UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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 No. 33-2794
---------------
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 17 pages.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 2001
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 2001 and
December 31, 2000............................................3
b) Statements of Operations - Three and Six Months
Ended June 30, 2001 and 2000.................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2000
and Six Months Ended June 30, 2001...........................5
d) Statements of Cash Flows - Six Months
Ended June 30, 2001 and 2000.................................6
e) Notes to Financial Statements................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........11
Part II. Other Information
Item 1. Legal Proceedings.......................................15
Item 6. Exhibits and Reports on Form 8-K........................15
Signature ........................................................17
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,
2001 2000
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 17,866,510 $ 19,195,305
RENT AND OTHER RECEIVABLES net of
allowance for credit losses of $85,000 and
$85,000 in 2001 and 2000 490,482 852,618
AIRCRAFT, held for sale 706,622 820,275
AIRCRAFT, net of accumulated depreciation of
$81,415,407 in 2001 and $79,276,053 in 2000 8,971,265 11,110,619
OTHER ASSETS -- 13,915
------------ ------------
Total Assets $ 28,034,879 $ 31,992,732
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 562,430 $ 295,334
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 615,830 605,896
DEFERRED INCOME 3,189,048 5,719,554
NOTES PAYABLE -- 493,388
------------ ------------
Total Liabilities 4,367,308 7,114,172
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,460,480) (3,448,329)
Limited Partners, 499,973 units
issued and outstanding 27,128,051 28,326,889
------------ ------------
Total Partners' Capital 23,667,571 24,878,560
------------ ------------
Total Liabilities and Partners' Capital $ 28,034,879 $ 31,992,732
============ ============
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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES:
Rent from operating leases $2,275,181 $3,145,675 $5,676,172 $6,291,351
Interest 210,958 282,863 456,437 542,732
Other -- -- 41,056 --
---------- ---------- ---------- ----------
Total Revenues 2,486,139 3,428,538 6,173,665 6,834,083
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 1,096,351 1,265,014 2,253,007 2,530,028
Management fees to general
partner 11,760 121,617 57,856 243,234
Operating 145,261 8,645 170,613 15,505
Interest 5,844 100,263 13,525 232,560
Administration and other 237,923 93,274 306,567 155,638
---------- ---------- ---------- ----------
Total Expenses 1,497,139 1,588,813 2,801,568 3,176,965
---------- ---------- ---------- ----------
NET INCOME $ 989,000 $1,839,725 $3,372,097 $3,657,118
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 197,362 $ 205,868 $ 446,158 $ 421,512
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 791,638 $1,633,857 $2,925,939 $3,235,606
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 1.58 $ 3.27 $ 5.85 $ 6.47
========== ========== ========== ==========
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, 2000 and
Six Months Ended June 30, 2001
------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1999 $ (3,287,469) $ 44,244,433 $ 40,956,964
Net income 683,539 (8,317,954) (7,634,415)
Cash distributions to partners (844,399) (7,599,590) (8,443,989)
------------ ------------ ------------
Balance, December 31, 2000 (3,448,329) 28,326,889 24,878,560
Net income 446,158 2,925,939 3,372,097
Cash distributions to partners (458,309) (4,124,777) (4,583,086)
------------ ------------ ------------
Balance, June 30, 2001 $ (3,460,480) $ 27,128,051 $ 23,667,571
============ ============ ============
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,
-------------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 3,372,097 $ 3,657,118
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,253,007 2,530,028
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables 362,136 (8,730)
Decrease in other assets 13,915 1,050
Increase in payable to affiliates 267,096 17,202
Increase in accounts payable
and accrued liabilities 9,934 10,662
Increase (decrease) in deferred income (2,530,506) 848,649
------------ ------------
Net cash provided by operating
activities 3,747,679 7,055,979
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable (493,388) (2,706,237)
Cash distributions to partners (4,583,086) (4,277,547)
------------ ------------
Net cash used in financing
activities (5,076,474) (6,983,784)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (1,328,795) 72,195
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 19,195,305 18,789,625
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 17,866,510 $ 18,861,820
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 12,841 $ 233,763
============ ============
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, 2000,
1999, and 1998 included in the Partnership's 2000 Annual Report to the SEC on
Form 10-K.
2. TWA Bankruptcy and Transaction with American Airlines
As described in greater detail in Item 5 of the Current Report on Form 8-K dated
February 28, 2001 and filed by the Partnership on or about March 24, 2001, TWA
filed a voluntary petition in the United States Bankruptcy Court of the District
of Delaware (the "Bankruptcy Court") for reorganization relief under Chapter 11
of the Bankruptcy Code on January 10, 2001. One day prior to filing its
bankruptcy petition, TWA entered into an Asset Purchase Agreement with American
that provided for the sale to American of substantially all of TWA's assets and
permitted American to exclude certain TWA contracts (including aircraft leases)
from the assets of TWA to be acquired by American. On February 28, 2001,
American presented the General Partner of the Partnership ("General Partner")
with a written proposal to assume, on modified terms and conditions, the Prior
Leases applicable to eleven of the fourteen Aircraft. For reasons discussed more
fully in the 8-K, the General Partner decided to accept American's proposal,
although consummation of the transactions with American remained subject to a
number of contingencies, including the approval of the Bankruptcy Court and
other regulatory approvals at the time of the preparation and filing of the 8-K.
On April 9, 2001, the American acquisition of the selected TWA assets was
consummated. As a result of this closing, American assumed the Prior Leases
applicable to eleven of the fourteen Aircraft, and simultaneously, such Prior
Leases were amended to incorporate the modified terms described in the 8-K (as
so assumed and amended, the "Assumed Leases"). As indicated in the 8-K, the
Assumed Leases are substantially less favorable to the Partnership than the
Prior Leases. In particular, the monthly rental rate for each Aircraft has been
reduced from $85,000 to $40,000, and the reduced rate was made effective as of
March 12, 2001 by a rent credit granted to American for the amount of rent above
$40,000 previously paid by TWA in respect of the period from and after March 12,
2001. In addition, the term of each Assumed Lease is scheduled to expire at the
time of the next scheduled heavy maintenance check of the applicable Aircraft,
compared to the scheduled expiry dates of November 27, 2004 and February 7, 2005
under the Prior Leases, provided that the aggregate average number of months for
which all eleven Aircraft are on lease to American would not be less than 22
months from and after March 12, 2001. Finally, the maintenance condition of the
aircraft to be met at lease expiry was eased in favor of American, as compared
to the corresponding conditions required under the Prior Leases.
7
With respect to the three Aircraft that American did not elect to acquire, TWA
officially rejected the Prior Leases applicable to these Aircraft (collectively,
the "Rejected Leases") as of April 20, 2001. One of these aircraft was leased to
TWA for the period of March 12, 2001 to April 12, 2001 for $85,000. All three
Aircraft have been returned to the Partnership and are now parked in storage in
Arizona. The General Partner has been actively remarketing these Aircraft for
sale and is continuing to pursue these efforts at this time. In addition, the
General Partner is in the process of filing administrative claims in the TWA
bankruptcy proceeding in an effort to recover (i) the fair value of TWA's actual
use, if any, of these three Aircraft during the 60-day period following TWA's
filing of its bankruptcy petition, and (ii) claims relating to these Aircraft
for the period from March 12, 2001 (the expiration of the 60-day automatic stay
period after the filing of bankruptcy petition) to April 20, 2001, the date on
which these Prior Leases were rejected by TWA. Furthermore, it is anticipated
that the General Partner will also file general unsecured claims for damages
arising from TWA's breach of the Rejected Leases. However, there can be no
assurances as to whether, or when, the General Partner will be successful in
asserting the value of the claims or be able to collect any amounts out of the
TWA bankruptcy estate, either in respect of administrative claims or other
claims.
Effect of the TWA Bankruptcy
As previously disclosed in the 8-K, the TWA bankruptcy is expected to have a
material adverse effect on the Partnership's results of operations and financial
position. As a result of the TWA bankruptcy and the transactions with American
described above, aggregate rentals to be received by the Partnership in 2001
have been reduced from approximately $14.3 million, had all fourteen aircraft
remained on lease at the former lease rate, to approximately $6.2 million, and
the average lease term for the eleven Aircraft that remain on lease has been
reduced from 47 to 24 months remaining at December 31, 2000. Three of the
Partnership's Aircraft, which would have been expected to generate aggregate
rentals in 2001 under the terms of the Prior Leases of approximately $3.0
million (included in the $14.3 million above), are now being marketed for sale
at scrap value (which the General Partner believes will be materially less than
the aggregate rental amount).
The amount and timing of the Partnership's distributions of cash available for
distribution depends upon many factors, including whether the General Partner is
able to collect any amounts in respect of the administrative and other claims
filed with the Bankruptcy Court. The amount of cash available for distribution
for the quarter ended March 31, 2001 was not materially different from the
corresponding quarter in 2000, but the General Partner expects the amount of
cash available for distribution for the subsequent quarters in 2001 to be
materially less.
The Accounting Treatment of the Transaction
As a result of the TWA bankruptcy and the modified lease terms reflected in the
Assumed Leases, the Partnership was required to review the carrying value of the
Aircraft pursuant to applicable accounting standards including SFAS 121. Any
downward adjustment in the estimated residual value or decrease in the projected
remaining economic life of any of the Aircraft dictates an increase in
depreciation expense over the projected economic life of such Aircraft. Further,
if the projected net cash flow for any of the Aircraft (projected rental
revenue, net of management fees, less projected maintenance costs, if any, plus
the estimated residual value) is less than the carrying value of such Aircraft,
an impairment loss must be recorded. After a review of the carrying value of the
Aircraft pursuant to applicable accounting standards including SFAS 121, the
Partnership recognized an impairment loss as increased depreciation expense in
the fourth quarter of 2000 of approximately $15 million, or $30.09 per limited
partnership unit.
8
In accordance with generally accepted accounting principles (GAAP), the
Partnership recognized rental income and management fees on a straight line
basis over the original lease terms of the Prior Leases. As a result, deferred
revenue and accrued management fees were recorded each month since the inception
of each Prior Lease, resulting in balances of deferred rental income and accrued
management fees of $5,068,954 and $232,533, respectively as of March 12, 2001.
Since the Prior Leases were effectively modified on March 12, 2001, the
Partnership must recognize the balances of deferred revenue and accrued
management fees over the new lease terms, from the date the leases were
modified. For the three Rejected Leases, the deferred revenue and accrued
management fees amounting to $950,130 and $38,432 were recognized as income in
March 2001. For the eleven Assumed Leases, the deferred revenue and accrued
management fees associated with each Aircraft will be recognized over the new
lease terms, ranging from 7 months to 33 months as of March 31, 2001. During the
quarter ended June 30, 2001, deferred revenue of $955,183 and accrued management
fees of $54,237 were recognized as income.
3. 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, 2001 June 30, 2001
------------- -------------
Aircraft Management Fees $ -- $333,590
Out-of-Pocket Administrative
Expense Reimbursement 327,936 228,839
-------- --------
$327,936 $562,429
======== ========
4. 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.
9
5. New Accounting Pronouncements
On January 1, 2001, the Partnership adopted Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), as amended by SFAS 138, which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
Partnership does not own any derivative instruments, and as such, the
implementation of this statement did not have a material impact on the
Partnership's financial position or results of operations.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
At June 30, 2001, Polaris Aircraft Income Fund II, a California limited
partnership (the "Partnership") owns fourteen McDonnell Douglas DC-9-30 aircraft
(the "Aircraft"). Prior to the closing of the transactions described below, all
of the Aircraft were on lease to Trans World Airlines, Inc. ("TWA")
(collectively, the "Prior Leases"). As a result of the transactions described
below, eleven of the Aircraft are now on lease to Trans World Airlines, LLC
(TWA), and the three remaining Aircraft are no longer on lease to any operator
and are being actively remarketed for sale.
Remarketing Update
TWA Bankruptcy and Transaction with American Airlines
As described in greater detail in Item 5 of the Current Report on Form 8-K dated
February 28, 2001 and filed by the Partnership on or about March 24, 2001, TWA
filed a voluntary petition in the United States Bankruptcy Court of the District
of Delaware (the "Bankruptcy Court") for reorganization relief under Chapter 11
of the Bankruptcy Code on January 10, 2001. One day prior to filing its
bankruptcy petition, TWA entered into an Asset Purchase Agreement with American
that provided for the sale to American of substantially all of TWA's assets and
permitted American to exclude certain TWA contracts (including aircraft leases)
from the assets of TWA to be acquired by American. On February 28, 2001,
American presented the General Partner of the Partnership ("General Partner")
with a written proposal to assume, on modified terms and conditions, the Prior
Leases applicable to eleven of the fourteen Aircraft. For reasons discussed more
fully in the 8-K, the General Partner decided to accept American's proposal,
although consummation of the transactions with American remained subject to a
number of contingencies, including the approval of the Bankruptcy Court and
other regulatory approvals at the time of the preparation and filing of the 8-K.
On April 9, 2001, the American acquisition of the selected TWA assets was
consummated. As a result of this closing, American assumed the Prior Leases
applicable to eleven of the fourteen Aircraft, and simultaneously, such Prior
Leases were amended to incorporate the modified terms described in the 8-K (as
so assumed and amended, the "Assumed Leases"). As indicated in the 8-K, the
Assumed Leases are substantially less favorable to the Partnership than the
Prior Leases. In particular, the monthly rental rate for each Aircraft has been
reduced from $85,000 to $40,000, and the reduced rate was made effective as of
March 12, 2001 by a rent credit granted to American for the amount of rent above
$40,000 previously paid by TWA in respect of the period from and after March 12,
2001. In addition, the term of each Assumed Lease is scheduled to expire at the
time of the next scheduled heavy maintenance check of the applicable Aircraft,
compared to the scheduled expiry dates of November 27, 2004 and February 7, 2005
under the Prior Leases, provided that the aggregate average number of months for
which all eleven Aircraft are on lease to American would not be less than 22
months from and after March 12, 2001. Finally, the maintenance condition of the
aircraft to be met at lease expiry was eased in favor of American, as compared
to the corresponding conditions required under the Prior Leases.
With respect to the three Aircraft that American did not elect to acquire, TWA
officially rejected the Prior Leases applicable to these Aircraft (collectively,
the "Rejected Leases") as of April 20, 2001. One of these aircraft was leased to
TWA for the period of March 12, 2001 to April 12, 2001 for $85,000. All three
Aircraft have been returned to the Partnership and are now parked in storage in
Arizona. The General Partner has been actively remarketing these Aircraft for
sale and is continuing to pursue these efforts at this time. In addition, the
General Partner is in the process of filing administrative claims in the TWA
11
bankruptcy proceeding in an effort to recover (i) the fair value of TWA's actual
use, if any, of these three Aircraft during the 60-day period following TWA's
filing of its bankruptcy petition, and (ii) claims relating to these Aircraft
for the period from March 12, 2001 (the expiration of the 60-day automatic stay
period after the filing of bankruptcy petition) to April 20, 2001, the date on
which these Prior Leases were rejected by TWA. Furthermore, it is anticipated
that the General Partner will also file general unsecured claims for damages
arising from TWA's breach of the Rejected Leases. However, there can be no
assurances as to whether, or when, the General Partner will be successful in
asserting the value of the claims or be able to collect any amounts out of the
TWA bankruptcy estate, either in respect of administrative claims or other
claims.
Effect of the TWA Bankruptcy
As previously disclosed in the 8-K, the TWA bankruptcy is expected to have a
material adverse effect on the Partnership's results of operations and financial
position. As a result of the TWA bankruptcy and the transactions with American
described above, aggregate rentals to be received by the Partnership in 2001
have been reduced from approximately $14.3 million, had all fourteen aircraft
remained on lease at the former lease rate, to approximately $6.2 million, and
the average lease term for the eleven Aircraft that remain on lease has been
reduced from 47 to 24 months remaining at December 31, 2000. Three of the
Partnership's Aircraft, which would have been expected to generate aggregate
rentals in 2001 under the terms of the Prior Leases of approximately $3.0
million (included in the $14.3 million above), are now being marketed for sale
at scrap value (which the General Partner believes will be materially less than
the aggregate rental amount).
The amount and timing of the Partnership's distributions of cash available for
distribution depends upon many factors, including whether the General Partner is
able to collect any amounts in respect of the administrative and other claims
filed with the Bankruptcy Court. The amount of cash available for distribution
for the quarter ended March 31, 2001 was not materially different from the
corresponding quarter in 2000, but the General Partner expects the amount of
cash available for distribution for the subsequent quarters in 2001 to be
materially less.
The Accounting Treatment of the Transaction
As a result of the TWA bankruptcy and the modified lease terms reflected in the
Assumed Leases, the Partnership was required to review the carrying value of the
Aircraft pursuant to applicable accounting standards including SFAS 121. Any
downward adjustment in the estimated residual value or decrease in the projected
remaining economic life of any of the Aircraft dictates an increase in
depreciation expense over the projected economic life of such Aircraft. Further,
if the projected net cash flow for any of the Aircraft (projected rental
revenue, net of management fees, less projected maintenance costs, if any, plus
the estimated residual value) is less than the carrying value of such Aircraft,
an impairment loss must be recorded. After a review of the carrying value of the
Aircraft pursuant to applicable accounting standards including SFAS 121, the
Partnership recognized an impairment loss as increased depreciation expense in
the fourth quarter of 2000 of approximately $15 million, or $30.09 per limited
partnership unit.
In accordance with generally accepted accounting principles (GAAP), the
Partnership recognized rental income and management fees on a straight line
basis over the original lease terms of the Prior Leases. As a result, deferred
revenue and accrued management fees were recorded each month since the inception
of each Prior Lease, resulting in balances of deferred rental income and accrued
management fees of $5,068,954 and $232,533, respectively as of March 12, 2001.
Since the Prior Leases were effectively modified on March 12, 2001, the
12
Partnership must recognize the balances of deferred revenue and accrued
management fees over the new lease terms, from the date the leases were
modified. For the three Rejected Leases, the deferred revenue and accrued
management fees amounting to $950,130 and $38,432 were recognized as income in
March 2001. For the eleven Assumed Leases, the deferred revenue and accrued
management fees associated with each Aircraft will be recognized over the new
lease terms, ranging from 7 months to 33 months as of March 31, 2001. During the
quarter ended June 30, 2001, deferred revenue of $955,183 and accrued management
fees of $54,237 were recognized as income.
Partnership Operations
The Partnership recorded net income of $989,000, or $1.58 per limited
partnership unit, for the three months ended June 30, 2001, compared to net
income of $1,839,725, or $3.27 per limited partnership unit, for the three
months ended June 30, 2000. The Partnership recorded net income of $3,372,097,
or $5.85 per limited partnership unit, for the six months ended June 30, 2001,
compared to net income of $3,657,118, or $6.47 per limited partnership unit, for
the six months ended June 30, 2000.
The decrease in net income is primarily due to decreased rental and interest
revenue and increased operating and administration expenses, partially offset by
decreased depreciation, interest expense, and management fees and increased
other revenue as discussed below.
Rent from operating leases decreased to $2,275,181 and $5,676,172 in the three
and six months ended June 30, 2001, as compared to $3,145,675 and $6,291,351 for
the respective periods in 2000. This was primarily due to the TWA bankruptcy and
acquisition of TWA by American Airlines. Three of the Partnerships 14 leases
were rejected by American, and the monthly rental rate for the 11 Accepted
Aircraft was reduced from $85,000 each to $40,000 each. This decrease was
partially offset by the recognition of deferred revenue of $955,181 and
$2,530,504 in the three and six months ended June 30, 2001. As discussed in Note
2, the deferred revenue existing at the time of the lease revisions in March
2001 is being recognized over the new lease terms for the Accepted Aircraft,
while it was recognized upon lease rejection for the three Rejected Aircraft.
Interest income decreased during the three and six months ended June 30, 2001,
as compared to the same periods in 2000, primarily due to lower average cash
reserves and a lower rate of return on those cash reserves.
Other income increased during the six months ended June 30, 2001, as compared to
the same period in 2000, primarily due to the receipt of default interest from
TWA as a result of late rental payments, which were cured, for eleven of the
aircraft, on March 12, 2001 as discussed above.
Depreciation expense decreased during the three and six months ended June 30,
2001, as compared to the same periods in 2000, primarily due to the downward
adjustment to the book value of the aircraft in the fourth quarter 2000. At June
30, 2001, three of the Partnership's aircraft were classified as held for sale
and were carried at the lower of cost or fair value less cost to sell.
Operating expense increased during the three and six months ended June 30, 2001,
as compared to the same periods in 2000, primarily due to maintenance and
storage related costs associated with the return of the three Rejected Aircraft.
13
Administration and other expenses increased during the three and six months
ended June 30, 2001, as compared to the same periods in 2000, primarily due to
legal and printing and postage costs incurred in connection with the TWA
Bankruptcy.
Interest expense decreased during the three and six months ended June 30, 2001,
as compared to the same periods in 2000, due to the final payoff of the notes
payable for the TWA hushkits.
Management fees decreased during the three and six months ended June 30, 2001 as
compared to the same periods in 2000, primarily due to the lower monthly rentals
earned on the eleven aircraft that remain on lease with TWA as well as the
amortization of accrued management fees of $54,237 and $100,239 during the three
and six months ended June 30, 2001, which are being amortized similar to
deferred revenue as discussed above.
Liquidity and Cash Distributions
Liquidity - The Partnership received all payments due from its sole lessee, TWA
Airlines LLC, for the eleven Assumed Leases as discussed above, during the six
months ended June 30, 2001.
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, 2001 and 2000 were $1,874,899, or $3.75 per limited
partnership unit and $1,874,899, or $3.75 per unit, respectively. Cash
distributions to limited partners during the six months ended June 30, 2001 and
2000 were $4,124,777, or $8.25 per limited partnership unit and $3,849,792, or
$7.70 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. The distributions made on July 16, 2001, were supplemented by a
lowering of remarketing reserves and were, therefore, exceptionally large.
Future cash distributions are expected to be materially affected by the lower
lease rates earned under the Assumed Leases.
14
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) 2000 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, 2001,
there are several pending legal actions or proceedings involving the
Partnership. Except as described below, there have been no material developments
with respect to any such actions or proceedings during the period covered by
this report.
Viscount Air Services, Inc. (Viscount) Bankruptcy - In connection with the
lawsuit by Wells Fargo Bank Northwest, N.A., fka First Security Bank, National
Association, as owner trustee for the Partnership (FSB), against BAE Aviation,
Inc. and the counterclaim by STS Services, Inc., Piping Design Services, Inc.,
dba PDS Technical Services, and BAE Aviation, Inc., a repayment of the attorney
fees and costs incurred by FSB et al. on appeal was secured by a supersedeas
bond issued by Reliance Insurance Company in the amount of $200,000. The surety
wired $236,590 in full satisfaction of the attorney fees and costs awards to FSB
et al. FSB acknowledged satisfaction of the attorney fees and costs obligation
and the supersedeas bond was exonerated. This payment finally resolves the
litigation.
Kepford, et al. V. Prudential Securities, et al. - In connection with the action
filed in the District Court of Harris County, Texas against Polaris Investment
Management Corporation, Polaris Securities Corporation, Polaris Holding Company,
Polaris Aircraft Leasing Corporation, the Partnership, Polaris Aircraft Income
Fund I, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV,
Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, General
Electric Capital Corporation, Prudential Securities, Inc., Prudential Insurance
Company of America and James J. Darr, on June 5, 2001, the remaining plaintiffs
who did not ask the court to dismiss their claims, Gerald and Judy Beckman, made
a motion to retain the case on the docket of the District Court of Harris
County, Texas with respect to their purported claims against all defendants
except Prudential Insurance Company of America and James J. Darr. On June 27,
2001, the Court entered a docket control order providing for a schedule for
discovery and a trial date of December 3, 2001.
Other Proceedings - Item 10 in Part III of the Partnership's 2000 Form 10-K and
Item 1 of Part II of the Partnership's Form 10-Q for the period ended March 31,
2001 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
15
No reports on Form 8-K were filed by the Registrant during the quarter
for which this report is filed.
16
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 13, 2001 By: /S/Steve Yost
------------------------ -------------
for Keith Helming
Chief Financial Officer
17