SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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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 executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 434-3900
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: Not applicable.
This document consists of 49 pages.
Pegasus Aircraft Partners II, L.P.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 2001
Table of Contents
Page
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Part I
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Item 1 Business........................................................3
Item 2 Properties......................................................7
Item 3 Legal Proceedings...............................................7
Item 4 Submission of Matters to a Vote of Unit Holders.................8
Part II
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Item 5 Market for Registrant's Common Partnership Capital and
Related Unitholder Matters....................................9
Item 6 Selected Financial Data........................................10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................10
Item 8 Financial Statements...........................................17
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................35
Part III
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Item 10 Directors and Executive Officers of the Registrant.............36
Item 11 Executive Compensation.........................................37
Item 12 Security Ownership of Certain Beneficial Owners and
Management.....................................................38
Item 13 Certain Relationships and Related Transactions.................39
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................40
2
PART I
ITEM 1. BUSINESS
General
Pegasus Aircraft Partners II, L.P. (the "Partnership" or the
"Registrant") is a limited partnership organized under the laws of the State of
Delaware on April 26, 1989. The general partners of the Partnership are Pegasus
Aircraft Management Corporation, the Managing General Partner, a California
corporation that is a wholly owned subsidiary of Pegasus Capital Corporation,
and Air Transport Leasing, Inc., the Administrative General Partner, a Delaware
corporation that is a wholly owned subsidiary of UBS Americas, Inc. UBS Americas
is the successor to Paine Webber Group, Inc. (Pegasus Aircraft Management
Corporation and Air Transport Leasing, Inc. are herein referred to as the
"General Partners").
On August 15, 1989, the Partnership commenced an offering of units of
limited partnership interest ("Units"). The offering of the Units was terminated
during the third quarter of 1990, when the total capitalization of the
Partnership reached $145.1 million. The Partnership incurred $16,295,000 of
commissions and other expenses in connection with the sale of these Units.
Although the Partnership was organized on April 26, 1989, the
Partnership conducted no activities and recognized no revenues, profits or
losses prior to September 20, 1989 at which time the Partnership commenced
operations. During the period between September 21, 1989 and August 22, 1990,
the Partnership acquired its portfolio of used commercial aircraft which are
principally subject to triple net operating leases with domestic and foreign
commercial air carriers.
Although it is likely to liquidate sooner, the Partnership is required
to dissolve and distribute all of its assets no later than December 31, 2007.
The Partnership sold its MD-82 and one of its Boeing 727 airframes in 2001.
These sales resulted in the Partnership owning seven aircraft, three engines,
and a 50% ownership in a Trust that owns one aircraft. The net proceeds of the
aircraft sales were generally utilized to pay down the Partnership's debt.
Outlook for the Airline and Aircraft Leasing Industries
The US airline industry had an unprofitable year in 2001 that ended the
industry's sustained trend of profitability. Results were adversely affected by
continuing high fuel prices through most of 2001 and higher labor costs. The
industry also accepted delivery of a record number of new aircraft, which also
put pressure on profitability. Further, as discussed below, the events of
September 11, 2001 have negatively impacted air travel and air freight.
The industry's results historically have been highly correlated to
general economic activity. Due to concern regarding an economic slowdown, the US
Federal Reserve Board has recently reduced its key lending rate on a number of
occasions in an attempt to stimulate economic activity. It is unclear as to the
ultimate impact on the level of economic activity of these rate decreases,
however, a significant economic slowdown has had an adverse affect on air travel
and airline performance.
On January 10, 2001 Trans World Airlines, Inc. ("TWA"), which accounted
for 8% of the Partnership's revenues in 2001, filed for Chapter 11 Bankruptcy
protection. On January 9, 2001, TWA entered into an Asset Purchase Agreement
with American Airlines, Inc. American purchased substantially all of TWA's
assets and assumed certain of its liabilities. As part of the transaction,
American Airlines purchased the Partnership's MD-82 for $9.5 million. Kitty Hawk
Aircargo, Inc. which leases a Boeing 727 freighter, accounted for 15% of the
Partnership's revenue in the year 2001, and has been operating under the
protection of the Federal bankruptcy law since May 2000. Due to an inability to
find adequate financing and reduced air traffic, Kitty Hawk has recently made
only partial rent payments.
Passenger aircraft and freighter aircraft leasing continues to be a
highly competitive business and the Partnership's lessees also continue to face
significant challenges.
3
Aircraft Portfolio
Based in part on appraised values for the Partnership's aircraft, the
Partnership's net asset value at December 31, 2001 was estimated to be $2.42 per
Unit. It should be noted that this is only an estimate of values as of that
date, and is not necessarily representative of the values that will ultimately
be realized when these aircraft are disposed of nor does this represent the
values that may be realized upon the disposition of a Unit.
The following table describes the Partnership's aircraft portfolio at
December 31, 2001:
Dec. Current Cumu- Cumu-
Owner- Acqui- 2001 Lease Original Noise lative lative
Current Aircraft ship sition Appraised Expiration Delivery Abatement Flight Flight
Lessee Type Interest Costs(1) Value(1) Date (2) Date Compliance Hours(3) Cycles(3)
------ ---- -------- -------- -------- -------- ---- ---------- -------- ---------
(dollar amounts in millions)
Off-Lease (5) McDonnell
Douglas DC-9-31 100% $ 8.9 $ 0.3 (5) 1971 Stage II 69,343 64,873
Kitty Hawk Boeing 727-200
Aircargo, Inc Freighter 100 9.2 1.1 12/6/06 1973 Stage III (7) 77,721 53,727
TNT Transport Boeing 727-200
Intl. B.V. Freighter 100 8.4 2.2 06/22/02 1973 Stage III (7) 74,864 53,597
Emery Worldwide McDonnell Douglas DC10-10
Airlines Inc. (6) Freighter 100 31.9 14.8 11/01/07 1973 Stage III 84,544 30,734
Off-Lease (5) Airbus Industrie
A300-B4-103 100 27.9 0.3 (5) 1979 Stage III 46,226 19,527
Off-Lease (5) Engines only (8) 100 0.1 0.3 (5) 1970 Stage III (7) (9) (9)
Off-Lease (5) Boeing 727-200
Freighter (7) 100 17.3 3.0 (5) 1973 Stage III (7) 62,246 32,734
Lockheed
Off-Lease (5) L-1011 100 17.8 0 (5) 1974 Stage III 61,209 22,907
Vanguard Airlines McDonnell
Douglas MD-81 50(4) 10.1 3.7 08/27/04 1982 Stage III 53,633 46,135
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$131.6 $25.7
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Notes: (1) Acquisition costs do not include related acquisition fees
paid to the General Partners. The Partnership previously
owned a McDonnell Douglas DC-9, which was a total loss in an
accident in 2000, a McDonnell Douglas MD-82, which was sold
in 2001, and a Boeing 727-200 airframe, which was sold to the
lessee.
An independent aircraft appraisal firm determined the
December 2001 appraised values. Appraised values include the
present value of rents due under leases in place plus the
present value of an estimated residual value for the aircraft
at the end of the lease, generally assuming half time
condition. The appraiser also assumes that achieving fair
market value may require 12 to 18 months of exposure to
prospective buyers. It should be noted that appraisals are
only estimates of value and should not be relied on as
measures of immediately realizable value. A discount rate of
10% was utilized and inflation was assumed to be 2.5%. The
Off-Lease aircraft is shown at the current book value. The
value of the Kitty Hawk aircraft is based on collected
reserves and the estimated value of lease unencumbered
aircraft, which approximates its book value of the aircraft.
The value of the TNT aircraft is what is anticipated to be
realized upon the sale of the aircraft at the end of the
lease.
(2) Lease expiration dates do not include renewal options unless
already exercised.
(3) The number of cumulative flight cycles and cumulative flight
hours shown are as of December 31, 2001.
(4) The remaining one-half beneficial interest is owned by
Pegasus Aircraft Partners, L.P., an affiliated partnership.
4
(5) Aircraft off lease at December 31, 2001. The value shown
represents the appraised value when available, or the book
value of the aircraft and engines, which represents estimated
realizable values.
(6) The lease with Continental expired on December 16, 1999. the
Partnership has converted the McDonnell Douglas DC 10-10
aircraft to a freighter. Conversion work was completed and
the aircraft was put into service with Emery Worldwide
Airlines, Inc. in December 2000.
(7) Federal Express hushkit installed.
(8) Engines from the Boeing 727, formerly leased to Falcon. Three
Pratt & Whitney JT8D-9A's, serial number MSN 665580, MSN
674404, and MSN 674570.
(9) Airframe sold.
A description of the principal financial terms of the leases is
described in Item 8, which is incorporated herein by reference.
Significant Lessees
The Partnership leased its aircraft to nine different airlines during
2001. Revenue from each of the airlines which accounted for 10% or greater of
the total rental revenue of the Partnership during 2001 are as follows:
Percentage of
Total
Airline Rental Revenue
------- --------------
TNT Transport International B.V. 18%
Kitty Hawk Aircargo, Inc. 15%
Emery Worldwide Airlines, Inc. 31%
Falcon Air Express, Inc. 12%
Safety Requirements and Aircraft Aging
In addition to registration, the FAA imposes strict requirements
governing aircraft inspection and certification, maintenance, equipment
requirements, general operating and flight rules (including limits on arrivals
and departures), noise levels, certification of personnel and record keeping in
connection with aircraft maintenance. FAA regulations establish standards for
repairs, periodic overhauls and alterations, and require that the owner or
operator of an aircraft establish an airworthiness inspection program to be
carried out by certified mechanics. Pursuant to the leases and FAA regulations,
no aircraft of the Partnership may be operated without a current airworthiness
certificate.
The FAA periodically reviews Service Bulletins, which are issued by the
aircraft manufacturers. These bulletins focus on safety problems that have
developed during the aircraft's operation. The FAA may incorporate these Service
Bulletins in Airworthiness Directives ("ADs"), which are mandates requiring the
airline to perform specific maintenance within a specified period of time.
Aircraft aging is a significant issue in aircraft safety regulation. In
the past, certain aviation incidents and accidents raised concerns over the
structural integrity of older aircraft. In 1989, in its "Report to Congress on
the Status of the U.S. Stage II Commercial Aircraft Fleet," the FAA stated that
"no correlation has been established between the chronological age of an
aircraft and its structural airworthiness. A more accurate assessment of the
physical "age" of an aircraft is the total number of flight cycles and flight
hours flown." A flight cycle is defined as one takeoff and one landing. A flight
cycle is important because of the added stress on the airframe, landing gear and
other components from repeated takeoffs, landings and pressurizations. As
5
different types of aircraft have different missions and carriers fly a variety
of routes, flight cycles can vary widely among aircraft of the same
chronological age. In general, narrow-body aircraft, which are used for
short-haul service, will have greater cycles per year than wide-body aircraft
used for longer routes. Other factors which contribute to the aging of an
aircraft are the number of hours actually flown, the predominant environment in
which an aircraft has flown, and its actual age in years.
The FAA has adopted certain ADs for Boeing and McDonnell Douglas
aircraft models, including Boeing 727s, 737s and 747s and McDonnell Douglas
DC-9s, MD-80s and DC-10s, as well as Lockheed L-1011s and Airbus A-300s. These
ADs make mandatory the periodic replacement or modification of structural
materials, fittings and skin at certain times in the life of an aircraft,
typically when the aircraft reaches a certain number of flight cycles or age
threshold. Previously, these aircraft were subject only to periodic inspection,
and the replacement and modification of materials and parts was done where
deemed necessary. In addition, it is widely expected that foreign civil aviation
authorities, especially in Europe and Japan, will adopt similar measures to
protect the structural integrity of older aircraft.
These aging aircraft ADs will initially impact only a limited number of
older aircraft, but additional aircraft will be covered as they accumulate
time-and-service and reach the thresholds for the required modifications.
Significantly, in the case of each aircraft type, a significant majority of
replacements or modifications are mandated when a plane reaches a certain number
of flight cycles and relatively few required replacements are triggered when a
plane reaches a certain chronological age or number of flight hours.
The following table summarizes the age, flight cycle, and flight hour
thresholds for each major aircraft type under the ADs. In general, these
thresholds are based on the "economic design goal" of an aircraft, which is
typically considered to be the period of service after which an increase in
maintenance costs is expected to take place in order to assure continued
operational safety. In addition, the table provides an estimate by the FAA of
the costs of complying with all of the mandated replacements and modifications
of the ADs. It is important to note that since most of the proposed work under
the ADs is based on flight cycle thresholds, those lower-cycle aircraft which
reach the aircraft age or flight hour thresholds should incur significantly
lower AD compliance cost than the total amounts estimated below.
Aircraft Flight Flight Estimated
Aircraft Age Cycle Hour AD
Type Threshold Threshold Threshold Costs
---- --------- --------- --------- -----
(Years)
Boeing 727 20 60,000 N/A $1,100,000
Boeing 737 20 75,000 N/A 934,000
Boeing 747 20* 20,000* N/A 3,400,000
McDonnell Douglas DC-9 20 100,000 75,000 79,000
McDonnell Douglas MD-80 20 75,000 75,000 4,000
McDonnell Douglas DC-10 None 42,000 60,000 187,000
* Substantially cycle limited
Flight cycle and flight hour information with respect to the
Partnership's aircraft is included in the aircraft portfolio table included
earlier in Item 1.
The Partnership's leases generally require the lessees to bear the
costs of compliance with ADs, which require action during the lease terms. All
of the Partnership's Boeing 727 aircraft have had the major calendar
modifications performed as required.
In 1999, the FAA organized a two year industry task force, the Aging
Transport Systems Rulemaking Advisory Committee, to investigate non-structural,
aging aircraft systems. It cannot be determined at this time what
recommendations, if any, will be made by the task force.
6
Aircraft Noise Regulations
On November 5, 1990, Congress enacted into law the Airport Noise and
Capacity Act of 1990 (the "Act"). On September 24, 1991, the FAA issued the
final rules of implementation for the Act. The Act provided that Stage II
aircraft would be phased out from operation within United States airspace by
December 31, 1999.
Implementing regulations proposed by the FAA required each United
States operator to increase its Stage III airplane fleet to 50 percent by
December 31, 1996; to 75 percent by December 31, 1998, and to 100 percent by
December 31, 1999.
However, the Act further provided, that if by July 1, 1999, at least
85% of an air carrier's fleet complied with Stage III noise levels, the carrier
may apply for a waiver of the operational ban for the remaining aircraft in the
operator's fleet until December 31, 2003. The application for such a waiver must
be submitted to the Secretary of the Department of Transportation no later than
January 1, 1999 and must include a plan with firm orders for making all aircraft
operated by the air carrier comply with Stage III noise levels by December 31,
2003.
Stage III hushkitting and re-engineering for the Boeing 727-200 and the
McDonnell Douglas DC-9-30 aircraft have been approved by the FAA. All of the
Partnership's Boeing 727-200 aircraft have had Federal Express hushkits
installed.
The European Commission has promulgated rules relating to aircraft
noise that would ban aircraft that are modified ("hushkitted") to achieve Stage
III noise compliance from European airspace after the year 2002. Such aircraft
cannot be added to European fleets after April of 1999. It is unclear in what
manner and if such rules will achieve full implementation.
Competition
The aircraft leasing industry is highly competitive. The Partnership
competes with aircraft manufacturers, distributors, airlines and other
operators, equipment managers, leasing companies, financial institutions and
other parties engaged in leasing, managing or remarketing aircraft, many of
which have significantly greater financial resources and greater experience than
the Partnership. Such competitors may lease aircraft at lower rates than the
Partnership and provide benefits, such as direct maintenance, crews, support
services and trade-in privileges, which the Partnership does not intend to
provide. Competitors may include certain affiliates of the General Partners.
Employees
The Partnership has no employees. The officers, directors and employees
of the General Partners and their affiliates perform services on behalf of the
Partnership. The General Partners are entitled to certain fees and
reimbursements of certain out-of-pocket expenses incurred in connection with the
performance of these management services. See Item 10 of this Report, "Directors
and Executive Officers of the Registrant", and Item 13 of this Report, "Certain
Relationships and Related Transactions", which are incorporated herein by
reference.
ITEM 2. PROPERTIES
The Partnership does not own or lease any physical properties other
than the aircraft which are discussed in Item 1 of this Report, "Business,"
which is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
In late 2001, three formerly VASP owned properties were sold and the
Court judgment awarded to the Partnership was satisfied, with interest. The
lawsuit against Capital Cargo was settled during pre-trial mediation, see Note
10. "Subsequent Events".
Although Kitty Hawk had affirmed the Partnership's lease in bankruptcy,
Kitty Hawk intends to file a motion in bankruptcy court in late March to
terminate the lease, and not pay damages. The Partnership has terminated the
lease by reason of Kitty Hawk's default and will file a motion for damages under
the lease. Oral arguments will be heard in early April and a decision is
anticipated sometime thereafter.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNIT HOLDERS
No matters were submitted to a vote of the Limited Partners of the
Partnership, through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year ended December 31, 2001.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON PARTNERSHIP CAPITAL AND RELATED
UNIT HOLDER MATTERS
There is no organized trading market for the purchase and sale of the
Units and certain measures have been adopted and implemented to assure that no
organized trading market will develop.
As of March 1, 2002, the number of Limited Partners of record was
approximately 7,196.
The Partnership declared the following distributions to its Limited
Partners out of cash flow received from operations during 2001 and 2000:
Amount of
Distribution
Period Per Unit Record Date Payment Date
------ -------- ----------- ------------
1st Quarter 2001 .00 None Paid
2nd Quarter 2001 $.20 June 30, 2001 July 10, 2001
3rd Quarter 2001 .00 None Paid
4th Quarter 2001 .00 None Paid
1st Quarter 2000 $.30 March 31, 2000 April 25, 2000
2nd Quarter 2000 .30 June 30, 2000 July 25, 2000
3rd Quarter 2000 .00 None Paid
4th Quarter 2000 .00 None Paid
Total distributions to all partners for 2001 and 2000 were declared as
follows (in thousands):
2001 2000
---- ----
Limited Partners $1,451 $4,353
General Partners 15 44
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$1,466 $4,397
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Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital, or both. The portion of
each cash distribution by a partnership, which exceeds its net income, may be
deemed a return of capital. Based on the net loss reported by the Partnership
for accounting purposes, all of the cash distributions paid to the partners for
the year 2001 constituted a return of capital. Approximately 73%, and 92%,
respectively, of the cash distributions paid to the partners for the years ended
December 31, 2000 and 1999, constituted a return of capital. Also, based on the
amount of cumulative net loss reported by the Partnership for accounting
purposes, approximately 86% of the cash distributions paid to the partners from
the inception of the Partnership through December 31, 2001 constituted a return
of capital. However, the total actual return on capital over the Partnership's
life can be determined only at the termination of the Partnership after all cash
flows, including proceeds from the sale of the aircraft, have been realized.
The Partnership paid out no distributions relating to the third and
fourth quarter 2001. The Partnership's lending facility has been limited to $25
million instead of the $30 million originally negotiated. This limitation is a
result of the fact that Aeromexico decided not to extend the leases on the
Partnership's two DC-9's for two years. Due to this limitation, the Partnership
suspended distributions in October 2000 in order to fully fund the DC10-10
conversion. As has historically been the case, the amount of future cash
distributions, if any, will be determined on a quarterly basis after an
evaluation of the Partnership's operating results and its current and expected
financial position. However, the Partnership is required to reduce the principal
on its loan through twenty quarterly installments starting April 2001, as well
as utilize proceeds from asset sales to reduce debt. Such principal repayment
will further reduce cash available for distributions. Additionally, the MD-82
aircraft leased to TWA, which accounted for 8% of the Partnership's rental
revenues in 2001, was sold to American Airlines in April 2001. Accordingly,
9
indebtedness was substantially reduced, and cash flow from operations was
additionally reduced.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Partnership was derived
from the audited financial statements for the indicated periods. The information
set forth below should be read in conjunction with the Partnership's Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Items 8 and 7,
respectively, of this Report on Form 10-K.
As of December 31,
or Year Ended December 31,
--------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per unit amounts)
Rental Revenue (2) $ 7,357 $ 9,344 $10,603 $11,210 $10,969
Net Income (Loss) (3,354) 1,788 978 1,855 1,255
Net Income (Loss) per Limited
Partnership Unit (0.46) 0.10 0.11 0.22 0.17
Distributions per Limited
Partnership Unit (1) 0.20 0.60 1.50 1.60 1.60
Total Assets 32,894 48,870 48,163 51,423 58,273
Notes Payable 9,483 21,210 16,530 10,000 4,751
Partners' Capital 16,756 21,576 24,185 34,200 44,070
(1) The fourth quarter distribution for the years 1996 to 1999 was paid in
January of the subsequent year.
(2) Prior Years restated to include ownership in MD 81 Trust on the equity
method, which results in a revenue reduction of $1,214 per year in
years 1999 through 1996. There was no effect on Net Income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Financial Data" and the Financial Statements of the Partnership and
the Notes thereto. This report may contain, in addition to historical
information, forward-looking statements that include risks and other
uncertainties. The Partnership's actual results may differ materially from those
anticipated in these forward-looking statements. Factors that might cause such a
difference include those discussed below, as well as general economic and
business conditions, competition and other factors discussed elsewhere in this
report. The Partnership undertakes no obligation to release publicly any
revisions to the forward-looking statements, if any, to reflect events or
circumstances after the date hereof or to reflect the occurrence of anticipated
or unanticipated events.
Liquidity and Capital Resources
The Partnership owns and manages a portfolio of leased commercial
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 general working
capital purposes or to reduce debt. As has historically been the case, the
amount of future cash distributions will be determined on a quarterly basis
after an evaluation of the Partnership's operating results and its current and
expected financial position.
The Partnership invests working capital and cash flow from operations
prior to its distributions to the partners in short-term, highly liquid
investments or a fund that invests in such instruments. At December 31, 2001,
the Partnership's unrestricted cash and cash equivalents of $8,444,000 were
primarily invested in such a fund. This amount was $6,147,000 more than the
Partnership's unrestricted cash and cash equivalents at December 31, 2000 of
$2,297,000. This increase in unrestricted cash was primarily attributable to
10
cash from operating activities of $9,981,000, investing activities of
$9,359,000, offset by cash used in financing activities of $13,193,000.
Net cash provided by operating activities was $10.0 million in 2001,
$5.9 million in 2000, and $9.2 million in 1999. In the aggregate, for this
three-year period, net cash provided by operating activities totaled $25.1
million. The $10 million of cash provided by operating activities in 2001 is
comprised of net income, adjusted for non cash items such as depreciation and
changes in assets and liabilities discussed below.
Rent and other receivables decreased by $71,000, or 23%, from $311,000
at December 31, 2000 to $240,000 at December 31, 2001. This decrease was
primarily due to lower rent receivables during the year ended December 31, 2001
caused by the termination of the lease with USAir, the sale of the MD-82,
formerly leased to TWA, and the non-accrual basis of the Vanguard rent, offset
by $140,000 increase in receivables from the sale of a Boeing 727-200 airframe.
Kitty Hawk filed for Bankruptcy protection under Chapter 11 on May 1,
2000, but has continued to pay monthly rent and maintenance reserves. The
September 11, 2001 events put the airline industry, in general, in extreme
financial hardship. As a result, the Partnership agreed that Kitty Hawk could
pay only half of monthly rent and maintenance reserves in October, November, and
December 2001, and 71% of rent for January, February, and March 2002. Kitty Hawk
accounted for 15% of the Partnership's lease revenue during 2001. A default or
deferral of lease payments on the part of Kitty Hawk, or any other lessee, would
adversely affect cash flow from operations.
Due to its failure to pay rents in the fourth quarter of 1998, Falcon
was placed on non-accrual status beginning October 1, 1998. Lease revenues from
Falcon were recognized by the Partnership based on cash received. For the period
January 1, 2001 through December 31, 2001, Falcon owed $855,000 in rent and
approximately $287,000 in maintenance reserves. For the period January 1, 2001
through December 31, 2001, Falcon paid approximately $808,000 in rent and
$527,000 in maintenance reserves. The Partnership had recorded a receivable for
$95,000 of past due rent which was offset against a $95,000 security deposit
from Falcon in the third quarter 2001. The Partnership agreed to an early
termination of the lease at the occasion of the next "C" check and the aircraft
was returned in September, 2001. The aircraft was written down by $1,464,000 in
2001, to a value of $279,000. In December 2001, the Partnership sold the
airframe to Falcon for $140,000, recognizing a loss of $100,000. The Partnership
also accepted a Falcon offer to pay $100,000 for a release of all obligations
under the lease.
Other assets decreased by $63,000, or 20%, from $309,000 as of December
31, 2000 to $246,000 as of December 31, 2001, primarily due to the amortization
of the debt placement fee on the note payable.
Accounts payable and accrued expenses decreased by $381,000, or 63%,
from $606,000 at December 31, 2000 to $225,000 at December 31, 2001, primarily
due to payments, in 2001, of capital expenditures accrued for work performed on
the McDonnell Douglas DC10-10 aircraft in 2000.
Payables to affiliates increased by $1,264,000, or 63%, from $2,012,000
at December 31, 2000 to $3,276,000 at December 31, 2001, principally due to an
increase in unpaid management fees due to the General Partners. While the fees
are being accrued, payments of fees on a current basis have been suspended due
to the Partnership Agreement provisions that require fees not to be paid if cash
distributions fall below 8% of initial capital per annum.
Notes payable decreased by $11,727,000, or 55%, from $21,210,000 at
December 31, 2000 to $9,483,000 at December 31, 2001, due to the payments of
principal from the proceeds from the sale of the MD-82 and the receipt of return
condition settlement with Aeromexico.
Accrued interest payable decreased by $104,000, or 79%, from $132,000
at December 31, 2000 to $28,000 at December 31, 2001, due to the lower principal
balance of the note and lower interest rates.
Deferred rental income and deposits decreased by $534,000, or 40%, from
$1,345,000 at December 31, 2000 to $811,000 at December 31, 2001. This decrease
was primarily attributable to the reclassification into income of the security
deposits of the Capital Cargo and the Falcon aircraft, and the reclassification
into income of the deferred rents from the Capital Cargo, the Aeromexico and the
Falcon aircraft.
11
Maintenance reserves payable increased by $326,000, or 16%, from
$1,989,000 at December 31, 2000 to $2,315,000 at December 31, 2001. This
increase was primarily due to payments for maintenance reserves by TNT and Kitty
Hawk and the application of all Vanguard's payments to maintenance reserves.
Net cash provided by investing activities for 2001 was $9,359,000,
primarily due to the proceeds of $9.5 million from the sale of the McDonnell
Douglas MD-82, formerly leased to TWA, and $688,000 in cash distributions from
investments in the MD-81 Trust, partially offset by capitalized aircraft
improvements expenditures of $829,000.
The cumulative freighter conversion cost for the Emery aircraft at
December 31, 2001 was $13.6 million, of which $669,000 were paid in the year
2001. Additionally, in 2001, there was a $159,000 upgrade cost on the Boeing
727, formerly leased to Capital Cargo, to meet the requirement of the maximum
take off weight.
The McDonnell Douglas MD-81 aircraft is owned by a Trust ("MD 81
Trust") in which the Partnership has a 50% interest. An affiliated Partnership
owns the other 50% interest. The aircraft was leased to US Airways Group, Inc.
("USAir") through June 2001. USAir returned the aircraft in July 2001 and paid
rent through the return date. In August 2001, the Partnership leased the
aircraft to Vanguard Airlines (see Notes to Financial Statements - Financial
Terms of Leases - Vanguard Airlines).
Net investment in the MD-81 Trust decreased by $287,000 from $1,583,000
at December 31, 2000 to $1,296,000 at December 31, 2001, due to the receipt of
cash distributions of $688,000 offset by equity interest earnings of $401,000.
The Partnership has adopted the guidance in EITF Issue No. 00-1
"Investor Balance Sheet and Income Statement Display under the Equity Method of
Investments in Certain Partnerships and Other Ventures" (EITF 00-1) in its
Annual Report on Form 10-K beginning the fiscal year ended December 31, 2000 and
accounts for its investment in the Trust which owns the MD-81 aircraft under the
equity method. In prior years, the Partnership had reported its ownership in the
MD-81 Trust on a proportionately consolidated basis. The financial results for
prior years contained herein have been restated utilizing the equity method. The
aircraft had been subject to a tax benefit transfer lease, which expired in
April 2000.
Net cash used in financing activities was $13,193,000 for 2001. This
amount represents $11,727,000 in payments on the principal balance of the note,
and cash distributions of $1,466,000 to the partners.
Partnership capital was $16,756,000, a decrease of approximately
$4,820,000 or 22% from December 31, 2000, due to net loss of $3,354,000, offset
by $1,466,000 distributions to partners during the year ended December 31, 2001,
as compared to the 2000 net income of $1,788,000, offset by $6,596,000 cash
distributions to partners during the year ended December 31, 2000.
Cash distributions declared by the Partnership were approximately $1.5
million for 2001 ($.20 per Unit), $4.4 million for 2000 ($.60 per Unit), and $11
million for 1999 ($1.50 per Unit). In the aggregate, for this three-year period,
cash distributions declared by the Partnership totaled $16.9 million.
The Partnership closed on a new $30 million lending facility on April
14, 2000 and an initial draw down was made of $19.5 million. The facility was
limited to $25 million because the Aeromexico leases were not extended for two
years. The proceeds were used to retire existing debt of $16.53 million, and to
replenish working capital. The term of the loan is six years, with interest only
payments the first twelve months. Thereafter, principal is required to be repaid
in equal quarterly installments over 60 months with the first payment due in
April 2001. The Partnership paid a 1.0% commitment fee and the interest rate is
225 basis points over a major money center bank's prime rate. The lender has a
mortgaged interest in all aircraft, except the 50% interest in the MD-81
aircraft, leased to Vanguard. The loan agreement requires that the Partnership's
cash be equal to or in excess of maintenance reserves. The balance of the bank
note must be amortized through 18 equal quarterly payments. If proceeds are
received from aircraft sales, under the bank note, they must be applied to a
reduction in the outstanding balance and the subsequent quarterly payments will
be redetermined such that the note balance will be retired through equal
quarterly payments through the remaining terms. The note balance was $9,483,000
at December 31, 2001.
12
Critical Accounting Policies
High-quality financial statements require rigorous application of
high-quality accounting policies. The policies discussed below are considered by
management to be critical to an understanding of the Partnership's financial
statements because their application requires significant judgment, with
financial reporting results relying on estimation about the effect of matters
that are inherently uncertain. Specific risks for these critical accounting
policies are described in the following paragraphs. For all of these policies,
management cautions that future events rarely develop exactly as forecast, and
the best estimates routinely require adjustment.
Lease Revenue Recognition:
Revenue under operating leases is recognized as rental income over the lease
term.
Depreciation:
Aircraft are recorded at cost and depreciated on a straight-line basis over the
estimated life to its estimated residual value. Certain major additions and
modifications to aircraft may be capitalized. The estimates are reviewed
periodically to ensure continued appropriateness.
Aircraft Valuation:
Aircraft are periodically reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". An impairment
loss is recognized when the fair value of the undiscounted future cash flows of
the aircraft is less than its net book value. The fair value of the aircraft is
generally based on independent appraisals of the aircraft and estimates of
undiscounted future cash flows. The appraisals assume, among other things, that
the aircraft are utilized normally in an open, unrestricted and stable market.
Short-term fluctuations in the market place are disregarded and it is assumed
that there is no necessity either to dispose of a significant number of aircraft
simultaneously or to dispose of aircraft quickly.
The Partnership determined the critical principles by considering accounting
policies that involve the most complex or subjective decisions or assessments.
The Partnership identified the most critical accounting policies to be those
related to lease revenue recognition, depreciation methods and valuation of
aircraft. The Partnership also states these accounting policies in the notes to
the consolidated financial statements and at relevant sections in this
discussion and analysis.
Results of Operations
Most of the Partnership's 2001 revenue was generated from the leasing
of the Partnership's aircraft to commercial air carriers under triple net
operating leases and from the gain on sale of assets.
Under the terms of the triple net leases, expenses related to the
operation and maintenance of the aircraft during 2001 were paid for by the
lessees directly or funded out of collected maintenance reserves. The direct
lease expenses incurred by the Partnership represent the costs of providing
insurance coverage for the Partnership's aircraft in excess of the amounts
required to be carried by the lessees, trustee fees related to the ownership of
the aircraft, the costs of storing the off-lease aircraft, and the work done on
the MD-81 aircraft to put it in condition for lease to Vanguard Airlines.
The Partnership also records depreciation expense pertaining to the
aircraft on lease and incurs interest expense and management fees and certain
general and administrative expenses in connection with the operations of the
Partnership. General and administrative expenses consist primarily of investor
reporting expenses, transfer agent and audit fees, and the cost of accounting
services. The Partnership also recorded a substantial write down of the value of
several aircraft in 2001.
2001 as compared to 2000
The Partnership's net loss was $3,354,000 for the year ended December
31, 2001 ("2001 Period") as compared to $1,788,000 net income for the year ended
December 31, 2000 ("2000 Period").
13
The Partnership's net loss for the 2001 Period compared to net income
of the 2000 Period was principally due to substantial write downs of the
aircraft and a decrease in rentals from operating leases, partially offset by
the VASP settlements and Judgement, the gain on sale of the MD-82, a decrease in
depreciation expense, and a decrease in interest expense.
Rentals from operating leases decreased by $1,987,000, or 21%, from
$9,344,000 in the 2000 Period to $7,357,000 in the 2001 Period. This decrease
was principally due to the sale of the MD-82 aircraft in April 2001, the return
of one Aeromexico aircraft in August 2001, the nonpayment of rent on the Capital
Cargo aircraft, partially offset by rent from the Emery aircraft which started
in December 2000.
Gain on sale and disposition of aircraft, engines or equipment
increased by $1,240,000, or 26%, from $4,816,000 for the year ending December
31, 2000 to $6,056,000 for the year ending December 31, 2001. This increase was
primarily attributable to the gain recognized from the sale of the MD-82 to
American Airlines in April 2001.
Interest Income increased by $594,000, or 437%, from $136,000 at
December 31, 2000 to $730,000 at December 31, 2001. This increase was primarily
due to the interest earned on the VASP Judgement and settlement in 2001.
Other Income recognized in the 2001 Period was $1,222,000, compared to
zero in the 2000 Period. This amount represents primarily $688,000 return
condition settlement from Aeromexico, and $527,000 of maintenance reserves taken
into income from Falcon.
The Partnership also received $3,791,000 from the VASP Judgement and
settlement in 2001.
Depreciation decreased by $2,425,000 or 41%, from $5,896,000 at
December 31, 2000 to $3,471,000 at December 31, 2001. This decrease was due
primarily to the end of the lease on a DC-9 aircraft leased to Aeromexico, the
sale of the MD-82 leased to TWA, resulting in no depreciation expense for the
aircraft, the off lease status of the Boeing 727, formerly leased to Capital
Cargo, offset by depreciation taken in 2001 on the DC10-10 aircraft, leased to
Emery.
The Partnership took significant write downs of its aircraft in 2001,
in part due to the adverse economic conditions and their impact on aircraft and
aircraft freighter values. Write down expense increased by $13,175,000, or 573%,
from $2,301,000 at December 31, 2000 to $15,476,000 at December 31, 2001. The
write downs in 2001 reduced the carrying value of the TNT aircraft, the three
Boeing 727s, one formerly leased to Capital Cargo, one formerly leased to Falcon
and one to Kitty Hawk, the DC-9, formerly leased to Aeromexico, and the A-300.
The write downs were $3,167,000 on the TNT aircraft, $1,396,000 on the Capital
Cargo aircraft, $1,464,000 on the Falcon aircraft, $4,250,000 on the Kitty Hawk
aircraft, $823,000 on the DC-9, and $2,665,000 on the A-300. There was also a
$1,711,000 write down on the Lockeed L-1011, which had been unsuccessfully
offered for lease or sale.
Management fees and re-lease fees for the 2001 Period increased by
$244,000, or 23%, from $1,043,000 at December 31, 2000 to $1,287,000 at December
31, 2001. This increase was primarily attributable to sales proceeds from the
sale of the MD-82 aircraft to American Airlines during 2001.
Interest expense for the 2001 Period decreased by $948,000, or 41%, in
comparison to the 2000 Period, from $2,309,000 to $1,361,000. This decrease was
primarily due to the lower balance of the Partnership's debt and a decrease in
the interest rate.
Direct lease expenses increased by $63,000 or 7% in the 2001 Period as
compared to the 2000 Period, due primarily to increases in maintenance expense
related to several aircraft which were off lease for most of the year, and the
costs incurred for work to transition the MD-81 aircraft to its lease with
Vanguard Airlines.
Return condition settlement expense of $51,000 was recognized during
the 2000 Period, resulting from a return condition settlement with Continental
Airlines, Inc., relating to the aircraft on lease to Kitty Hawk. There was no
corresponding expense in the 2001 Period.
14
2000 as compared to 1999
The Partnership's net income was $1,788,000 for the year ended December
31, 2000 ("2000 Period") as compared to $978,000 for the year ended December 31,
1999 ("1999 Period").
The increase in the Partnership's net income for the 2000 Period was
principally due to a decrease in depreciation expense in the 2000 Period as
compared to the 1999 period, and a gain on disposition of aircraft in the 2000
period. Partially offsetting these items was a decrease in rental income in the
2000 Period as compared to the 1999 Period, and increases in write downs,
interest expense and direct lease expense in the 2000 Period as compared to the
1999 Period.
Depreciation and amortization decreased by $1,653,000 or 22% in the
2000 Period as compared to the 1999 Period. This decrease was due primarily to
the DC10-10 aircraft not being depreciated in the 2000 Period and a decrease in
depreciation related to the Boeing 727-200 aircraft on lease to Kitty Hawk. The
decrease in depreciation expense related to the Boeing 727-200 aircraft was due
to an increased useful life after capital improvements.
Rental income decreased by $1,259,000 or 12% in the 2000 Period as
compared to the 1999 Period. The decrease was principally due to the absence of
rental income related to the DC10-10 aircraft and a decrease in rental income
related to the Boeing 727-200 aircraft on lease to Falcon. This was partially
offset by an increase in rental income related to the Boeing 727-200 aircraft on
lease to Kitty Hawk.
During the 2000 Period, the Partnership provided a write-down of
$1,400,000 on the A-300 aircraft in order to reduce its value to estimated fair
market value at June 30, 2000. At December 31, 2000 the Partnership wrote down
the Boeing 727-200 freighter on lease to TNT by $901,000. There were no
corresponding write-downs during the 1999 Period.
Interest expense for the 2000 Period increased by $1,075,000 or 87% in
comparison to the 1999 Period, primarily due to increases in the note balance
and the related interest rate during the 2000 period.
Direct lease expenses increased by $700,000 or 324% in the 2000 Period
as compared to the 1999 Period, due primarily to increases in maintenance
expense related to several aircraft and insurance expense related to the
DC-10-10 aircraft which was off lease for most of the year.
Gain on disposition of aircraft, engines or equipment increased
$4,643,000 for the 2000 period compared to the 1999 period. This increase was
primarily attributable to the gain recognized as a result of the total loss of
an aircraft leased to Aeromexico as a result of a runway accident. Proceeds
received from insurance exceeded the net book value of the aircraft.
During the 1999 Period, the Partnership swapped the three JT8D-15
engines that were part of the Boeing 727-200 aircraft returned by Continental
Airlines for three JT8D-9A engines owned by an affiliate of the Managing General
Partner. The Partnership realized a gain of $173,000 related to the swap in the
1999 Period.
Return condition settlement expense of $51,000 was recognized during
the 2000 Period, resulting from a return condition settlement with Continental
Airlines, Inc., relating to the aircraft on lease to Kitty Hawk. There was no
corresponding expense in the 1999 Period.
Inflation and Changing Prices
Inflation has had no material impact on the operations or financial
condition of the Partnership from inception through December 31, 2001. However,
market and worldwide economic conditions and changes in federal and foreign
aircraft regulations have in the past, and may in the future, affect the airline
industry and thus lease rates and aircraft values. Additionally, inflation and
changing prices, may affect subsequent lease rates and the eventual selling
prices of the aircraft. High jet fuel prices for most of 2001 affected the
airline industry's profitability and that of the Partnership's lessees.
15
Due to concern regarding the economic slowdown, the US Federal Reserve
Board has decreased its key lending rate on a number of occasions in an attempt
to stimulate economic activity. It is unclear as to the ultimate impact on the
level of economic activity of this rate decrease, however, a significant
economic slowdown has had an adverse affect on air travel and airline
performance.
Risks and Uncertainties
The events of September 11, 2001 have had a negative impact on the US
economy and the passenger airlines, including increases in airline costs such as
insurance and security, and a significant decline in passenger demand for air
travel. Due to the conversion of its aircraft to freighter configurations, the
Partnership is more reliant on the air freight industry than the passenger
airlines. While certain prohibitions on passenger planes carrying cargo have
increased cargo for the fully dedicated air freight business, the air freight
business in general has been negatively impacted by the economic slowdown. These
conditions have caused certain lessees to reduce payments and should they
continue, may further affect these and the other lessees' ability to make rent
and other lease payments and may impair the ability of the Partnership to
re-lease aircraft on a timely basis and at favorable rates and may reduce the
value of the aircraft. Also, because of reduced passenger traffic, major
airlines such as United Airlines and American Airlines announced plans to
accelerate the retirement of their Boeing 727-200 aircraft, which also
negatively impacted the value of the Partnership's aircraft.
Accounting Pronouncements
The Partnership has adopted the guidance in EITF Issue No. 00-1
"Investor Balance Sheet and Income Statement Display under the Equity Method of
Investments in Certain Partnerships and Other Ventures" (EITF 00-1) in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and
accounts for its investment in the Trust which owns the MD-81 aircraft leased to
US Airways under the equity method. In prior years, the Partnership had reported
its ownership in the MD-81 Trust on a proportionately consolidated basis. The
financial results in prior years contained herein have been restated utilizing
the equity method. The aircraft had been subject to a tax benefit transfer
lease, which expired in April 2000.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.144 ("SFAS 144") Accounting for
the Impairment or Disposal of Long Lived Assets". SFAS 144, which is effective
for fiscal years beginning after December 15, 2001 with earlier application
encouraged, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supercedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of ", and the accounting and reporting provisions of APB 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as previously
defined in that Opinion). The implementation of this Statement is not expected
to have a material effect on the Company's financial position, results of
operations or cash flows.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PEGASUS AIRCRAFT PARTNERS II, L.P.
List of Financial Statements Page
----
Report of Independent Accountants ................................... 18
Balance Sheets -- December 31, 2001 and 2000......................... 19
Statements of Income for the years ended
December 31, 2001, 2000, and 1999............................... 20
Statements of Partners' Capital for the years ended
December 31, 2001, 2000, and 1999............................... 21
Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999............................... 22
Notes to Financial Statements........................................ 24
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
(1) the information required is disclosed in the financial statements and notes
thereto; (2) schedules are not required under the related instructions; or (3)
the schedules are inapplicable.
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Pegasus Aircraft Partners II, L.P.
In our opinion, the accompanying balance sheets and the related
statements of income, of partners' capital and of cash flows present fairly, in
all material respects, the financial position of Pegasus Aircraft Partners II,
L.P. (the "Partnership") as of December 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
March 19, 2002
18
PEGASUS AIRCRAFT PARTNERS II, L.P.
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS
2001 2000
---- ----
(in thousands, except unit data)
Cash and cash equivalents $ 8,444 $ 2,297
Rent and other receivables 240 311
Aircraft, net 23,964 45,953
Other assets 246 309
------- -------
Total Assets $32,894 $48,870
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accounts payable and accrued expenses $ 225 $ 606
Payable to affiliates 3,276 2,012
Maintenance reserves payable 2,315 1,989
Notes payable 9,483 21,210
Accrued interest payable 28 132
Deferred rental income and deposits 811 1,345
------- -------
Total Liabilities 16,138 27,294
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)
PARTNERS' CAPITAL:
General Partners 169 218
Limited Partners (7,255,000 units issued and
outstanding in 2001 and 2000) 16,587 21,358
------- -------
Total Partners' Capital 16,756 21,576
------- -------
Total Liabilities and Partners' Capital $32,894 $48,870
======= =======
The accompanying notes are an integral part of these financial statements.
19
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
---- ---- ----
(in thousands, except unit data
and per unit amounts)
REVENUES:
Rentals from operating leases $ 7,357 $ 9,344 $ 10,603
Interest 730 136 112
Equity in earnings of MD-81 Trust 401 443 443
VASP Judgement and Settlement 3,791 -- --
Other income 1,222 -- --
Gain on disposition of aircraft,
engines or equipment 6,056 4,816 173
----------- ----------- -----------
19,557 14,739 11,331
----------- ----------- -----------
EXPENSES:
Depreciation and amortization 3,471 5,896 7,549
Write-downs 15,476 2,301 --
Management and re-lease fees 1,287 1,043 960
Interest 1,361 2,309 1,234
General and administrative 337 435 394
Direct lease 979 916 216
Return condition settlement -- 51 --
----------- ----------- -----------
22,911 12,951 10,353
----------- ----------- -----------
NET INCOME (LOSS) (3,354) 1,788 978
=========== =========== ===========
NET INCOME (LOSS) ALLOCATED:
To the General Partners (34) 1,058 182
To the Limited Partners (3,320) 730 796
----------- ----------- -----------
(3,354) 1,788 978
----------- ----------- -----------
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (0.46) $ 0.10 $ 0.11
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS ISSUED AND
OUTSTANDING 7,255,000 7,255,000 7,255,000
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
20
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
General Limited
Partners Partners Total
-------- -------- -----
(dollar amounts in thousands)
Balance, December 31, 1998 $ (868) $ 35,068 $ 34,200
Net income 182 796 978
Distributions declared to partners (110) (10,883) (10,993)
-------- -------- --------
Balance, December 31, 1999 (796) 24,981 24,185
Net income 1,058 730 1,788
Distributions declared to partners (44) (4,353) (4,397)
-------- -------- --------
Balance, December 31, 2000 218 21,358 21,576
Net income (34) (3,320) (3,354)
Distributions declared to partners (15) (1,451) (1,466)
-------- -------- --------
Balance, December 31, 2001 $ 169 $ 16,587 $ 16,756
======== ======== ========
The accompanying notes are an integral part of these financial statements.
21
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
2001 2000 1999
---- ---- ----
(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (3,354) $ 1,788 $ 978
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposition or sale of engines
and equipment (6,056) (4,816) (173)
Depreciation 3,471 5,896 7,549
Equity in earnings of MD-81 Trust (401) (443) (443)
Write-downs 15,476 2,301 --
Change in assets and liabilities:
Rent and other receivables 211 (115) 295
Other assets 63 (294) 6
Accounts payable and accrued expenses (381) 112 388
Accrued interest payable (104) 132 --
Deferred rental income and deposits (534) (130) (423)
Payable to affiliates 1,264 1,043 377
Maintenance reserves payable 326 459 615
-------- -------- --------
Net cash provided by operating
activities 9,981 5,933 9,169
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash distributions from investment in
MD-81 Trust 688 1,214 1,214
Capitalized aircraft improvements (829) (11,755) (5,639)
Proceeds from the disposition or sale of
engines and equipment 9,500 6,150 259
Decrease (increase) in restricted cash -- 371 (371)
-------- -------- --------
Net cash provided by (used in)
investing activities 9,359 (4,020) (4,537)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) / Proceeds from notes
payable (11,727) 4,680 6,530
Cash distributions paid to partners (1,466) (6,596) (11,725)
-------- -------- --------
Net cash used in financing
activities (13,193) (1,916) (5,195)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS 6,147 (3) (563)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,297 2,300 2,863
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,444 $ 2,297 $ 2,300
======== ======== ========
The accompanying notes are an integral part of these financial statements.
22
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (continued)
2001 2000 1999
---- ---- ----
(dollar amounts in thousands)
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $1,413 $2,143 $1,226
NONCASH TRANSACTIONS:
Distributions declared to partners but unpaid $ -- $ -- $2,199
Application of maintenance reserves payable
to the carrying value of aircraft $ -- $ 781 $ --
Deposit applied to capitalized aircraft
improvements $ -- $ 790 $ --
Proceeds from sale of Boeing 727-200 not
received $ 140 $ -- $ --
The accompanying notes are an integral part of these financial statements.
23
PEGASUS AIRCRAFT PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. Significant Accounting Policies
Basis of Presentation. Pegasus Aircraft Partners II, L.P. (the
"Partnership"), a Delaware limited partnership, maintains its accounting records
and prepares financial statements on the accrual basis of accounting. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant assumptions and estimates relate to useful life and
recoverability of the aircraft. Actual results could differ from such estimates.
Certain financial statement items in the years prior to 2000 have been
reclassified to conform to the 2000 and 2001 presentation.
Cash and Cash Equivalents. The Partnership invests funds not
immediately required for operations or distributions in short term, highly
liquid investments until such time as the funds are required to meet its
obligations. The short term, highly liquid investments are recorded at cost,
which approximates fair market value. For purposes of the balance sheets and the
statements of cash flows, the Partnership considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Aircraft and Depreciation. The aircraft are recorded at cost, which
includes acquisition costs and the acquisition fee and the financial management
advisory fee paid upon acquisition to the General Partners. Depreciation to an
estimated salvage value (in general, 10%) is computed using the straight-line
method over an estimated economic life of twelve years. Major improvements to
aircraft are capitalized when incurred and depreciated over the useful life of
the improvement.
In accordance with Statement of Financial Accounting Standards No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"), the recognition of an impairment for a long-lived
asset is required when the estimate of undiscounted future cash flows expected
to be generated by the asset is less than its carrying amount. Measurement of an
impairment loss is to be recognized based on the fair value of the asset. The
Partnership generally bases its estimate of fair market value of the aircraft
upon valuation by an independent third party. SFAS 144 also requires that
long-lived assets to be disposed of be reported at the lower of the carrying
amount or fair value less estimated disposal costs.
MD-81 Trust. The McDonnell Douglas MD-81 aircraft, currently under
lease to Vanguard Airlines ("Vanguard"), is owned by a trust in which the
Partnership has a 50% interest. An affiliated Partnership owns the other 50%
interest. The Partnership has adopted the guidance in EITF Issue No. 00-1
"Investor Balance Sheet and Income Statement Display under the Equity Method of
Investment in Certain Partnerships and Other Ventures" (EITF 00-1) in its Annual
Report on Form 10-K starting from the fiscal year ended December 31, 2000 and
accounts for its investment in the Trust which owns the MD-81 aircraft leased to
Vanguard under the equity method. In prior years the Partnership had reported
its ownership in the MD-81 Trust on a proportionately consolidated basis. The
financial results in prior years contained herein have been restated utilizing
the equity method. The aircraft had been subject to a tax benefit transfer
lease, which expired in April 2000.
Maintenance Reserve Funds. The Partnership has four leases where the
lessee is required to make monthly payments to maintenance reserve funds
administered by the Partnership. The Partnership may be obligated to reimburse
the lessee for specified maintenance costs out of the reserve funds, upon
submission of appropriate evidence documenting the maintenance costs incurred by
the lessee. Excess costs over the reserve are the lessees' responsibility.
Operating Leases. The aircraft leases, which are structured principally
as triple net leases, are accounted for as operating leases. Lease revenues are
recognized in equal installments over the terms of the related leases.
Deferred Income. Some of the Partnership's operating leases require
rental payments to be paid monthly, in advance. Deferred rental income
represents payments received in advance, which have not been earned.
24
Income Taxes. No provision for income taxes has been made in the
financial statements since such taxes are the responsibility of the individual
partners rather than the Partnership.
Net Income Per Limited Partnership Unit. The net income per limited
partnership unit is computed by dividing the net income allocated to the Limited
Partners by the weighted average number of Units outstanding during the year.
Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for
the Impairment or Disposal of Long-Lived Assets". SFAS 144, which is effective
for fiscal years beginning after December 15, 2001 with earlier application
encouraged, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of", and the accounting and reporting provisions of APB 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as previously
defined in that Opinion). The implementation of this Statement is not expected
to have a material effect on the Company's financial position, results of
operations or cash flows.
2. Organization of the Partnership
The Partnership was formed on April 26, 1989 for the purpose of
acquiring, leasing and ultimately selling used commercial aircraft. The Managing
General Partner of the Partnership is Pegasus Aircraft Management Corporation, a
wholly owned subsidiary of Pegasus Capital Corporation, and the Administrative
General Partner is Air Transport Leasing, Inc., a wholly owned subsidiary of UBS
Americas, Inc. UBS Americas is the successor to Paine Webber Group, Inc.
(collectively, the "General Partners").
The Partnership is required to dissolve and distribute all of its
assets no later than December 31, 2007. The net proceeds of any future sales of
aircraft will be used to reduce Partnership indebtedness.
Upon formation of the Partnership, the General Partners each
contributed $500 to the capital of the Partnership. An additional 7,255,000
units of limited partnership interest ("Units") were then sold at a price of $20
per Unit with the Partnership receiving gross offering proceeds of $145,100,000.
Title to the aircraft owned by the Partnership is held by
non-affiliated trustees of trusts of which the Partnership is the beneficiary or
one of two beneficiaries. The purpose of this method of holding title is to
satisfy certain registration requirements of the Federal Aviation
Administration.
3. Partnership Allocations
The Partnership Agreement provides that cash flow from operations be
distributed on a quarterly basis at the General Partners' discretion, 99% to the
Limited Partners and 1% to the General Partners. Cash flow is defined in the
Partnership Agreement as including cash receipts from operations and interest
income earned, less expenses incurred and paid in connection with the ownership
and operation of the aircraft. Depreciation and amortization expenses are not
deducted from cash receipts in determining cash flow. Distributable proceeds
from sales of aircraft upon liquidation of the Partnership will be distributed
in accordance with the partners' capital accounts after all allocations of
income and losses.
Income and losses generally will be allocated 99% to the Limited
Partners and 1% to the General Partners. Upon the sale of aircraft, gain
generally will be allocated, first, to the General Partners in an amount equal
to the difference between their capital contributions and 1.01% of the aggregate
capital contributions of the Limited Partners, and then, 99% to the Limited
Partners, and 1% to the General Partners.
25
4. Aircraft
Net Investment in Aircraft
The Partnership's net investment in aircraft as of December 31, 2001
and 2000 consisted of the following (in thousands):
2001 2000
---- ----
Aircraft on operating leases, at cost $ 49,941 $ 108,866
Less: Accumulated depreciation (22,556) (61,914)
Write-downs (8,567) (7,279)
--------- ---------
$ 18,818 $ 39,673
--------- ---------
Net Investment in MD-81 Trust $ 1,296 $ 1,583
--------- ---------
Aircraft held for lease or sale, at cost $ 73,616 $ 46,744
Less: Accumulated depreciation (36,474) (19,334)
Write-downs (33,292) (22,713)
--------- ---------
3,850 4,697
--------- ---------
Aircraft, net $ 23,964 $ 45,953
========= =========
Financial Terms of Leases
Trans World Airlines, Inc. Lease. During December 1989, the Partnership
acquired a McDonnell Douglas MD-82 aircraft for a total purchase price of
$20,763,000, subject to an operating lease with Trans World Airlines, Inc.
("TWA"), which was originally scheduled to expire on April 13, 1993, but was
amended and extended until November 1, 1998 with monthly rental payments, in
advance, of $185,000. This lease was further extended to November 2004 during
TWA's prepackaged bankruptcy in 1995.
TWA filed for Chapter 11 bankruptcy protection under the Federal
Bankruptcy code in January 2001 and just before it filed, it entered into an
Asset Sale and Purchase Agreement with American Airlines, Inc. TWA paid the
Partnership, during the first quarter of 2001, all arrearages in lease payments.
On April 9, 2001, American Airlines purchased the Partnership's McDonnell
Douglas MD-82 aircraft for $9.5 million. The proceeds were utilized to reduce
the Partnership's debt and the Partnership recognized a gain on the sale of the
aircraft of $6,156,000.
Aeromexico Leases. During 2000, one of the DC-9's leased to Aeromexico
suffered a total loss in a runway accident. The asset cost and accumulated
depreciation related to this aircraft was written off in 2000 to reflect the
loss of the aircraft. Since the insurance proceeds received were greater than
the net book value of the aircraft, a gain on disposition of $4.8 million was
recognized in 2000. The lease with Aeromexico for the other DC-9 was extended at
its option, to February 6, 2000. Aeromexico paid for the aircraft on a
month-to-month basis and maintained possession of the aircraft while a potential
sale of the aircraft to Aeromexico was being discussed. After negotiations
relating to the sale were unsuccessful, the aircraft was returned in July 2001.
Aeromexico paid $688,000 for the return condition settlement. The aircraft only
achieves Stage II noise compliance and due to the high cost to achieve Stage III
noise compliance, it has been determined that the plane will be sold as is. Due
to the decision to sell the aircraft "as is", the return condition payment was
taken into income and the aircraft was written down by a like amount. An
additional write down of $136,000 was recorded in the fourth quarter 2001, based
on management's discussion of sale to a third party.
Kitty Hawk Aircargo, Inc. ("Kitty Hawk") Lease. A Boeing 727-200,
received from Continental as partial satisfaction of the A-300 return conditions
was converted to a freighter, hushkitted and delivered to Kitty Hawk in
November, 1999. The Partnership swapped the three JT8D-15 engines that were
returned with the aircraft for three JT8D-9A engines owned by an affiliate of
the Managing General Partner. The Partnership also received a payment of
$259,000 from the affiliate to compensate the Partnership for the relative
difference in value of the engines as determined by a third party appraiser,
26
resulting in a $173,000 gain. The lease with Kitty Hawk is for 84 months, the
lease rate is $112,700 per month and maintenance reserves are to be paid at the
rate of $375 per flight hour, with engine reserves to be increased if the flight
hour/cycle ratio falls below 1.5 to 1. Kitty Hawk has provided a security
deposit of $225,400. The Partnership had incurred costs of approximately $4.7
million related to the cargo conversion and hushkitting, as of December 31,
1999.
Kitty Hawk filed for Bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy Code on May 1, 2000, but stayed current with regard to its rent
payments through September 2001. For the months of October, November, and
December 2001, Kitty Hawk could not make a full payment of the monthly rent, and
the Partnership agreed to a payment of only half of the amount due. The
Partnership also agreed to a 50% reduction of the maintenance reserves due for
the months of September, October, and November 2001. Kitty Hawk accounted for
15% of the Partnership's lease revenue during 2001. The default or deferral of
lease payments on the part of Kitty Hawk, or any other lessee, may adversely
affect future cash distributions by the Partnership (See Note 8. "Litigation").
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 lease unencumbered aircraft, which approximates the book
value of the aircraft.
US Airways Group Inc. ("USAir") Lease. During September 1989, the
Partnership acquired one-half of the beneficial interest in a trust ("Trust")
that is the owner/lessor of a McDonnell Douglas MD-81 aircraft for a total
purchase price of $10,041,000. The remaining one-half interest in the Trust is
owned by Pegasus Aircraft Partners, L.P., an affiliated partnership. The
aircraft was purchased subject to a tax benefit transfer lease ("TBT lease")
which expired in 2000. The aircraft was subject to an operating lease with
USAir, which expired on June 1, 2001 pursuant to the renewal option exercised by
USAir in 1997. Rental payments were payable quarterly, in arrears, at the rate
of $304,000 (for the Partnership's one-half interest in the aircraft). USAir
also had three additional one-year renewal options at fair market rental rates,
but chose to return the aircraft at the end of the lease. In July 2001, USAir
returned the aircraft and paid rent through the return date.
Vanguard Airlines ("Vanguard") Lease. USAir returned the MD-81 in July
2001, and in August 2001, the Trust entered into a three-year lease of the
aircraft with Vanguard Airlines, a Kansas City, Missouri airline providing
passenger services to 14 U.S. cities. The lease agreement is 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 is also responsible
for funding the maintenance reserves for the aircraft. Due to the events of
September 11, 2001, Vanguard only paid its August and September aircraft
utilization payment, and a partial amount of its October aircraft utilization.
Vanguard has been unable to pay any of its maintenance reserves due. As of
December 31, 2001, Vanguard has paid a total of $260,000 to the Trust, of which
50% was distributed to the Partnership and the remaining 50% was distributed to
another affiliated Partnership. These payments were applied to maintenance
reserves within the Trust. In January 2002, the Trust is negotiating with
Vanguard for a payment plan of its rent and maintenance reserves. As a result,
the Trust has decided to account for the Vanguard lease on a cash collection
basis.
Falcon Air Express, Inc. Lease. In December 1996, the Partnership
entered into a lease agreement with Falcon Air Express, Inc. ("Falcon"), a
charter airline, with respect to the 727-200 non-advanced aircraft formerly
leased to Kiwi. The lease is for a term of 60 months and provides for a monthly
rental of $95,000. Falcon provided a security deposit of $95,000. The lease also
requires Falcon to fund, on a monthly basis, maintenance reserves of $317 per
flight hour. In connection with the delivery of the aircraft, the Partnership
completed a heavy maintenance check on the aircraft, including certain
modifications at a cost of approximately $2,700,000. The Partnership also
purchased an engine at a cost of $760,000 prior to delivery of the aircraft and
spent approximately $700,000 with respect to maintenance work on one engine
returned by Kiwi. The aircraft was delivered to Falcon in March 1997.
Maintenance reserves previously collected from Kiwi of approximately $1,104,000
were applied to such costs.
Due to its failure to pay rents in the fourth quarter of 1998, Falcon
was placed on non-accrual status beginning October 1, 1998. Lease revenues from
Falcon were recognized by the Partnership on a cash collection basis, and
additional receivables were not accrued. For the period from January 1, 2001
through December 31, 2001, Falcon owed $855,000 in rent and approximately
$287,000 in maintenance reserves. Falcon paid, during the same period,
approximately $808,000 in rent and $527,000 in maintenance reserves. The
Partnership recorded a receivable for $95,000 of past due rent and also held a
$95,000 security deposit from Falcon, which were offset in September 2001. The
Partnership agreed to an early termination of the lease at the occasion of the
next "C" check and the aircraft was returned in September, 2001.
27
In October 2001, the Partnership decided to accept an offer from Falcon
to buy the airframe for $140,000 and to pay $100,000 for a release of all
obligations under the lease. As a result, the Partnership recorded, at December
31, 2001, a receivable of $140,000 for the sale of the aircraft, a receivable of
$100,000 for the rent, and recognized a loss of $100,000 on the sale of the
aircraft.
In 2001, the aircraft was written down by an additional $1,464,000 to
$279,000, for the value of its engines. A total of $527,000 of maintenance
reserves collected in 2001 was taken into income.
Capital Cargo International Airlines, Inc. Lease. In January 1997, the
Partnership entered into a lease agreement with Capital Cargo International
Airlines, Inc. ("Capital Cargo"), a start-up freight carrier, with respect to
the Boeing 727-200 advanced aircraft formerly leased to Kiwi. The Partnership
agreed to finance the conversion of the aircraft to a freighter and complete a
C-check. The Capital Cargo Lease ("Capital Cargo Lease") was for a term of
approximately eight years and provided for an initial monthly lease rate of
$105,000 per month. The Capital Cargo Lease required the Partnership to hushkit
the aircraft on or before its 1999 C-check visit at its own expense at which
time the lease rate increased to $139,000 per month. Pursuant to the lease
agreement, the aircraft underwent a "C" check and received a hushkit in December
1998 and the Partnership incurred costs of approximately $2,412,000.
The lease requires Capital Cargo to fund maintenance reserves monthly
at a rate of $377 per flight hour. Capital Cargo provided an initial security
deposit of $50,000 and added $17,000 per month to the security deposit during
the lease term until the deposit totaled $220,000. The lease was executed and
the aircraft was delivered to Capital Cargo in July 1997.
As of January 25, 2001, Capital Cargo failed to make its lease and
reserve payment. 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 Partnerhship and Capital Cargo reached a court mediated
settlement (see Note 10. "Subsequent Events").
As of December 31, 2001, Capital Cargo owes the Partnership monthly
rent, maintenance reserves, and expenses relating to the failure of the aircraft
to meet return conditions, the amounts of which are to be determined. The
Partnership held a Capital Cargo deposit of $220,000, which was netted against
$220,000 of rent receivable in the second quarter of 2001. The maximum take off
weight of the aircraft was upgraded, during late 2000, in accordance with the
lease delivery requirements and $159,000 was paid by the Partnership in the
first quarter of 2001 for this upgrade.
In 2001, based on an independent appraisal, the Partnership wrote down
the value of the aircraft by $1,396,000 to its estimated fair market value of
$2,950,000.
TNT Transport International B.V. Lease. In June 1998, the Partnership
delivered a Boeing 727-200 advanced aircraft formerly leased to Continental to a
European freight carrier, TNT Transport International B.V. ("TNT") for a lease
term of four years. The lease provides for monthly rentals of $123,500 (subject
to a reduction of approximately 10% after two years if TNT exercises, during the
lease term, an option to extend the lease for an additional two years beyond the
original expiration date) and airframe and landing gear reserves aggregating $85
per flight hour. TNT has contracted with a third party service provider for
maintenance of the engines. TNT has provided a $150,000 security deposit. TNT
also has the right to extend the lease for an additional two years at the end of
the initial lease term (if the above option is not exercised) at $95,000 per
month.
The Partnership has invested approximately $7.8 million for a low gross
weight hushkit and cargo conversion of the aircraft, and the purchase of three
JT8D-7B engines. The Partnership received cash proceeds of $1,050,000 for the
sale of the JT8D-15 engines from this aircraft, which resulted in a $60,000
impairment expense. In the third quarter of 1998, due to the conversion of this
aircraft to a freighter, the Partnership wrote-off the remaining net book value
of the interior, determined through a third party appraisal, which resulted in
an impairment expense of $57,000. This aircraft was also written down at
December 31, 2000 by $901,000. In 2001, the aircraft was again written down by
$3,167,000 to a value of $2,241,000, based on sale discussions plus six months
rent at $123,500 per month.
28
TNT is responsible for the first $50,000 of cost in complying with the
newly issued freighter conversion AD. Costs in excess of this amount are
initially paid for by TNT. At the end of the lease, TNT will be reimbursed by
the Partnership for a portion of the AD compliance cost based on a formula set
forth in the Partnership agreement, not to exceed $250,000.
Pursuant to the lease, TNT has renewal options, however, it has
indicated its intention to return the aircraft at the end of the lease in June
2002. The General Partners anticipate a negotiated sale of the aircraft to TNT
at the end of the lease. If unsuccessful in the negotiations, the Partnership
will remarket the aircraft for lease or sale, but there can be no assurance as
to whether the plane will be remarketed, the time it will take or the lease
rate, if any, which may be achieved.
Emery Worldwide Airlines Inc. ("Emery") Lease. The lease on the
McDonnell Douglas DC10-10 with Continental expired on September 15, 1999. Work
necessary for the aircraft to meet the lease return conditions was done at
Continental's expense at a maintenance facility. Continental continued to pay
rent until the aircraft achieved the lease requirements for its return, which
took place on December 16, 1999. The aircraft was stored at a modification
facility until June 2000 at which time work commenced to convert it to a
freighter for Emery Worldwide Airlines Inc. ("Emery"). The Partnership and Emery
have signed a lease for a term of 84 months with rent of $218,000 per month. The
lease also provides 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 converted to a
freighter in 2000 and delivered to Emery in December, 2000. At December 31, 2001
the conversion work totaled approximately $13.6 million.
Lockheed L-1011. Based on the amount of time the L-1011 has been
unsuccessfully offered for lease or sale and the large number of similar
aircraft available for lease or sale, the aircraft was written down from $1.7
million to a zero value in 2001. The aircraft is being offered for sale.
Airbus A-300 Aircraft Lease. 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. At December 31, 1999, VASP was in arrears with respect to scheduled
rent payments for a total of $838,000, and $1,265,000 in arrears with respect to
maintenance reserve payments. The Partnership sued in mid-1999 in Florida and
obtained a judgment against VASP in March 2000 for unpaid rent and reserves. A
receiver appointed to liquidate three VASP properties to satisfy claims of VASP
creditors has sold all three properties. The Partnership received $3.5 million
from the proceeds of the sale of the properties. Of the $3.5 million, $3 million
represents the Court award to the Partnership, and $467,000 the interest earned
on that amount since the date of the judgement in May 2000 through the final
payment date of December 31, 2001. The Partnership received all payments due
from the VASP Judgement in the fourth quarter 2001.
One of the engines was damaged during its lease by VASP. It was
disassembled during the first quarter of 2001 and determined to be a total loss.
During the first quarter of 2001, the Partnership and VASP agreed to a
Settlement Stipulation under which VASP paid $800,000 to resolve all disputes
between itself and the Partnership related to the damaged engine and the
Partnership's legal costs. The Partnership received $800,000, which was recorded
as Other Income, and a write-down of the same amount was recorded on the A-300
in March 2001 reflecting the allocated cash value of the damaged engine.
Subsequent to the September 11, 2001 events, the Partnership wrote down the
aircraft an additional $1,865,000 for a total of $2,665,000, resulting in a
value of $320,000 for its airframe and remaining engine. The airframe and
remaining engine are being offered for sale.
General. The aircraft leases are principally triple net leases. As
such, during the terms of the leases, the lessees are required to pay
substantially all expenses associated with the aircraft.
29
Significant Lessees
The Partnership leased its aircraft to nine different airlines or
airfreight companies during 2001. Revenues from each of the airlines which
accounted for 10% or greater of the Partnership's total rental revenue during
2001, 2000, and 1999 are as follows:
Airlines Percentage of Rental Revenue(a)
- -------- -------------------------------
2001 2000 1999
---- ---- ----
Continental Airlines, Inc. (b) 0 (c) 20%
Trans World Airlines, Inc. (c) 21% 19
Aerovias de Mexico S.A. de C.V. (c) 16 15
Capital Cargo International Airlines, Inc. (c) 16 14
TNT Transport International B.V. 18% 1413
Kitty Hawk Aircargo, Inc. 15 13 (c)
US Airways Group Inc. (c) 12 10
Emery 31 (c) 0
Falcon 12 (c) (c)
(a) Such percentages include the periodic recognition of amounts that were
prepaid in connection with certain lease settlements.
(b) Includes rental revenue from Continental Micronesia, Inc., a subsidiary
of Continental Airlines, Inc.
(c) Represents less than 10%.
Revenues include rentals from aircraft leased to foreign airlines or
carriers of $1,767,000, $3,132,000, and $3,350,000 in 2001, 2000, and 1999
respectively.
Future Minimum Rental Income
The following is a schedule by year of future minimum rental income
under the leases as of December 31, 2001 (in thousands):
Year Amount
---- ------
2002 6,336
2003 5,636
2004 5,636
2005 4,941
Thereafter 6,320
-------
Total $28,869
=======
Note: includes rents from Capital Cargo of $139,000 per month through
7/25/05 and rents from Kitty Hawk of $112,700 per month through 12/6/06.
The Partnership operates in one industry, the leasing of used aircraft
to commercial passenger and freight airlines.
30
5. 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 the 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 is 6 years, with interest only payments for the first twelve months.
Thereafter, principal is required to be repaid in equal quarterly installments
over 60 months with the first payment having been paid in July 2001. Proceeds
from the sale of aircraft must be applied to principal reduction and the
subsequent required principal payments will be reset over the remaining term.
The interest rate is 225 basis points over a major money center bank's prime
rate. The lender has a mortgage interest in all aircraft except the 50% interest
in the US Airways MD-81 aircraft. The loan agreement requires 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 April 9, 2001, the Partnership sold the MD-82, formerly leased to
TWA, for $9.5 million and used the proceeds to pay down principal on the note.
As of December 31, 2001, the balance due on the note is $9,483,000.
The Limited Partnership Agreement permits the Partnership to borrow up
to 35% (or $50,785,000) of the initial offering proceeds.
6. Transactions with Affiliates
Management Fees. The General Partners are entitled to a quarterly
subordinated base management fee in an amount generally equal to 1.5% of gross
aircraft rentals, net of re-lease fees paid. Of this amount, 1.0% is payable to
the Managing General Partner and 0.5% is payable to the Administrative General
Partner. During the years ended December 31, 2001, 2000, and 1999, the General
Partners earned base management fees of $120,000, $155,000, and $174,000,
respectively.
Incentive Management Fees. The General Partners also are entitled to 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. During the years ended December 31, 2001, 2000,
and 1999, the General Partners earned incentive management fees of $909,000,
$592,000, and $442,000, respectively.
Re-lease Fee. The General Partners are entitled to a quarterly
subordinated fee for re-leasing aircraft or renewing a lease in an amount equal
to 3.5% of the gross rentals from such re-lease or renewal for each quarter for
which such payment is received. Of this amount, 2.5% is payable to the Managing
General Partner and 1.0% is payable to the Administrative General Partner.
During the years ended December 31, 2001, 2000, and 1999, the General Partners
earned re-lease fees of $258,000, $319,000, and $344,000, respectively.
Beginning July 1, 1995, as part of the 1996 and 1997 class action
settlement, the Administrative General Partner remits to an affiliate, all
management fees as well as all 1997 and future fees and distributions received
by the Administrative General Partner, for deposit into an escrow account for
the benefit of the class action members. As distributions from the Partnership
have fallen below a level of 8% per annum of original capital, pursuant to the
Partnership Agreement, fees to the General Partners are being accrued but not
paid on a current basis.
Accountable Expenses. The General Partners are entitled to
reimbursement of certain expenses paid on behalf of the Partnership which are
incurred in connection with the administration and management of the
Partnership. There was no such reimbursable expenses in each of the years ended
December 31, 2001, 2000, and 1999. The continued absence of accountable expenses
is due to the subcontracting of certain accounting services, and their cost is
included in general and administrative expenses.
Other. During 2001, 2000, 1999 and 1998, the Partnership paid $118,000,
$693,000, and $87,000, respectively, to a licensed maintenance facility
affiliated with the Managing General Partner for the storage of the off-lease
aircraft. Additionally, during 2001, 2000, and 1999, the Partnership paid
31
$929,000, $1,034,000, and $1,294,000, respectively, for aircraft parts to a
company owned by the President and Director of the Managing General Partner.
32
7. Reconciliation to Income Tax Method of Accounting
The following is a reconciliation of the net income as shown in the
accompanying financial statements to the taxable (loss) income reported for
federal income tax purposes (in thousands):
2001 2000 1999
---- ---- ----
Net income per financial statements $ (3,354) $ 1,788 $ 978
Increase (decrease) resulting from:
Depreciation 13,627 3,503 (648)
TBT interest income, less
TBT rental expense 128 (570) (1,492)
Gain on sale of engines 1,499 69 85
Reserves for maintenance costs,
net of maintenance expense and
write-downs of aircraft -- (187) (192)
Maintenance reserve payable 195 1,457 1,113
Deferred rental income (311) -- (192)
Rental income (3,190) (256) (285)
Management fees 46 -- 27
Other (24) (22) 13
-------- -------- --------
Taxable (loss) income per federal
income tax return $ 8,616 $ 5,782 $ (593)
======== ======== ========
The following is a reconciliation of the amount of the Partnership's
total Partnership capital as shown in the accompanying financial statements to
the tax bases of the Partnership's net assets (in thousands):
2001 2000 1999
---- ---- ----
Total Partnership capital per
financial statements $ 16,756 $ 21,575 $ 24,185
Increase (decrease) resulting from:
Commission and expenses paid
in connection with the sale of limited
partnership units 16,295 16,295 16,295
Accounts receivable -- -- 233
Distributions payable to partners -- -- 2,169
Management fees payable 24 -- --
Reserves for maintenance costs and
write-downs 34,882 25,316 22,627
Deferred income -- 311 167
Accumulated depreciation (34,521) (40,243) (43,096)
TBT interest income less TBT rental
expense - Investment in Partnership -- (7,086) (6,516)
Lease settlement payment, including lease
aircraft received accounted for under
the cost recovery method -- 10,115 10,115
Allowance for bad debts -- -- --
Securities received in leasing transaction -- -- --
Fixed Assets -- -- 538
Other (24) (22) 328
-------- -------- --------
Tax bases of net assets $ 33,412 $ 26,261 $ 27,045
======== ======== ========
33
8. Litigation
In January 2001, Capital Cargo stopped making its rent and maintenance
reserve payments to the Partnership. As of September 30, 2001, Capital Cargo
owed the Partnership monthly rent of $139,000 from January 2001 through
September 2001 and $49,000 in maintenance reserve payments. On June 14, 2001,
the Partnership sued Capital Cargo in the court of Orlando County, Florida, for
the breach of its monetary obligations and damages relating to failure of the
aircraft to meet lease return conditions. In March 2002,the parties to the
lawsuit have achieved a court mediated settlement of the lawsuit, see Note 10,
"Subsequent Events".
Although Kitty Hawk had affirmed the Partnership's lease in bankruptcy,
Kitty Hawk intends to file a motion in bankruptcy court in late March to
terminate the lease, and not pay damages. The Partnership has terminated the
lease by reason of Kitty Hawk's default and will file a motion for damages under
the lease. Oral arguments will be heard in early April and a decision is
anticipated sometime thereafter.
9. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value of certain financial instruments, whether or
not reported in the balance sheet. Where quoted market prices are unavailable
the values are based on estimates using present value or other valuation
techniques. The results are significantly affected by the assumptions used
including the discount rate and estimates of future cash flows. In addition,
because SFAS No. 107 excludes certain assets such as leased aircraft owned by
the Partnership, the aggregate fair value amounts discussed below do not purport
to represent and should not be considered representative of the underlying
market value of the Partnership.
The methods and assumptions used to estimate the fair value of each
class of the financial instruments are described below.
Cash and cash equivalents, rents and other receivables. For these
balances, carrying value approximates fair value due to their short-term nature.
Notes payable. For notes payable, carrying value approximates fair
value based upon current rates offered for notes of the same remaining
maturities.
Accounts payable and accrued expenses, payable to affiliates, and
accrued interest payable. For these balances carrying value approximates fair
value due to their short-term nature.
10. Subsequent Events
The Partnership agreed with Kitty Hawk for the payment of approximately
71% of the monthly rent, and no maintenance reserves for each of the first three
months of 2002. Any unpaid rent and reserves will be added to the existing
Chapter 11 administrative claims.
The Partnership is negotiating with Vanguard with regards to its
payments of the monthly rent and maintenance reserves.
On March 14, 2002, the Partnership sold the A-300 airframe for $121,000
and the proceeds were used to pay principal on the Partnership's indebtedness.
On March 15, 2002, the parties to the Capital Cargo lawsuit achieved a
court mediated settlement. The settlement will result in the Partnership selling
the Boeing 727 freighter leased to Capital Cargo for $2.0 million and the
Partnership will retain maintenance reserves of $1.27 million and a $220,000
security deposit. The $2.0 million purchase price for the aircraft will be paid
through an initial payment of $625,000 and a twelve month note with 11 payments
of $35,000 and a balloon payment at the end. The note will bear interest and
34
will be in the favor of the Partnership's lender with payments made reducing the
Partnership's indebtedness.
On March 28, 2002, the Partnership paid down its note payable by $5
million. The outstanding balance after this principal payment is $3.8 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements with accountants
with respect to accounting or financial disclosure issues during 2001, 2000, and
1999.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no officers and directors. The General Partners
jointly manage and control the affairs of the Partnership and have general
responsibility and authority in all matters affecting its business. Richard L.
Funk resigned as Senior Vice President, Technical of Pegasus Aircraft Management
Corporation as of January 15, 2001, and Ervin Bach assumed the position on the
same day. Information concerning the directors and executive officers of the
General Partners is as follows:
Pegasus Aircraft Management Corporation
Name Positions Held
- ---- --------------
Richard S. Wiley President and Chairman of the Board
Carol L. Chase Executive Vice President, General Counsel and Secretary
Richard M. Oster Senior Vice President, Chief Financial Officer
Ervin Bach Senior Vice President, Technical
Richard S. Wiley, age 48, is President and Chairman of the Board of the
Managing General Partner and Pegasus Capital Corporation ("PCC"), which was
formed in 1988. Prior to forming Pegasus Capital Corporation, Mr. Wiley was a
Vice President of CIS Corporation ("CIS"), a wholly owned subsidiary of
Continental Information Systems Corporation ("Continental") for the period 1986
to 1988. Mr. Wiley originated aircraft transactions throughout the world and
sold aircraft to third-party investors. From 1985 to 1986, Mr. Wiley worked as
Treasurer of Caterpillar Capital Company in San Diego, California. From 1983 to
1985, he served as Managing General Partner and President of RAM Financial
Corporation in Houston, Texas, an equipment leasing venture capital company.
Prior to joining RAM, he worked for GATX Leasing Corporation as a District
Manager from 1980 to 1983. Mr. Wiley received a BS degree from the Indiana
University School of Business and an MBA from the University of California, Los
Angeles.
Carol L. Chase, Esq., age 49, is a Executive Vice President, General
Counsel and Secretary of the Managing General Partner and Pegasus Capital
Corporation. She is responsible for providing legal counsel for all aspects of
capital equipment leasing, financing and placement. Prior to joining Pegasus,
from 1987 to 1988, Ms. Chase was Senior Corporate Counsel at CIS where she
provided legal counsel for transactions involving aircraft and related
equipment. From 1981 to 1987, Ms. Chase was legal counsel at Transamerica
Airlines where she was responsible for the legal negotiation and documentation
for the purchase, sale, lease and finance of aircraft and aircraft-related
equipment. Ms. Chase received a BA degree from California State University,
Hayward and a J.D. degree from the University of California, Davis. She is a
member of the State Bar of California, the American Bar Association, and the
American Corporate Counsel Association.
Richard M. Oster, age 50, is Chief Financial Officer, Senior Vice
President Administration of Pegasus Aircraft Management Corporation (PAMC). Mr.
Oster is primarily responsible within the Pegasus companies for all
corporate-wide Finance and Administration functions that include all financial
reporting, planning and analysis, accounting, information systems, human
resources and other administrative functions. Prior to joining Pegasus, Mr.Oster
served as Senior Vice President and Chief Financial Officer of Crowley Maritime
Corporation; and prior to that, as Senior Vice President and Chief Financial
Officer of Inchcape Shipping Services. Mr.Oster is a CPA and holds a B.S. in
Business Administration from the University of North Carolina and a M.B.A. from
the Rutgers Graduate School of Business.
Ervin Bach, 40, is Senior Vice President, Technical of the Managing
General Partner and Pegasus Capital Corporation. Mr. Bach has been employed in
various technical capacities with affiliates of the Managing General Partner
since 1996. From 1994 to 1996 he was Manager of Structures for Hamilton
Aviation, Tucson and he has held the same position with Lockheed Aeromod, Tucson
from 1993 to 1994. From 1989 to 1993, Mr. Bach held various positions with the
Evergreen Air Center, Marana, Arizona, the last being Manager of Engineering.
During 1991, Mr. Bach was employed for seven months as a structural mechanic
with Trans World Airlines in Kansas City. Mr. Bach was with the United States
Air Force from 1982 to 1989, rising to the rank of Staff Sergeant with the
responsibility of maintaining the mission worthiness of 13 electronic combat
C-130's. Mr. Bach holds an Airframe and Power Plant license and attended USAF
36
technical and leadership schools. Mr. Bach attended Pima Community College
during 1990-91.
Air Transport Leasing, Inc.
Name Positions Held
- ---- --------------
Clifford B. Wattley President, Chief Financial And Accounting Officer and
Director
Stephen R. Dyer Vice President, Secretary, Treasurer and Director
Clifford B. Wattley, age 52, is President, Chief Financial and
Accounting Officer and a Director of the Administrative General Partner. Mr.
Wattley is a Corporate Vice President with UBS PaineWebber Inc. having joined
the firm in 1986. He also was employed previously by Paine, Webber, Jackson &
Curtis from 1979 to 1980. From 1986 to 1992, Mr. Wattley participated in
PaineWebber's Principal Transactions Group. Since 1992, Mr. Wattley has been a
member of the Private Investment Department. He holds a Bachelor of Science
degree in engineering from Columbia University and a Masters in Business
Administration from Harvard University. Mr. Wattley assumed the positions of
Cjief Financial and Accounting Officer on March 11, 2002, and will serve in that
capacity until such time as a replacement for Carmine Fusco is named.
Stephen R. Dyer, age 42, is Vice President, Secretary and a Director of
the Administrative General Partner. He joined UBS PaineWebber Inc. in June 1988
as a Divisional Vice President and is currently a Senior Vice President and
Director of Private Investments. Prior to joining PaineWebber Incorporated, Mr.
Dyer had been employed, since June 1987, as an Assistant Vice President in the
Retail National Products Group of L.F. Rothschild & Co. Incorporated. Prior to
joining L.F. Rothschild he was employed, beginning in January 1985, as an
Associate in the Real Estate Department of Thomson McKinnon Securities Inc. From
July 1981 to August 1983, Mr. Dyer was on the audit staff of the accounting firm
of Arthur Young & Company. He received his Bachelor of Science degree in
Accounting in 1981 from Boston College and a Masters of Business Administration
from Indiana University in December 1984. Mr. Dyer is a Certified Public
Accountant. Mr. Dyer assumed the positions of Secretary and Treasurer on March
11, 2002 and will serve until such time as a replacement for Carmine Fusco is
named.
Carmine Fusco, age 33, was Vice President, Secretary, Treasurer and
Chief Financial and Accounting Officer of the Administrative General Partner and
also served as an Assistant Vice President within the Private Investments
Department of UBS PaineWebber Inc. On February 25, 2000, Mr. Fusco was charged
with, and on January 14, 2002 pleaded guilty to, conspiracy to distribute a
controlled substance. His employment with UBS PaineWebber Inc. and the
Administrative General Partner was terminated on March 11, 2002, the date UBS
PaineWebber Inc. and the Administrative General Partner were informed of these
facts.
ITEM 11. EXECUTIVE COMPENSATION
No compensation was paid by the Partnership to the officers and
directors of the General Partners. See Item 13 of this Report, "Certain
Relationships and Related Transactions", which is incorporated herein by
reference, for a description of the compensation and fees paid to the General
Partners and their affiliates by the Partnership during 2001.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) As of the date hereof, no person is known by the Partnership
to be the beneficial owner of more than 5% of the Units of
the Partnership. The Partnership has no directors or
officers, and neither of the General Partners of the
Partnership owns any Units. The Assignor Limited Partner for
the Partnership, Pegasus Assignor L.P.A., Inc. (an affiliate
of the Managing General Partner), owns 5 Units. Additionally,
ATL Inc., an affiliate of the Administrative General Partner
owns approximately 112,916 units.
The names and addresses of the General Partners are as
follows:
Managing General Partner:
Pegasus Aircraft Management Corporation
Four Embarcadero Center, 35th Floor
San Francisco, CA 94111
Administrative General Partner:
Air Transport Leasing, Inc.
800 Harbor Boulevard, 3rd Floor
Weehawken, NJ 07087
The General Partners, collectively, have a 1% interest in
each item of the Partnership's income, gains, losses,
deductions, credits and distributions.
(b) The following table sets forth the number of Units
beneficially owned by directors of the General Partners and
by all directors and officers of such corporations as a group
as of March 1, 2002.
Amount and Nature
of Beneficial Percent
Name Ownership of Class
---- --------- --------
Managing General Partner:
Richard S. Wiley 19,135 *
Carol L. Chase 1,300 *
All directors and officers as
a group (2 persons) 21,435 *
Administrative Managing Partner:
None
* Less than 1% of class.
(c) The Partnership knows of no arrangements, the operation of
the terms of which may at a subsequent date result in a
change in control of the Partnership.
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The General Partners and their affiliates have received or will receive
certain types of compensation, fees, or other distributions in connection with
the operations of the Partnership. The fees and compensation were determined in
accordance with the applicable provisions of the Partnership Agreement. Due to
the subordination provisions of the partnership Agreement, fees to the General
Partners are being accrued but are not being paid on a current basis.
Following is a summary of the amounts paid or payable to the General
Partners and their affiliates during 2001.
Base Management Fee. The General Partners receive a quarterly
subordinated base management fee in an amount generally equal to 1.5% of gross
aircraft rentals, net of re-lease fees paid. Of this amount, 1.0% is payable to
the Managing General Partner and 0.5% is payable to the Administrative General
Partner. During 2001, the General Partners earned base management fees of
$120,000.
Incentive Management Fee. The General Partners 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. The General Partners earned incentive management fees of $909,000
during 2001.
Re-lease Fee. The General Partners receive a quarterly subordinated fee
for re-leasing aircraft or renewing a lease in an amount equal to 3.5% of the
gross rentals from such re-lease or renewal for each quarter for which such
payment is received. Of this amount, 2.5% is payable to the Managing General
Partner and 1.0% is payable to the Administrative General Partner. The General
Partners earned re-lease fees of $ 258,000 during 2001.
Accountable Expenses. The General Partners are entitled to
reimbursement of certain expenses paid on behalf of the Partnership which are
incurred in connection with the administration and management of the
Partnership. There was no such reimbursable expenses during 2001. As discussed
in Note 6 to the Financial Statements, accountable expenses remained $-0- due to
the subcontracting of certain accounting services, and their cost is included in
general and administrative expenses.
Other. In 2001, the Partnership purchased certain equipment and parts
for two Partnership aircraft from a company owned by the Director and President
and two former officers and directors of the Managing General Partner in the
amount of $929,000. During 2001, the Partnership paid $118,000 to a licensed
maintenance facility affiliated with the Managing General Partner for work
performed on certain aircraft.
Partnership Interest. The General Partners received or were entitled to
receive distributions of $15,000 as their allocable share of distributable cash
flow for 2001. In addition, pursuant to the Partnership Agreement as it relates
to the sale of an asset, $34,000 of the Partnership's net taxable loss for 2001
was allocated to the General Partners.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: (Incorporated by reference to Item 8 of
this Report, "Financial Statements Supplementary Data")
(b) The Partnership filed a Form 8-K on June 30, 2001, reporting a
distribution of $0.20 per Unit on or about July 10, 2001 to
unitholders of record as of June 30, 2001. The distribution was a
result of cash flow from operations and in part funds available
from the sale of the McDonnell-Douglas MD-82 to American Airlines
in April 2001.
During the fourth quarter of 2001, the Partnership did not file
any reports on Form 8-K.
(c) Exhibits required to be filed.
Exhibit No. Description
----------- -----------
3.1 (a) Amended and Restated Limited Partnership Agreement dated
April 27, 1989, as amended and restated July 11, 1989.
Filed as Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1989.*
(b) Amendment, dated as of December 26, 1990, to the Amended
and Restated Limited Partnership Agreement dated July
11, 1989. Filed as Exhibit 1 to the Registrant's Current
Report on Form 8-K dated December 26, 1990.*
(c) Amendment, dated as of March 31, 1992, to the Amended
and Restated Limited Partnership Agreement dated July
11, 1989. Filed as Exhibit 4 to the Registrant's Current
Report on Form 8-K dated April 16, 1992.*
10.1 (a) Agreement pursuant to Selection 168(f)(8) of the
Internal Revenue Code of 1954, as amended, between
Pacific Southwest Airlines and General Mills, Inc. Filed
as Exhibit 19.3(c) to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1989 for Pegasus
Aircraft Partners, L.P. (Commission File No. 33-22986).*
(b) Participation Agreement, dated September 21, 1989, among
Pegasus Aircraft Partners, L.P., a Delaware limited
partnership ("Pegasus Aircraft Partners"), First
Security Bank of Utah, National Association (the "Owner
Trustee"), Concord Asset Management, Inc., a Delaware
corporation ("CAMI"), and the Registrant. Filed as
Exhibit 19.2(e) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989.*
(c) Amended and Restated Reimbursement Agreement, dated
September 21, 1989 between Pegasus Aircraft Partners and
CAMI. Filed as Exhibit 19.2(f) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.*
(d) Reimbursement Agreement, dated September 21, 1989,
between the Registrant and CAMI. Filed as Exhibit
19.2(g) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1989.*
40
(e) Amended and Restated Security Agreement, dated September
21, 1989 between Pegasus Aircraft Partners and CAMI.
Filed as Exhibit 19.2(h) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1989.*
(f) Security Agreement, dated September 21, 1989, between
the Registrant and CAMI. Filed as Exhibit 19.2(i) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989.*
(g) Security Agreement, dated September 21, 1989, between
the Registrant and Pegasus Aircraft Partners. Filed as
Exhibit 19.2(j) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989.*
(h) Security Agreement, dated September 21, 1989, between
Pegasus Aircraft Partners and the Registrant. Filed as
Exhibit 19.2(k) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989.*
(i) Trust Agreement 814, dated as of March 10, 1989, among
Pegasus Capital Corporation, a California corporation
("PCC") as Beneficiary, Pegasus Aircraft Partners as
Beneficiary, and the Owner Trustee. Filed as Exhibit
19.3(i) to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1989 for Pegasus Aircraft
Partners, L.P. (Commission File No. 33-22986).*
(j) First Amendment to Trust Agreement 814, dated September
21, 1989, among Pegasus Aircraft Partners as
Beneficiary, the Registrant as Beneficiary, and the
Owner Trustee. Filed as Exhibit 19.2(m) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989.*
(k) Amended and Restated Lease No. 1, dated October 14,
1988, between PS Group, Inc. and USAir, Inc. Filed as
Exhibit 10.2.9 to Form S-1 Registration Statement dated
July 3, 1989 (Commission File No. 33-28359).*
(l) Assumption Agreement, dated March 22, 1989, among PCC,
the Buyer, CAMI and Pegasus Aircraft Partners. Filed as
Exhibit No. 19.3(e) to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1989 for Pegasus
Aircraft Partners, L.P. (Commission File No. 33-22986).*
(m) Letter of Credit Agreement, dated as of April 30, 1992,
between First Security Bank of Utah as Owner Trustee and
Philadelphia National Bank, Incorporated, as CoreStates
Bank, N.A. Filed as Exhibit 10.4(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*
(n) Assumption Agreement, dated April 30, 1992, among
Pegasus Aircraft Partners, L.P. and Pegasus Aircraft
Partners II, L.P. as Obligors and Philadelphia National
Bank, Incorporated, as CoreStates Bank, N.A. Filed as
Exhibit 10.4(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.*
(o) Security Agreement and Assignment of Lease, dated as of
April 30, 1992, between First Security Bank of Utah,
National Association as Owner Trustee and Philadelphia
National Bank, Incorporated, as CoreStates Bank, N.A.
Filed as Exhibit 10.4(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992.*
(p) Assignment of Collateral, dated as of April 30, 1992,
between Pegasus Aircraft Partners II, L.P. and
Philadelphia National Bank, Incorporated, as CoreStates
Bank, N.A. Filed as Exhibit 10.4(d) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*
41
10.2 (a) Trust Agreement 047, dated as of April 12, 1989, between
PCC as Beneficiary, and First Security Bank of Utah,
National Association as Owner Trustee. Filed as Exhibit
19.3(b) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1989.*
(b) Lease Agreement 047, dated as of April 12, 1989, between
Owner Trustee and Continental Airlines, Inc. Filed as
Exhibit 19.3(c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989.*
(c) Amendment No. 1 to Lease Agreement 047, dated September
21, 1989. Filed as Exhibit 10.3(f) to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1989.*
(d) Stipulation and Order, dated June 19, 1991, among
Continental Airlines, Inc., New York Airlines, Inc., Bay
Air Lease I, Cirrus Capital Corporation of Florida, Bay
Air Lease III, Meridian Trust Company, as Owner Trustee,
IAL Aircraft Acquisitions, Inc., Pegasus Aircraft
Partners II, L.P., Pegasus Capital Corporation, IAL
Aviation Resources, Inc., Aircraft Leasing, Inc.,
Pegasus Aircraft Partners, L.P., Gilman Financial
Services, Inc. and First Security Bank of Utah, as Owner
Trustee concerning various aircraft and aircraft
engines. Filed as Exhibit 19.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1991.*
(e) Agreed Order, dated July 3, 1991, in connection with
approval of Stipulation and Order, dated June 19, 1991,
among Continental Airlines, Inc., New York Airlines,
Inc., Bay Air Lease I, Cirrus Capital Corporation of
Florida, Bay Air Lease III, Meridian Trust Company, as
Owner Trustee, IAL Aircraft Acquisitions, Inc., Pegasus
Aircraft Partners II, L.P., Pegasus Capital Corporation,
IAL Aviation Resources, Inc., Aircraft Leasing, Inc.,
Pegasus Aircraft Partners, L.P., Gilman Financial
Services, Inc. and First Security Bank of Utah, as Owner
Trustee concerning various aircraft and aircraft
engines. Filed as Exhibit 19.1(b) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1991.*
(f) Supplemental Stipulation and Order, dated December 30,
1992, among Continental Airlines, Inc., Bay Air Lease I,
Cirrus Capital Corporation of Florida, Bay Air Lease
III, Aviation Assets I, Aviation Assets II, Aviation
Assets III, Aviation Assets IV, IAL Aircraft
Acquisitions, Inc., Pegasus Aircraft Partners II, L.P.,
Pegasus Capital Corporation, IAL Aviation Resources,
Inc., Pegasus Aircraft Partners, L.P., Gilman Financial
Services, and First Security Bank of Utah, as Owner
Trustee concerning various aircraft and aircraft
engines. Filed as Exhibit 10.2(f) to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1992.*
(g) Amendment No. 2 to Lease Agreement 047 between First
Security Bank of Utah, N.A. as Lesser and Continental
Micronesia as Lessee dated March 15, 1995.
10.3 (a) Trust Agreement 32719 between the Registrant and First
Security Bank of Utah, National Association as Owner
Trustee. Filed as Exhibit 19.4(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989.*
(b) Aircraft Lease Agreement, dated as of February 15, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and KIWI International Air
Lines, Inc. Filed as Exhibit 10.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.*
(c) Lease Supplement No. 1, dated March 5, 1993, between
First Security Bank of Utah, National Association as
Owner Trustee and KIWI International Air Lines, Inc.
Filed as Exhibit 10.1(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1993.*
(d) Amendment No. 1 dated March 15, 1995 to the lease
between First Security Bank of Utah National Association
as Trustee (Lessor) and Kiwi International Air Lines
Inc. with respect to a certain 727 Aircraft, US
Registration N32719.*
42
10.4 (a) Trust Agreement 909, dated as of May 25, 1989, between
PCC as Beneficiary and First Security Bank of Utah,
National Association as Owner Trustee. Filed as Exhibit
10.5(b) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1989.*
(b) Lease Agreement, dated as of October 1, 1983, between
DC-9T-II as Lessor and Trans World Airlines, Inc.
("TWA") as Lessee. Filed as Exhibit 10.2.8 to Form S-1
Registration Statement dated July 3, 1989 (Commission
File No. 33-28359).*
(c) Lease Supplement No. 1 dated, October 13, 1983, between
TWA and DC-9T-II. Filed with Lease Agreement as Exhibit
10.2.8 to Form S-1 Registration Statement dated July 3,
1989 (Commission File No. 33-28359).*
(d) Amendment No. 1, dated as of May 1, 1991, to Lease dated
as of October 1, 1983, each between First Security Bank
of Utah, National Association as Owner Trustee and
Lessor and Trans World Airlines, Inc. as Lessee. Filed
as Exhibit 19.1(a) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1991.*
(e) Provisional Amendment, dated as of March 31, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and Trans World Airlines,
Inc. Filed as Exhibit 10.3(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.*
(f) Amendment No. 2, dated as of April 15, 1993, between
First Security Bank of Utah, National Association as
Owner Trustee and Trans World Airlines, Inc. Filed as
Exhibit 10.3(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.*
(g) Agreed Order, dated April 14, 1993, approving lease
amendments among Trans World Airlines, Inc., Pegasus
Aircraft Partners, L.P., Registrant and Pegasus Capital
Corporation relating to leases of certain aircraft.
Filed as Exhibit 10.3(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1993.*
(h) Amendment No. 3 dated January 16, 1995 between First
Security Trust of Utah as Lessor Owner Trustee and TWA
as lessee with respect to the lease of one Lockheed
L-1011 aircraft, U.S. Registration No. N41016.*
(i) Amendment No. 3 dated as of January 16, 1995 between
Meridian Trust Company as Lessor Owner Trustee and TWA
as lessee with respect to the lease of one McDonnell
Douglas MD-82 aircraft, U.S. Registration No. 909TW.*
10.5 (a) Lease Agreement, dated as of December 30, 1981, between
First Security Bank of Utah, National Association as
Lessor and TWA as Lessee. Filed as Exhibit 10.2.3 to
Form S-1 Registration Statement dated July 3, 1989
(Commission File No. 33-28359).*
(b) Trust Agreement, dated as of December 30, 1981, between
BWL as Owner Participant and First Security Bank of
Utah, National Association as Owner Trustee. Filed as
Exhibit 10.6(h) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1989.*
(c) Amendment No. 1, dated as of May 1, 1991, to Lease dated
as of December 30, 1981, each between First Security
Bank of Utah, National Association as Owner Trustee and
Lessor and Trans World Airlines, Inc. as Lessee. Filed
as Exhibit 19.1(a) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1991.*
43
(d) Provisional Amendment, dated as of March 31, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and Trans World Airlines,
Inc. Filed as Exhibit 10.4(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.*
(e) Amendment No. 2, dated as of April 15, 1993, between
First Security Bank of Utah, National Association as
Owner Trustee and Trans World Airlines, Inc. Filed as
Exhibit 10.4(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.*
(f) Agreed Order, dated April 14, 1993, approving lease
amendments among Trans World Airlines, Inc., Pegasus
Aircraft Partners, L.P., Registrant and Pegasus Capital
Corporation relating to leases of certain aircraft.
Filed as Exhibit 10.4(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1993.*
10.6 (a) Trust Agreement 935, dated as of April 2, 1990, between
Registrant as Beneficiary and First Security Bank of
Utah, National Association, as Owner Trustee. Filed as
Exhibit 19.1(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1990.*
(b) Aircraft Lease Agreement, dated as of June 1, 1992,
between First Security Bank of Utah, National
Association as Owner Trustee and Lessor and Aerovias de
Mexico, S.A. de C.V. as Lessee, pertaining to one
McDonnell Douglas DC-9-31 aircraft, U.S. Registration
No. N935ML. Filed as Exhibit 10.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*
(c) Estoppel and Acceptance Certificate, dated July 1, 1992,
executed by Aerovias de Mexico, S.A. de C.V. as Lessee
under Aircraft Lease Agreement, dated as of June 1,
1992, between Aerovias de Mexico, S.A. de C.V. and First
Security Bank of Utah, National Association as Owner
Trustee and Lessor, pertaining to one McDonnell Douglas
DC-9-31 aircraft, U.S. Registration No. N935ML. Filed as
Exhibit 10.1(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.*
10.7 (a) Trust Agreement 936, dated as of May 9, 1990, between
Registrant as Beneficiary and First Security Bank of
Utah, National Association, as Owner Trustee. Filed as
Exhibit 19.1(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1990.*
(b) Aircraft Lease Agreement, dated as of June 1, 1992,
between First Security Bank of Utah, National
Association as Owner Trustee and Lessor and Aerovias de
Mexico, S.A. de C.V. as Lessee, pertaining to one
McDonnell Douglas DC-9-31 aircraft, U.S. Registration
No. N936ML. Filed as Exhibit 10.2(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*
(c) Estoppel and Acceptance Certificate, dated July 20,
1992, executed by Aerovias de Mexico, S.A. de C.V. as
Lessee under Aircraft Lease Agreement, dated as of June
1, 1992, between Aerovias de Mexico, S.A. de C.V. and
First Security Bank of Utah, National Association as
Owner Trustee and Lessor, pertaining to one McDonnell
Douglas DC-9-31 aircraft, U.S. Registration No. N936ML.
Filed as Exhibit 10.2(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992.*
10.7 (d) Standstill Agreement dated December 13, 1994, between
Aerovias de Mexico SA de CV and First Security Bank of
Utah National Association as Owner Trustee of two
DC-9-31 Aircraft, US Registration N936ML and N937ML.
10.7 (e) Standstill Extension and Amendment dated as of February
28, 1995 between Aerovias de Mexico SA de CV and First
Security Bank of Utah National Association as Owner
Trustee of two DC-9-31 Aircraft, US Registration N936ML
and N937ML.
44
10.8 (a) Trust Agreement 16982, dated as of August 22, 1990,
between Registrant as Beneficiary and First Security
Bank of Utah, National Association as Owner Trustee.
Filed as Exhibit 19.1(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1990.*
(b) Lease Agreement 212, dated as of December 15, 1988,
between Wilmington Trust Company as Owner Trustee and
Lessor and Continental Airlines, Inc. as Lessee. Filed
as Exhibit 10.2.5 to Form S-1 Registration Statement
dated July 3, 1989, (Commission File No. 33-28359).*
(c) Amendment No. 1, dated as of May 26, 1989, to Lease
Agreement 212, between Wilmington Trust Company as Owner
Trustee and Lessor and Continental Airlines, Inc. as
Lessee. Filed as Exhibit 10.2.5 to Form S-1 Registration
Statement dated July 3, 1989, (Commission File No.
33-28359).*
(d) Stipulation and Order, dated June 19, 1991, among
Continental Airlines, Inc., New York Airlines, Inc., Bay
Air Lease I, Cirrus Capital Corporation of Florida, Bay
Air Lease III, Meridian Trust Company, as Owner Trustee,
IAL Aircraft Acquisitions, Inc., Pegasus Aircraft
Partners II, L.P., Pegasus Capital Corporation, IAL
Aviation Resources, Inc., Aircraft Leasing, Inc.,
Pegasus Aircraft Partners, L.P., Gilman Financial
Services, Inc. and First Security Bank of Utah, as Owner
Trustee concerning various aircraft and aircraft
engines. Filed as Exhibit 19.1(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1991.*
(e) Agreed Order, dated July 3, 1991, in connection with
approval of Stipulation and Order, dated June 19, 1991,
among Continental Airlines, Inc., New York Airlines,
Inc., Bay Air Lease I, Cirrus Capital Corporation of
Florida, Bay Air Lease III, Meridian Trust Company, as
Owner Trustee, IAL Aircraft Acquisitions, Inc., Pegasus
Aircraft Partners II, L.P., Pegasus Capital Corporation,
IAL Aviation Resources, Inc., Aircraft Leasing, Inc.,
Pegasus Aircraft Partners, L.P., Gilman Financial
Services, Inc. and First Security Bank of Utah, as Owner
Trustee concerning various aircraft and aircraft
engines. Filed as Exhibit 19.1(b) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1991.*
(f) Supplemental Stipulation and Order, dated December 30,
1992, among Continental Airlines, Inc., Bay Air Lease I,
Cirrus Capital Corporation of Florida, Bay Air Lease
III, Aviation Assets I, Aviation Assets II, Aviation
Assets III, Aviation Assets IV, IAL Aircraft
Acquisitions, Inc., Pegasus Aircraft Partners II, L.P.,
Pegasus Capital Corporation, IAL Aviation Resources,
Inc., Pegasus Aircraft Partners, L.P., Gilman Financial
Services, and First Security Bank of Utah, as Owner
Trustee concerning various aircraft and aircraft
engines. Filed as Exhibit 10.8(f) to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1992.*
(g) Lease Termination Agreement dated November 15, 1995
between and among Continental Airlines, Inc., First
Security Bank of Utah, N.A., Pegasus Aircraft
Management, Inc. and Air Transport Leasing, Inc.
(h) Supplement to Lease Termination Agreement between and
among Continental Airlines, Inc., First Security Bank of
Utah, N.A., Pegasus Aircraft Management, Inc. and Air
Transport Leasing, Inc.
10.9 Prospectus of Registrant, dated as of July 11, 1989.
Filed as Exhibit 2 of the Registrant's Form 8-K filed
for the Event occurring on September 20, 1989.*
10.10 (a) Loan Agreement, dated June 10, 1992, between Pegasus
Aircraft Partners II, L.P. and Philadelphia National
Bank, Incorporated, as CoreStates Bank, N.A. Filed as
Exhibit 10.3(a) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992.*
45
(b) Promissory Note, dated June 10, 1992, made by Pegasus
Aircraft Partners II, L.P. in favor of Philadelphia
National Bank, Incorporated, as CoreStates Bank, N.A.
Filed as Exhibit 10.3(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992.*
(c) Assignment of Collateral, dated as of June 10, 1992,
between Pegasus Aircraft Partners II, L.P. and
Philadelphia National Bank, Incorporated, as CoreStates
Bank, N.A. Filed as Exhibit 10.3(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.*
(d) Security Agreement and Assignment of Lease, dated as of
June 10, 1992, between First Security Bank of Utah,
National Association as Owner Trustee and Philadelphia
National Bank, Incorporated, as CoreStates Bank, N.A.
Filed as Exhibit 10.3(d) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1992.*
10.11(a) Secured Loan Agreement, dated September 10, 1992, among
Greyhound Financial Corporation, as Lender and First
Security Bank of Utah, National Association as Owner
Trustee under (i) Trust Agreement 935, dated as of April
2, 1990, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., (ii)
Trust Agreement 936, dated as of May 9, 1990, between
First Security Bank of Utah, National Association and
Pegasus Aircraft Partners II, L.P., and (iii) Trust
Agreement 909, dated as of May 25, 1989, between First
Security Bank of Utah, National Association and Pegasus
Aircraft Partners II, L.P. as Co-Borrowers. Filed as
Exhibit 10.1(a) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1992.*
(b) Promissory Note, dated September 10, 1992, made by First
Security Bank of Utah, National Association as Owner
Trustee under (i) Trust Agreement 935, dated as of April
2, 1990, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., (ii)
Trust Agreement 936, dated as of May 9, 1990, between
First Security Bank of Utah, National Association and
Pegasus Aircraft Partners II, L.P., and (iii) Trust
Agreement 909, dated as of May 25, 1989, between First
Security Bank of Utah, National Association and Pegasus
Aircraft Partners II, L.P. in favor of Greyhound
Financial Corporation. Filed as Exhibit 10.1(b) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992.*
(c) Beneficial Interest Security Agreement, dated as of
September 10, 1992, between Pegasus Aircraft Partners
II, L.P. and Greyhound Financial Corporation. Filed as
Exhibit 10.1(c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1992.*
(d) Continuing Guaranty and Subordination Agreement, dated
September 10, 1992, between Greyhound Financial
Corporation and First Security Bank of Utah, National
Association as Owner Trustee under (i) Trust Agreement
935, dated as of April 2, 1990, between First Security
Bank of Utah, National Association and Pegasus Aircraft
Partners II, L.P., (ii) Trust Agreement 936, dated as of
May 9, 1990, between First Security Bank of Utah,
National Association and Pegasus Aircraft Partners II,
L.P., and (iii) Trust Agreement 909, dated as of May 25,
1989, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P. Filed
as Exhibit 10.1(d) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1992.*
(e) Negative Pledge Agreement, dated as of September 10,
1992, by and among Greyhound Financial Corporation and
First Security Bank of Utah, National Association as
Owner Trustee under (i) Trust Agreement 935, dated as of
April 2, 1990, between First Security Bank of Utah,
National Association and Pegasus Aircraft Partners II,
L.P., (ii) Trust Agreement 936, dated as of May 9, 1990,
between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P.,
(iii) Trust Agreement 909, dated as of May 25, 1989,
between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., and
(iv) Trust Agreement 16982 between First Security Bank
of Utah, National Association and Pegasus Aircraft
Partners II, L.P. Filed as Exhibit 10.1(e) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992.*
46
(f) First Priority Aircraft Chattel Mortgage and Security
Agreement, dated September 10, 1992, between First
Security Bank of Utah, National Association as Owner
Trustee under Trust Agreement 935, dated as of April 2,
1990, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., as
Mortgagor, and Greyhound Financial Corporation, as
Mortgagee. Filed as Exhibit 10.1(f) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.*
(g) First Priority Aircraft Chattel Mortgage and Security
Agreement, dated September 10, 1992, between First
Security Bank of Utah, National Association as Owner
Trustee under Trust Agreement 936, dated as of May 9,
1990, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., as
Mortgagor, and Greyhound Financial Corporation, as
Mortgagee. Filed as Exhibit 10.1(g) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.*
(h) First Priority Aircraft Chattel Mortgage and Security
Agreement, dated September 10, 1992, between First
Security Bank of Utah, National Association as Owner
Trustee under Trust Agreement 909, dated as of May 25,
1989, between First Security Bank of Utah, National
Association and Pegasus Aircraft Partners II, L.P., as
Mortgagor, and Greyhound Financial Corporation, as
Mortgagee. Filed as Exhibit 10.1(h) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992.*
10.12(a) Trust Agreement 357, dated as of February 15, 1993,
between Registrant and First Security Bank of Utah,
National Association as Owner Trustee. Filed as Exhibit
10.2(a) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1993.*
(b) Aircraft Lease Agreement, dated as of March 15, 1993,
between First Security Bank of Utah, National
Association as Owner Trustee and KIWI International Air
Lines, Inc. Filed as Exhibit 10.2(b) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993.*
(c) Lease Supplement No. 1, dated May 24, 1993, between
First Security Bank of Utah, National Association as
Owner Trustee and KIWI International Air Lines, Inc.
Filed as Exhibit 10.1(a) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1993.*
(d) Amendment No. 1 dated March 15, 1995 to the lease
between First Security Bank of Utah National Association
as Trustee (Lessor) and Kiwi International Air Lines
Inc. with respect to a certain 727 Aircraft, US
Registration N357KP.*
10.13 (a) Aircraft lease of 727-200 Advanced Aircraft N16784
(formerly N516PE) as of September 25, 1984 by Seventh
HFC Leasing Corporation as Lessor and People Express
Airlines, Inc. as Lessee.
(b) Amendment No. 1 to lease of 727-200 Advanced Aircraft
N16784 dated November 15, 1995 between Continental
Airlines, Inc. as Lessee and First Security Bank of Utah
as Owner Trustee of a trust in which Pegasus Aircraft
Partners II, L.P. is the sole beneficiary.
10.14 (a) Aircraft lease of 727-200 advanced Aircraft N77780
(formerly N512PE) as of August 23, 1984 by Mellon
Financial Services Corporation #3 as Lessor and People
Express as Lessee.
(b) Amendment No. 1 to lease of 727-200 Advanced Aircraft
N77780 dated November 21, 1995 between Continental
Airlines, Inc. as Lessee and First Security Bank of Utah
as Owner Trustee of a trust in which Pegasus Aircraft
Partners II, L.P. is the sole beneficiary.
10.15(a) Promissory note issued in favor of Pegasus Aircraft
Partners II, L.P. with face amount of $307,166 dated
March 16, 1996 from Kiwi International Airlines Inc.
47
10.16(a) Loan and Security Agreement dated December 23, 1996
between Provident Bank, N.A. and First Security Bank as
Owner Trustee.
11 Partnership Policy for Requests for Partner Lists.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 2002
Pegasus Aircraft Partners II, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
Administrative General Partner
By: /s/ CLIFFORD B. WATTLEY
Clifford B. Wattley
President, Chief Financial and Accounting
Officer and Director
By: Pegasus Aircraft Management Corporation
Managing General Partner
By: /s/ RICHARD S. WILEY
Richard S. Wiley
President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 2002.
Signature Title
- --------- -----
/s/ RICHARD S. WILEY President and Chairman of
Richard S. Wiley the Board of Pegasus Aircraft
Management Corporation
/s/ CLIFFORD B. WATTLEY President, Chief Financial and Accounting Officer,
Clifford B. Wattley and Director of Air Transport Leasing, Inc.
/s/ STEPHEN R. DYER Vice-President, Treasurer, Secretary and Director
Stephen R. Dyer of Air Transport Leasing, Inc.
49