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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 June 30, 2003
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
Securities registered pursuant to Section 12(b) and 12(g) of the Act: None
----
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 13 pages.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 2003
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a) Condensed Balance Sheets - June 30, 2003 and
December 31, 2002............................................3
b) Condensed Statements of Income - Three and Six Months
Ended June 30, 2003 and 2002.................................4
c) Condensed Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2002
and Six Months Ended June 30, 2003...........................5
d) Condensed Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002.................................6
e) Notes to Condensed Financial Statements......................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............9
Item 4. Controls and Procedures.................................10
Part II. Other Information
Item 1. Legal Proceedings.......................................12
Item 6. Exhibits and Reports on Form 8-K........................12
Signature ........................................................13
2
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 4,473,614 $ 10,605,028
RENT AND OTHER RECEIVABLES 121,622 241,560
AIRCRAFT HELD FOR SALE 1,295,000 740,000
AIRCRAFT ON OPERATING LEASE,
net of accumulated depreciation of
$23,854,478 in 2003 and $46,906,230 in 2002 751,155 2,318,650
------------ ------------
Total Assets $ 6,641,391 $ 13,905,238
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 19,893 $ 81,151
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 190,114 551,766
DEFERRED INCOME 72,335 475,788
------------ ------------
Total Liabilities 282,342 1,108,705
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,642,743) (3,555,808)
Limited Partners, 499,840 units in 2003
and 499,910 units in 2002
issued and outstanding 10,001,792 16,352,341
------------ ------------
Total Partners' Capital 6,359,049 12,796,533
------------ ------------
Total Liabilities and Partners' Capital $ 6,641,391 $ 13,905,238
============ ============
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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
REVENUES:
Rent from operating leases $ 657,358 $ 1,377,636 $ 1,619,453 $ 3,063,737
Interest 12,774 40,277 28,023 79,551
Gain on sale of aircraft -- -- -- 65,000
Lessee return condition settlements 90,630 57,380 120,745 136,325
Other income 69,346 -- 69,346 --
----------- ----------- ----------- -----------
Total Revenues 830,108 1,475,293 1,837,567 3,344,613
----------- ----------- ----------- -----------
EXPENSES:
Depreciation 412,705 905,347 1,012,495 2,004,860
Management fees to general partner 17,452 34,370 42,071 68,385
Operating 64,255 36,413 116,454 62,993
Administration and other 99,473 90,999 160,836 162,200
----------- ----------- ----------- -----------
Total Expenses 593,885 1,067,129 1,331,856 2,298,438
----------- ----------- ----------- -----------
NET INCOME $ 236,223 $ 408,164 $ 505,711 $ 1,046,175
=========== =========== =========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 2,362 $ 4,083 $ 607,384 $ 523,883
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 233,861 $ 404,081 $ (101,673) $ 522,292
=========== =========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 0.47 $ 0.81 $ (0.20) $ 1.04
=========== =========== =========== ===========
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, 2002 and
Six Months Ended June 30, 2003
------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 2001 $ (3,531,847) $ 20,069,934 $ 16,538,087
Net income 531,557 1,282,066 1,813,623
Cash distribution to partners (555,518) (4,999,659) (5,555,177)
------------ ------------ ------------
Balance, December 31, 2002 (3,555,808) 16,352,341 12,796,533
Net income (loss) 607,384 (101,673) 505,711
Cash distribution to partners (694,319) (6,248,876) (6,943,195)
------------ ------------ ------------
Balance, June 30, 2003 $ (3,642,743) $ 10,001,792 $ 6,359,049
============ ============ ============
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)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income $ 505,711 $ 1,046,175
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,012,495 2,004,860
Gain on sale of aircraft -- (65,000)
Changes in operating assets and liabilities:
Decrease in rent and other receivables 119,938 83,262
Decrease in payable to affiliates (61,258) (517,145)
Decrease in accounts payable
and accrued liabilities (361,652) (56,861)
Decrease in deferred income (403,453) (898,404)
------------ ------------
Net cash provided by operating
activities 811,781 1,596,887
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 250,000
------------ ------------
Net cash provided by investing
activities -- 250,000
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (6,943,195) (5,555,177)
------------ ------------
Net cash used in financing activities (6,943,195) (5,555,177)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (6,131,414) (3,708,290)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 10,605,028 12,639,824
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,473,614 $ 8,931,534
============ ============
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfer of operating lease assets to
assets held for sale $ 555,000 370,000
============ ============
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)
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 (the Agreement). During the three months ended June 30,
2003, 50 units were abandoned. At June 30, 2003, there were 499,840 units
outstanding, net of redemptions.
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 3 and 4.
At June 30, 2003, the Partnership owned a portfolio of 10 used McDonnell Douglas
DC-9-30 commercial jet aircraft, and an inventory of spare parts out of its
original portfolio of 30 aircraft. Three of these aircraft were on lease to TWA
Airlines, LLC (TWA LLC), a wholly owned subsidiary of American Airlines, Inc.
(American). The seven remaining aircraft were stored in New Mexico and were
being remarketed for sale.
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, 2002 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
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, 2002, 2001, and 2000 included in the
Partnership's 2002 Annual Report to the SEC on Form 10-K.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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3. Related Parties
Under the Agreement, the Partnership paid or agreed to pay the following amounts
for the current quarter to the General Partner, Polaris Investment Management
Corporation, in connection with services rendered or payments made on behalf of
the Partnership:
Payments made during the
Three Months Ended Payable at
June 30, 2003 June 30, 2003
------------- -------------
Aircraft Management Fees $ 29,200 $ 10,929
Out-of-Pocket Operating
Expense Reimbursement 59,234 8,964
Out-of-Pocket Administrative
Expense Reimbursement 575,850 --
-------- --------
$664,284 $ 19,893
======== ========
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.
5. Sale of Aircraft
On February 13, 2002 PIMC, on behalf of the Partnership, sold one DC-9-30
aircraft to Amtec Corporation for $250,000 cash. The Partnership recognized a
gain on the sale of $65,000.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Overview
At June 30, 2003, 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 an inventory of spare parts out of its
original portfolio of 30 aircraft. Three of these aircraft were on lease to TWA
Airlines, LLC (TWA LLC), a wholly owned subsidiary of American Airlines Inc.
(American). All remaining leases will expire by October 3, 2003, after which
these aircraft will be remarketed for sale. The seven remaining aircraft were
being stored in New Mexico and were being remarketed for sale.
Partnership Operations
The Partnership recorded net income of $236,223, or $0.47 per limited
partnership unit, for the three months ended June 30, 2003, compared to net
income of $408,164, or $0.81 per limited partnership unit, for the three months
ended June 30, 2002. The Partnership recorded net income of $505,711, which
resulted in a net loss of $0.20 per limited partnership unit, for the six months
ended June 30, 2003, compared to net income of $1,046,175, or $1.04 per limited
partnership unit, for the six months ended June 30, 2002. The decreases in net
income are primarily due to decreases in rental and interest income, and a
decrease in gain on sale of aircraft along with an increase in operating
expenses, partially offset by an increase in other income and decreases in
depreciation and management fees to the General Partner as discussed below.
Rent from operating leases decreased to $657,358 and $1,619,453 in the three and
six months ended June 30, 2003 respectively, as compared to $1,377,636 and
$3,063,737 for the respective periods in 2002, primarily due to fewer aircraft
on lease. Additionally, the decrease in rent from operating leases was also
caused by lower recognition of deferred revenue of $160,024 and $403,454 in the
three and six months ended June 30, 2003 respectively, as compared to $384,302
and $898,403 in the respective periods in 2002.
Interest income decreased during the three and six months ended June 30, 2003,
as compared to the same periods in 2002, primarily due to lower average cash
reserves and a lower rate of return on those cash reserves.
Gain on sale of aircraft decreased during the six months ended June 30, 2003, as
compared to the same period in 2002, due to the sale of one of the Partnership's
aircraft on February 13, 2002 for $250,000 resulting in a gain on the sale of
$65,000. There were no aircraft sales in 2003.
Lessee return condition settlements increased during the three months ended June
30, 2003, as compared to the same period in 2002. Two aircraft were returned to
the Partnership during the 2003 period as compared to one aircraft during the
2002 period. Lessee return condition settlements decreased during the six months
ended June 30, 2003, as compared to the same period in 2002. Three aircraft were
returned to the Partnership during the 2003 period as compared to two aircraft
during the 2002 period. The amount of return condition settlement for a
particular aircraft can vary significantly from the next due to the fact that
TWA LLC is required to return the installed engines on each aircraft with a
target level of average cycle life remaining to replacement for all life limited
parts of 25%. If the average cycle life remaining on the installed engines on an
aircraft is below the 25% target level, a financial adjustment is payable by TWA
9
LLC to the Partnership (but no payment will be owed by the Partnership to TWA
LLC if cycle life remaining at return exceeds the target level).
Other income increased during the three and six months ended June 30, 2003, as
compared to the same periods in 2002, primarily due to a payment received during
the three months ended June 30, 2003 from TWA's bankrupt estate in respect of
certain administrative rent claims in the amount of $69,345 of the total claim
of $422,989.
Depreciation expense decreased during the three and six months ended June 30,
2003, as compared to the same periods in 2002, primarily due to fewer aircraft
remaining on lease and subject to depreciation.
Operating expense increased during the three and six months ended June 30, 2003
primarily due to increased maintenance and storage related costs associated with
the aircraft as they come off lease and are held for sale. As of June 30, 2003
seven aircraft remain in storage while being remarketed for sale.
Administration and other expense increased during the three months ended June
30, 2003, as compared to the same period in 2002, primarily due to increased
audit fees. Administration and other expense decreased during the six months
ended June 30, 2003 as compared to the same period in 2002, primarily due to a
decrease in legal fees. In the 2002 period legal fees were incurred in
connection with an SEC prompted court order related to transfers of units to
entities owned by an investor. There were no such fees incurred in the 2003
period.
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, 2003.
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 LLC require remarketing, and for
other contingencies, including expenses of the Partnership. The Partnership's
cash reserves will be monitored and may be revised from time to time as further
information becomes available in the future.
Cash Distributions - Cash distributions to limited partners during the six
months ended June 30, 2003 and 2002 were $6,248,876, or $12.50 per limited
partnership unit, and $4,999,659, or $10.00 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
As required by Rule 13a-15(b), PIMC management, including the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation as of the end of
the period covered by this report, of the effectiveness of the Partnership's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
10
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Partnership's disclosure controls and procedures were
effective as of the end of the period covered by this report. As required by
Rule 13a-15(d), PIMC management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the Partnership's internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Partnership's internal control over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
11
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) 2002 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, 2003,
all legal actions or proceedings involving the Partnership have been resolved or
disposed of by the respective courts.
Other Proceedings - Item 10 in Part III of the Partnership's 2002 Form 10-K and
Item 1 of Part II of the Partnership's Quarterly Report to the SEC on Form 10-Q
for the period ended March 31, 2003 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)
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.
12
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 12, 2003 By: /S/Stephen E. Yost
- --------------------------- -------------------------------------
Stephen E. Yost, Chief Financial Officer
13