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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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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Pegasus Aircraft Partners II, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1997
Table of Contents
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Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - March 31, 1997
and December 31, 1996 2
Statements of Income for the three
months ended March 31, 1997
and 1996 3
Statements of Partners' Equity for the
three months ended March 31, 1997
and 1996 4
Statements of Cash Flows for the three
months ended March 31, 1997 and
1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Part II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 3. Exhibits and Reports on Form 8-K 20
</TABLE>
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS II, L.P.
BALANCE SHEETS -- MARCH 31, 1997 AND DECEMBER 31, 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- --------
(in thousands, except unit data)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,651 $ 12,831
Restricted cash (Note 4) -- 2,248
Rent and other receivables, net (Note 4) 708 758
Aircraft, net (Notes 2 and 4) 55,429 56,177
Other assets 56 25
-------- --------
Total Assets $ 68,844 $ 72,039
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Lease settlement reserve $ 3,000 $ 3,000
Accounts payable and accrued expenses 155 95
Payable to affiliates (Note 3) 655 636
Interest payable 41 1
Maintenance reserves payable 1,215 2,248
Notes payable 4,751 4,751
Deferred rental income and deposits 3,538 3,779
Distributions payable to partners 3,003 2,989
-------- --------
Total Liabilities 16,358 17,499
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 5)
PARTNERS' EQUITY:
General Partners (924) (904)
Limited Partners (7,255,000 units outstanding) 53,410 55,444
-------- --------
Total Partners' Equity 52,486 54,540
-------- --------
Total Liabilities and Partners' Equity' $ 68,844 $ 72,039
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(in thousands, except unit data
and per unit amounts)
<S> <C> <C>
REVENUE:
Rentals from operating leases $ 2,763 $ 3,927
Interest 153 208
---------- ----------
2,916 4,135
---------- ----------
EXPENSES:
Depreciation and amortization 1,533 2,705
Management and re-lease fees (Note 3) 220 291
Interest 115 172
General and administrative (Note 3) 99 87
Direct lease 72 91
---------- ----------
2,039 3,346
---------- ----------
NET INCOME $ 877 $ 789
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 9 $ 8
To the Limited Partners 868 781
---------- ----------
$ 877 $ 789
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .12 $ .11
========== ==========
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.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF PARTNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, January 1, 1997 $ (904) $ 55,444 $ 54,540
Net income 9 868 877
Distributions to partners declared (29) (2,902) (2,931)
-------- -------- --------
Balance, March 31, 1997 $ (924) $ 53,410 $ 52,486
======== ======== ========
Balance, January 1, 1996 $ (816) $ 64,183 $ 63,367
Net income 8 781 789
Distributions to partners declared (29) (2,902) (2,931)
-------- -------- --------
Balance, March 31, 1996 ($ 837) $ 62,062 $ 61,225
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 877 $ 789
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,533 2,705
Change in assets and liabilities:
Rent and other receivables (35) 476
Other assets (31) 16
Accounts payable and accrued expenses 60 6
Payable to affiliates 19 (20)
Interest payable 40 (5)
Deferred rental income and deposits (241) (771)
-------- --------
Net cash provided by operating activities 2,222 3,196
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (785) (19)
Repayment of advances by lessees 85 102
-------- --------
Net cash (used in) provided by investing activities (700) 83
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfer from restricted cash 2,275 --
Application of mantenance reserves
payable to restore aircraft (1,060) --
Repayment of notes payable (--) (479)
Cash distributions paid to partners (2,917) (2,917)
-------- --------
Net cash used in financing activities (1,702) (3,396)
-------- --------
NET DECREASE IN
CASH AND CASH EQUIVALENTS (180) (117)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 12,831 11,955
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 12,651 $ 11,838
======== ========
Supplemental schedule of cash flow information:
Interest paid $ 75 $ 177
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(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 March 31, 1997 and the results of its
operations, changes in partners' equity and cash flows for the three 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, 1996.
2. AIRCRAFT
The Partnership's net investment in aircraft as of March 31, 1997 and
December 31, 1996 consisted of the following (in thousands):
<TABLE>
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1997 1996
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<S> <C> <C>
Aircraft on operating leases $ 86,896 $ 77,189
Less: Accumulated depreciation (43,810) (39,518)
Provision for decline in market
value of aircraft (5,631) (3,339)
-------- --------
$ 37,455 $ 34,332
Aircraft held for lease $ 59,573 $ 68,495
Less: Accumulated depreciation (24,212) (26,971)
Reserve for decline in market value of
aircraft (6,715) (9,007)
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)
-------- --------
17,974 21,845
-------- --------
Aircraft, net $ 55,429 $ 56,177
======== ========
</TABLE>
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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. 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 $40,000 of base management fees during the three months
ended March 31, 1997.
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 $114,000 of incentive management fees
during the three months ended March 31, 1997.
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 $66,000 of re-lease fees during the three months ended
March 31, 1997.
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 $19,000
during the three months ended March 31, 1997, all of which was payable to the
Administrative General Partner.
During the quarter ended March 31, 1997 the Partnership paid $700,000
to a maintenance facility affiliated with the Managing General Partner for work
performed on certain aircraft, including the cargo conversion. The Partnership
also paid $185,000 for aircraft parts to a company owned by the three directors
of the Managing General Partner. An engine owned by the Partnership was
installed on an aircraft owned by an affiliated partnership for substantially
all of the quarter ended March 31, 1997. With respect to the quarter ended
March 31, 1997. the Partnership received or is entitled to receive
approximately $22,000 plus collected maintenance reserves with respect to the
engine. The engine has been returned to the Partnership.
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 had 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
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terms as those included in any bona fide offer made to the Partnership by a
third party. This lease was modified in 1995 and 1996 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.
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 1996, 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 1996. 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
1996, and the aircraft was prepared for delivery in June 1996 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 has since
defaulted (See Footnote 9, to the Financial Statements, "Lessee Default"). The
Partnership has recovered the A-300 aircraft and is currently remarketing it.
The Partnership estimates that it will spend approximately $2.5 million for a
scheduled heavy maintenance check, modifcations and FAA mandated work 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, 1996, the Partnership reached an agreement with
Continental regarding the settlement for the 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 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
meeting the 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,
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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. During 1996, Continental and the Partnership reached an
agreement to extend the lease to June 30, 1998 at a lease rate of $150,000 per
month.
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 March 31, 1997, the Partnership had aircraft modification
advances to Continental totaling $72,000, which are being repaid monthly with
interest.
TRANS WORLD AIRLINES, INC.
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 March 31, 1997, the balance of the
receivable was $257,000. All 1997 repayments of advances have been made by TWA.
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
interests at 9.68%. At March 31, 1997, the balance of the receivable was
$181,000. All 1997 repayments of advances have been made by TWA.
In mid-October 1994, because of operating and financial problems, TWA
announced that it would seek a global restructuring of its capital by offering
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
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through April 1995 rent with respect to the L-1011 aircraft) followed by a
return to the original payment schedule. All rents deferred during the November
1994 to April 1995 period were repaid with interest at 12% from the date of
deferral over an 18-month period which commenced May 1, 1995. 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. However,
there can be no assurance that it will be able to meet its obligations in the
future.
In mid-1996, as part of its fleet restructuring, TWA offered to return
the L-1011 aircraft it leased from the Partnership. The lease, which provided
for monthly rentals of $130,000, was originally scheduled to expire in September
1998. TWA agreed to pay the Partnership $2,846,000, which represents rents due
under the remaining term of the lease, discounted at 5% plus $3,000,000 as an
economic settlement for noncompliance with certain lease return conditions. The
lease was terminated, the aircraft was returned and the amounts aggregating
$5,846,000 were received on October 16, 1996. The Partnership is reviewing
alternatives for the use of the proceeds received, including the use of the
economic settlement to purchase an additional aircraft or engines. It is
possible that the Partnership will lease the engines that were a part of the
L-1011 separately and sell the airframe for parts.
The L-1011 aircraft was originally purchased in 1990 for $18,205,000
(including related fees) and had a net book value of approximately $6.1 million
unadjusted for the $3,000,000 economic settlement accounted for as a Lease
settlement reserve on the balance sheets at March 31, 1997 and December 31,
1996. Additionally, the prepayment for the rents due under the lease
($2,846,000) was accounted for as deferred income and will be recognized ratably
over the original remaining lease term.
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.
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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. Aeromexico made all of its monthly
rental payments due, repaid the October 1994 rent with interest and has
continued to pay the monthly rent equivalent for each aircraft.
The Partnership has entered into negotiations with Aeromexico to extend
each of the two leases to January 2000 at a slightly lower lease rate. Such
extensions are subject to final documentation.
Kiwi International Air Lines, Inc.-Bankruptcy In 1993, the Partnership
leased its two Boeing 727-200 aircraft, to Kiwi. The aircraft were originally
purchased in 1989 (Non-advanced) and 1990 (Advanced) for purchase prices of
$6,261,000 and $10,748,000 respectively (including related fees). The leases
were operating leases which required 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. In 1995, the leases were amended and extended to December 31,
1999. Kiwi was also obliged to make monthly payments of $250 per flight hour for
maintenance reserve funds administered by the Partnership. An affiliated
partnership and affiliates of the Managing General Partner also own aircraft
which were leased to 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 the prior lessee. Capitalized
improvements of $743,000 were made with respect to the non-advanced aircraft.
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 originally recorded the securities at a value of $600,000. The
securities were valued at approximately $1,000 at March 31, 1997 and December
31, 1996.
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.
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In August 1996, the Partnership paid $1.9 million to hushkit the
non-advanced 727 aircraft. The purchase price was funded out of cash reserves
previously generated.
In June 1996, Kiwi agreed with the FAA to ground 25% of its fleet due
to certain pilot training handbook deficiencies. In August 1996, Kiwi and the
FAA resolved the deficiencies and Kiwi returned to full capacity. In addition to
the FAA grounding, Kiwi was also negatively impacted by the market reaction to
the ValuJet incident and as a result, did not meet its financial goals. In July
1996, an 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 had options to invest an
additional $6,000,000 in convertible preferred stock which expires in March
1997. Existing shareholders (including directors and employees) were given the
opportunity to make additional investments.
Kiwi requested and was granted by the Partnership a deferral of its
August 1996 rental and July 1996 maintenance payments for the advanced aircraft
and the July rental and June maintenance reserves with respect to the
non-advanced aircraft. Kiwi was also unable to make its September rental and
August maintenance payments for each aircraft and was placed in default by the
Partnership.
In late September, Kiwi proposed a restructuring of its obligations
with certain creditors, including the Partnership. On September 30, 1996, Kiwi
filed a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code ("Bankruptcy Code") and did not make any subsequent payments.
The Kiwi leases accounted for approximately 11% of the Partnership's rental
revenue in 1996 and the aircraft had net book values aggregating approximately
$8,100,000 (including the hushkit), net of allowance for decline in market value
of aircraft of $100,000 at December 31, 1996 (same at March 31, 1997) (excluding
the cost of the heavy maintenance check being completed prior to delivery to
Falcon Air Express Inc. discussed below). Additionally, the unpaid balance of
the Bellyskin Note, plus interest, was $290,000. On October 15, 1996, Kiwi
ceased scheduled flight operations while still exploring financial alternatives.
Kiwi filed a motion to reject both leases as of November 15, 1996. The
Partnership provided an allowance for bad debts in the amount of $640,000 in
respect of amounts due at December 31, 1996. The Partnership recovered the
aircraft in late 1996. Kiwi restarted operations in early 1997 after obtaining
debtor-in-possession financing. However, Kiwi's long-term prospects are
undeterminable at this time. The Partnership filed claims in Kiwi's bankruptcy
preserving its rights in the Kiwi estate. In April 1997, the Partnership won a
summary judgement in Bankruptcy Court permitting the use of the maintenance
reserves ($2.3 million held). The Partnership reclassified the collected
reserves from restricted cash to cash and cash equivalents at March 31, 1997 and
a portion of the related maintenance reserve payable was applied against
expenditures made to make the aircraft leaseable.
Falcon Air Express, Inc. 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
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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 $1,400,000. The
Partnership also purchased an engine at a cost of $760,000 prior to delivery of
the aircraft. The aircraft was delivered to Falcon in March 1997.
Capital Cargo International Airlines, Inc. In January 1997, the
Partnership entered into a lease agreement with Capital Cargo International
Airlines, Inc. ("Capital"), a start-up freight carrier, with respect to the
727-200 advanced aircraft formerly leased to Kiwi. The Partnership agreed to
convert the aircraft to a freighter at its own expense, which is estimated to
cost $1.5 million. The lease is for a term of approximately eight years and
provides for an initial monthly lease rate of $105,000 per month. The lease
requires the Partnership to hushkit the aircraft during its 1999 C check visit
at its own expense (approximately $3 million) at which time the lease rate
increases to $139,000 per month. The lease requires Capital to fund maintenance
reserves monthly at a rate of $377 per flight hour. Capital provided a security
deposit of $50,000 and is obligated to add $17,000 per month to the security
deposit during the lease term until the deposit totals $220,000.
6. 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 ("District Court") 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
13
<PAGE> 15
of all fees and income derived by PaineWebber from the limited partnerships. In
addition, the plaintiffs also sought treble damages under RICO.
On May 30, 1995, the 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
agreed to settle the case. A definitive settlement was agreed in July 1996 and
in March 1997, the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement PaineWebber agreed to pay $125
million and additional consideration to class members. The investors who had
objected to the settlement have appealed the District Court's approval to the
United States Court of Appeals for the Second Cicuit.
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
challenged the proposed settlement of these cases. Their objections were
overruled when the District Court approved the class action settlement with
respect to the New York Limited Partnership Actions. 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 230 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 purchase 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
14
<PAGE> 16
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. In September 1996, the California Superior
Court dismissed many of the plaintiff's claims as barred by the applicable
statutes of limitation.
In June 1996, counsel for the Abbate plaintiffs instituted two
additional actions containing allegations nearly identical to those set forth in
Abbate. Bandrowski v. PaineWebber Incorporated, et al. was filed in California
Superior Court and Barstad v. Paine Webber Incorporated, et al. was filed in
Arizona Superior Court. Collectively, the two additional actions are brought by
approximately 50 plaintiffs and seek compensatory damages of approximately $4
million plus punitive damages. In March 1997, all of these actions were settled.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations, PaineWebber and its affiliates,
including the Administrative General Partner were entitled to indemnification
from the Partnership for expenses and liabilities in connection with the above
actions. PaineWebber and its affiliates have agreed to not seek any
indemnification from the Partnership for any amounts payable in connection with
the New York Limited Partnership Actions. The General Partners do not believe
that the settlement of the Abbate, Bandrowski and Barstad actions will have a
material effect on the Partnership's financial statements, taken as a whole.
On September 30, 1996, Kiwi filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code and the
Partnership recovered the aircraft. The Partnership has a claim against Kiwi for
all unpaid items under the leases as well as rejection damages. The Partnership
filed an adversarial complaint seeking the Bankruptcy Court's authority to use
certain maintenance reserves ($2.3 million) collected from Kiwi. In April 1997,
the Partnership won a summary judgment in Bankruptcy Court permitting the use of
the collected maintenance reserves. The Partnership reclassified the collected
reserves from restricted cash to cash and cash equivalents at March 31, 1997 and
a portion of the maintenance reserve payable was applied against expenditures
made to make the aircraft leasable.
The Partnership was also involved in litigation within the Kiwi
bankruptcy with the company that acted as Kiwi's engine manager regarding each
party's compliance with a settlement agreement to facilitate the recovery of the
aircraft and engines. The parties achieved a negotiated settlement in May 1997.
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 March 31, 1997, the Partnership's unrestricted cash and cash
equivalents of $12,651,000 was primarily invested in commercial paper. This
amount was $180,000 less than the Partnership's unrestricted cash and
equivalents at December 31, 1996 of $12,831,000. 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 quarter and capitalized
expenditures for aircraft exceeded cash provided by operating activities plus
the collection of amounts previously advanced to lessees and the transfer from
restricted cash of maintenance reserves held with respect to the former Kiwi
aircraft (See Footnote 4, "Aircraft" and Footnote 5 "Litigation") during the
three months ended March 31, 1997.
Rent and other receivable, net, decreased $50,000 from $758,000 at
December 31, 1996 to $708,000 at March 31, 1997. This decrease resulted
primarily from the continued repayment of advances by Continental and TWA.
The Partnership made advances to Continental aggregating $900,000 under
the lease agreements with Continental of which $72,000 remained outstanding at
March 31, 1997. All related payments have been made when due.
The Partnership's leases with TWA for the Lockheed L-1011 and McDonnell
Douglas MD-82 aircraft were modified and extended during 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. 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 March 31, 1997, the
balance of the advances to TWA aggregated $438,000.
Other assets increased $31,000 from $25,000 at December 31, 1996 to
$56,000 at March 31, 1997. This increase resulted primarily from expenses
associated with the refinancing which will be amortized in the term of the loan
facility.
The payable to affiliates increased $19,000 from $636,000 at December
31, 1996 to $655,000 at March 31, 1997.
Deferred rental income and deposits was $3,538,000 at March 31, 1997 as
compared to $3,779,000 at December 31, 1996. The decrease was primarily
attributable to the recognition of amounts previously received in connection
with the A-300 Lease Settlement and the L-1011 Lease Prepayment, partially
offset by the collection of security deposits from Falcon and Capital.
16
<PAGE> 18
During the three months ended March 31, 1997, the Partnership paid cash
distributions pertaining to the fourth quarter of (except the amount due to the
Administrative General Partner which remains unpaid). The quarterly distribution
represented an annualized rate equal to 8.0% of contributed capital ($.40 per
Unit).
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
expected financial position. The distribution for the first quarter of 1997 was
paid on April 25, 1997 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 70% of
the cash distributions paid to the partners for the three months ended March 31,
1997 constituted a return of capital. Also, based on the amount of net income
reported by the Partnership for accounting purposes, approximately 82% of the
cash distributions paid to the partners from the inception of the Partnership
through March 31, 1997 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.
In December 1996, the Partnership established a new $10,000,000 loan
facility with an unaffiliated third party lender. The loan commitment is for a
period of 36 months, terminating December 31, 1999, at which time outstanding
principal is due. The loan provides for interest at a rate of 1% over the
lender's prime rate of interest (9.50% at March 31, 1997) which is payable
monthly. The Partnership is required to maintain a minimum balance outstanding
of $4,000,000 during the loan commitment period. The loan is collateralized by
the Partnership's interest in the MD-82 aircraft leased to TWA and the two
727-200 Advanced aircraft leased to Continental. The Partnership utilized
proceeds of $4,751,000 to pay off the prior two loan facilities.
Based upon the operating cash reserves held at March 31, 1997 and the
leases currently in place, the Partnership anticipates being able to maintain
current cash distribution levels through 1997. 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 (including FAA mandated work and aircraft modifications) is
estimated to cost $2,500,000. 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.
17
<PAGE> 19
RESULTS OF OPERATIONS
The Partnership's net income was $877,000 for the three months ended
March 31, 1997 ("1997 Quarter") as compared to $789,000 for the quarter ended
March 31, 1996 ("1996 Quarter"). Net income per limited partnership unit also
increased from $.11 in the 1996 Quarter to $.12 for the 1997 Quarter.
The increase in the Partnership's net income for the 1997 Quarter
resulted primarily from the decrease in depreciation and amortization,
management and release fees and interest expense partially offset by a decrease
in rentals and interest income.
Rental income decreased by $1,164,000, or 30% in the 1997 Quarter as
compared to the 1996 Quarter, pricipally due to a decrease in rent recognized
with respect to the DC-10-10 restructuring, which was recognized ratably during
the 1996 Quarter and the off-lease status of the two former Kiwi aircraft for
all or substantially all of the 1997 Quarter.
Interest income decreased $55,000, or 26%, for the 1997 Quarter in
comparison to the 1996 Quarter, due to a decrease in balances of advances of
advances and defferals (due to continued repayments) as well as the non-accrual
status of the Bellyskin note with Kiwi, which was fully reserved as a bad debt
in 1996. Interest was recognized with respect to the Bellyskin note in the 1996
Quarter.
Depreciation and amortization expense decreased $1,172,000, or 43%, for
the 1997 Quarter in comparison to the 1996 Quarter due primarily to the change
in estimate relating the DC10-10 aircraft as well as the off-lease status of
L1011 aircraft and the 727 aircraft for all or substantially all of the 1997
Quarter. The Partnership does not recognize depreciation on off-lease aircraft.
Management and re-lease fees for the 1997 Quarter decreased by $71,000
or 24% in comparison to the 1996 Quarter primarily because of the increases in
rental income and net income adjusted for depreciation which serve as the bases
upon which management and re-lease fees are calculated.
Interest expense for the 1997 Quarter decreased by $57,000 or 33% in
comparison to the 1996 Quarter primarily because of a decrease in pricipal
outstanding as well as a decrease in the effective interest rate on amounts
outstanding due principally to the refinancing in December 1996.
General and administrative expenses increased by $12,000 or 14% in the
1997 Quarter as compared to the 1996 Quarter due to an increase in the level of
certain administrative expenses.
Direct lease expenses decreased by $19,000 or 21% in the 1997 Quarter
as compared to the 1996 Quarter due primarily to an decrease in insurance
premiums.
18
<PAGE> 20
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 ("District Court") 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 Partnership").
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 Paine Webber 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 income derived by PaineWebber from the limited
partnerships. In addition, the plaintiffs also sought treble damages under RICO.
On May 30, 1995, the District Court certified class action treatment of
the plaintiff's 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
agreed to settle the case. A definitive settlement was agreed in July 1996 and
in March 1997, the District Court approved the settlement as fair and
reasonable. Under the terms of the settlement PaineWebber agreed to pay $125
million and additional consideration to class members. The investors who had
objected to the settlement have appealed the District Court's approval to the
United States Court of Appeals for the Second Circuit.
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 New York Limited Partnership
Actions, but limited in subject matter to the sale
19
<PAGE> 21
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 challenged the proposed settlement of these cases. Their
objections were overruled when the District Court approved the class action
settlement with respect to the New York Limited Partnership Actions. 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 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 v. 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 230 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 purchase 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. In
September 1996, the California Superior Court dismissed many of the plaintiff's
claims as barred by the applicable statutes of limitation.
In June 1996, counsel for the Abbate plaintiffs instituted two
additional actions containing the allegations nearly identical to those set
forth in Abbate. Bankdrowski v. PaineWebber Incorporated, et al. was filed in
California Superior Court and Barstad v. Paine Webber Incorporated, et al. was
filed in Arizona Superior Court, Collectively, the two additional actions are
brought by approximately 50 plaintiffs and seek compensatory damages of
approximately $4 million plus punitive damages. In March 1997, all of these
actions were settled.
Under certain limited circumstances, pursuant to the Partnership
Agreement and other contractual obligations. PaineWebber and its affiliates,
including the Administrative General Partner were entitled to indemnification
from the Partnership for expenses and liabilities in connection with the above
actions. PaineWebber and its affiliates have agreed to not seek any
indemnification from the Partnership for any
20
<PAGE> 22
amounts payable in connection with the New York Limited Partnership Actions. The
General Partners do not believe that the settlement of the Abbate, Bandrowski
and Barstad actions will have a material effect on the Partnership's financial
statements, taken as a whole.
On September 30, 1996, Kiwi filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code and the
Partnership recovered the aircraft. The Partnership has a claim against Kiwi for
all unpaid items under the leases as well as rejection damages. The Partnership
filed an adversarial complaint seeking the Bankruptcy Court's authority to use
certain maintenance reserves ($2.3 million) collected from Kiwi. In April 1997,
the Partnership won a summary judgment in Bankruptcy Court permitting the use of
the collected maintenance reserves. The Partnership was also involved in a
litigation within the Kiwi bankruptcy with the company that acted as Kiwi's
engine manager regarding each party's compliance with a settlement agreement to
facilitate the recovery of the aircraft and engines. The parties achieved a
negotiated settlement in May 1997.
Item 4. Exhibits and Reports on Form 8-K
(a) None
(b) The Partnership did not file any reports on Form 8-K during
the first quarter of the fiscal year ending December 31, 1997.
21
<PAGE> 23
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: May 15, 1997 By: /s/ Joseph P. Ciavarella
-----------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
PEGUSUS AIRCRAFT PARTNERS II L.P. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,651,000
<SECURITIES> 0
<RECEIVABLES> 1,348,000
<ALLOWANCES> (640,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 146,470,000
<DEPRECIATION> (91,041,000)<F2>
<TOTAL-ASSETS> 68,844,000
<CURRENT-LIABILITIES> 0
<BONDS> 4,751,000
0
0
<COMMON> 0
<OTHER-SE> 52,486,000
<TOTAL-LIABILITY-AND-EQUITY> 68,844,000
<SALES> 2,763,000
<TOTAL-REVENUES> 2,916,000
<CGS> 0
<TOTAL-COSTS> 1,825,000
<OTHER-EXPENSES> 99,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,000
<INCOME-PRETAX> 877,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 877,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 877,000
<EPS-PRIMARY> .12<F1>
<EPS-DILUTED> 0
<FN>
<F1>PER LIMITED PARTNERSHIP UNIT OUTSTANDING.
<F2>INCLUDES WRITEDOWNS AND AMOUNTS ACCOUNTED FOR AS COST RECOVERY.
</FN>
</TABLE>
