UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
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 March 31, 2002
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 17 pages.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 2002
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 2002 and
December 31, 2001...........................................3
b) Statements of Operations - Three Months
Ended March 31, 2002 and 2001...............................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2001
and Three Months Ended March 31, 2002.......................5
d) Statements of Cash Flows - Three Months
Ended March 31, 2002 and 2001...............................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.......................16
Signature .......................................................17
2
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 8,427,013 $ 12,639,824
RENT AND OTHER RECEIVABLES net of
allowance for credit losses of $85,000
and $85,000 in 2002 and 2001 364,822 404,822
AIRCRAFT, held for sale 185,000 185,000
AIRCRAFT, net of accumulated depreciation
of $68,851,785 in 2002 and $67,849,268
in 2001 5,280,040 6,564,553
------------ ------------
Total Assets $ 14,256,875 $ 19,794,199
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 534,073 $ 637,651
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 616,110 618,589
DEFERRED INCOME 1,485,771 1,999,872
------------ ------------
Total Liabilities 2,635,954 3,256,112
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,567,564) (3,531,847)
Limited Partners, 499,960 units
(499,966 for 2001) issued and
outstanding 15,188,485 20,069,934
------------ ------------
Total Partners' Capital 11,620,921 16,538,087
------------ ------------
Total Liabilities and Partners'
Capital $ 14,256,875 $ 19,794,199
============ ============
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 March 31,
----------------------------
2002 2001
---- ----
REVENUES:
Rent from operating leases $1,686,101 $3,400,991
Interest 39,274 245,479
Gain on sale of aircraft 65,000 --
Other 78,945 41,056
---------- ----------
Total Revenues 1,869,320 3,687,526
---------- ----------
EXPENSES:
Depreciation 1,099,513 1,156,656
Management fees to general partner 34,015 46,096
Operating 26,580 25,352
Interest -- 7,681
Administration and other 71,201 68,644
---------- ----------
Total Expenses 1,231,309 1,304,429
---------- ----------
NET INCOME $ 638,011 $2,383,097
========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 519,800 $ 248,796
========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 118,211 $2,134,301
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.24 $ 4.27
========== ==========
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, 2001 and
Three Months Ended March 31, 2002
---------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 2000 $ (3,448,329) $ 28,326,889 $ 24,878,560
Net income 1,183,080 3,142,429 4,325,509
Cash distributions to partners (1,266,598) (11,399,384) (12,665,982)
------------ ------------ ------------
Balance, December 31, 2001 (3,531,847) 20,069,934 16,538,087
Net income 519,800 118,211 638,011
Cash distributions to partners (555,517) (4,999,660) (5,555,177)
------------ ------------ ------------
Balance, March 31, 2002 $ (3,567,564) $ 15,188,485 $ 11,620,921
============ ============ ============
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)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income $ 638,011 $ 2,383,097
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,099,513 1,156,656
Gain on sale of aircraft (65,000) --
Changes in operating assets and liabilities:
Decrease in rent and other receivables 40,000 807,994
Decrease in other assets -- 13,915
Increase (decrease) in payable to
affiliates (103,578) 54,089
Increase (decrease) in accounts payable
and accrued liabilities (2,479) 914,353
Decrease in deferred income (514,101) (1,455,325)
------------ ------------
Net cash provided by operating
activities 1,092,366 3,874,779
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft 250,000 --
------------ ------------
Net cash provided by investing
activities 250,000 --
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable -- (273,726)
Cash distributions to partners (5,555,177) (2,499,865)
------------ ------------
Net cash used in financing
activities (5,555,177) (2,773,591)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (4,212,811) 1,101,188
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 12,639,824 19,195,305
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,427,013 $ 20,296,493
============ ============
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 accounting principles generally
accepted in the United States ("GAAP"). These statements should be read in
conjunction with the financial statements and notes thereto for the years ended
December 31, 2001, 2000, and 1999 included in the Partnership's 2001 Annual
Report to the SEC on Form 10-K.
2. TWA Bankruptcy Filing and Transaction with American Airlines
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,
eleven of the fourteen then existing leases (collectively the "Previous
Leases"). 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.
On April 9, 2001, the American acquisition of the selected TWA assets was
consummated. As a result of this closing, TWA Airlines LLC (TWA LLC) assumed the
Previous Leases applicable to eleven of the fourteen Aircraft, and
simultaneously, such Previous Leases were amended to incorporate modified terms
(as so assumed and amended, the "Assumed Leases"). The Assumed Leases are
substantially less favorable to the Partnership than the Previous 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 TWA LLC 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 Previous Leases, provided that the aggregate average number of months
for which all eleven Aircraft are on lease to TWA LLC were not 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 TWA LLC, as compared to
the corresponding conditions required under the Previous Leases.
With respect to the three Aircraft that American did not elect to acquire, TWA
officially rejected the Previous Leases applicable to these Aircraft
(collectively, the "Rejected Leases") as of April 20, 2001. One of these
7
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. As
aircraft were returned to the Partnership they were parked in storage in Arizona
while the General Partner remarketed them for sale. The three aircraft were sold
on October 19, 2001, for $565,000, resulting in neither a gain nor a loss for
the Partnership. In addition, the General Partner has filed 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 Previous Leases were rejected by
American. Furthermore, the General Partner has filed 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
The TWA bankruptcy had 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 received by the
Partnership in 2001 were 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 nine Aircraft that remain on
lease at March 31, 2002 was reduced from 32 to 12 months remaining at March 31,
2002. In 2002, aggregate rentals will be reduced from approximately $14.3
million, to approximately $3.9 million. Three of the Partnership's Aircraft that
were rejected, had been expected to generate aggregate rentals in 2002 under the
terms of the Previous Leases of approximately $3.0 million (included in the
$14.3 million above). The three aircraft were sold for scrap value in October
2001. One more aircraft returned in 2001, was sold on February 13, 2002 for a
gain of $65,000. An additional aircraft which was returned on March 9, 2002, is
being marketed for sale at scrap value.
The Accounting Treatment of the TWA 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 Statement of
Financial Accounting Standards ("SFAS") 121 in 2000. After a review of the
carrying value of the Aircraft, 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. The write-downs included
the impact of the revised lease terms that were effective as of March 12, 2001.
In accordance with GAAP, the Partnership recognized rental income and management
fees on a straight line basis over the original lease terms of the Previous
Leases. As a result, deferred revenue and accrued management fees were recorded
each month since the inception of each Previous 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 Previous Leases were effectively
modified on March 12, 2001, the Partnership recognized 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
rental revenue and a reduction of management fee respectively in March 2001. For
the Assumed Leases, the deferred revenue and accrued management fees associated
with each Aircraft was recognized over the new lease terms, ranging from 4
months to 30 months as of March 31, 2001. As of March 31, 2002, the Partnership
had a deferred revenue balance of $1,485,771, and a deferred management fee
balance of $68,953 included in Payable to Affiliates on the Balance Sheet, which
8
will be recognized over the remaining lives of the aircraft leases, up to 18
months.
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
March 31, 2002 March 31, 2002
-------------- --------------
Aircraft Management Fees $ -- $433,813
Out-of-Pocket Operating
Expense Reimbursement 152,965 100,260
Out-of-Pocket Administrative
Expense Reimbursement 84,887 --
-------- --------
$237,852 $534,073
======== ========
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.
5. Sale of Aircraft
On February 13, 2002 PIMC, on behalf of the Partnership, sold one DC-9-30
aircraft to Amtec Corporation for $250,000 cash. The Partnership recognized a
gain of $65,000 over its book value.
6. New Accounting Pronouncements
In June 2001, the FASB approved for issuance SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred and that the associated asset retirement costs be
9
capitalized as part of the carrying value of the related long-lived asset. SFAS
No. 143 will be effective January 1, 2003 for the Partnership. Management does
not expect this standard to have a material impact on the Partnership's balance
sheet or statement of operations.
In August 2001, the FASB approved for issuance SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 broadens the
presentation of discontinued operations to include more transactions and
eliminates the need to accrue for future operating losses. Additionally, SFAS
No. 144 prohibits the retroactive classification of assets as held for sale and
requires revisions to the depreciable lives of long-lived assets to be
abandoned. SFAS No. 144 became effective January 1, 2002 for the Partnership and
has not had a material impact on the Partnership's balance sheet or statement of
operations.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Overview
At March 31, 2002, Polaris Aircraft Income Fund II, A California Limited
Partnership (the "Partnership") owned a portfolio of 10 used McDonnell Douglas
DC-9-30 commercial jet aircraft, and spare parts inventory out of its original
portfolio of 30 aircraft. Nine of these aircraft were on lease to TWA Airlines,
LLC. The one remaining aircraft was being stored in Arizona and was actively
being remarketed for sale.
Remarketing Update
TWA Bankruptcy Filing and Transaction with American Airlines
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 Previous Leases applicable to eleven of the fourteen Aircraft. 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.
On April 9, 2001, the American acquisition of the selected TWA assets was
consummated. As a result of this closing, TWA LLC assumed the Previous Leases
applicable to eleven of the fourteen Aircraft, and simultaneously, such Previous
Leases were amended to incorporate modified terms (as so assumed and amended,
the "Assumed Leases"). The Assumed Leases are substantially less favorable to
the Partnership than the Previous 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 TWA LLC 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 Previous Leases, provided that the aggregate
average number of months for which all eleven Aircraft are on lease to TWA LLC
is not 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 TWA LLC, as compared to the corresponding conditions required under the
Previous Leases.
With respect to the three Aircraft that American did not elect to acquire, TWA
officially rejected the Previous 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. As
aircraft were returned to the Partnership they were parked in storage in Arizona
while the General Partner remarketed them for sale. The three aircraft were sold
11
on October 19, 2001 for $565,000, resulting in neither a gain nor a loss for the
Partnership. In addition, the General Partner has filed 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 Previous Leases were rejected by American.
Furthermore, the General Partner has filed 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
The TWA bankruptcy had 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 received by the
Partnership in 2001 were 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 nine Aircraft that remain on
lease at March 31, 2002 was reduced from 32 to 12 months remaining at March 31,
2002. In 2002, aggregate rentals will be reduced from approximately $14.3
million, to approximately $3.9 million. Three of the Partnership's Aircraft that
were rejected, had been expected to generate aggregate rentals in 2002 under the
terms of the Previous Leases of approximately $3.0 million (included in the
$14.3 million above). The three aircraft were sold for scrap value in October
2001. One more aircraft returned in 2001, was sold on February 13, 2002 for a
gain of $65,000. An additional aircraft which was returned on March 9, 2002, is
being marketed for sale at scrap value.
The Accounting Treatment of the TWA 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 in 2000.
After a review of the carrying value of the Aircraft, 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. The
write-downs included the impact of the revised lease terms that were effective
as of March 12, 2001.
In accordance with GAAP, the Partnership recognized rental income and management
fees on a straight line basis over the original lease terms of the Previous
Leases. As a result, deferred revenue and accrued management fees were recorded
each month since the inception of each Previous 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 Previous Leases were effectively
modified on March 12, 2001, the Partnership recognized 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
rental revenue and a reduction of management fee respectively in March 2001. For
the Assumed Leases, the deferred revenue and accrued management fees associated
with each Aircraft was recognized over the new lease terms, ranging from 4
months to 30 months as of March 31, 2001. As of March 31, 2002, the Partnership
had a deferred revenue balance of $1,485,771, and a deferred management fee
balance of $68,953 included in Payable to Affiliates on the Balance Sheet, which
will be recognized over the remaining lives of the aircraft leases, up to 18
months.
12
Partnership Operations
The Partnership recorded net income of $638,011, or $0.24 per limited
partnership unit, for the three months ended March 31, 2002, compared to net
income of $2,383,097, or $4.27 per limited partnership unit, for the three
months ended March 31, 2001.
The decrease in net income is primarily due to decreases in rental and interest
income, partially offset by increases in gain on sale of aircraft and other
income and decreases in depreciation and management fees, as discussed below.
Rental income decreased for the three months ended March 31, 2002, as compared
to the same period in 2001, primarily due to lower lease rates and fewer
aircraft on lease as a result of the TWA bankruptcy and the recognition of
$950,130 of deferred revenue on the three Rejected leases in the first quarter
of 2001. As discussed in Note 2, in April of 2001 three of the Partnership's
fourteen leases were rejected by American, and the monthly rental rate for the
accepted aircraft was reduced from $85,000 each to $40,000 each. 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 months ended March 31, 2002, as
compared to the same period in 2001, primarily due to lower average cash
reserves and lower average interest rates over the same period.
Gain on sale of aircraft increased during the three months ended March 31, 2002,
as compared to the same period in 2001, due to the sale of one of the
Partnership's aircraft on February 13, 2002 for $250,000 resulting in a gain of
$65,000.
Other income increased during the three months ended March 31, 2002, as compared
to the same period in 2001, primarily due to payments made by TWA LLC for the
return of an aircraft that did not meet return conditions required by the lease.
Depreciation expense decreased during the three months ended March 31, 2002, as
compared to the same period in 2001, primarily due to fewer aircraft remaining
on lease.
Management fees decreased during the three months ended March 31, 2002, as
compared to the same period in 2001 primarily due to lower rental revenue.
Liquidity and Cash Distributions
Liquidity - The Partnership received all payments due from its sole lessee, TWA
Airlines LLC, for the aircraft remaining on lease during the three months ended
March 31, 2002.
Through the time of the TWA bankruptcy filing, discussed above under "TWA
Bankruptcy Filing and Transaction with American Airlines", the General Partner
had determined that the Partnership maintain cash reserves as a prudent measure
to ensure that the Partnership would have available funds in the event that the
aircraft on lease to TWA required remarketing, and for other contingencies
including expenses of the Partnership. During 2001 such reserves were reduced
from $14 million down to $2.5 million due to reduced expectations of future cash
13
requirements. The Partnership's cash reserves will be monitored and may be
revised from time to time as further information becomes available.
Cash Distributions - Cash distributions to limited partners during the three
months ended March 31, 2002 and 2001 were $4,999,660, or $10.00 per limited
partnership unit, and $2,249,879, or $4.50 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; the receipt of rental payments from TWA LLC, and payments generated
from the aircraft sales proceeds.
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) 2001 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K), there are several pending legal actions or proceedings
involving the Partnership. There have been no material developments with respect
to any of the actions described therein during the period covered by this
report.
Other Proceedings - Item 10 in Part III of the Partnership's 2001 Form 10-K
discusses 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. 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.
Sara J. Bishop, et al. v. Kidder, Peabody & Co., et al., Superior Court of
California, County of Sacramento; Wilson et al. v. Polaris Holding Company et
al., Superior Court of California, County of Sacramento, and ten other
California Actions(1) - In the California actions filed in 1996, approximately
4000 plaintiffs who purchased limited partnership units in Polaris Aircraft
Income Funds I through VI and other limited partnerships sold by Kidder, Peabody
named Kidder, Peabody, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, and General Electric Credit
Corporation and Does 1-100 as defendants. The Partnership was not named as a
defendant in these actions. The complaints all allege violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaints seek to recover compensatory damages and punitive damages in an
unspecified amount, interest, and rescission with respect to Polaris Aircraft
Income Funds III-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The California actions have been settled.
An additional settlement was entered into with certain plaintiffs who had
refused to participate in the first settlement. Plaintiffs' counsel advised the
Court that they would withdraw from representing the remaining plaintiffs --
approximately 330 -- who refused to participate in either of the settlements. In
July, 2000, plaintiffs' counsel submitted to the Court motions to withdraw as
counsel of record for all of the actions. The Court indicated that it would
grant such motions and thereafter would consider dismissing each of the actions
if no plaintiff came forward to prosecute. On August 2, 2001, the Court
conducted a series of status conferences in connection with each of the twelve
California actions and at the conferences dismissed most of the remaining
plaintiffs in those actions. On November 9, 2001, defendants moved for summary
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1 The ten other actions are Abrams, et al. v. Polaris Holding Company, et al.,
Elphick, et al. v. Kidder Peabody & Co., et al., Johnson, et al. v. Polaris
Holding Company, et al., Kuntz, et al. v. Polaris Holding Company, et al.,
McDevitt, et al. v. Polaris Holding Company, et al., Ouellette, et al. v. Kidder
Peabody & Co., et al., Rolph, et al. v. Polaris Holding Company, et al., Self,
et al. v. Polaris Holding Company, et al., Tarrer, et al. v. Kidder Peabody &
Co., et al., Zicos, et al. v. Polaris Holding Company, et al., all filed in
Superior Court of California, County of Sacramento.
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judgment against most of the remaining plaintiffs based upon a settlement and
bar order entered in a multi-district litigation in 1997. On March 1, 2002 the
judge granted the defendants' summary judgment motions. This action does not
have a material adverse effect on the Partnership.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
None.
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.
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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
May 13, 2002 By: /S/Stephen E. Yost
---------------- ----------------------------------------
Stephen E. Yost, Chief Financial Officer
17