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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 June 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 17 pages.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 2002
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a) Special Notice Regarding Financial Statements................3
b) Balance Sheets - June 30, 2002 and
December 31, 2001............................................4
c) Statements of Income - Three and Six Months
Ended June 30, 2002 and 2001.................................5
d) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2001
and Six Months Ended June 30, 2002...........................6
e) Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001.................................7
f) Notes to Financial Statements................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........12
Part II. Other Information
Item 1. Legal Proceedings.......................................16
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
SPECIAL NOTICE REGARDING FINANCIAL STATEMENTS
The Polaris Aircraft Income Fund II's (the "Partnership") Quarterly Report on
Form 10-Q ("Form 10-Q") for the period ended June 30, 2002 is being filed on an
incomplete basis as the Partnership has been unable to obtain access to
documents in the possession of Arthur Andersen, the previous Certifying
Accountant, in order to provide such documents to Ernst & Young LLP, the
Partnership's new Certifying Accountant. As a result, Ernst & Young LLP is
unable to complete their timely quarterly review in accordance with Statements
of Auditing Standards No. 71. Once Ernst & Young LLP has completed their
quarterly review of the financial statements contained in the Form 10-Q for the
period ended June 30, 2002, the Partnership will file an amended Form 10-Q.
The accompanying notes are an integral part of these statements.
3
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 8,931,534 $ 12,639,824
RENT AND OTHER RECEIVABLES net of
allowance for credit losses of $85,000 and
$85,000 in 2002 and 2001 321,560 404,822
AIRCRAFT, held for sale 370,000 185,000
AIRCRAFT ON OPERATING LEASES,
net of accumulated depreciation of
$61,718,541 in 2002 and $75,763,132 in 2001 4,189,693 6,564,553
------------ ------------
Total Assets $ 13,812,787 $ 19,794,199
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 120,506 $ 637,651
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 561,728 618,589
DEFERRED INCOME 1,101,468 1,999,872
------------ ------------
Total Liabilities 1,783,702 3,256,112
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,563,482) (3,531,847)
Limited Partners, 499,952 units (499,966 in
2001) issued and outstanding 15,592,567 20,069,934
------------ ------------
Total Partners' Capital (Deficit) 12,029,085 16,538,087
------------ ------------
Total Liabilities and Partners' Capital
(Deficit) $ 13,812,787 $ 19,794,199
============ ============
The accompanying notes are an integral part of these statements.
4
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Rent from operating leases $1,377,636 $2,275,181 $3,063,737 $5,676,172
Interest 40,277 210,958 79,551 456,437
Gain on sale of aircraft -- -- 65,000 --
Other 57,380 -- 136,325 41,056
---------- ---------- ---------- ----------
Total Revenues 1,475,293 2,486,139 3,344,613 6,173,665
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 905,347 1,096,351 2,004,860 2,253,007
Management fees to general
partner 34,370 11,760 68,385 57,856
Operating 36,413 145,261 62,993 170,613
Interest -- 5,844 -- 13,525
Legal 15,380 122,982 17,575 124,292
Administration and other 75,619 114,941 144,625 182,275
---------- ---------- ---------- ----------
Total Expenses 1,067,129 1,497,139 2,298,438 2,801,568
---------- ---------- ---------- ----------
NET INCOME $ 408,164 $ 989,000 $1,046,175 $3,372,097
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 4,083 $ 197,362 $ 523,883 $ 446,158
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 404,081 $ 791,638 $ 522,292 $2,925,939
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.81 $ 1.58 $ 1.04 $ 5.85
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
5
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 2001 and
Six Months Ended June 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 523,883 522,292 1,046,175
Cash distribution to partners (555,518) (4,999,659) (5,555,177)
------------ ------------ ------------
Balance, June 30, 2002 $ (3,563,482) $ 15,592,567 $ 12,029,085
============ ============ ============
The accompanying notes are an integral part of these statements.
6
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income $ 1,046,175 $ 3,372,097
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,004,860 2,253,007
Gain on sale of aircraft (65,000) --
Changes in operating assets and liabilities:
Decrease in rent and other receivables 83,262 362,136
Decrease in other assets -- 13,915
Increase (decrease) in payable to
affiliates (517,145) 267,096
Increase (decrease) in accounts payable
and accrued liabilities (56,861) 9,934
Decrease in deferred income (898,404) (2,530,506)
------------ ------------
Net cash provided by operating
activities 1,596,887 3,747,679
------------ ------------
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) (4,583,086)
------------ ------------
Net cash used in financing
activities (5,555,177) (5,076,474)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (3,708,290) (1,328,795)
------------ ------------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 12,639,824 19,195,305
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 8,931,534 $ 17,866,510
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ -- $ 12,841
============ ============
The accompanying notes are an integral part of these statements.
7
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
January 2002, 6 units were abandoned and during June 2002 8 units were
abandoned. At June 30, 2002, there were 499,952 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 June 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. Eight of these aircraft were on lease to TWA Airlines,
LLC. The two remaining aircraft were being stored in Arizona and were actively
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 financial position, 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
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
8
American Airlines, Inc. ("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, 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, a wholly owned
subsidiary of American ("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. 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,
9
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 June 30, 2002, the
Partnership had a deferred revenue balance of $1,101,468, and a deferred
management fee balance of $51,118 included in Payable to Affiliates on the
Balance Sheet, which will be recognized over the remaining lives of the aircraft
leases, up to 15 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
June 30, 2002 June 30, 2002
------------- -------------
Aircraft Management Fees $401,066 $ 67,118
Out-of-Pocket Operating
Expense Reimbursement 89,663 24,429
Out-of-Pocket Administrative
Expense Reimbursement 134,101 28,959
-------- --------
$624,830 $120,506
======== ========
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.
10
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.
7. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB") approved for
issuance Statement of Financial Accounting Standard ("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 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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Overview
At June 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. Eight of these aircraft were on lease to TWA Airlines,
LLC. The two remaining aircraft were being stored in Arizona and were 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 (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,
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, a wholly owned
subsidiary of American ("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
12
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. 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.
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
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 June 30, 2002, the
Partnership had a deferred revenue balance of $1,101,468, and a deferred
management fee balance of $51,118 included in Payable to Affiliates on the
Balance Sheet, which will be recognized over the remaining lives of the aircraft
leases, up to 15 months.
Partnership Operations
The Partnership recorded net income of $408,164, or $0.81 per limited
partnership unit, for the three months ended June 30, 2002, compared to net
income of $989,000, or $1.58 per limited partnership unit, for the three months
ended June 30, 2001. The Partnership recorded net income of $1,046,175, or $1.04
per limited partnership unit, for the six months ended June 30, 2002, compared
to net income of $3,372,097, or $5.85 per limited partnership unit, for the six
months ended June 30, 2001. The decreases in net income are 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, operating
and legal expenses as discussed below.
Rent from operating leases decreased to $1,377,636 and $3,063,737 in the three
and six months ended June 30, 2002, as compared to $2,275,181 and $5,676,172 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 and the recognition of
less deferred revenue of $384,302 and $898,403 in the three and six months ended
June 30, 2002 as compared to $955,181 and $2,530,504 of deferred revenue being
recognized in the respective periods in 2001. As discussed in Note 3, 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.
13
Interest income decreased during the three and six months ended June 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 increased during the six months ended June 30, 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 and six months ended June 30, 2002, as
compared to the same periods in 2001, primarily due to payments made by TWA LLC
for the return of aircraft that did not meet return conditions required by the
leases.
Depreciation expense decreased during the three and six months ended June 30,
2002, as compared to the same periods in 2001, primarily due to fewer aircraft
remaining on lease.
Operating expense decreased during the three and six months ended June 30, 2002,
as compared to the same periods in 2001, primarily due to lower maintenance and
storage related costs associated with the aircraft as they came off lease and
were held for sale. As of June 30, 2002 only two aircraft remain in storage
while being marketed for sale.
Legal expenses decreased during the three and six months ended June 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 and partially offset
in 2002 by fees incurred to comply with an SEC prompted court order related to
transfers of units to entities owned by George Hoffman.
Administration and other expense decreased during the three and six months ended
June 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 six months ended
June 30, 2002.
PIMC, the General Partner, has determined that cash reserves be maintained as a
prudent measure to ensure that the Partnership has available funds in the event
that the aircraft presently on lease to TWA require remarketing, and for other
contingencies, including expenses of the Partnership. The Partnership's cash
reserves will be monitored and may be revised from time to time as further
information becomes available in the future.
Cash Distributions - There were no cash distributions to limited partners during
the three months ended June 30, 2002 compared to cash distributions of
$1,874,899, or $3.75 per limited partnership unit, during the three months ended
June 30, 2001. Cash distributions to limited partners during the six months
ended June 30, 2002 and 2001 were $4,999,659, or $10.00 per limited partnership
unit and $4,124,777, or $8.25 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
14
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.
15
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
March 31, 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 March 31, 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. 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)
99.1 Certification of President.
99.2 Certification of Chief Financial Officer.
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. 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
August 19, 2002 By: /S/Stephen E. Yost
------------------- ----------------------------------------
Stephen E. Yost, Chief Financial Officer
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