTS OF PARTNERS' CAPITAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)

The accompanying notes are an integral part of these interim financial statements. 6 PEGASUS AIRCRAFT PARTNERS, L.P. STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)

The accompanying notes are an integral part of these interim financial statements. 7 PEGASUS AIRCRAFT PARTNERS, L.P. STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)

The accompanying notes are an integral part of these interim financial statements. 8 PEGASUS AIRCRAFT PARTNERS, 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):

KITTY HAWK AIRCARGO, INC. ("KITTY HAWK"). One of the Partnership's 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. Kitty Hawk filed for protection under Chapter 11 of the U.S. Bankruptcy Code on May 1, 2000, but stayed current with regard to its rent payment 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 9 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, February 2002 and no maintenance reserves payment for these months. However, Kitty Hawk could not make any payment in March and April 2002. In May 2002, the Partnership agreed 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 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 was paid with payments of $65,000 per month from January through March 2003 and the last payment was in April 2003. VANGUARD AIRLINES ("VANGUARD") LEASE. US Airways returned the MD-81 in July 2001, and in August 2001, the Trust that owned the MD-81 entered into a three-year lease of the aircraft with Vanguard Airlines, a Kansas City, Missouri airline providing passenger services to a number of U.S. cities. Vanguard, as have many other airlines, had 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 September 30, 2003, recovery of any 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 $500,000 cash ($250,000 for the Partnership for its 50% interest). The Partnership retained $442,000 of maintenance reserves ($221,000 for the Partnership for its 50% interest). TNT TRANSPORT INTERNATIONAL B.V. ("TNT") LEASE. The TNT lease ended on March 24, 2002 and the Partnership sold the Boeing 727-200 freighter to TNT. The Partnership received cash proceeds of $1,241,000 and also applied, as part of the sale, TNT's maintenance reserves of $367,000 and the security deposit of $150,000. BOEING 727-200. The Boeing 727-200, formerly leased to Discovery Airlines (Sky Trek), was returned in March 2000. During the second quarter 2001, the Partnership took $848,000 of paid-in maintenance reserves relating to the aircraft into 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. During the third quarter of 2003, the Partnership sold the aircraft and engines on September 30, 2003 for $50,000 on an "as-is, where-is" basis, recognizing a loss on sale of $50,000. GENERAL. All of the aircraft the Partnership originally owned have been sold. 10 NOTE 3. TRANSACTIONS WITH AFFILIATES The Management Fee, Incentive Fee and Re-Lease Fee payable to the General Partners are subordinated to the limited partners receiving an 8% annual, non-cumulative return based upon Unreturned Capital Contribution, as Unreturned Capital Contribution 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 $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. Management Fees of $8,000 were accrued for the three months ended March 31, 2002 and this accrual was reversed at June 30, 2002. Incentive Management Fees: The General Partners also are entitled to receive a quarterly subordinated incentive management fee in an amount equal to 4.5% of quarterly cash flows and sales proceeds (net of resale fees). Of this amount, 2.5% is payable to the Managing General Partner and 2.0% is payable to the Administrative General Partner. Incentive Management Fees of $99,000 were accrued for the three months ended March 31, 2002 and this accrual was reversed at June 30, 2002 . Re-lease Fees: The General Partners are entitled to receive a quarterly subordinated fee for re-leasing aircraft or renewing a lease in an amount equal to 3.5% of the gross rentals from such re-lease or renewal for each quarter for which such payment is made. Of this amount, 2.5% is payable to the Managing General Partner and 1.0% is payable to the Administrative General Partner. Re-lease Fees of $18,000 were accrued for the three months ended March 31, 2002 and this accrual was reversed at June 30, 2002. Accountable General and Administrative Expenses: The General Partners are entitled to reimbursement of certain expenses paid on behalf of the Partnership which are incurred in connection with the administration and management of the Partnership. There were no reimbursable expenses paid to the Administrative General Partner in the nine months ended September 30, 2003. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements of the Partnership and the Notes thereto. This report may contain, in addition to historical information, Forward-Looking statements that include risks and other uncertainties. The Partnership's actual results may differ materially from those anticipated in these Forward-Looking statements. Factors that might cause such a difference include those discussed below, as well as general economic and business conditions, competition and other factors discussed elsewhere in this report. The Partnership undertakes no obligation to release publicly any revisions to the Forward-Looking statements, if any, to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events. LIQUIDITY AND CAPITAL RESOURCES The Partnership owned and managed commercial passenger aircraft and distributes to the partners cash flow generated by operations or asset sales in the current and/or prior periods. In certain situations, the Partnership may retain cash flow from operations to finance authorized capital expenditures, or for general working capital purposes. 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 in mid-2004. The Partnership invests working capital and cash flow from operations prior to its distributions to the partners in short-term, highly liquid investments or a fund that invests in such instruments. At September 30, 2003, the Partnership's unrestricted cash and cash equivalents of $1,087,000 were primarily invested in such a fund. This amount was $1,512,000 less than the Partnership's unrestricted cash and cash equivalents at December 31, 2002 of $2,599,000. This decrease in unrestricted cash was primarily attributable to cash distributions made to partners of $1,616,000, offset by an increase in cash received from proceeds of an aircraft sale of $261,000, a capital contribution of $45,000 and cash used in operating activities of $202,000. For the nine months ended September 30, 2003 ("2003 Period"), net cash used in operating activities was $202,000, comprised of net loss of $246,000 for the 2003 Period adjusted by changes in assets and liabilities, as discussed below. Rent and Other receivables decreased by 81%, or $211,000, due to $261,000 being received from the note receivable from Kitty Hawk for the sale of the Boeing 727-200 in December 2002. This was partially offset by the accrual of sales proceeds receivable of $50,000 for the sale of the Boeing 727-200, formerly leased to Sky Trek, in September 2003. Other assets increased during the 2003 Period by 100%, or $14,000, due to a credit refund of insurance premiums. Accounts payable and accrued expenses increased by 6%, or $8,000, due to increased accrued expenses. 12 Cash flows from investing activities were $261,000 for the 2003 Period, resulting from payments on a note receivable from the sale of the Boeing 727 leased to Kitty Hawk. Partnership capital was $1,016,000, a decrease of approximately $1,817,000 or 64% from $2,833,000 at December 31, 2002, as a result of a net loss of $246,000, a distribution to partners of $1,616,000 and a capital contribution of $45,000. A special distribution was declared and paid on August 7, 2003 to Units holders of record as of August 1, 2003, in the amount of $1,616,000. RESULTS OF OPERATIONS The Partnership's net loss was $246,000 for the nine months ended September 30, 2003 (the "2003 Period") and $107,000 for the quarter ended September 30, 2003 (the "2003 Quarter"), respectively, as compared to net income of $1,558,000 for the nine months ended September 30, 2002 (the "2002 Period") and a net loss of $133,000 for the quarter ended September 30, 2002 (the "2002 Quarter"), respectively. The change from net income in the 2002 Period to net loss in the 2003 Period was principally due to income from the reversal of management fees in 2002 compared to no corresponding income in 2003. There was also no rental income and no gain on sale of aircraft in the 2003 Period. The change from net income in the 2002 Period to loss in the 2003 Period was partially offset by no depreciation expense, no management fees and less direct lease expense in the 2003 Period as compared to the 2002 Period. Rentals from operating leases decreased by 100%, or $864,000, from $864,000 for the 2002 Period to zero for the 2003 Period, and by 100%, or $196,000, from $196,000 for the 2002 Quarter to zero for the 2003 Quarter. The Partnership's remaining aircraft had an off lease status during the 2003 Period. This aircraft, a Boeing 727-200 formerly leased to Sky Trek, was sold on September 30, 2003. Gain on sale of aircraft decreased by 100%, or $91,000, from $91,000 for the 2002 Period to zero for the 2003 Period as a result of the sale of the Boeing 727 to TNT in the 2002 Period versus the sale of a Boeing 727-200 aircraft, formerly leased to Sky Trek, in the 2003 Period, which was sold for a $50,000 loss. There was no aircraft or equipment sale in the 2002 Quarter versus the sale of a Boeing 727-200 aircraft, as discussed for the 2003 Period. Interest income decreased by 67%, or $29,000, from $43,000 for the 2002 Period to $14,000 for the 2003 Period, and by 80%, or $12,000, from $15,000 for the 2002 Quarter to $3,000 for the 2003 Quarter, due to the lower interest rate and a reduction in cash in the 2003 Period and Quarter compared to the 2002 Period and Quarter. Equity in deficit of the MD-81 Trust decreased by 100%, or $548,000, from $548,000 for the 2002 Period to zero for the 2003 Period, and by 100%, or $526,000, from $526,000 for the 2002 Quarter to zero for the 2003 Quarter due to the sale of the MD-81 Trust aircraft in October 2002. The Partnership recognized revenue of $2,862,000 for the 2002 Period due to the reversal of accrued management fees for the years ending December 31, 2000 and 2001, and the first quarter of 2002. There were no such revenues in the 2003 Period and the 2003 Quarter. 13 Other income decreased by 99%, or $912,000, from $917,000 in the 2002 Period to $5,000 in the 2003 Period and decreased by 100%, from $917,000 in the 2002 Quarter to zero in the 2003 Quarter, due to the maintenance reserves from Kitty Hawk being recognized as income in 2002. Depreciation decreased by 100%, or $520,000, from $520,000 for the 2002 Period and $130,000 for the 2002 Quarter to zero for both the 2003 Period and the 2003 Quarter. This decrease was primarily due to the off lease status of the remaining aircraft of the Partnership in the 2003 Period and Quarter. This aircraft was sold on September 30, 2003. Direct Lease expense decreased by 46%, or $18,000, from $39,000 for the 2002 Period to $21,000 for the 2003 Period, and increased by 100%, or $4,000, from zero for the 2002 Quarter to $4,000 for the 2003 Quarter. The decrease in the 2003 Period was primarily due to the inspection cost of an engine of the Boeing 727-200, formerly leased to Sky Trek in the 2002 Period and the recording of a refund in the 2003 Period and Quarter due to the Partnership for aircraft insurance expense paid in 2002. 14 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. 15 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. 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Pegasus Aircraft Partners, L.P. (Registrant) By: Air Transport Leasing, Inc. Administrative General Partner Date November 13, 2003 By: /s/ CLIFFORD B. WATTLEY ----------------------- Clifford B. Wattley President and Director 17

PEGASUS AIRCRAFT PARTNERS L P 10-Q