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 March 31, 2004
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes No X
--- ---
This document consists of 15 pages.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 2004
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a) Condensed Balance Sheets - March 31, 2004 and
December 31, 2003............................................3
b) Condensed Statements of Operations - Three Months
Ended March 31, 2004 and 2003................................4
c) Condensed Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2003
and Three Months Ended March 31, 2004........................5
d) Condensed Statements of Cash Flows - Three Months
Ended March 31, 2004 and 2003................................6
e) Notes to Condensed Financial Statements......................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........10
Item 4. Controls and Procedures.................................13
Part II. Other Information
Item 1. Legal Proceedings.......................................14
Item 6. Exhibits and Reports on Form 8-K........................14
Signature ........................................................15
2
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 4,025,975 $ 4,649,947
RENT AND OTHER RECEIVABLES 1,612 1,612
AIRCRAFT HELD FOR SALE 775,000 1,049,000
PREPAID EXPENSE 15,131 --
----------- -----------
Total Assets $ 4,817,718 $ 5,700,559
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 192,497 $ 120,867
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 99,720 124,580
----------- -----------
Total Liabilities 292,217 245,447
----------- -----------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,660,097) (3,651,782)
Limited Partners, 499,730 units in 2004
and 499,757 units in 2003
issued and outstanding 8,185,598 9,106,894
----------- -----------
Total Partners' Capital 4,525,501 5,455,112
----------- -----------
Total Liabilities and Partners' Capital $ 4,817,718 $ 5,700,559
=========== ===========
The accompanying notes are an integral part of these condensed statements.
3
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2004 2003
---- ----
REVENUES:
Rent from operating leases $ -- $ 962,095
Interest 9,756 15,249
Gain on sale of aircraft 1,000 --
Lessee return condition settlements -- 30,115
----------- -----------
Total Revenues 10,756 1,007,459
----------- -----------
EXPENSES:
Depreciation -- 599,790
Write-up of aircraft held for sale (175,000) --
Management fees to general partner -- 24,619
Operating 74,198 52,199
Administration and other 69,419 61,363
----------- -----------
Total Expenses (31,383) 737,971
----------- -----------
NET INCOME $ 42,139 $ 269,488
=========== ===========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 88,860 $ 605,022
=========== ===========
NET LOSS ALLOCATED TO
LIMITED PARTNERS $ (46,721) $ (335,534)
=========== ===========
NET LOSS PER LIMITED
PARTNERSHIP UNIT $ (0.09) $ (0.67)
=========== ===========
The accompanying notes are an integral part of these condensed statements.
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POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
CONDENSED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 2003 and
Three Months Ended March 31, 2004
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 2002 $ (3,555,808) $ 16,352,341 $ 12,796,533
Net income (loss) 598,345 (996,571) (398,226)
Cash distribution to
partners ($12.50 per
Limited Partnership Unit) (694,319) (6,248,876) (6,943,195)
------------ ------------ ------------
Balance, December 31, 2003 (3,651,782) 9,106,894 5,455,112
Net income (loss) 88,860 (46,721) 42,139
Cash distribution to
partners ($1.75 per
Limited Partnership Unit) (97,175) (874,575) (971,750)
------------ ------------ ------------
Balance, March 31, 2004 $ (3,660,097) $ 8,185,598 $ 4,525,501
============ ============ ============
The accompanying notes are an integral part of these condensed statements.
5
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2004 2003
---- ----
OPERATING ACTIVITIES:
Net income $ 42,139 $ 269,488
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Depreciation -- 599,790
Write-up of aircraft held for sale (175,000) --
Gain on sale of aircraft (1,000) --
Changes in operating assets and
liabilities:
Increase in rent and other receivables -- (28,781)
Increase in prepaid expense (15,131) --
Increase in payable to affiliates 71,630 77,851
Decrease in accounts payable and
accrued liabilities (24,860) (13,798)
Decrease in deferred income -- (243,429)
------------ ------------
Net cash (used in) provided by
operating activities (102,222) 661,121
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft 450,000 --
------------ ------------
Net cash provided by investing
activities 450,000 --
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (971,750) (6,943,195)
------------ ------------
Net cash used in financing activities (971,750) (6,943,195)
------------ ------------
CHANGES IN CASH AND CASH EQUIVALENTS (623,972) (6,282,074)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,649,947 10,605,028
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,025,975 $ 4,322,954
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of operating lease assets to
assets held for sale $ -- $ 185,000
============ ============
The accompanying notes are an integral part of these condensed statements.
6
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and the Partnership
Polaris Aircraft Income Fund II, A California Limited Partnership (PAIF-II or
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 of the Partnership (the General
Partner) and the initial Limited Partner contributed $500. The Partnership
recognized no profits or losses during the periods ended December 31, 1984 and
1985. 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 the
three months ended March 31, 2004, 27 units were abandoned. At March 31, 2004,
there were 499,730 units outstanding, net of redemption.
As of March 31, 2004, the Partnership owned six aircraft which are being
marketed for sale. Upon completion of such sales, the Partnership plans to
liquidate all its assets in an orderly manner, make a final distribution, and
terminate the Partnership thereafter; however, it is uncertain when this
liquidation will occur. The General Partner is actively seeking buyers for the
aircraft; however the actual timing for completing such sales and the prices
obtained will depend upon a number of factors outside the control of the General
Partner, including market conditions. Thus, there can be no assurance as to
either the timing of such sales or whether such sales may be completed on terms
deemed favorable to the Partnership. However, the General Partner intends to
seek to complete such sales during calendar year 2004. On April 14, 2004, the
Partnership entered into a Letter of Intent to sell its six remaining aircraft
to an unaffiliated buyer for a total selling price of $820,000. The sale is
expected to be completed by May 31, 2004.
Polaris Investment Management Corporation (PIMC), the sole General Partner of
the Partnership, 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
3 and 4.
Note 2. Accounting Principles and Policies
In the opinion of management, the condensed financial statements presented
herein include all adjustments, consisting only of normal recurring items,
necessary to summarize fairly 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. The condensed balance sheet at December 31, 2003 has
been derived from the audited financial statements at that date but does not
include all of the information and note disclosures required by accounting
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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, 2003, 2002, and 2001 included in the
Partnership's 2003 Annual Report to the SEC on Form 10-K.
Note 3. Related Parties
Under the Partnership Agreement (the 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
March 31, 2004 March 31, 2004
-------------- --------------
Out-of-Pocket Operating
Expense Reimbursement $ 35,096 $149,308
Out-of-Pocket Administrative
Expense Reimbursement 76,807 43,189
-------- --------
$111,903 $192,497
======== ========
Note 4. Partners' Capital
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.
Note 5. Aircraft and Depreciation
The Partnership periodically reviewed the estimated realizability of the
residual values at the projected end of each aircraft's economic life. For any
downward adjustment in estimated residual value or decrease in the projected
remaining economic life, the depreciation expense over the projected remaining
economic life of the aircraft was increased.
Aircraft on lease were carried at cost unless deemed impaired, in which case the
asset was recorded at fair value. Aircraft on lease were deemed impaired, if the
8
projected net cash flow for each aircraft (projected rental revenue, net of
management fees, less projected maintenance costs, if any, plus the estimated
residual value) was less than the carrying value of the aircraft. An impairment
loss was recognized equal to the difference between the net carrying value of
the asset and its fair value.
Aircraft held for sale are carried at the lower of cost or fair value less cost
to sell. During the three months ended March 31, 2004, the Partnership
recognized a write-up of $175,000 in the carrying value of aircraft held for
sale due to changes in estimated fair market values based on the selling price
of the Partnership's remaining aircraft negotiated in a Letter of Intent dated
April 14, 2004. The adjustment to increase the net carrying value does not
result in a net carrying value in excess of the original net carrying value of
the assets when they were initially designated as held for sale. Management
believes the assumptions related to the fair value of impaired assets represent
the best estimates based on reasonable and supportable assumptions and
projections.
Note 6. Sale of Aircraft
On February 9, 2004, the General Partner, on behalf of the Partnership sold four
DC-9-30 aircraft for $450,000 in cash. The Partnership recognized a gain on the
sale of $1,000.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Overview
At March 31, 2004, Polaris Aircraft Income Fund II (PAIF-II or the Partnership)
owned a portfolio of six used McDonnell Douglas DC-9-30 commercial jet aircraft
(DC-9-30) out of its original portfolio of 30 aircraft. These DC-9-30 aircraft
were being stored in New Mexico and were being marketed for sale. During the
three months ended March 31, 2004, the Partnership sold four DC-9-30 aircraft to
Newjet Corporation on February 9, 2004 for total cash proceeds of $450,000. The
Partnership plans to liquidate all its assets in an orderly manner, make a final
distribution, and terminate the Partnership thereafter; however, it is uncertain
when this liquidation will occur. The General Partner is actively seeking buyers
for the aircraft; however the actual timing for completing such sales and the
prices obtained will depend upon a number of factors outside the control of the
General Partner, including market conditions. Thus, there can be no assurance as
to either the timing of such sales or whether such sales may be completed on
terms deemed favorable to the Partnership. However, the General Partner intends
to seek to complete such sales during calendar year 2004. On April 14, 2004, a
Letter of Intent was signed by an unaffiliated buyer to purchase the six
remaining DC-9-30 aircraft owned by the Partnership for total purchase price of
$820,000. The sale is expected to close in the second quarter.
Partnership Operations
The Partnership recorded net income of $42,139, which resulted in a net loss of
$0.09 per Limited Partnership Unit, for the three months ended March 31, 2004,
compared to net income of $269,488, which resulted in a net loss of $0.67 per
Limited Partnership unit, for the three months ended March 31, 2003. Variances
in net income may not correspond to variances in net income per Limited
Partnership Unit due to the allocation of components of income and loss in
accordance with the Partnership Agreement.
The decrease in net income is primarily due to an absence of rental income, a
decrease in interest income along with an increase in operating expenses,
partially offset by a write-up of the carrying value of aircraft held for sale,
and an absence of depreciation expense and management fees to the General
Partner, as discussed below.
The absence of rental income from operating leases during the three months ended
March 31, 2004, as compared to $962,000 in the same period in 2003, is due to
all lease terms having expired during 2003.
Interest income decreased during the three months ended March 31, 2004, as
compared to the same period in 2003, primarily due to lower interest rates and
lower average cash balances.
The recognized gain on sale of aircraft during the three months ended March 31,
2004 of $1,000 was due to the sale of four of the Partnership's aircraft on
February 9, 2004 for $450,000. There were no aircraft sales during the three
months ended March 31, 2003.
There were no payments of lessee return condition settlements during the three
months ended March 31, 2004, as compared to the same period in 2003, due to all
remaining aircraft having been returned upon lease expiration during 2003. There
was one aircraft returned for the three months ended March 31, 2003, which
required a lessee return condition settlement to be paid.
10
Aircraft held for sale are carried at the lower of cost or fair value less cost
to sell. During the three months ended March 31, 2004, the Partnership
recognized income of $175,000, or $0.35 per Limited Partnership Unit, on the
write-up of the carrying value of five of its aircraft, which previously had
been reduced through additional depreciation expense as the result of past
reviews of estimated market values. The estimated fair market value of the
aircraft held for sale at March 31 2004 was based on the total purchase price of
$820,000 for the Partnership's six DC-9-30's in a Letter of Intent dated April
14, 2004. The carrying value of one of the Partnership's aircraft was not
adjusted at March 31, 2004 because its cost basis determined at lease expiration
was less than the current estimated fair market value. No adjustments to the
market value of aircraft held for sale were made during the same period in 2003.
The absence of depreciation expense and management fees to the General Partner
during the three months ended March 31 2004, as compared to the same period in
2003, was due to all lease terms having expired during 2003.
Operating expenses increased during the three months ended March 31, 2004, as
compared to the same period in 2003, primarily due to maintenance and storage
related costs associated with the aircraft while they are being held for sale.
During the three months ended March 31, 2004, ten aircraft were held in storage
until February 9, 2004 when four were sold and six remained in storage, as
compared to the same period in 2003, when five aircraft were kept in storage.
Administration and other expense increased slightly during the three months
ended March 31, 2004, as compared to the same period in 2003, generally due to
higher costs for printing, postage, legal and trustee fees.
Liquidity and Cash Distributions
Liquidity - No further rent payments were due during the three months ended
March 31, 2004 since all lease terms expired during 2003. 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, 2003.
PIMC, the General Partner, has determined that cash reserves be maintained as a
prudent measure to ensure that the Partnership has available funds for winding
up the affairs of the Partnership and for other contingencies. The Partnership
plans to liquidate all its assets in an orderly manner, make a final
distribution, and terminate the Partnership thereafter; however, it is uncertain
when this liquidation will occur. The General Partner is actively seeking buyers
for the aircraft; however the actual timing for completing such sales and the
prices obtained will depend upon a number of factors outside the control of the
General Partner, including market conditions. Thus, there can be no assurance as
to either the timing of such sales or whether such sales may be completed on
terms deemed favorable to the Partnership. However, the General Partner intends
to seek to complete such sales during calendar year 2004 and, as discussed
above, on April 14, 2004, a Letter of Intent was signed by an unaffiliated buyer
to purchase the six remaining DC-9-30 aircraft owned by the Partnership for
total purchase price of $820,000. 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 March 31, 2004 and 2003 were $874,575, or $1.75 per Limited
Partnership Unit, and 6,248,876, or $12.50 per unit, respectively. The General
Partner has determined that it is in the best interests of the Partnership to
11
suspend any further cash distributions until the Partnership is in a position to
dissolve, wind up and terminate, and make a final distribution of its remaining
cash. In reaching this conclusion, the General Partner considered the
anticipated costs of storing and insuring the aircraft pending sale, the
anticipated costs of marketing and preparing the aircraft for sale, the
anticipated costs of winding up the Partnership's business, the uncertainty as
to the period of time required to sell the aircraft and wind up the Partnership,
the uncertainty as to the terms on which the Partnership's aircraft may be sold
and the desirability of maintaining a prudent level of cash reserves for
Partnership needs and contingencies.
The Partnership does not have any material off balance sheet commitments or
obligations.
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Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
PIMC management reviewed the Partnership's internal controls and procedures and
the effectiveness of these controls. As of March 31, 2004, PIMC management,
including its Chief Executive Officer and Chief Financial Officer, carried out
an evaluation of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures pursuant to Rules 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Partnership's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Partnership required to be
included in its periodic SEC filings.
(b) Change to internal controls
There was no change in the Partnership's internal controls over financial
reporting or in other factors during the Partnership's last quarter that
materially affected, or are reasonably likely to materially affect, the
Partnership's internal controls over financial reporting. There were no
significant deficiencies or material weaknesses, and therefore no corrective
actions taken.
13
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) 2003 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. 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.
Trans World Airlines, Inc. (TWA) Bankruptcy - As previously reported, on June
25, 2002, the TWA bankruptcy estate approved the administrative rent claims
filed by Polaris Investment Management Corporation (the General Partner) on
behalf of the Partnership in the amount of $422,989 in the TWA bankruptcy
proceeding. Such administrative rent claims were to be paid to the Partnership
through periodic distributions over a one to two year period starting on June
25, 2002. As of this date, only a portion of the administrative rent claims
totaling $111,742 has been paid and it is anticipated by the General Partner
that the remaining balance of the administrative rent claims will not be paid in
full until the next one to two years from March 30, 2004.
Other Proceedings - Item 10 in Part III of the Partnership's 2003 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. 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)
31.1 CEO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 CFO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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.
14
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 14, 2004 By: /s/ Stephen E. Yost
- ------------ --------------------
Stephen E. Yost, Chief Financial Officer
15