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 September 30, 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 21 pages.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended September 30, 2002
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - September 30, 2002 and
December 31, 2001...........................................3
b) Statements of Income - Three and Nine Months
Ended September 30, 2002 and 2001...........................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2001
and Nine Months Ended September 30, 2002....................5
d) Statements of Cash Flows - Nine Months
Ended September 30, 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
Item 4. Controls and Procedures................................14
Part II. Other Information
Item 1. Legal Proceedings......................................15
Item 6. Exhibits and Reports on Form 8-K.......................16
Signature...........................................................17
Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002..........................................18
2
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
September 30, December 31,
2002 2001
(Unaudited) ----
-----------
ASSETS:
CASH AND CASH EQUIVALENTS $ 9,878,632 $ 12,639,824
RENT AND OTHER RECEIVABLES net of
allowance for credit losses of $85,000 and
$85,000 in 2002 and 2001, respectively 281,560 404,822
AIRCRAFT, held for sale 555,000 185,000
AIRCRAFT ON OPERATING LEASES,
net of accumulated depreciation of
$54,452,615 in 2002 and $75,763,132 in 2001 3,191,208 6,564,553
------------ ------------
Total Assets $ 13,906,400 $ 19,794,199
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 133,443 $ 637,651
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 501,230 618,589
DEFERRED INCOME 762,978 1,999,872
------------ ------------
Total Liabilities 1,397,651 3,256,112
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,558,686) (3,531,847)
Limited Partners, 499,935 units (499,966
in 2001) issued and outstanding 16,067,435 20,069,934
------------ ------------
Total Partners' Capital (Deficit) 12,508,749 16,538,087
------------ ------------
Total Liabilities and Partners' Capital
(Deficit) $ 13,906,400 $ 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 INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Rent from operating leases $1,255,824 $1,977,910 $4,319,561 $7,654,082
Interest 40,670 116,707 120,221 573,144
Gain on sale of aircraft -- -- 65,000 --
Other 128,738 4,864 265,063 45,920
---------- ---------- ---------- ----------
Total Revenues 1,425,232 2,099,481 4,769,845 8,273,146
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 813,485 1,232,463 2,818,345 3,485,470
Management fees to general
partner 30,149 32,117 98,534 89,973
Operating 50,011 54,887 113,004 225,500
Interest -- -- -- 13,525
Legal 1,153 103,131 18,728 227,423
Administration and other 50,770 81,541 195,395 263,816
---------- ---------- ---------- ----------
Total Expenses 945,568 1,504,139 3,244,006 4,305,707
---------- ---------- ---------- ----------
NET INCOME $ 479,664 $ 595,342 $1,525,839 $3,967,439
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 4,796 $ 608,360 $ 528,679 $1,054,518
========== ========== ========== ==========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 474,868 $ (13,018) $ 997,160 $2,912,921
========== ========== ========== ==========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 0.95 $ (0.03) $ 1.99 $ 5.83
========== ========== ========== ==========
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)
Year Ended December 31, 2001 and
Nine Months Ended September 30, 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 (Unaudited) 528,679 997,160 1,525,839
Cash distribution to partners
(Unaudited) (555,518) (4,999,659) (5,555,177)
------------ ------------ ------------
Balance, September 30, 2002
(Unaudited) $ (3,558,686) $ 16,067,435 $ 12,508,749
============ ============ ============
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)
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income $ 1,525,839 $ 3,967,439
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,818,345 3,485,470
Gain on sale of aircraft (65,000) --
Changes in operating assets and liabilities:
Decrease in rent and other receivables 123,262 402,135
Decrease in other assets -- 13,915
Increase (decrease) in payable to
affiliates (504,208) 106,373
Increase (decrease) in accounts payable
and accrued liabilities (117,359) 6,543
Decrease in deferred income (1,236,894) (3,183,081)
------------ ------------
Net cash provided by operating
activities 2,543,985 4,798,794
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft 250,000 --
------------ ------------
Net cash provided by investing
activities 250,000 --
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable -- (493,388)
Cash distributions to partners (5,555,177) (11,277,169)
------------ ------------
Net cash used in financing
activities (5,555,177) (11,770,557)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (2,761,192) (6,971,763)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 12,639,824 19,195,305
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 9,878,632 $ 12,223,542
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ -- $ 12,841
============ ============
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. Organization and the Partnership
Polaris Aircraft Income Fund II, A California Limited Partnership (the
"Partnership") was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. The Partnership will terminate no later than December 2010.
Upon organization, both the General Partner and the initial Limited Partner
contributed $500. The Partnership recognized no profits or losses during the
periods ended December 31, 1985 and 1984. The offering of Limited Partnership
units terminated on December 31, 1986, at which time the Partnership had sold
499,997 units of $500, representing $249,998,500. All partners were admitted to
the Partnership on or before December 1, 1986. During January 1998, 24 units
were redeemed by the Partnership in accordance with section 18 of the Limited
Partnership agreement. During December 2001, 7 units were abandoned. During the
nine months ended September 30, 2002, 31 units were abandoned. At September 30,
2002, there were 499,935 units outstanding.
Polaris Investment Management Corporation ("PIMC"), the sole General Partner of
the Partnership (the "General Partner"), supervises the day-to-day operations of
the Partnership. PIMC is a wholly-owned subsidiary of Polaris Aircraft Leasing
Corporation ("PALC"). Polaris Holding Company ("PHC") is the parent company of
PALC. General Electric Capital Corporation ("GE Capital"), an affiliate of
General Electric Company, owns 100% of PHC's outstanding common stock. PIMC has
entered into a services agreement dated as of July 1, 1994 with GE Capital
Aviation Services, Inc. ("GECAS"). Amounts paid and allocations to related
parties are described in Notes 4 and 5.
At September 30, 2002, 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. Seven of these aircraft were on lease to TWA
Airlines LLC ("TWA LLC"), a wholly owned subsidiary of American Airlines, Inc.
("American"). The three remaining aircraft were being stored in New Mexico and
were being remarketed for sale.
2. 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 the Partnership's balance sheets, results of operations, and
cash flows. 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.
3. TWA Bankruptcy Filing and Transaction with American Airlines
Trans World Airlines, Inc. ("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,
7
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 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.
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 was 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 TWA LLC 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
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 rent
claims in the amount of $422,989 in the TWA bankruptcy proceeding in an effort
to recover the fair value of TWA's actual use, if any, of these three Aircraft
under the Rejected Leases during the 60-day period following TWA's filing of its
bankruptcy petition. These administrative rent claims have been approved by the
estate with the plan of reorganization on June 25, 2002 (the "Plan") and will be
paid to the Partnership through periodic distributions over the next one to two
years. These funds will be recognized on a cash basis as they are received. The
General Partner also filed administrative claims in the amount of $95,359 in the
TWA bankruptcy proceeding in connection with certain legal expenses incurred by
the Partnership in connection with the bankruptcy proceeding which were settled
for $73,448 with the estate under the Plan. The settlement was received by the
Partnership on September 26, 2002. 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 general unsecured
claims or be able to collect any amounts out of the TWA bankruptcy estate.
The Accounting Treatment of the TWA Transaction
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
8
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 were recognized over the new lease terms, ranging
from 4 months to 30 months as of March 31, 2001. As of September 30, 2002, the
Partnership had a deferred revenue balance of $762,978, and a deferred
management fee balance of $35,400 included in Payable to Affiliates on the
Balance Sheet, which will be recognized over the remaining lives of the aircraft
leases, up to 12 months.
4. 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, PIMC, in
connection with services rendered or payments made on behalf of the Partnership:
Payments made during the
Three Months Ended Payable at
September 30, 2002 September 30, 2002
------------------ ------------------
Aircraft Management Fees $ 47,867 $ 49,400
Out-of-Pocket Operating
Expense Reimbursement 45,107 44,912
Out-of-Pocket Administrative
Expense Reimbursement 86,670 39,131
-------- --------
$179,644 $133,443
======== ========
5. Partners' Capital (Deficit)
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
6. 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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Overview
At September 30, 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. Seven of these aircraft were on lease to TWA Airlines
LLC ("TWA LLC"), a wholly owned subsidiary of American Airlines, Inc.
("American"). The three remaining aircraft were being stored in New Mexico and
were being remarketed for sale.
Remarketing Update
TWA Bankruptcy Filing and Transaction with American Airlines
Trans World Airlines, Inc. ("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 (the "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.
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 was 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 TWA LLC 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
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 rent
claims in the amount of $422,989 in the TWA bankruptcy proceeding in an effort
to recover the fair value of TWA's actual use, if any, of these three Aircraft
11
under the Rejected Leases during the 60-day period following TWA's filing of its
bankruptcy petition. These administrative rent claims have been approved by the
estate with the plan of reorganization on June 25, 2002 (the "Plan") and will be
paid to the Partnership through periodic distributions over the next one to two
years. These funds will be recognized on a cash basis as they are received. The
General Partner also filed administrative claims in the amount of $95,359 in the
TWA bankruptcy proceeding in connection with certain legal expenses incurred by
the Partnership in connection with the bankruptcy proceeding which were settled
for $73,448 with the estate under the Plan. The settlement was received by the
Partnership on September 26, 2002. 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 general unsecured
claims or be able to collect any amounts out of the TWA bankruptcy estate.
The Accounting Treatment of the TWA Transaction
In accordance with accounting principles generally accepted in the United States
("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 were recognized over the new lease terms, ranging
from 4 months to 30 months as of March 31, 2001. As of September 30, 2002, the
Partnership had a deferred revenue balance of $762,978, and a deferred
management fee balance of $35,400 included in Payable to Affiliates on the
Balance Sheet, which will be recognized over the remaining lives of the aircraft
leases, up to 12 months.
Partnership Operations
The Partnership recorded net income of $479,664, or $0.95 per limited
partnership unit, for the three months ended September 30, 2002, compared to net
income of $595,342, or a loss of $0.03 per limited partnership unit, for the
three months ended September 30, 2001. The Partnership recorded net income of
$1,525,839, or $1.99 per limited partnership unit, for the nine months ended
September 30, 2002, compared to net income of $3,967,439, or $5.83 per limited
partnership unit, for the nine months ended September 30, 2001. The decreases in
net income for the three and nine months ended September 30, 2002, is primarily
due to decreases in rental and interest income, partially offset by increases in
gain on sale of aircraft and other income as well as decreases in depreciation,
operating, legal, and administration and other expenses as discussed below.
Rent from operating leases decreased to $1,255,824 and $4,319,561 in the three
and nine months ended September 30, 2002, as compared to $1,977,910 and
$7,654,082 for the respective periods in 2001. This was primarily due to lower
lease rates and fewer aircraft on lease as a result of the TWA bankruptcy.
Additionally, the decrease in rent from operating leases was also caused by
lower recognition of deferred revenue of $338,490 and $1,236,894 in the three
and nine months ended September 30, 2002 as compared to $652,578 and $3,183,081
of deferred revenue being recognized in the respective periods in 2001. As
discussed in Note 3 to the financial statements, the deferred revenue balance
12
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 nine months ended September 30,
2002, as compared to the same periods in 2001, primarily due to lower average
cash balances and a lower rate of return on those cash balances.
Gain on sale of aircraft during the nine months ended September 30, 2002 related
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 and nine months ended September 30,
2002, as compared to the same periods in 2001, primarily due to payments made by
TWA LLC in March, April and September, 2002 for the return of aircraft that did
not meet return conditions required by the leases and due to a payment of
$73,448 for the settlement of administrative claims in connection with TWA's
bankruptcy proceedings.
Depreciation expense decreased during the three and nine months ended September
30, 2002, as compared to the same periods in 2001, primarily due to fewer
aircraft remaining on lease and being depreciated.
Operating expense decreased during the three and nine months ended September 30,
2002, as compared to the same periods in 2001, primarily due to fewer aircraft
being stored in the 2002 periods than in the corresponding periods in 2001.
Legal expenses decreased during the three and nine months ended September 30,
2002, as compared to the same periods in 2001, primarily due to the high costs
incurred in the 2001 periods in connection with the TWA Bankruptcy. Legal fees
during 2002 are primarily due to fees incurred to comply with an SEC prompted
court order related to transfers of units to entities owned by an investor.
Administration and other expense decreased during the three and nine months
ended September 30, 2002, as compared to the same periods in 2001, primarily due
to extra printing and postage expenses incurred in 2001 due to the issuance of
an 8-K related to the TWA bankruptcy.
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 nine months ended
September 30, 2002.
PIMC, the General Partner, has decided that cash reserves should 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 - There were no cash distributions to limited partners during
the three months ended September 30, 2002 compared to cash distributions of
$6,024,675, or $12.05 per limited partnership unit, during the three months
ended September 30, 2001. Cash distributions to limited partners during the nine
13
months ended September 30, 2002 and 2001 were $4,999,659, or $10.00 per limited
partnership unit and $10,149,452, or $20.30 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 aircraft sales proceeds.
Item 4. Controls and Procedures
PIMC management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
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") 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 June
30, 2002, 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 2001 Form 10-K and
Item 1 of Part II of the Partnership's Quarterly Reports to the SEC on Form 10-Q
for the period ended June 30, 2002 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. Except as described in the last
sentence 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
- --------
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. On August 15, 2002, the
judge entered a judgment of dismissal in each of the California actions.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
99.1 Certification of President.
99.2 Certification of Chief Financial Officer.
b) Reports on Form 8-K
As described in greater detail in Item 4 of the Current Report on Form
8-K dated August 1, 2002 and first filed by the Partnership on or about
August 2, 2002, the Partnership adopted a resolution dismissing Arthur
Andersen LLP ("Andersen") as the Partnership's auditors and appointed
Ernst & Young LLP to replace Andersen.
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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
November 12, 2002 By: /S/Stephen E. Yost
--------------------- ------------------
Stephen E. Yost, Chief Financial Officer
17
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, William R. Carpenter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Polaris Aircraft Income
Fund II (A California Limited Partnership);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
18
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
By: Polaris Investment Management Corporation,
General Partner
/s/ William R. Carpenter
- ------------------------
William R. Carpenter
President
19
CERTIFICATION
- -------------
I, Stephen E. Yost, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Polaris Aircraft Income
Fund II (A California Limited Partnership);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
20
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
By: Polaris Investment Management Corporation,
General Partner
/s/ Stephen E. Yost
- -------------------
Stephen E. Yost
Chief Financial Officer
21