UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
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Commission File No. 33-2794
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POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
State of Organization: California
IRS Employer Identification No. 94-2985086
201 High Ridge Road, Stamford, Connecticut 06927
Telephone - (203) 357-3776
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
This document consists of 12 pages.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 2000
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 2000 and
December 31, 1999...........................................3
b) Statements of Operations - Three and Six Months
Ended June 30, 2000 and 1999................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1999
and Six Months Ended June 30, 2000..........................5
d) Statements of Cash Flows - Six Months
Ended June 30, 2000 and 1999................................6
e) Notes to Financial Statements...............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........8
Part II. Other Information
Item 1. Legal Proceedings.....................................10
Item 6. Exhibits and Reports on Form 8-K......................10
Signature ......................................................11
2
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 18,861,820 $ 18,789,625
RENT AND OTHER RECEIVABLES 943,734 935,004
AIRCRAFT, net of accumulated depreciation of
$85,860,286 in 2000 and $83,330,258 in 1999 29,503,023 32,033,051
OTHER ASSETS 1,785 2,835
------------ ------------
Total Assets $ 49,310,362 $ 51,760,515
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 243,444 $ 226,242
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 528,694 518,032
DEFERRED INCOME 4,870,905 4,022,256
NOTES PAYABLE 3,330,784 6,037,021
------------ ------------
Total Liabilities 8,973,827 10,803,551
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,293,712) (3,287,469)
Limited Partners, 499,973 units
issued and outstanding 43,630,247 44,244,433
------------ ------------
Total Partners' Capital (Deficits) 40,336,535 40,956,964
------------ ------------
Total Liabilities and Partners' Capital
(Deficit) $ 49,310,362 $ 51,760,515
============ ============
The accompanying notes are an integral part of these statements.
3
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Rent from operating leases $3,145,675 $3,145,675 $6,291,351 $6,291,351
Interest 282,863 211,883 542,732 428,226
Gain on sale of aircraft
inventory -- -- -- 65,619
---------- ---------- ---------- ----------
Total Revenues 3,428,538 3,357,558 6,834,083 6,785,196
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 1,265,014 1,329,790 2,530,028 2,659,580
Management fees to general
partner 121,617 121,617 243,234 243,234
Operating 8,645 10,019 15,505 22,208
Interest 100,263 223,970 232,560 477,079
Administration and other 93,274 79,608 155,638 141,257
---------- ---------- ---------- ----------
Total Expenses 1,588,813 1,765,004 3,176,965 3,543,358
---------- ---------- ---------- ----------
NET INCOME $1,839,725 $1,592,554 $3,657,118 $3,241,838
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 205,868 $ 197,492 $ 421,512 $ 471,445
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $1,633,857 $1,395,062 $3,235,606 $2,770,393
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 3.27 $ 2.79 $ 6.47 $ 5.54
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
4
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1999 and
Six Months Ended June 30, 2000
------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1998 $ (3,256,230) $ 46,701,630 $ 43,445,400
Net income 879,823 5,742,360 6,622,183
Cash distributions to partners (911,062) (8,199,557) (9,110,619)
------------ ------------ ------------
Balance, December 31, 1999 (3,287,469) 44,244,433 40,956,964
Net income 421,512 3,235,606 3,657,118
Cash distributions to partners (427,755) (3,849,792) (4,277,547)
------------ ------------ ------------
Balance, June 30, 2000 $ (3,293,712) $ 43,630,247 $ 40,336,535
============ ============ ============
The accompanying notes are an integral part of these statements.
5
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income $ 3,657,118 $ 3,241,838
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,530,028 2,659,580
Gain on sale of aircraft inventory -- (65,619)
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables (8,730) 6,392
Decrease in other assets 1,050 956
Increase in payable to affiliates 17,202 36,074
Increase (decrease) in accounts payable
and accrued liabilities 10,662 (8,545)
Increase in deferred income 848,649 848,649
------------ ------------
Net cash provided by operating
activities 7,055,979 6,719,325
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable (2,706,237) (2,461,828)
Cash distributions to partners (4,277,547) (4,944,177)
------------ ------------
Net cash used in financing activities (6,983,784) (7,406,005)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS 72,195 (686,680)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 18,789,625 19,228,093
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 18,861,820 $ 18,541,413
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 233,763 $ 478,173
============ ============
The accompanying notes are an integral part of these statements.
6
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Principles and Policies
In the opinion of management, the financial statements presented herein include
all adjustments, consisting only of normal recurring items, necessary to
summarize fairly Polaris Aircraft Income Fund II's (the Partnership's) financial
position and results of operations. The financial statements have been prepared
in accordance with the instructions of the Quarterly Report to the Securities
and Exchange Commission (SEC) Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles (GAAP). These statements should be read in conjunction with the
financial statements and notes thereto for the years ended December 31, 1999,
1998, and 1997 included in the Partnership's 1999 Annual Report to the SEC on
Form 10-K.
2. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
June 30, 2000 June 30, 2000
------------- -------------
Aircraft Management Fees $105,000 $242,500
Out-of-Pocket Administrative
Expense Reimbursement 236,310 944
-------- --------
$341,310 $243,444
======== ========
3. Partners' Capital
The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the general partner and the limited partners.
Such allocations are made using income or loss calculated under GAAP for book
purposes, which varies from income or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the general partner and 90% to the limited
partners.
The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
At June 30, 2000, Polaris Aircraft Income Fund II (the Partnership) owned a
portfolio of 14 used commercial jet aircraft and spare parts out of its original
portfolio of 30 aircraft. The portfolio consists of 14 McDonnell Douglas DC-9-30
aircraft leased to Trans World Airlines, Inc. (TWA).
Partnership Operations
The Partnership recorded net income of $1,839,725, or $3.27 per limited
partnership unit, for the three months ended June 30, 2000, compared to net
income of $1,592,554, or $2.79 per limited partnership unit, for the three
months ended June 30, 1999. The Partnership recorded net income of $3,657,118,
or $6.47 per limited partnership unit, for the six months ended June 30, 2000,
compared to net income of $3,241,838, or $5.54 per limited partnership unit, for
the six months ended June 30, 1999.
The increase in net income is primarily due to increased interest revenue and
decreases in depreciation, interest expense, operating expense, partially offset
by increases in administration expenses and a decrease in the sale of aircraft
inventory, as discussed below.
The increase in the deferred income balance at June 30, 2000 is attributable to
differences between the payments due and the rental income earned on the TWA
leases for the 14 aircraft currently on lease to TWA. For income recognition
purposes, the Partnership recognizes rental income over the life of the lease in
equal monthly amounts. As a result, the difference between rental income earned
and the rental payments due is recognized as deferred income. The rental
payments due from TWA during the six months ended June 30, 2000 exceeded the
rental income earned, causing an increase in the deferred income balance.
Interest income increased during the three and six months ended June 30, 2000,
as compared to the same periods in 1999, primarily due to higher average cash
reserves and a higher rate of return on those cash reserves.
Gains on the sale of aircraft inventory decreased during the three and six
months ended June 30, 2000 as compared to the same periods in 1999, as a result
of the sale of aircraft inventory to Soundair, Inc. during 1999.
The decrease in depreciation expense is the result of several aircraft having
been fully depreciated down to their original estimated residual values during
1999 offset by additional ongoing depreciation. The residual values at lease end
on all aircraft were reviewed and adjusted downward in the fourth quarter of
1999 resulting in additional ongoing depreciation on aircraft previously fully
depreciated.
Operating expenses decreased during the three and six months ended June 30,
2000, as compared to the same periods in 1999, due to a decrease in legal
expenses related to the Viscount default and Chapter 11 bankruptcy filing.
Interest expense decreased during the three and six months ended June 30, 2000,
as compared to the same period in 1999, due to the continued payments made on
the notes payable for the TWA hushkits.
Administration expenses increased during the three and six months ended June 30,
2000, as compared to the same periods in 1999, primarily due to consulting fees
incurred for the research and reissue of a large number of investor distribution
checks during 2000. The increase in printing and postage costs also contributed
to the higher administration expenses during 2000.
8
Liquidity and Cash Distributions
Liquidity - The Partnership received all payments due from its sole lessee, TWA,
during the six months ended June 30, 2000, except for the June 2000 lease
payment. On July 5, 2000, the Partnership received its $935,000 rental payment
from TWA that was due on June 27, 2000. This amount was included in rent and
other receivables on the balance sheet at June 30, 2000.
Polaris Investment Management Corporation, the general partner, has determined
that cash reserves be maintained as a prudent measure to ensure that the
Partnership has available funds in the event that the aircraft presently on
lease to TWA require remarketing, and for other contingencies, including
expenses of the Partnership. The Partnership's cash reserves will be monitored
and may be revised from time to time as further information becomes available in
the future.
Cash Distributions - Cash distributions to limited partners during the three
months ended June 30, 2000 and 1999 were $1,874,899, or $3.75 per limited
partnership unit, respectively. Cash distributions to limited partners during
the six months ended June 30, 2000 and 1999 were $3,849,792, or $7.70 per
limited partnership unit and $4,449,759, or $8.90 per unit, respectively. The
timing and amount of future cash distributions are not yet known and will depend
on the Partnership's future cash requirements (including expenses of the
Partnership), the need to retain cash reserves as previously discussed in the
Liquidity section and the receipt of rental payments from TWA.
9
Part II. Other Information
--------------------------
Item 1. Legal Proceedings
As discussed in Item 3 of Part I of Polaris Aircraft Income Fund II's (the
Partnership) 1999 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the period ended March 31, 2000,
there are several pending legal actions or proceedings involving the
Partnership. There have been no material developments with respect to any such
actions or proceedings during the period covered by this report.
Other Proceedings - Item 10 of Part III of the Partnership's 1999 Form 10-K and
Item 1 of Part II of the Partnership's Form 10-Q for the period ended March 31,
2000 discuss certain actions which have been filed against Polaris Investment
Management Corporation and others in connection with the sale of interests in
the Partnership and the management of the Partnership. The Partnership is not a
party to these actions. There have been no material developments with respect to
any of the actions described therein during the period covered by this report.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedule (in electronic format only).
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
for which this report is filed.
10
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
August 10, 2000 By: /S/Stephen E. Yost
---------------- --------------------------------
Stephen E. Yost
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
11