<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________________ to _____________________
Commission file number 0-18387
Pegasus Aircraft Partners II, L.P.
(Exact name of registrant as specified in its charter)
Delaware 84-1111757
(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ____.
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25
Pegasus Aircraft Partners II, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1996
Table of Contents
Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - June 30, 1996
and December 31, 1995 2
Statements of Income for the three
months ended June 30, 1996
and 1995 3
Statements of Income for the six
months ended June 30, 1996
and 1995 4
Statements of Partners' Equity for the
six months ended June 30, 1996
and 1995 5
Statements of Cash Flows for the six
months ended June 30, 1996 and
1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
Part II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 3. Exhibits and Reports on Form 8-K 23
1
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS II, L.P.
BALANCE SHEETS -- JUNE 30, 1996 AND DECEMBER 31, 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(in thousands, except unit data)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 11,605 $ 11,955
Restricted cash 2,381 2,104
Rent and other receivables 1,613 2,557
Aircraft, net (Notes 2 and 4) 58,091 63,482
Other assets 214 701
-------- --------
Total Assets $ 73,904 $ 80,799
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 123 $ 148
Payable to affiliates (Note 3) 998 893
Interest payable 36 46
Maintenance payable 2,381 2,104
Notes payable 5,680 6,638
Deferred income 2,687 4,672
Distributions payable to partners 2,960 2,931
-------- --------
Total Liabilities 14,865 17,432
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3,4 and 5)
PARTNERS' EQUITY:
General Partners (860) (816)
Limited Partners (7,255,000 units outstanding) 59,899 64,183
-------- --------
Total Partners' Equity 59,039 63,367
-------- --------
Total Liabilities and Partners' Equity $ 73,904 $ 80,799
======== ========
The accompanying notes are an integral part
of these financial statements.
</TABLE>
2
<PAGE> 4
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(in thousands, except unit data and per unit amounts)
REVENUE:
<S> <C> <C>
Rentals from operating leases (Note 4) $ 3,927 $ 3,340
Interest 195 157
---------- ----------
$ 4,122 $ 3,497
---------- ----------
EXPENSES:
Depreciation and amortization 2,705 2,341
Management and re-lease fees (Note 3) 291 253
Interest 178 225
General and administrative (Note 3) 107 76
Direct lease 96 34
---------- ----------
3,377 2, 929
---------- ----------
NET INCOME $ 745 $ 568
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 7 $ 6
To the Limited Partners 738 562
---------- ----------
$ 745 $ 568
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .10 $ .08
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 7,255,000 7,255,000
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
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PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(in thousands, except unit data and per unit amounts)
REVENUE:
<S> <C> <C>
Rentals from operating leases (Note 4) $ 7,854 $ 6,901
Interest 403 283
---------- ----------
8,257 7,184
---------- ----------
EXPENSES:
Depreciation and amortization 5,410 4,682
Management and re-lease fees (Note 3) 582 519
Interest 350 427
General and administrative (Note 3) 194 146
Direct lease 187 93
---------- ----------
6,723 5,867
---------- ----------
NET INCOME $ 1,534 $ 1,317
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 15 $ 13
To the Limited Partners 1,519 1,304
---------- ----------
$ 1,534 $ 1,317
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .21 $ .18
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 7,255,000 7,255,000
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE> 6
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1996 $(816) $ 64,183 $ 63,367
Net income 15 1,519 1,534
Distributions to partners declared (59) (5,803) (5,862)
----- -------- --------
Balance, June 30, 1996 ($860) $ 59,899 $ 59,039
===== ======== ========
Balance, January 1, 1995 $(719) $ 73,792 $ 73,073
Net income 13 1,304 1,317
Distributions to partners declared (59) (5,803) (5,862)
----- -------- --------
Balance, June 30, 1995 $(765) $ 69,293 $ 68,528
===== ======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE> 7
PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
-------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,534 $ 1,317
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,410 4,682
Loss arising from securities received
in leasing transaction 36 --
Change in assets and liabilities:
Rent and other receivables 729 (867)
Other assets 7 8
Accounts payable and accrued expenses (25) 184
Payable to affiliates 105 154
Interest payable (10) 5
Deferred income and deposits (1,541) (225)
-------- -------
Net cash provided by operating activities 6,245 5,258
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (19) (16)
Repayment of advances by lessees 215 232
-------- -------
Net cash provided by investing activities 196 216
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers to restricted cash -- (70)
Repayment of notes payable (958) (176)
Cash distributions paid to partners (5,833) (5,862)
-------- -------
Net cash used in financing activities (6,791) (6,108)
-------- -------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (350) (634)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 11,955 4,513
-------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 11,605 $ 3,879
======== =======
Supplemental schedule of cash flow information:
Interest paid $ 360 $ 422
======== =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE> 8
PEGASUS AIRCRAFT PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(unaudited)
1. GENERAL
The accompanying unaudited interim financial statements include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of the General Partners, necessary to fairly present the financial
position of the Partnership as of June 30, 1996 and the results of its
operations, changes in partners' equity and cash flows for the six months then
ended.
These financial statements should be read in conjunction with the
Significant Accounting Policies and other Notes to Financial Statements included
in the Partnership's annual audited financial statements for the year ended
December 31, 1995.
2. AIRCRAFT
The Partnership's net investment in aircraft as of June 30, 1996 and
December 31, 1995 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Aircraft on operating leases $ 114,460 $ 114,460
Less: Accumulated depreciation (51,185) (45,775)
Provision for decline in market
value of aircraft (12,246) (12,246)
--------- ---------
$ 51,029 $ 56,439
Aircraft held for lease (A-300 Aircraft) $ 28,747 $ 28,728
Less: Accumulated depreciation (11,013) (11,013)
Amounts received including value
of aircraft in Lease Settlement accounted
for under the cost recovery method (10,115) (10,115)
Reserves for maintenance (557) (557)
--------- ---------
7,062 7,043
--------- ---------
Aircraft, net $ 58,091 $ 63,482
========= =========
</TABLE>
7
<PAGE> 9
3. TRANSACTIONS WITH AFFILIATES
Management Fees The General Partners are entitled to receive a quarterly
subordinated base management fee in an amount generally equal to 1.5% of gross
aircraft rentals, net of re-lease fees paid. Of this amount, 1.0% is payable to
the Managing General Partner and 0.5% is payable to the Administrative General
Partner. The General Partners earned $58,000 and $116,000 of base management
fees during the quarter and six months ended June 30, 1996, respectively.
The General Partners also are entitled to receive a quarterly subordinated
incentive management fee in an amount equal to 4.5% of quarterly cash flow and
sales proceeds (net of resale fees), of which 2.5% is payable to the Managing
General Partner and 2.0% is payable to the Administrative General Partner. The
General Partners earned $165,000 and $330,000 of incentive management fees
during the quarter and six months ended June 30, 1996, respectively. All of
the above fees are subordinated to the Limited Partners received an 8% annual
non-commulative return based upon original contributed capital.
Re-lease Fees The General Partners are entitled to receive a quarterly
subordinated fee for re-leasing aircraft or renewing a lease in an amount equal
to 3.5% of the gross rentals from such re-lease or renewal for each quarter for
which such payment is made. Of this amount, 2.5% is payable to the Managing
General Partner and 1.0% is payable to the Administrative General Partner. The
General Partners earned $68,000 and $136,000 of re-lease fees during the quarter
and six months ended June 30, 1996, respectively.
Accountable General and Administrative Expenses The General Partners are
entitled to reimbursement of certain expenses paid on behalf of the Partnership
which are incurred in connection with the administration and management of the
Partnership. Such reimbursable expenses amounted to $18,000 and $37,000 during
the quarter and six months ended June 30, 1996, respectively, all of which was
payable to the Administrative General Partner.
During the six months ended June 30, 1996 and the year ended December 31,
1995, the Administrative General Partner deferred the receipt of management fees
and re-lease fees earned beginning January 1, 1995. Such fees aggregated
$224,000 and $445,000 for the six months ended June 30, 1996 and the year ended
December 31, 1995, respectively. As part of the proposed class action settlement
(See Note 5, "Litigation" these management and re-lease fees as well as all
future fees earned by the Administrative General Partner have been assigned by
an affiliate to an escrow account for the benefit of class members.
In the six months ended June 30, 1996, the Partnership purchased certain
equipment and parts relating to the A-300 aircraft from a company owned by the
three directors of the Managing General Partner in the amount of $10,000.
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<PAGE> 10
4. AIRCRAFT LEASES
Continental Airlines Leases During September 1989, the Partnership acquired
a McDonnell Douglas DC-10-10 aircraft for a total purchase price of $18,301,000,
subject to an operating lease with Continental, originally scheduled to expire
on May 31, 1997, with rents of $252,000 per month. Continental also has three
two-year renewal options, with rent payable during the first two such renewal
periods at the lesser of the then fair market rental value or the rental rate
during the initial term, and during the third such renewal period at the then
fair market rental rate. In addition, the lessee has a right of first refusal to
purchase or re-lease the aircraft after the last renewal period on the same
terms as those included in any bona fide offer made to the Partnership by a
third party. This lease was modified in 1995 as discussed below.
During September 1989, the Partnership acquired a Boeing 727-200
non-advanced aircraft for a total purchase price of $6,116,000, subject to an
operating lease with Continental. This aircraft was returned during
Continental's bankruptcy and subsequently leased to Kiwi (see discussion of Kiwi
below).
During August 1990, the Partnership acquired an Airbus Industrie Model
A300-B4-103 ("A-300") aircraft for a total purchase price of $28,070,000,
subject to an operating lease with Continental, originally scheduled to expire
on December 29, 2000 and with monthly, in advance, rentals of $312,000.
In January 1995, Continental announced that it was grounding its fleet of
Airbus Industrie A-300 aircraft, including the A-300 aircraft leased to it by
the Partnership, and notified the Partnership of its intention to return the
aircraft to the Partnership. Continental paid $150,000 of the $312,000 monthly
rental payment due in February through May 1995. The Partnership did not accrue
as rental revenue the difference between the amount due and the amount paid by
Continental for such months. Continental took the A-300 out of service in May
1995, and the Partnership prepared the aircraft for delivery in June 1995 to a
new lessee, Akdeniz Air Mediterranean, Inc. ("Akdeniz") based in Turkey.
In June 1995, the Partnership executed a lease of the A-300 aircraft to
Akdeniz for a scheduled term of four years, under which Akdeniz subsequently
defaulted. The Partnership recovered the A-300 aircraft, returned it to FAA
registry, and is currently remarketing it. The Partnership estimates that it
will spend approximately $1.4 million for a scheduled heavy maintenance check
that will be required prior to delivery of the aircraft to a new lessee. The
Partnership received $557,000 from Continental pursuant to the A-300 Settlement
discussed below which will be applied towards such maintenance.
On November 15, 1995, the Partnership reached an agreement with Continental
regarding the settlement of its lease obligations under the A-300 lease ("A-300
Lease Settlement"), which also included a restructuring of the DC-10-10 Aircraft
lease ("DC-10 Restructuring").
Under the terms of the A-300 Lease Settlement, the Partnership received a
cash payment of approximately $3,721,000, including approximately $325,000 as
reimbursement for certain integration and transaction expenses, and (i) title to
a Boeing 727-200 advanced aircraft subject to lease with Continental for a term
of approximately
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26 months at a lease rate of $85,000 per month and (ii) title to a second Boeing
727-200 advanced aircraft subject to a lease with Continental for a term of
approximately 42 months at a lease rate of $85,000 per month. Additionally, the
Partnership received approximately $557,000 as an economic settlement in lieu of
Continental performing certain maintenance work and the aircraft meeting certain
return conditions required by the lease.
Under the DC-10 Restructuring the Partnership received approximately
$3,100,000, the lease expiration date was changed from May 31, 1997 to October
31, 1996 and the monthly lease payments were reduced from $252,000 to $135,000
effective September 15, 1995. All other terms and conditions of the DC-10-10
lease remain unchanged. The Partnership has had discussions with Continental
regarding a lease extension and is investigating other options for deployment.
Continental did not make the monthly rental payments due under the three
leases with the Partnership on December 1, 1990 and filed for Chapter 11
bankruptcy protection on December 3, 1990. The Partnership entered into various
lease modifications and financing arrangements with Continental as a result of
the bankruptcy. At June 30, 1996, the Partnership had aircraft modification
advances outstanding from Continental totaling $185,000, which are being repaid
monthly with interest.
Trans World Airlines Leases 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 TWA, which was originally scheduled to expire
on April 13, 1993, but was amended and extended until November 1, 1998 with
monthly, in advance, rental payments of $185,000. As described below, this lease
was further extended to November 2004 during TWA's prepackaged bankruptcy in
1995.
Upon execution of the lease amendment, the Partnership reimbursed TWA for
$225,000 of capital improvements which were made to the aircraft and advanced
$750,000 to TWA to finance certain major maintenance procedures, which is being
repaid over the remaining lease term, in monthly installments with interest at a
fixed rate of 9.70%. At June 30, 1996, the balance of the receivable was
$366,000. All 1996 repayments of advances have been made by TWA as scheduled.
During January 1990, the Partnership acquired a Lockheed L-1011 aircraft
for a total purchase price of $17,555,000, subject to an operating lease with
TWA, originally scheduled to expire on June 30, 1993. The lease was amended and
extended to October 1, 1998 with rental payments payable monthly, in advance, at
the rate of $130,000.
Upon execution of the lease amendment, the Partnership reimbursed TWA for
$225,000 of capital improvements which were made to the aircraft and advanced
$550,000 to TWA to finance certain major maintenance procedures, which is being
repaid over the remaining lease term in monthly installments with interest at
9.68%. At June 30, 1996, the balance of the receivable was $262,000. All 1996
repayments of advances have been made by TWA as scheduled. The Partnership is
obligated to advance an additional $550,000 with respect to additional
maintenance procedures, when such work is completed.
In mid-October 1994, because of operating and financial problems, TWA
announced that it would seek a global restructuring of its capital by offering
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common stock for its debt securities, preferred stock obligations and lease
deferrals negotiated with aircraft lessors such as the Partnership ("Exchange
Offer") with the objective of an orderly financial reorganization through a
prepackaged bankruptcy filing. In conjunction with this restructuring, TWA and
the Partnership agreed ("TWA Agreement") to a deferral of 50% of the rent
scheduled for November 1994, and 75% of the rent scheduled from December 1994 to
April 1995 for the MD-82 aircraft (50% of the December 1994 through April 1995
rent with respect to the L-1011 aircraft) followed by a return to the original
payment schedule. Under the terms of the TWA Agreement all rents deferred during
the November 1994 to April 1995 period are to be repaid with interest at 12%
from the date of deferral over an 18-month period, the repayments of which
commenced May 1, 1995. Deferred rent pursuant to the TWA Agreement of $303,000
and $736,000 was included in rents and other receivables in the balance sheets
as of June 30, 1996 and December 31, 1995, respectively. Additionally, TWA and
the Partnership agreed to extend the lease of the MD-82 aircraft six years
beyond the scheduled expiration date (to November 2004) at the current lease
rate of $185,000 per month. On June 30, 1995, TWA filed its prepackaged
reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. On August 23,
1995 the reorganization plan which included the foregoing lease modification was
confirmed by the Bankruptcy Court and TWA emerged from bankruptcy. TWA has made
all rental payments, advance repayments and payments of deferred rent when due.
However, there can be no assurance that it will be able to meet its obligations
in the future.
Aeromexico Leases During July 1992, the Partnership re-leased two McDonnell
Douglas DC-9-31 aircraft previously leased to Midway Airlines Inc. to Aerovias
de Mexico, S.A. de C.V. ("Aeromexico"). The leases are operating leases that
require quarterly rental payments, in advance, in the amount of $234,000 per
aircraft. The terms of the leases expire on July 6, 1997 and July 23, 1997.
Aeromexico has the right to renew the leases for up to five consecutive one-year
renewal periods for the then fair market rental value.
The DC-9-31 aircraft had originally been acquired in April and March 1990
for purchase prices aggregating $14,295,000. At the time the Partnership
repossessed these two aircraft from Midway, the aircraft were in need of
substantial maintenance work. As a precondition to accepting the aircraft for
lease, Aeromexico required the Partnership to complete the needed maintenance
procedures and also to make certain capital improvements to the aircraft. The
Partnership incurred approximately $5.5 million in completing these maintenance
procedures and capital improvements.
In October 1994, Aeromexico failed to make the quarterly in advance rental
payments for both aircraft. Aeromexico announced it was having financial and
operating problems and, in response, made significant management changes and
began to develop a revised business plan. Aeromexico agreed to and paid monthly
rental payments equal to the monthly equivalent rent ($78,000 per aircraft)
beginning November 1994 in return for a four-month standstill agreement
("Standstill Agreement") from lessors and lenders, including the Partnership,
not to pursue their rights and remedies with respect to Aeromexico's failure to
pay rent and other debt due in October 1994. The Standstill Agreement was
extended an additional three months to allow Aeromexico to complete a financial
restructuring. Aeromexico made all of its monthly rental payments due and repaid
the October 1994 rent with interest.
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Kiwi International Air Lines Leases During March and May 1993, the
Partnership leased its two Boeing 727-200 aircraft, which were previously leased
to Continental (727 Non-Advanced Aircraft) and Dan-Air Services Limited
("Dan-Air") ("727 Advanced Aircraft") to Kiwi International Air Lines, Inc.
("Kiwi"). The leases are operating leases which require monthly rental payments,
in advance, in the amounts of $60,000 (Non-advanced) and $115,000 (Advanced).
The terms of the leases were originally scheduled to expire on April 15, 1998
and June 30, 1998, respectively. During the terms of the leases Kiwi can request
that the aircraft be hushkitted to obtain Stage 3 noise abatement for which the
lease term will be reset to five years with lease payments increasing to
amortize the cost of the hushkitting at the rate of approximately 2% per month.
Alternatively, the Partnership can deem the hushkitting economically infeasible
at which point Kiwi can terminate the leases and return the aircraft. The
original leases also had an annual one month rent abatement feature, which
would extend the term of the leases by a month for each year Kiwi opted for the
abatement. Under the original terms, Kiwi had two one-year renewal options,
with rent payable at the then current fair market rental rate.
The Partnership also received Kiwi stock and rights to warrants in
connection with these leasing transactions. The Partnership is subject to
significant restrictions on its ability to dispose of these securities. Based
upon the price at which Kiwi sold similar securities to unrelated third parties,
the Partnership recorded the securities at a value of $600,000 and is
recognizing the associated income ratably over the lease terms. Of the $600,000,
$81,000 and $75,000 were recognized as income during 1994 and 1993,
respectively. Because of concerns discussed below, the Partnership stopped
amortizing such income in the fourth quarter of 1994. In July 1996, Kiwi
received proceeds from an outsider investor in return for a convertible note.
(See discussion below) Based upon the valuation of Kiwi's stock, the Partnership
reduced its investment in Kiwi stock from $600,000 to $120,000, reduced deferred
income by $444,000 and charged $36,000 to operations during the quarter ended
June 30, 1996.
Kiwi is also obligated to make monthly payments of $250 per flight hour for
maintenance reserve funds administered by the Partnership. The Partnership is
obligated to reimburse Kiwi for specified maintenance costs out of the reserve
funds, upon submission of appropriate evidence documenting the maintenance costs
incurred by Kiwi.
In connection with the delivery of the aircraft the Partnership expended
$2,228,000 with respect to the 727 Advanced aircraft, of which $971,000 was
capitalized and $1,257,000 represented maintenance costs which were paid out of
funds received in a maintenance settlement with Dan-Air.
During 1994, the Partnership funded approximately $633,000 of costs related
to maintenance of the Kiwi aircraft, including compliance with certain FAA
airworthiness directives, $308,000 of which was scheduled to be repaid by Kiwi
over a one-year period. In March 1996 Kiwi signed a promissory note ("Bellyskin
Note") scheduling the repayment of this amount, with interest from February 1996
at 12% per annum, over eighteen months which began June 1, 1996.
Kiwi, as a start-up airline, had continued liquidity concerns that were
worsened by operating problems in early 1995. Kiwi made significant management
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<PAGE> 14
changes and has sought to rationalize costs and raise capital. Kiwi elected to
defer January 1995 rent under the previously described rental abatement feature
of the original leases, and did not make the rental payments due in February and
March 1995 and did not make maintenance reserve deposits due in those months.
The Partnership and Kiwi executed lease amendments that modified the lease
terms that enabled Kiwi to defer February's and half of March's rent in 1995.
Pursuant to the lease amendments, the deferred rent was repaid over a nine-month
period with 12% interest, which began July 1, 1995. Kiwi did not make payments
towards the maintenance reserves for February, March and April 1995 but funded
or is obligated to fund the related maintenance work in its entirety as it
becomes due. Pursuant to the lease amendments, each of the leases was extended
to December 1999. The lease amendments removed the rental abatement feature of
the original leases.
Based upon the composition of its fleet and FAA mandated deadlines for
compliance with Stage 3 noise reduction standards, Kiwi and the Partnership have
entered into discussions to hushkit one or both of the 727 aircraft leased to it
by December 31, 1996. If the Partnership elected to complete such work, it is
anticipated that it would be funded from operating reserves and borrowings. It
is estimated that this upgrade would cost $1.9 million for the non-advanced
aircraft and $3 million for the advanced aircraft. If the Partnership elected
not to complete such work, Kiwi could terminate the leases. See Item 2,
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations", for a discussion of capital requirements.
At June 30, 1996, the Partnership held maintenance deposits aggregating
$2,381,000 with respect to the Kiwi aircraft which is included in restricted
cash on the balance sheet. Kiwi made its February and May 1996 payments late and
has requested a deferral of its July 1996 maintenance reserve payments and the
Bellyskin Note payments and its July 1996 rental payment relative to the 727
non-advanced aircraft and the August payment for the 727 Advanced aircraft. Kiwi
is to repay the deferred rent and Bellyskin Note installment over nine months at
12% interest starting in October 1996 and make up the deficiency in maintenance
reserve payments at the next scheduled maintenance checks. In June 1996, Kiwi
agreed with the FAA to ground 25% of its fleet due to certain pilot training
manual deficiencies. Kiwi is working towards satisfying the FAA and has returned
two of the four aircraft grounded to active status. Additionally, in July 1996,
an outside institutional investor contributed $4,000,000 in return for a
convertible note due in March 1997, for up to 32% of Kiwi's common stock and two
seats on Kiwi's Board of Directors. The investor has options to invest the
additional $6,000,000 in convertible preferred stock which expires in March
1997. Existing shareholders are also making or being given an opportunity to
make additional investments. Kiwi's ability to make timely lease and
maintenance reserve payments is uncertain due to its long-term liquidity,
capital and market concerns.
5. LITIGATION
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated sale and
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sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Air Transport Leasing, Inc., an affiliate
of PaineWebber and the Administrative General Partner in the Partnership
("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions alleged,
among other things, that, in connection with the sale of interests in Pegasus
Aircraft Partners II, L.P., PaineWebber and the Administrative General Partners
(1) failed to provide adequate disclosure of the risks involved with each
partnership; (2) made false and misleading representations about the safety of
the investments and the partnership's anticipated performance; and (3) marketed
the partnership to investors for whom such investments were not suitable. The
plaintiffs also alleged that following the sale of the partnership investments
PaineWebber and the Administrative General Partner misrepresented financial
information about the partnership's value and performance. The amended complaint
alleged that PaineWebber and the Administrative General Partner violated the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal
securities laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also sought treble damages
under RICO.
On May 30, 1995, the US District Court certified class action treatment of
the plaintiffs' claims in the New York Limited Partnership Actions.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York ("District Court") to be used to resolve the litigation. On July 17, 1996,
the District Court granted preliminary approval of the proposed settlement of
the class action litigation. As part of the class action settlement,
PaineWebber agreed to pay $125 million and additional consideration to class
members. The order entered by the District Court provides for notice to be
mailed to class members and schedules a final hearing on the proposed
settlement for October 25, 1996.
In April 1995, two investors in the Pegasus limited partnerships filed a
purported class action in the Circuit Court of the State of Illinois for Cook
County entitled Robert M. Jacobson, et al. v. PaineWebber, Inc., et al., making
allegations substantially similar to those in the New York Limited Partnership
Actions, but limited in subject matter to the sale of the Pegasus partnerships,
and without a RICO claim. The plaintiffs in the Jacobson case simultaneously
remained as participants in the New York Limited Partnership Actions, and
subsequently sought to intervene in that action and to be named class
representatives for a separate subclass that they asked the Court to establish
14
<PAGE> 16
consisting of investors in the Pegasus partnerships. The court in the New York
Limited Partnership Actions denied their request, and the plaintiffs have taken
an appeal to the United States Court of Appeals for the Second Circuit. The
Illinois case has been dismissed.
Three actions were filed in the District Court for Brazoria County, Texas,
relating to the sale and sponsorship of interests in the Partnership and an
affiliated partnership. The complaints make state law claims, specifically,
common law fraud, conspiracy, violations of section 27.01 of the Texas Business
and Commerce Code, fraud in the inducement, negligent misrepresentation,
negligence, breach of fiduciary duty, violations of the Texas Securities Act,
and violations of the Texas Deceptive Trade Practices Act. The plaintiffs seek
unspecified damages, including attorneys' fees, reimbursement for all sums
invested by them in the partnerships, exemplary damages, and treble damages
under the Texas Deceptive Trade Practices Act. All three actions have been
removed to federal court and two have been transferred to the United States
District Court for the Southern District of New York and consolidated under the
title, Mallia vs. PaineWebber, Inc. The third action has been dismissed with the
consent of the parties on the grounds that it is duplicative of the two actions
now before the federal court in New York.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleges, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber and its affiliates, including the
Administrative General Partner could be entitled to indemnification from the
Partnership for expenses and liabilities in connection with the Mallia and
Abbate litigations. The General Partners are unable to determine the effect, if
any, of these actions on the Partnership's financial statements taken as a
whole.
15
<PAGE> 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Partnership invests working capital and cash flow from operations prior
to its distribution to the partners in short-term, highly liquid investments. At
June 30, 1996, the Partnership's unrestricted cash and cash equivalents of
$11,605,000 was primarily invested in commercial paper. This amount was $350,000
less than the Partnership's unrestricted cash and equivalents at December 31,
1995 of $11,955,000. This decrease in unrestricted cash was equal to the amount
by which the combined total of the quarterly cash distributions paid to the
partners during the six months, the required principal payments on the
Partnership's debt, and capitalized expenditures for aircraft exceeded cash
provided by operating activities plus the collection of amounts previously
advanced to lessees during the six months ended June 30, 1996.
Restricted cash increased $277,000 from $2,104,000 at December 31, 1995 to
$2,381,000 at June 30, 1996. During 1993, the Partnership leased two Boeing
727-200 aircraft to Kiwi. Under the terms of the leases, Kiwi is obligated to
make monthly payments to maintenance reserve funds administered by the
Partnership. The Partnership is obligated to reimburse Kiwi for specified
maintenance costs out of the reserve funds, upon submission of appropriate
evidence documenting the maintenance costs incurred by Kiwi. Interest earned on
the reserve funds is deposited into the funds and utilized in the same manner as
other payments to the funds. This amount is reflected on the balance sheet both
as restricted cash and as maintenance payable. (See discussion below regarding
Kiwi deferrals.)
Rent and other receivables decreased $944,000 from $2,557,000 at December
31, 1995 to $1,613,000 at June 30, 1996. This decrease resulted primarily from
the continued repayment of advances and deferrals with Continental, TWA and
Kiwi.
The Partnership entered into various lease modifications and financing
arrangements with Continental as a result of its December 1990 bankruptcy. At
June 30, 1996, the Partnership had aircraft modification advances outstanding
from Continental totaling $185,000, which are being repaid monthly with
interest.
As part of TWA's January 1991 bankruptcy filing, the Partnership's leases
with TWA for the Lockheed L-1011 and McDonnell Douglas MD-82 aircraft were
modified and extended in April 1993. Upon execution of the lease amendments, the
Partnership advanced $1,300,000 to TWA to finance certain major maintenance
procedures which had been performed on the two aircraft. The Partnership is
obligated to advance an additional $550,000 if and when additional maintenance
procedures are completed on the Lockheed L-1011 aircraft. TWA has agreed to
repay these amounts to the Partnership over the applicable remaining lease terms
in equal monthly installments with interest at a fixed rate of 450 basis points
over the equivalent term U.S. treasury obligations (9.68% and 9.70% for the
initial advances). At June 30, 1996, the balance of the advances to TWA
aggregated $628,000.
16
<PAGE> 18
Other assets decreased $487,000 from $701,000 at December 31, 1995 to
$214,000 at June 30, 1996. During the 1996 Quarter, the Partnership removed
$480,000 from the books relating to the interest in the Kiwi stock, based upon
the Kiwi financing which took place in July 1996. (See below for discussion of
deferred income)
The Partnership received Kiwi stock and rights to warrants in connection
with the leasing of the two Boeing 727-200 aircraft to Kiwi. The Partnership is
subject to significant restrictions on its ability to dispose of these
securities and has no current plans to dispose of the securities. Based upon the
price at which Kiwi sold similar securities to unrelated third parties, the
Partnership recorded the securities at a value of $600,000 and began recognizing
the associated income ratably over the lease terms. Through September 30, 1994,
the Partnership recognized $156,000 of income with respect to such securities.
Because of Kiwi's operating and liquidity problems, the Partnership did not
recognize income with respect to these securities in 1995 or the six months
ended June 30, 1996.
The payable to affiliates increased $105,000 from $893,000 at December 31,
1995 to $998,000 at June 30, 1996. The increase was attributable to the
continued deferral of fees earned by the Administrative General Partner offset
by the payment of fees associated with the A-300 Lease Settlement and DC-10
Restructuring.
In order to finance expenditures made during 1992 and 1993 for the
maintenance work and the capital improvements to the aircraft leased to
Aeromexico and Kiwi and re-leased to TWA, as well as the various advances to
Continental and TWA, the Partnership established two loan facilities which
permit the Partnership to borrow up to $10.5 million. Borrowings, up to the
amounts expended, were made when needed to fund Partnership operations or
distributions. At June 30, 1996, the Partnership borrowings, net of repayments,
totaled $5,680,000. The Partnership will incur additional borrowings if
necessary to fund future advances to lessees as required to finance or
modification enhancements (such as hushkitting) if such investment is necessary
to maintain or enhance the value of the Partnership's assets. In July 1996, the
Partnership entered into an agreement in principle with an unaffiliated third
party lender to refinance a portion of the outstanding debt. Under the term of
the agreement in principle, the commitment would be for an aggregated
$10,000,000, the commitment period would be for a term of three years, the
interest rate would be reduced to prime plus 1.00% and there would be no
principal payment due until the maturity date (the expiration of the three year
commitment period).
Deferred income was $2,687,000 at June 30, 1996 as compared to $4,672,000
at December 31, 1995. The decrease was primarily attributable to the recognition
of amounts previously received in connection with the A-300 Lease Settlement and
the DC-10 Restructuring. Additionally, the Partnership removed $444,000 of
deferred income from the books during the 1996 Quarter based upon valuation of
Kiwi stock pursuant to the Kiwi financing that took place during July 1996.
The amount of each distribution will be determined on a quarterly basis
after an evaluation of the Partnership's operating results and its current and
17
<PAGE> 19
expected financial position. The distribution for the second quarter of 1996 was
paid on July 25, 1996 at an annualized rate equal to 8.0% of contributed capital
($.40 per Unit).
Distributions may be characterized for tax, accounting and economic
purposes as a return of capital, a return on capital or both. The portion of
each cash distribution by a partnership which exceeds its net income for the
fiscal period may be deemed a return of capital. Based on the amount of net
income reported by the Partnership for accounting purposes, approximately 75% of
the cash distributions paid to the partners for the three months ended June 30,
1996 (74% for the six months then ended) constituted a return of capital. Also,
based on the amount of net income reported by the Partnership for accounting
purposes, approximately 83% of the cash distributions paid to the partners from
the inception of the Partnership through June 30, 1996 constituted a return of
capital. However, the total actual return on capital over the Partnership's life
can only be determined at the termination of the Partnership after all cash
flows, including proceeds from the sale of the aircraft, have been realized.
Based upon the operating cash reserves held at June 30, 1996 and the leases
currently in place, the Partnership anticipates being able to maintain current
cash distribution levels through 1996. The Partnership continues to actively
remarket the A-300, which is currently off lease. The A-300 will require a heavy
maintenance check in connection with its remarketing and the work required is
estimated to cost $1,400,000. As part of the A-300 Settlement, the Partnership
received $557,000 settlement in lieu of Continental meeting certain return
conditions required by the lease. Such amount was accounted for as a reserve for
maintenance and will be utilized to fund a portion of such maintenance. It is
anticipated the Partnership will utilize a portion of the operating reserves to
fund the balance of work required. Additionally, the lease of the DC-10-10 will
expire in October 1996, unless renewed. Finally, because of the need to comply
with FAA mandated Stage 3 Noise Reduction regulation, Kiwi may require the
Partnership to hushkit (upgrade to Stage 3) one or both of the 727-200 aircraft
leased to Kiwi. If the Partnership elects to do such work, estimated to cost
$1.9 million for the non-advanced aircraft and approximately $3 million for the
advanced aircraft, it will utilize operating reserves and borrowings. If the
Partnership elected not to do the work, Kiwi could terminate the leases.
Partnership cash flow would be negatively impacted during any remarketing
period. Additionally, significant costs could be incurred in redeployment of the
Kiwi aircraft.
RESULTS OF OPERATIONS
The Partnership's net income was $745,000 and $1,534,000 for the quarter
and six months ended June 30, 1996 ("1996 Quarter" and "1995 Period",
respectively) as compared to $568,000 and $1,317,000 for the quarter and six
months ended June 30, 1995 ("1995 Quarter" and "1995 Period", respectively).
The increase in the Partnership's net income for the 1996 Quarter and 1996
Period resulted primarily from the recognition of income during the quarter with
respect to the A-300 Lease Settlement (including the income associated with the
two 727 aircraft received in connection with the settlement) and the DC-10
18
<PAGE> 20
Restructuring offset by an increase in depreciation attributable to the DC-10-10
aircraft (discussed below). (See "Liquidity and Capital Resources" and Footnote
4 to the Financial Statements, "Aircraft Leases" for a discussion of
Continental.)
Rental income increased by $587,000 and $953,000 , or 18% and 14% in the
1996 Quarter and 1996 Period, respectively, as compared to the 1995 Quarter and
1995 Period which reflects the difference between the income recognized with
respect to the A-300 Lease Settlement (including the rent associated with the
two 727 aircraft received in the settlement) and DC-10 Restructuring in the 1996
Quarter and the rents recognized in the 1995 Quarter, which included the
DC-10-10 rentals at the original lease rate and the rents recognized under the
A-300 Lease under which rentals of $312,000 were recognized in January 1995 and
reduced rents ($150,000 per month) were recognized in February through May 1995.
Interest income increased $38,000 and $120,000, or 24% and 42%, for the
1996 Quarter and 1996 Period, in comparison to the 1995 Quarter and 1995 Period,
respectively. This increase was primarily attributable to the interest income
earned with respect to the cash reserves held by the Partnership during the 1996
Quarter (substantially provided by the A-300 Lease Settlement and DC 10-10
Restructuring discussed above).
Depreciation and amortization expense increased $364,000 and $728,000, or
16% and 16%, for the 1996 Quarter and 1996 Period in comparison to the 1995
Quarter and 1995 Period, respectively. The increase was attributable to the
increase in depreciation relating to the DC 10-10 aircraft (based upon a change
in estimate of the aircraft's end of lease residual value) as well as the
depreciation relating to the two 727 aircraft received in the A-300 Lease
Settlement, which were not in place in the 1995 Quarter and 1995 period, offset
by a reduction in depreciation expense in respect to the A-300 which was off
lease during the 1996 Quarter and 1996 Period(thus no depreciation was
recognized).
Management and re-lease fees for the 1996 Quarter and 1996 Period,
increased by $38,000 and $63,000 or 15% and 12%, respectively, in comparison to
the 1995 Quarter and 1995 Period primarily because of the increases in rental
income and net income adjusted for depreciation which serve as the bases upon
which management fees are calculated.
Interest expense for the 1996 Quarter and 1996 Period, decreased by $47,000
and $77,000 or 21% and 18% in comparison to the 1995 Quarter and 1995 Period,
primarily because of an decrease in interest rates which affected the variable
rate note as well as a reduction in the principal outstanding.
General and administrative expenses increased by $31,000 and $48,000 or
41% and 33% during the 1996 Quarter and 1996 Period respectively, as compared
to the 1995 Quarter and 1995 Period. The Partnership recorded $36,000 during the
1996 Quarter to reflect the reduction in value of the Partnerships interest in
Kiwi stock, based upon the July 1996 Kiwi financing.
Direct lease expenses increased by $62,000 and $94,000 in the 1996 Quarter
and 1996 Period, as compared to the 1995 Quarter and 1995 Period, due
19
<PAGE> 21
primarily to an increase in insurance premiums as well as certain storage costs
and technical consulting costs related to the A-300 aircraft which was off lease
during the 1996 Quarter and 1996 Period.
20
<PAGE> 22
Part II. OTHER INFORMATION
Item 3. Legal Proceedings
In November 1994, a series of purported class actions (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated sale and
sponsorship of various limited partnership investments, including those offered
by the Partnership. The lawsuits were brought against PaineWebber Incorporated
and Paine Webber Group, Inc. (together, "PaineWebber"), among others, by
allegedly dissatisfied partnership investors. In March 1995, after the actions
were consolidated under the title In re: PaineWebber Limited Partnerships
Litigation, the plaintiffs amended their complaint to assert claims against a
variety of other defendants, including Air Transport Leasing, Inc., an affiliate
of PaineWebber and the Administrative General Partner in the Partnership
("Administrative General Partner").
The amended complaint in the New York Limited Partnership Actions alleged,
among other things, that, in connection with the sale of interests in Pegasus
Aircraft Partners II, L.P., PaineWebber and the Administrative General Partners
(1) failed to provide adequate disclosure of the risks involved with each
partnership; (2) made false and misleading representations about the safety of
the investments and the partnership's anticipated performance; and (3) marketed
the partnership to investors for whom such investments were not suitable. The
plaintiffs also alleged that following the sale of the partnership investments
PaineWebber and the Administrative General Partner misrepresented financial
information about the partnership's value and performance. The amended complaint
alleged that PaineWebber and the Administrative General Partner violated the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal
securities laws. The plaintiffs sought unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also sought treble damages
under RICO.
On May 30, 1995, the US District Court certified class action treatment of
the plaintiffs' claims in the New York Limited Partnership Actions.
In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the class action outlining the terms under which the parties have
agreed to settle the case. Pursuant to that memorandum of understanding,
PaineWebber irrevocably deposited $125 million into an escrow fund under the
supervision of the United States District Court for the Southern District of New
York ("District Court") to be used to resolve the litigation. On July 17, 1996,
the United States District Court granted preliminary approval of the proposed
settlement of the class action litigation. As part of the class action
settlement, PaineWebber agreed to pay $125 million and additional consideration
to class members. The order entered by the District Court provides for notice
to be mailed to class members and schedules a final hearing on the proposed
settlement for October 25, 1996.
21
<PAGE> 23
In April 1995, two investors in the Pegasus limited partnerships filed a
purported class action in the Circuit Court of the State of Illinois for Cook
County entitled Robert M. Jacobson, et al. v. PaineWebber, Inc., et al., making
allegations substantially similar to those in the New York Limited Partnership
Actions, but limited in subject matter to the sale of the Pegasus partnerships,
and without a RICO claim. The plaintiffs in the Jacobson case simultaneously
remained as participants in the New York Limited Partnership Actions, and
subsequently sought to intervene in that action and to be named class
representatives for a separate subclass that they asked the Court to establish
consisting of investors in the Pegasus partnerships. The court in the New York
Limited Partnership Actions has not yet ruled on their request.
Three actions were filed in the District Court for Brazoria County, Texas,
relating to the sale and sponsorship of interests in the Partnership and an
affiliated partnership. The complaints make state law claims, specifically,
common law fraud, conspiracy, violations of section 27.01 of the Texas Business
and Commerce Code, fraud in the inducement, negligent misrepresentation,
negligence, breach of fiduciary duty, violations of the Texas Securities Act,
and violations of the Texas Deceptive Trade Practices Act. The plaintiffs seek
unspecified damages, including attorneys' fees, reimbursement for all sums
invested by them in the partnerships, exemplary damages, and treble damages
under the Texas Deceptive Trade Practices Act. All three actions have been
removed to federal court and two have been transferred to the United States
District Court for the Southern District of New York and consolidated under the
title, Mallia vs. PaineWebber, Inc. The third action has been dismissed with the
consent of the parties on the grounds that it is duplicative of the two actions
now before the federal court in New York.
In February 1996, approximately 150 plaintiffs filed an action entitled
Abbate v. PaineWebber Inc. in Sacramento, California Superior Court against
PaineWebber Incorporated and various affiliated entities concerning the
plaintiff's purchases of various limited partnership interests. The complaint
alleges, among other things, that PaineWebber and its related entities committed
fraud and misrepresentation and breached fiduciary duties allegedly owed to the
plaintiffs by selling or promoting limited partnership investments that were
unsuitable for the plaintiffs and by overstating the benefits, understating the
risks and failing to state material facts concerning the investments. The
complaint seeks compensatory damages of $15 million plus punitive damages.
Under certain limited circumstances, pursuant to the Partnership Agreement
and other contractual obligations, PaineWebber and its affiliates, including the
Administrative General Partner could be entitled to indemnification from the
Partnership for expenses and liabilities in connection with this litigation. The
General Partners are unable to determine the effect, if any, of these actions on
the Partnership's financial statements taken as a whole.
Item 4. Exhibits and Reports on Form 8-K
(a) None
22
<PAGE> 24
(b) The Partnership filed a Form 8-K during the second quarter of the
fiscal year ending December 31, 1996 dated June 10, 1996 reporting the
Partnership Annual report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pegasus Aircraft Partners II, L.P.
(Registrant)
By: Air Transport Leasing, Inc.
A General Partner
Date: August 12, 1996 By: /s/ Joseph P. Ciavarella
------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a) Form
10-Q for the quarter ended June 10, 1996 for Pegasus Aircraft Partners II, LP
and is qualified in its entirety by reference to such (b) Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,605,000
<SECURITIES> 0
<RECEIVABLES> 1,613,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,581,000
<PP&E> 143,207,000
<DEPRECIATION> 85,116,000<F3>
<TOTAL-ASSETS> 73,904,000<F3>
<CURRENT-LIABILITIES> 11,097,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 59,039,000<F2>
<TOTAL-LIABILITY-AND-EQUITY> 73,904,000
<SALES> 0
<TOTAL-REVENUES> 4,122,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 107,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178,000
<INCOME-PRETAX> 745,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 745,000
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0
<FN>
<F1>Income per unit of limited partnership interest (.10)
<F2>Includes partners' capital and accumulated earnings and distribution to
partners.
<F3>Includes allowances for equipment impairment.
</FN>
</TABLE>
