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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 June 30, 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
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(State of organization) (IRS Employer
Identification No.)
Four Embarcadero Center 35th Floor
San Francisco, California 94111
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (415) 434-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
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Pegasus Aircraft Partners II, L.P.
Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997
Table of Contents
Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Balance Sheets - June 30, 1997
and December 31, 1996 2
Statements of Income for the three
months ended June 30, 1997
and 1996 3
Statements of Income for the six
months ended June 30, 1997
and 1996 4
Statements of Partners' Equity for the
six months ended June 30, 1997
and 1996 5
Statements of Cash Flows for the six
months ended June 30, 1997 and
1996 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
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PEGASUS AIRCRAFT PARTNERS II, L.P.
BALANCE SHEETS -- JUNE 30, 1997 AND DECEMBER 31, 1996
(unaudited)
1997 1996
---- ----
(in thousands, except unit data)
ASSETS
Cash and cash equivalents $ 9,601 $ 12,831
Restricted cash -- 2,248
Rent and other receivables, net 789 758
Aircraft, net (Notes 2 and 4) 55,006 56,177
Other assets 41 25
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Total Assets $ 65,437 $ 72,039
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Lease settlement reserve (Note 4) $ 3,000 $ 3,000
Accounts payable and accrued expenses 129 95
Accounts payable-aircraft 303 --
Payable to affiliates (Note 3) 428 636
Interest payable 3 1
Maintenance payable 444 2,248
Notes payable 4,751 4,751
Deferred income and deposits 3,033 3,779
Distributions payable to partners 3,018 2,989
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Total Liabilities 15,109 17,499
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COMMITMENTS AND CONTINGENCIES (Notes 3,
4, and 5)
PARTNERS' EQUITY:
General Partners (947) (904)
Limited Partners (7,255,000 units
outstanding) 51,275 55,444
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Total Partners' Equity 50,328 54,540
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Total Liabilities and Partners' Equity $ 65,437 $ 72,039
======== ========
The accompanying notes are an integral part
of these finiancial statment.
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PEGASUS AIRCRAFT PARTNERS II, L.P.
STATEMENTS OF INCOME
FOR THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
1997 1996
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(in thousands, except unit
data and per unit amounts)
REVENUE:
Rentals from operating leases (Note 4) $ 3,005 $ 3,927
Interest 148 195
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3,153 4,122
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EXPENSES:
Depreciation and amortization 1,786 2,705
Management and re-lease fees (Note 3) 239 291
Interest 116 178
General and administrative (Note 3) 83 107
Direct lease 156 96
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2,380 3, 377
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NET INCOME $ 773 $ 745
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 7 $ 7
To the Limited Partners 766 738
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$ 773 $ 745
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .11 $ .10
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 7,255,000 7,255,000
========== ==========
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 SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
1997 1996
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(in thousands, except unit
data and per unit amounts)
REVENUE:
Rentals from operating leases (Note 4) $ 5,768 $ 7,854
Interest 301 403
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6,069 8,257
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EXPENSES:
Depreciation and amortization 3,319 5,410
Management and re-lease fees (Note 3) 459 582
Interest 231 350
General and administrative (Note 3) 182 194
Direct lease 228 187
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4,419 6,723
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NET INCOME $ 1,650 $ 1,534
========== ==========
NET INCOME ALLOCATED:
To the General Partners $ 16 $ 15
To the Limited Partners 1,634 1,519
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$ 1,650 $ 1,534
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .23 $ .21
========== ==========
WEIGHTED AVERAGE NUMBER OF LIMITED
PARTNERSHIP UNITS OUTSTANDING 7,255,000 7,255,000
========== ==========
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 SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
General Limited
Partners Partners Total
-------- -------- -----
(in thousands)
Balance, January 1, 1997 $ (904) $ 55,444 $ 54,540
Net income 16 1,634 1,650
Distributions to partners declared (59) (5,803) (5,862)
-------- -------- --------
Balance, June 30, 1997 $ (947) $ 51,275 $ 50,328
======== ======== ========
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
======== ======== ========
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 SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
1997 1996
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(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,650 $ 1,534
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,319 5,410
Loss arising from securities received in -- 36
leasing transaction
Change in assets and liabilities:
Rent and other receivables (204) 729
Other assets (16) 7
Accounts payable and accrued expenses 34 (25)
Payable to affiliates (208) 105
Interest payable 2 (10)
Deferred income and deposits (891) (1,541)
Unrestricted maintenance reserves payable 233 --
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Net cash provided by operating activities 3,919 6,245
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized aircraft improvements (2,148) (19)
Accounts payable-aircraft 303 --
Repayment of advances by lessees 173 215
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Net cash (used in) provided by investing
activities (1,672) 196
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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 (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(unaudited)
1997 1996
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CASH FLOWS FROM FINANCING ACTIVITIES:
Transfer from restricted cash 2,275 --
Application of maintenance reserves payable
to restore aircraft (2,036) --
Application of maintenance reserves payable
for maintenance (28) --
Security deposits 145 --
Repayment of notes payable -- (958)
Cash distributions paid to partners (5,833) (5,833)
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Net cash used in financing activities (5,477) (6,791)
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NET DECREASE IN CASH AND
CASH EQUIVALENTS (3,230) (350)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 12,831 11,955
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 9,601 $ 11,605
======== ========
Supplemental schedule of cash flow information:
Interest paid $ 229 $ 360
======== ========
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
JUNE 30, 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 June 30, 1997 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, 1996.
2. AIRCRAFT
The Partnership's net investment in aircraft as of June 30, 1997 and
December 31, 1996 consisted of the following (in thousands):
1997 1996
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Aircraft on operating leases $ 86,896 $ 77,189
Less: Accumulated depreciation (45,596) (39,518)
Provision for decline in market
value of aircraft (5,631) (3,339)
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$ 35,669 $ 34,332
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Aircraft held for lease $ 60,936 $ 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)
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19,337 21,845
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Aircraft, net $ 55,006 $ 56,177
======== ========
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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, 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 $44,000 and $84,000 of base management fees
during the quarter and six months ended June 30, 1997, 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 $120,000 and $234,000 of incentive management fees
during the quarter and six months ended June 30, 1997, respectively.
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 $75,000 and $141,000 of re-lease fees during the quarter
and six months ended June 30, 1997, respectively. All of the above fees are
subordinated to the limited partners receiving an 8% annual non-cumulative
return based upon original, contributed capital.
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, 1997, respectively, all of which was
payable to the Administrative General Partner.
During the six months ended June 30, 1997 the Partnership paid $1,434,000
to a maintenance facility affiliated with the Managing General Partner for work
performed on certain aircraft, including the cargo conversion. The Partnership
also paid or accrued $1,692,000 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
during the first quarter and was installed on an aircraft owned by an affiliate
of the Managing General Partner during the second quarter and generated rent of
$45,000 and maintenance or accrued reserves of $200,000 during the six months
ended June 30, 1997.
4. AIRCRAFT LEASE
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
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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 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. This aircraft was returned to the Partnership
during Continental's bankruptcy leased to Kiwi and was recently delivered to
Falcon Air Express Inc. (see discussion 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 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
1995, and the aircraft was prepared 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 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, modifications 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, 1995, 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 for the Akdeniz
remarket, 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
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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 A-300 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. 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 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, 1997,
the Partnership had aircraft modification advances to Continental with a
remaining outstanding balance of $51,000, which are being repaid monthly with
interest.
Trans World Airlines, Inc. 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 1993 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 in monthly installments through November 1998 with interest at a
fixed rate of 9.70%. At June 30, 1997, the balance of the receivable was
$219,000. 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 in monthly installments through October 1998 with interest at 9.68%. At
June 30, 1997, the balance of the receivable was $153,000. 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
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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. 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 US 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,
TWA has continued to incur substantial losses and there can be no assurance that
it will be able to meet its obligations in the future.
In mid-1996, as part of a 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 represented rents due
under the remaining term of the lease, discounted at 5% ("L-1011 Lease
Prepayment") plus $3,000,000 as an economic settlement for noncompliance with
certain lease return conditions. The lease was terminated, the aircraft was
returned and $5,846,000 was 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 June 30, 1997 and December 31, 1996.
Additionally, the L-1011 Lease Prepayment 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 required quarterly rental payments, in advance, in the amount of $234,000
per aircraft. The leases which were each scheduled to expire in July 1997 were
each extended to January 2000, at a rate of $75,000 per month.
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
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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
prior to delivery of the aircraft to Aeromexico.
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) (collectively, the
"Kiwi Leases"). The Kiwi Leases were originally scheduled to expire on April 15,
1998 and June 30, 1998, respectively. In 1995, the Kiwi Leases were amended and
extended to December 31, 1999. Kiwi was also obligated 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 to Kiwi 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 June 30, 1997 and December 31,
1996. (See Kiwi bankruptcy discussion below)
During 1994, the Partnership funded approximately $633,000 of costs
primarily related to 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.
In August 1996, the Partnership paid $1.9 million to hushkit the
non-advanced 727 aircraft for which Kiwi was to pay an increased lease rate over
an extended term. 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's operation were also negatively impacted by the market
reaction to the ValuJet incident and as a result, Kiwi did not meet its
financial goals. In July 1996, an institutional investor contributed $4,000,000
in return for a convertible note, 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
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additional $6,000,000 in convertible preferred stock which expired in March
1997. Existing shareholders (including directors and employees) were to be 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), at December 31, 1996 (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 rejected
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 and prepared them for
delivery to new lessees, Falcon Air Express, Inc. and Capital Cargo
International Airlines, Inc. discussed below. Kiwi restarted operations in early
1997 after obtaining debtor-in-possession financing. The Partnership filed
claims in Kiwi's bankruptcy preserving its rights in the Kiwi estate. In April
1997, the Partnership won a summary judgment in Bankruptcy Court permitting the
use of the previously collected maintenance reserves ($2.3 million). The
Partnership reclassified the collected reserves from restricted cash to cash and
cash equivalents and a portion of the related maintenance reserve payable was
applied against expenditures made to make the aircraft leaseable. In July 1997,
the Bankruptcy Court approved a proposal submitted by a group that includes
certain of the parties that had provided debtor-in-possession financing to
purchase the assets of Kiwi. Based upon the approved purchase price, it is
likely that the Partnership will have little or no recovery of its bankruptcy
claims.
Falcon Air Express, Inc. Lease - In December 1996, the Partnership entered
into a lease agreement with Falcon Air Express, Inc. ("Falcon") a charter
airline with respect to the 727-200 non-advanced aircraft formerly leased to
Kiwi. The lease is for a term of 60 months and provides for a monthly rental of
$95,000. Falcon provided a security deposit of $95,000. The lease also requires
Falcon to fund, on a monthly basis, maintenance reserves of $317 per flight
hour. In connection with the delivery of the aircraft, the Partnership completed
a heavy maintenance check on the aircraft, including certain modifications at a
cost of approximately $1,800,000, a portion of which was expended in 1996. 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.
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Capital Cargo International Airlines, Inc. Lease - 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 (approximately $2.4
million), of which $2.2 million was paid or accrued at June 30, 1997. 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. The aircraft was delivered to Capital in July 1997.
(See Footnote 6, "Subsequent Events").
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 ("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 PaineWebber 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 partnerships' 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 partnerships' 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 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.
15
<PAGE> 17
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 July 1997, the U.S.
Court of Appeals for the Second Circuit affirmed the District Court's approval
of the settlement.
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 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.
16
<PAGE> 18
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. PaineWebber 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 and a portion of the
maintenance reserve payable was applied against expenditures made to make the
aircraft leasable. In July 1997, the Bankruptcy Court approved a proposal to
purchase the assets of Kiwi submitted by a group that included certain of the
parties that had provided debtor-in-possession financing to Kiwi. Based upon the
approved purchase price, it is likely that the Partnership will have little or
no recovery of its bankruptcy claims.
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.
6. SUBSEQUENT EVENTS
In July 1997, in connection with the delivery of the Boeing 727-200
Advanced aircraft to Capital, the Partnership purchased two JT8D-15 engines from
an unaffiliated third party for cash of $1,550,000 plus two JT8D-15 engine cores
returned with the aircraft by Kiwi. Additionally, the Partnership spent $416,000
in connection with the overhaul of the other JT8D-15 engine delivered as part of
the 727-200 leased to Capital.
17
<PAGE> 19
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, 1997, the Partnership's unrestricted cash and cash
equivalents of $9,601,000 was primarily invested in commercial paper. This
amount was $3,230,000 less than the Partnership's unrestricted cash and
equivalents at December 31, 1996 of $12,831,000. This decrease in unrestricted
cash was attributable to the amount by which cash distribution to partners and
capitalized aircraft improvements exceeded cash generated by operating
activities, collection of advances to lessees and the unapplied maintenance
reserves, (see Footnote 4, "Aircraft" and Footnote 5 "Litigation") during the
six months ended June 30, 1997.
Rent and other receivables, net, increased $31,000 from $758,000 at
December 31, 1996 to $789,000 at June 30, 1997. This increase resulted primarily
from the rents associated with the lease of an engine from one of the former
Kiwi aircraft to Sky Trek which were outstanding at June 30, 1997 (paid in July
1997) and rents associated with the lease of an ex-Kiwi engine to Nations Air
Express, Inc. (which was having significant liquidity issues), partially offset
by the continued repayment of advances and deferrals with Continental and TWA.
The Partnership made advances to Continental aggregating $900,000 under
the lease agreements with Continental of which $51,000 remained outstanding at
June 30, 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 June 30, 1997, the
balance of the advances to TWA aggregated $372,000.
Other assets increased $16,000 from $25,000 at December 31, 1996 to
$41,000 at June 30, 1997. Such amounts are primarily prepaid expenses.
The payable to affiliates decreased $208,000 to $428,000 at June 30, 1997
from $636,000 at December 31, 1996. The decrease was attributable to the payment
(during the period) of fees previously accrued but unpaid to the Administrative
General Partner. As part of the class action settlement, the fees and
distributions earned by the Administrative General Partner have been assigned by
an affiliate to an escrow account for the benefit of class action members. (See
Note 5, "Litigation").
Deferred rental income and deposits was $3,033,000 at June 30, 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
18
<PAGE> 20
Settlement and the L-1011 Lease Prepayment. The Partnership continues to
actively remarket the A-300 and search for alternatives relating to the L-1011
aircraft both of which are currently off lease. The Partnership expended or
committed to expend approximately 7.0 million with respect to aircraft
delivered to Falcon and Capital (including approximately $600,000 spent in
1996), including $2 million spent in July 1997 for engines. The Partnership
utilized the reserves collected for Kiwi to partially offset these expenditures.
The amount of each distribution will be determined on a quarterly basis
after an evaluation of the Partnership's operating results and its current and
expected financial position. The distribution for the second quarter of 1997 was
paid on July 25, 1997 at an annualized rate equal to 8.0% of contributed capital
($.40 per Unit). Based upon the operating cash reserves held at June 30, 1997
and the leases currently in place, the Partnership anticipates being able to
maintain current cash distribution levels through 1997.
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 73% of
the cash distributions paid to the partners for the three months ended June 30,
1997 (71% 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 82% of the cash distributions paid to the partners from
the inception of the Partnership through June 30, 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.
RESULTS OF OPERATIONS
The Partnership's net income was $773,000 and $1,650,000 for the quarter
and six months ended June 30, 1997 ("1997 Quarter" and "1997 Period",
respectively) as compared to $745,000 and $1,534,000 for the quarter and six
months ended June 30, 1996 ("1996 Quarter" and "1996 Period", respectively).
Rental income decreased by $922,000 and $2,086,000 , or 24% and 27% in the
1997 Quarter and 1997 Period, respectively, as compared to the 1996 Quarter and
1996 Period principally due to (i) the recognition during the 1996 Quarter and
1996 Period of rental income associated with the DC 10-10 restructuring and (ii)
the off-lease status of the two former Kiwi aircraft for all or a part of the
1997 Period.
Interest income decreased $47,000 and $102,000, or 24% and 25%, for the
1997 Quarter and 1997 Period, in comparison to the 1996 Quarter and 1996 Period,
respectively. This decrease was due to the continued prepayment of advances by
Continental and TWA reducing the balances on which interest is earned, the
non-accrual status of the advance to Kiwi which has been fully reserved as a bad
debt and the expenditure of certain cash reserves for capitalized aircraft
improvements, reducing cash available for investment.
19
<PAGE> 21
Depreciation and amortization expense decreased $919,000 and $2,091,000,
or 34% and 39%, for the 1997 Quarter and 1997 Period in comparison to the 1996
Quarter and 1996 Period, respectively. The decrease was attributable to the
off-lease status of the L-1011 aircraft and the 727 Advanced aircraft during the
entire period and the non-advanced 727 aircraft for a portion of the period. The
A-300 was off-lease in each of the respective periods. The Partnership does not
recognize depreciation with respect to off-lease aircraft.
Management and re-lease fees for the 1997 Quarter and 1997 Period,
decreased by $52,000 and $123,000 or 18% and 21%, respectively, in comparison to
the 1996 Quarter and 1996 Period primarily because of the decrease in rental
income which serves as a basis upon which certain management fees and re-lease
fees are calculated.
Interest expense for the 1997 Quarter and 1997 Period, decreased by
$62,000 and $119,000 or 35% and 34% in comparison to the 1996 Quarter and 1996
Period, primarily because of lower interest rates and lower principal
outstanding during the 1997 Quarter and 1997 Period principally because of the
December 1996 refinancing.
General and administrative expenses decreased by $24,000 and $12,000 or
22% and 6% during the 1997 Quarter and 1997 Period respectively, as compared to
the 1996 Quarter and 1996 Period. The Partnership recorded $36,000 during the
1996 Quarter to reflect the reduction in value of the Partnership's interest in
Kiwi stock, based upon the July 1996 Kiwi financing which was reflected in
general and administrative expenses during the 1996 Quarter and 1996 Period.
Otherwise, there was an increase in general and administrative expenses which
was consistent with the Partnership's level of operations.
Direct lease expenses increased by $60,000 and $41,000 in the 1997 Quarter
and 1997 Period, or 63% and 22%, respectively, as compared to the 1996 Quarter
and 1996 Period, due primarily to an increase in certain storage expenses as
well as certain maintenance expenses incurred in connection with the recovery
and redeployment of aircraft during the 1997 Quarter and 1997 Period.
Additionally, legal fees associated with the Kiwi bankruptcy were included in
such amounts for the 1997 Quarter and 1997 Period.
20
<PAGE> 22
Part II. OTHER INFORMATION
Item 3. Legal Proceedings
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 PaineWebber 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 partnerships' 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 partnerships' 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 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 Circuit. In July 1997, the U.S.
Court of Appeals for the Second Circuit affirmed the District Court's approval
of the settlement.
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
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 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. PaineWebber 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
22
<PAGE> 24
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 and a portion of the
maintenance reserve payable was applied against expenditures made to make the
aircraft leasable. In July 1997, the Bankruptcy Court approved a proposal to
purchase the assets of Kiwi submitted by a group that included certain of the
parties that had provided debtor-in-possession financing to Kiwi. Based upon the
approved purchase price, it is likely that the Partnership will have little or
no recovery of its bankruptcy claims.
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.
23
<PAGE> 25
Item 4. Exhibits and Reports on Form 8-K
(a) None
(b) The Partnership did not file a report on Form 8-K during the second
quarter of the focal year ending December 31, 1997.
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, 1997 By: /s/ Joseph P. Ciavarella
-----------------------------------
Joseph P. Ciavarella
Vice President, Treasurer
and Chief Financial
and Accounting Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEGASUS
AIRCRAFT PARTNERS II, L.P.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,601,000
<SECURITIES> 0
<RECEIVABLES> 1,429,000
<ALLOWANCES> (640,000)
<INVENTORY> 0
<CURRENT-ASSETS> 10,431,000
<PP&E> 147,832,000
<DEPRECIATION> 92,816,000<F2>
<TOTAL-ASSETS> 65,437,000
<CURRENT-LIABILITIES> 10,358,000
<BONDS> 4,751,000
0
0
<COMMON> 0
<OTHER-SE> 50,328,000
<TOTAL-LIABILITY-AND-EQUITY> 65,437,000
<SALES> 5,768,000
<TOTAL-REVENUES> 6,069,000
<CGS> 0
<TOTAL-COSTS> 4,006,000
<OTHER-EXPENSES> 182,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 231,000
<INCOME-PRETAX> 1,650,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,650,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,650,000
<EPS-PRIMARY> .23<F1>
<EPS-DILUTED> 0
<FN>
<F1>PER LIMITED PARTNERSHIP UNITS OUTSTANDING
<F2>INCLUDES WRITEDOWNS
</FN>
</TABLE>
