UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No.33-2794
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
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(Exact name of registrant as specified in its charter)
California 94-2985086
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(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
201 High Ridge Road, Stamford, Connecticut 06927
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 357-3776
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 2003.
Documents incorporated by reference: None
This document consists of 36 pages.
PART I
Item 1. Business
Polaris Aircraft Income Fund II, a California Limited Partnership (PAIF-II or
the Partnership), was formed primarily to purchase and lease used commercial jet
aircraft in order to provide quarterly distributions of cash from operations, to
maximize the residual values of aircraft upon sale and to protect Partnership
capital through experienced management and diversification. PAIF-II was
organized as a California Limited Partnership on June 27, 1984 and will
terminate no later than December 2010.
PAIF-II has many competitors in the aircraft leasing market, including airlines,
aircraft leasing companies, other limited partnerships, banks and several other
types of financial institutions. This market is highly competitive and there is
no single competitor who has a significant influence on the industry. In
addition to other competitors, Polaris Investment Management Corporation (PIMC
or the General Partner), and its affiliates, including GE Capital Aviation
Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris
Holding Company (PHC) and General Electric Capital Corporation (GE Capital),
acquire, lease, finance, sell and remarket aircraft for their own accounts and
for existing aircraft and aircraft leasing programs managed by them. Further,
GECAS provides a significant range of aircraft management services to third
parties, including without limitation, Airplanes Group, together with its
subsidiaries (APG), which leases and sells aircraft. Accordingly, in seeking to
re-lease and sell its aircraft, the Partnership may be in competition with the
General Partner, its affiliates, APG, and other third parties to whom GECAS
provides aircraft management services from time to time.
As of December 31, 2003, the Partnership had 10 McDonnell Douglas DC-9-30
aircraft held for sale previously on operating lease to TWA Airlines LLC (TWA
LLC) a wholly owned subsidiary of American Airlines, Inc. (American). The ten
aircraft are being stored in New Mexico and remarketed 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 (see Note 13).
See additional discussion of TWA LLC and Trans World Airlines, Inc. ("TWA") in
Note 5 to the financial statements.
Item 2. Properties
At December 31, 2003, the Partnership owned 10 McDonnell Douglas DC-9-30
(DC-9-30) aircraft held for sale on the ground in New Mexico. Originally, the
portfolio consisted of 30 aircraft. The Partnership sold three DC-9-30 aircraft
to Aeroturbine, Inc. in October 2001. The Partnership sold one DC-9-30 aircraft
to Amtec Corp. in February 2002 (see Note 13).
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The following table describes the Partnership's aircraft portfolio at December
31, 2003:
Year of Cycles
Aircraft Type Serial Number Manufacture As of 12/31/03
- ------------- ------------- ----------- --------------
McDonnell Douglas DC-9-30 47107 1968 88,776
McDonnell Douglas DC-9-30 47135 1968 85,853
McDonnell Douglas DC-9-30 47137 1968 85,637
McDonnell Douglas DC-9-30 47249 1968 91,605
McDonnell Douglas DC-9-30 47251 1968 89,725
McDonnell Douglas DC-9-30 47343 1969 88,520
McDonnell Douglas DC-9-30 47345 1969 86,860
McDonnell Douglas DC-9-30 47357 1969 83,337
McDonnell Douglas DC-9-30 47411 1969 84,397
McDonnell Douglas DC-9-30 47412 1969 83,504
The DC-9-30 is a short- to medium-range twin-engine jet that was introduced in
1967. Providing reliable, inexpensive lift, these aircraft fill thin niche
markets, mostly in the United States. Hushkits are available to bring these
aircraft into compliance with Stage 3 noise restrictions. Hushkits have been
installed on the remaining Partnership aircraft. Certain Airworthiness
Directives (ADs) applicable to the DC-9-30 have been issued to prevent fatigue
cracks and control corrosion.
Item 3. Legal Proceedings
Please refer to Note 5 to the Financial Statements for the only legal
proceedings in which the Partnership is a party.
Other Proceedings - Part III, Item 10 discusses certain other actions which have
been filed against the General Partner in connection with certain public
offerings, including that of the Partnership. The Partnership is not a party to
these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
a) PAIF-II's Limited Partnership Interests (Units) are not publicly
traded. Currently there is no market for PAIF-II's Units and it is
unlikely that any market will develop.
b) Number of Security Holders:
Number of Record Holders
Title of Class as of December 31, 2003
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Limited Partnership Interest: 13,194
General Partnership Interest: 1
c) Dividends:
The Partnership distributed cash to partners on a quarterly basis
beginning July 1986. As of January 2002, the Partnership switched to
making distributions on an annual basis. Cash distributions to Limited
Partners during 2003 and 2002 totaled $6,248,876 and $4,999,659,
respectively. Cash distributions per Limited Partnership Unit were
$12.50 and $10.00 in 2003 and 2002, respectively.
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Item 6. Selected Financial Data
For the years ended December 31,
--------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $ 2,305,349 $ 5,912,312 $ 10,034,851 $ 13,729,468 $ 13,559,480
Net Income (Loss) $ (398,226) $ 1,813,623 $ 4,325,509 $ (7,634,415) $ 6,622,183
Net Income (Loss)
Allocated to Limited
Partners $ (996,571) $ 1,282,066 $ 3,142,429 $ (8,317,954) $ 5,742,360
Net Income (Loss) per
Limited Partnership Unit $ (1.99) $ 2.56 $ 6.29 $ (16.64) $ 11.49
Cash Distributions per
Limited Partnership
Unit $ 12.50 $ 10.00 $ 22.80 $ 15.20 $ 16.40
Limited Partnership Units 499,757 499,910 499,966 499,973 499,973
Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit* $ 0.00 $ 0.00 $ 0.00 $ 1.46** $ 16.40
Total Assets $ 5,700,559 $ 13,905,238 $ 19,794,199 $ 31,992,732 $ 51,760,515
Partners' Capital $ 5,455,112 $ 12,796,533 $ 16,538,087 $ 24,878,560 $ 40,956,964
* The portion of such distributions, which represents a return of capital on an
economic basis, will depend in part on the residual sale value of the
Partnership's aircraft and thus will not be ultimately determinable until the
Partnership disposes of its aircraft. However, such portion may be significant
and may equal, exceed, or be smaller than the amount shown in the above table.
** During 2000, total cumulative distributions, per unit, reached $500, the
initial capital contribution per unit, such that all further distributions would
be considered a return on capital.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies
In response to the Securities and Exchange Commission's (SEC) Release No.
33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting
Policies," we identified the most critical accounting principles upon which our
financial reporting depends. We determined the critical principles by
considering accounting policies that involve the most complex or subjective
decisions or assessments. We identified our most critical accounting policies to
be those related to lease revenue recognition, depreciation policies, and
valuation of aircraft. We state these accounting policies in the notes to the
financial statements and in relevant sections in this discussion and analysis.
Business Overview
At December 31, 2003, Polaris Aircraft Income Fund II (PAIF-II or the
Partnership) owned a portfolio of 10 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. The Partnership sold three DC-9-30 aircraft to Aeroturbine, Inc. in
October 2001. The Partnership sold one DC-9-30 aircraft to Amtec Corporation in
February 2002 that resulted in a net gain of $65,000 to the Partnership. On
November 26, 2003, a Letter of Intent was signed by Newjet Corporation to
purchase four of the DC-9-30 aircraft owned by the Partnership. In January 2004,
the Partnership entered into a sale and purchase agreement with Newjet
Corporation and on February 9, 2004 the Partnership received proceeds of
$450,000 for the sale of the four aircraft. 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.
Industry Update
Demand for Aircraft - At year end 2003, there were approximately 17,300 western
built passenger and freighter jet aircraft in the world fleet. As a result of a
slowdown in travel that began in the spring of 2001 as well as the large shift
in travel levels in the wake of the September 11th tragedy, 2,125 of those
aircraft are currently stored or out of active service. Air travel as measured
by global revenue passenger miles for 2003 is expected to be approximately 1%
less than the poor results from the year 2002 when the final numbers are
compiled. The traffic levels in 2004 are expected to show growth from this low
base as evidenced by growth shown in the fourth quarter 2003. The war with Iraq,
SARS and continued threat of global terrorism impacted 2003 traffic levels,
particularly through spring and summer. While production rates are relatively
low and retirements are fairly high, the number of surplus aircraft is still at
record levels.
The unprecedented, sustained and worldwide decrease in demand has had profound
implications to airlines as well as aircraft owners and manufacturers. Network
airlines are still experiencing losses, and are struggling to match capacity and
pricing to demand. Manufacturers have attempted to deliver the aircraft that
were in the backlog and the modest orders in 2002-2003, and achieve some
6
stability in their production lines. Trading values and lease rates have
declined further, particularly on older aircraft as the demand shock took a
cyclical downturn into a deep trough. As manufacturers reduce production,
airlines accelerate retirements of older aircraft, and as a recovering air
travel market begins to reduce the aircraft surplus, this cyclical downturn is
expected to reverse itself and the market is expected to return to a stable
condition. This will take more time as manufacturers cannot drop production
overnight and owners will be reluctant to scrap aircraft that they own despite
the lack of a current market for them.
Low cost carriers were able to prosper in this environment of commoditized
airfare pricing. The bulk of the orders that were actually placed during
2002-2003 came from low cost carriers such as Easyjet. Asia is recovering well
from the SARS epidemic and is now showing traffic growth again after a sharp
decline for carriers in affected areas last year.
Maintenance of Aging Aircraft - The process of aircraft maintenance begins at
the aircraft design stage. For aircraft operating under Federal Aviation
Administration (FAA) regulations, a review board consisting of representatives
of the manufacturer, FAA representatives and operating airline representatives
is responsible for specifying the aircraft's initial maintenance program. The
General Partner understands that this program is constantly reviewed and
modified throughout the aircraft's operational life.
Since 1988, the FAA, working with the aircraft manufacturers and operators, has
issued a series of Airworthiness Directives (ADs), which mandate that operators
conduct more intensive inspections, primarily of the aircraft fuselages. The
results of these mandatory inspections may result in the need for repairs or
structural modifications that may not have been required under pre-existing
maintenance programs.
Under the Previous Leases (see Note 5 to the financial statements), TWA was
generally required to return the aircraft in airworthy condition including
compliance with all ADs for which action is mandated by the FAA during the lease
term. Three of the Partnership's Aircraft were returned by TWA without meeting
the return conditions specified in the Previous Leases, and the return
conditions under the modified lease terms and conditions for the Partnership's
remaining Aircraft were quite limited. The costs of compliance with FAA
maintenance standards caused the Partnership to sell for scrap value the three
Aircraft being returned by TWA under the Rejected Leases (see Note 5), and the
aircraft returned in 2001 was likewise marketed at scrap value. Similarly, such
costs will likely cause the Partnership to sell for scrap value the
Partnership's ten remaining Aircraft.
Aircraft Noise - Another issue, which has affected the airline industry, is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are no
longer allowed to operate from civil airports in the United States. Stage 2
aircraft meet current FAA requirements, subject to the phase-out rules discussed
below. Stage 3 aircraft are the most quiet and are the standard for all new
aircraft.
Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3
requirements, are currently available for the Partnership's aircraft and were
added to the Partnership's aircraft in 1996 and 1997.
Other countries have also adopted noise policies. The European Union (EU)
adopted a non-addition rule in 1989, which directed each member country to pass
the necessary legislation to prohibit airlines from adding Stage 2 aircraft to
their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the
year 2002. The International Civil Aviation Organization has also endorsed the
phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.
Legislation had been drafted and was under review by the EU for sometime to
7
adopt anti-hushkitting regulations within member states. The legislation sought
to ban hushkitted aircraft from being added to member states registers and
precluded all operation of hushkitted aircraft within the EU after certain
specific dates. Due to criticism by the US Government, the enactment of this
legislation has been withheld. However, the effect of this proposal has been to
reduce the demand for hushkitted aircraft within the EU and its neighboring
states, including the former Eastern Block states.
Partnership Operations
The Partnership reported a net loss of $398,226 which resulted in a net loss per
Limited Partnership unit of $1.99 for the year ended December 31, 2003, as
compared to net income of $1,813,623 and $2.56 per Limited Partnership unit,
respectively, for the year ended December 31, 2002, and net income of $4,325,509
and $6.29 per Limited Partnership unit, respectively, for the year ended
December 31, 2001. 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 in 2003, as compared to 2002, is primarily due to
decreases in rental and interest income, and an absence of any recognized gains
on sale of aircraft, along with an increase in operating and administration
expenses, partially offset by decreases in depreciation and management fees to
the General Partner, as discussed below. The decrease in net income in 2002, as
compared to 2001, is primarily due to decreases in rental and interest income,
partially offset by increases in gain on sale of aircraft inventory and other
income and decreases in depreciation, legal, operating, interest and
administration and other expenses.
Rent from operating leases decreased in 2003, as compared to 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 in 2003, as
compared to 2002. Rental income decreased in 2002, as compared to 2001,
primarily due to the lower lease rates and fewer aircraft on lease as a result
of the 2001 TWA bankruptcy. Additionally, the decrease in rent from operating
leases was also caused by lower recognition of deferred revenue. As discussed in
Note 5 to the financial statements, the deferred revenue balance existing at the
time of the lease revisions in March 2001 was recognized over the new lease
terms for the Assumed Leases, while it was recognized upon lease rejection for
the three Rejected Aircraft.
Interest income decreased in 2003 as compared to 2002, and in 2002, as compared
to 2001, primarily due to lower interest rates and lower average cash balances.
There were no sales of aircraft in 2003. In 2002, a gain of $65,000 was recorded
from the sale of an aircraft. In 2001, three aircraft were sold at their book
value resulting in no overall gain or loss.
Lessee return condition settlements increased during 2003, as compared to 2002,
and in 2002, as compared to 2001. The increases during 2003, and 2002, are
primarily due to the number of aircraft being returned as the lease terms
expire. The amount of return condition settlement for each aircraft can vary
significantly 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. If the average cycle life remaining on
the installed engines on an aircraft is below the target level, a financial
adjustment is payable by TWA 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).
8
Lessee settlement income increased during 2003, as compared to 2002, and in 2002
as compared to 2001. The payments received during 2003 resulted from two
distributions by TWA's bankrupt estate representing a portion of the $422,989
administrative rent claims initially filed by the Partnership pursuant to the
bankruptcy. The payment made during 2002 represents settlement of an
administrative claim filed in the TWA bankruptcy proceeding in connection with
certain legal expenses incurred by the Partnership. Note 5 to the financial
statements includes a further discussion of these items. The payment in 2001 was
the Partnership's pro rata share of the final distribution from Braniff's
bankrupt estate in respect of the unsecured claims of the Partnership and other
affiliates of PIMC.
There was an absence of other income in 2003 and 2002, as compared to 2001, due
to the receipt of default interest in 2001 from TWA resulting from late rental
payments subsequent to the TWA bankruptcy filing. Note 5 to the financial
statements includes a further discussion of this item.
Depreciation expense decreased in 2003, as compared to 2002, and in 2002, as
compared to 2001 primarily as a result of fewer aircraft remaining on lease and
being depreciated; however, as discussed below, 2003 depreciation expense also
includes a fair market adjustment for aircraft held for sale as compared to
2002, which had no such impairment expense.
The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life based on estimated
fair values at that time. The Partnership's future earnings are impacted by the
net effect of the adjustments to the carrying value of the aircraft (which has
the effect of decreasing future depreciation expense), and the downward
adjustments to the estimated residual values (which has the effect of increasing
future depreciation expense).
Aircraft held for sale are carried at the lower of cost or fair value less cost
to sell. During the year ended December 31, 2003, the Partnership recognized
additional depreciation expense of $804,293, or $1.61 per Limited Partnership
Unit, on aircraft held for sale due to changes in estimated fair market values.
No such adjustments to market value through additional depreciation expense were
made during 2002.
If the projected net cash flow for each aircraft on operating lease (projected
rental revenue, net of management fees, less projected maintenance costs, if
any, plus the estimated residual value) is less than the carrying value of the
aircraft, the Partnership recognizes an impairment loss for the amount by which
the carrying amount exceeds its fair value. The impairment loss is recognized as
depreciation expense. The Partnership recognized impairment losses aggregating
approximately $200,000, or $0.41 per Limited Partnership unit, in 2001, as
increased depreciation expense as a result of the TWA bankruptcy and the
modified lease terms with TWA LLC. The Partnership decided to accept American's
proposal to take assignment of eleven of the fourteen existing leases on
modified terms and conditions. This acceptance constituted an event that
required the Partnership to review the aircraft carrying values pursuant to
Statement of Financial Accounting Standards 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (as amended by
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"). As
a result of a review of the aircraft, future cash flows expected to be derived
from the aircraft over projected lease terms were less than the carrying values
of the aircraft, so the Partnership has recorded impairment losses as of
September 30, 2001. Management believes the assumptions related to fair value of
impaired assets represented the best estimates based on reasonable and
supportable assumptions and projections.
Management fees to the General Partner decreased in 2003, as compared to 2002,
primarily as a result of fewer aircraft being on lease during 2003 and all
aircraft being off-lease as of December 31, 2003. Management fees to the General
9
Partner increased slightly in 2002, as compared to 2001, primarily as a result
of the deferred management fees being recognized for three rejected leases and
leases expiring during 2001 due to the TWA bankruptcy.
There was no interest expense in 2003 and 2002 due to outstanding debt being
fully repaid in 2001. The interest expense in 2001 was from debt incurred to
install hushkits on the Partnership's aircraft. In November 1996 and February
1997, hushkits were installed on the 14 Partnership aircraft. The leases then in
place for these 14 aircraft were then extended for a period of eight years. The
rent payable by TWA under the leases was increased by an amount sufficient to
cover the monthly debt service payments on the hushkits and fully repay, during
the term of the TWA leases, the amount borrowed.
Operating expenses increased during 2003, as compared to 2002, primarily due to
maintenance and storage related costs associated with the aircraft as they come
off lease and are prepared for and kept in storage while being held for sale.
During 2003, six aircraft were returned and prepared for storage. As of December
31, 2003, ten aircraft remain in storage while being marketed for sale.
Operating expense decreased in 2002, as compared to 2001, primarily due to
reduced costs associated with the storage of aircraft from the time of their
return to the time of their sale. During 2002, four aircraft were prepared for
storage and stored for an average of 5 months each. During 2001, four aircraft
were prepared for storage and stored for an average of 6 months each at a
facility that was more expensive than the facility aircraft are now flown to at
lease expiration.
Legal expenses were significantly higher in 2001, as compared to 2003 and 2002,
primarily due to the costs incurred in connection with the TWA bankruptcy.
Administration and other expense increased slightly during 2003, as compared to
2002, primarily due to increased audit fees and printing and postage costs.
Administration and other expenses decreased in 2002, as compared to 2001,
primarily due to costs incurred in 2001 that were related to the TWA bankruptcy.
This includes audit fees, as well as additional printing and postage expenses.
Liquidity and Cash Distributions
Liquidity - The Partnership received all rent payments due in 2003 and 2002 from
its sole lessee, TWA Airlines LLC for the aircraft while on lease. As of
December 31, 2003, no further rent payments will be received since all lease
terms have expired.
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. 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 were $6,248,876,
$4,999,659 and $11,399,384, in 2003, 2002 and 2001, respectively. Cash
10
distributions per Limited Partnership unit were $12.50, $10.00 and $22.80, in
2003, 2002 and 2001, respectively. The General Partner has determined that it is
in the best interests of the Partnership to 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.
Sale of Aircraft
On October 19, 2001, PIMC, on behalf of the Partnership, sold three DC-9-30
aircraft. for $565,000 cash. The Partnership recognized neither a loss nor a
gain on the transaction due to an impairment expense being taken during 2001 in
anticipation of the sales. On February 13, 2002, the General Partner sold one
DC-9-30 for $250,000, resulting in a gain of $65,000.
On November 26, 2003, a Letter of Intent was signed by Newjet Corporation to
purchase four of the DC-9-30 aircraft owned by the Partnership. In January 2004,
the Partnership entered into a sale and purchase agreement with Newjet
Corporation and on February 9, 2004, the Partnership received proceeds of
$450,000 for the sale of the four aircraft.
Aircraft Impairment Assessment
The Partnership periodically reviews 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 is increased.
If the projected net cash flow for each aircraft on operating lease (projected
rental revenue, net of management fees, less projected maintenance costs, if
any, plus the estimated residual value) is less than the carrying value of the
aircraft, an impairment loss is recognized for the amount by which the carrying
amount exceeds its fair values.
The Partnership uses available information and estimates related to the
Partnership's aircraft, to determine an estimate of fair value to measure
impairment as required by SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144) and to determine residual values. The
estimates of fair value can vary dramatically depending on the condition of the
specific aircraft and the actual marketplace conditions at the time of the
actual disposition of the asset. If assets are deemed impaired, there could be
substantial write-downs in the future.
Aircraft held for sale are carried at the lower of cost or fair value less cost
to sell. During the year ended December 31, 2003, the Partnership recognized
additional depreciation expense of $804,293, or $1.61 per Limited Partnership
Unit, on aircraft held for sale due to decreases in estimated fair market
values.
The Partnership made downward adjustments to the estimated residual value of
certain of its aircraft on-lease as of September 30, 2001. This decrease
reflected the weakening used aircraft market and reflected the additional facts
11
and circumstances resulting from the advanced negotiations with a buyer, which
resulted in a sale of three held for sale aircraft on October 19, 2001. As a
result, the Partnership decreased the residual values as of September 30, 2001
to reflect the depressed market. This decrease in residual values was reflected
in greater depreciation expense over the remaining life of the aircraft.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about market risk disclosures involves forward-looking
statements. Market risks may include exposure to changes in equity prices,
interest rates and foreign currency exchange rates. Actual results could differ
materially from those projected in the forward-looking statements. The
Partnership does not use derivative financial instruments for speculative,
trading or any other purpose.
Equity Price Risk - The potential for changes in the market value of marketable
securities is referred to as "market risk". The Partnership does not own any
marketable securities.
Interest Rate Risk - Exposure to market risk resulting from changes in interest
rates relates primarily to the Partnership's lease portfolio. Income and cash
flows would not be impacted by changes in the general level of U.S. interest
rates since the Partnership's leases are fixed rate. The General Partner would
not expect an immediate 10% increase or decrease in current interest rates to
have a material effect on the fair market value of the Partnership's lease
portfolio.
Foreign Currency Risk - The Partnership does not have any foreign currency
denominated assets or liabilities or purchase commitments and have not entered
into any foreign currency contracts. Accordingly, the Partnership is not exposed
to fluctuations in foreign currency exchange rates.
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Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003 AND 2002
AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
TOGETHER WITH THE
REPORT OF INDEPENDENT AUDITORS
13
REPORT OF INDEPENDENT AUDITORS
The Partners
Polaris Aircraft Income Fund II
We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
II (a California Limited Partnership), as of December 31, 2003 and 2002, and the
related statements of operations, changes in partners' capital (deficit) and
cash flows for years then ended. These financial statements are the
responsibility of the General Partner. Our responsibility is to express an
opinion on these financial statements based on our audits. The 2001 financial
statements were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements in their
report dated February 1, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the General Partner, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 2003 and 2002 financial statements referred to above present
fairly, in all material respects, the financial position of Polaris Aircraft
Income Fund II as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California,
February 13, 2004
14
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with the Polaris Aircraft Income Fund II's filing on Form 10-K for
the year ended December 31, 2001. This audit report has not been reissued by
Arthur Andersen LLP in connection with this filing on Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Polaris Aircraft Income Fund II,
A California Limited Partnership:
We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
II, A California Limited Partnership as of December 31, 2001 and 2000, and the
related statements of operations, changes in partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the General Partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the General Partner, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Polaris Aircraft Income Fund
II, A California Limited Partnership as of December 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Francisco, California,
February 1, 2002 (except with respect to the matter discussed in Note 12, as
to which the date is February 13, 2002)
15
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 4,649,947 $ 10,605,028
RENT AND OTHER RECEIVABLES 1,612 241,560
AIRCRAFT HELD FOR SALE 1,049,000 740,000
AIRCRAFT ON OPERATING LEASE, net of accumulated
depreciation of $0 in 2003 and $46,906,230 in
2002 -- 2,318,650
------------ ------------
Total Assets $ 5,700,559 $ 13,905,238
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 120,867 $ 81,151
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 124,580 551,766
DEFERRED INCOME -- 475,788
------------ ------------
Total Liabilities 245,447 1,108,705
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,651,782) (3,555,808)
Limited Partners, 499,757 units (499,910 in
2002) issued and outstanding 9,106,894 16,352,341
------------ ------------
Total Partners' Capital 5,455,112 12,796,533
------------ ------------
Total Liabilities and Partners' Capital $ 5,700,559 $ 13,905,238
============ ============
The accompanying notes are an integral part of these statements.
16
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
REVENUES:
Rent from operating leases $ 1,929,121 $ 5,424,084 $ 9,341,022
Interest 49,026 158,165 647,909
Gain on sale of aircraft
inventory -- 65,000 --
Lessee return condition
settlements 215,460 191,615 4,864
Lessee settlement 111,742 73,448 8,530
Other -- -- 32,526
----------- ----------- -----------
Total Revenues 2,305,349 5,912,312 10,034,851
----------- ----------- -----------
EXPENSES:
Depreciation 2,009,650 3,505,903 4,616,341
Management fees to General
Partner 50,609 126,059 124,065
Interest -- -- 13,525
Operating 347,040 178,072 376,626
Legal 16,110 24,483 229,465
Administration and other 280,166 264,172 349,320
----------- ----------- -----------
Total Expenses 2,703,575 4,098,689 5,709,342
----------- ----------- -----------
NET INCOME (LOSS) $ (398,226) $ 1,813,623 $ 4,325,509
=========== =========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 598,345 $ 531,557 $ 1,183,080
=========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO THE LIMITED PARTNERS $ (996,571) $ 1,282,066 $ 3,142,429
=========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (1.99) $ 2.56 $ 6.29
=========== =========== ===========
UNITS USED TO CALCULATE
NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT 499,757 499,910 499,966
The accompanying notes are an integral part of these statements.
17
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 531,557 1,282,066 1,813,623
Cash distributions 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) 598,345 (996,571) (398,226)
Cash distributions to partners (694,319) (6,248,876) (6,943,195)
------------ ------------ ------------
Balance, December 31, 2003 $ (3,651,782) $ 9,106,894 $ 5,455,112
============ ============ ============
The accompanying notes are an integral part of these statements.
18
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (398,226) $ 1,813,623 $ 4,325,509
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 2,009,650 3,505,903 4,616,341
Gain on sale of aircraft inventory -- (65,000) --
Changes in operating assets and liabilities:
Decrease in rent and other receivables 239,948 163,262 447,796
Decrease in other assets -- -- 13,915
Increase (decrease) in payable to
affiliates 39,716 (556,500) 342,317
Increase (decrease) in accounts payable
and accrued liabilities (427,186) (66,823) 12,693
Decrease in deferred income (475,788) (1,524,084) (3,719,682)
------------ ------------ ------------
Net cash provided by operating
activities 988,114 3,270,381 6,038,889
------------ ------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft
inventory -- 250,000 565,000
------------ ------------ ------------
Net cash provided by investing
activities -- 250,000 565,000
------------ ------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable -- -- (493,388)
Cash distributions to partners (6,943,195) (5,555,177) (12,665,982)
------------ ------------ ------------
Net cash used in financing activities (6,943,195) (5,555,177) (13,159,370)
------------ ------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (5,955,081) (2,034,796) (6,555,481)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,605,028 12,639,824 19,195,305
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 4,649,947 $ 10,605,028 $ 12,639,824
============ ============ ============
Supplemental Disclosure of Non-Cash Investing
- ---------------------------------------------
Activities:
- ----------
Reclassification of aircraft on operating
leases to aircraft held for sale $ 1,025,000 $ 740,000 $ 185,000
============ ============ ============
The accompanying notes are an integral part of these statements.
19
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 2002
and 2003, 56 and 153 units were abandoned, respectively. At December 31, 2003,
there were 499,757 units outstanding.
As of December 31, 2003, the Partnership owned ten 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 (see Note 13).
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). Allocations to related parties are described in Notes 8 and 9.
Note 2. Accounting Principles and Policies
Accounting Method - The Partnership maintains its accounting records, and
prepares its financial statements on the accrual basis of accounting. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates. The most significant estimates
with regard to these financial statements are the residual values of the
aircraft, the useful lives of the aircraft and the estimated amount and timing
of cash-flows associated with each aircraft which are used to determine
impairment, if any.
20
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds. Cash and cash equivalents are stated at cost, which
approximates fair value.
Aircraft and Depreciation - The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual value is computed using
the straight-line method over the estimated economic life of the aircraft which
was originally estimated to be 30 years from the date of manufacture or the end
of the remaining lease term if beyond the 30 year life. Depreciation in the year
of acquisition was calculated based upon the number of days that the aircraft
were in service.
The Partnership periodically reviews 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 will be increased.
If the projected net cash flow for each aircraft on lease (projected rental
revenue, net of management fees, less projected maintenance costs, if any, plus
the estimated residual value) is less than the carrying value of the aircraft,
an impairment loss is recognized. Pursuant to Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144), as discussed in Note 3, measurement of an impairment loss
will be based on the "fair value" of the asset as defined in the statement.
Aircraft held for sale are carried at the lower of cost or fair value less cost
to sell.
Capitalized Costs - Aircraft modification and maintenance costs, which are
determined to increase the value or extend the useful life of the aircraft, are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement or the remaining lease term, if shorter. These
costs are also subject to periodic impairment evaluation as discussed above.
Operating Leases - The aircraft leases are accounted for as operating leases.
Lease revenues are recognized in equal installments over the terms of the
leases. Due to the fact that the Partnership received greater payments in the
beginning of the lease than at the end of the lease under the terms of the
leases in effect at the time of the TWA bankruptcy filing (the Previous Leases)
(See Note 5), this has resulted in deferred income on the balance sheet. As of
December 31, 2003, deferred income and deferred management fees were fully
amortized as all remaining lease terms ended during 2003. As of December 31,
2003, there are no leases in place.
Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft, including costs related to
lessee defaults and costs of disassembling aircraft inventory.
Net Income (Loss) Per Limited Partnership Unit - Net income per Limited
Partnership unit is based on the Limited Partners' share of net income or loss,
allocated in accordance with the Partnership Agreement, and the number of units
outstanding of 499,757 for the year ended December 2003, 499,910 for the year
ended December 2002 and 499,966 for the year ended December 2001.
Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
Fair Value of Financial Instruments - The recorded amounts of the Partnership's
cash and cash equivalents, rent and other receivables, payable to affiliates,
accounts payable and accrued liabilities as of December 31, 2003 approximate
21
their fair value because of the liquidity and/or short-term maturity of these
instruments.
Reclassification - Certain 2002 and 2001 amounts have been reclassified to
conform to the 2003 presentation. These reclassifications had no impact on
previously reported net income or partners' capital.
Note 3. Aircraft
At December 31, 2003, the Partnership owned a portfolio of 10 used commercial
jet aircraft out of its original portfolio of 30 aircraft, which were acquired,
leased or sold as discussed below. The remaining 10 aircraft are off lease and
held for sale as of December 31, 2003. The aircraft leases were net operating
leases, requiring the lessees to pay all operating expenses associated with the
aircraft during the lease term. The leases generally stated a minimum acceptable
return condition for which the lessee is liable under the terms of the lease
agreement.
The following table describes the Partnership's aircraft portfolio at December
31, 2003:
Year of
Aircraft Type Serial Number Manufacture
- ------------- ------------- -----------
McDonnell Douglas DC-9-30 47107 1968
McDonnell Douglas DC-9-30 47135 1968
McDonnell Douglas DC-9-30 47137 1968
McDonnell Douglas DC-9-30 47249 1968
McDonnell Douglas DC-9-30 47251 1968
McDonnell Douglas DC-9-30 47343 1969
McDonnell Douglas DC-9-30 47345 1969
McDonnell Douglas DC-9-30 47357 1969
McDonnell Douglas DC-9-30 47411 1969
McDonnell Douglas DC-9-30 47412 1969
Initially there were 17 McDonnell Douglas DC-9-30 and one McDonnell Douglas
DC-9-40 which were acquired for $122,222,040 during 1986, and leased to Ozark
Air Lines, Inc. (Ozark). In 1987, Trans World Airlines, Inc. (TWA) merged with
Ozark and assumed the leases. The leases were modified and extended in 1991. Two
of the aircraft had a lease expiration date of February 1998 and two other
aircraft had a lease expiration date of November 1998. These four aircraft were
sold to Triton Aviation Services II LLC in June 1997. The leases for 11 of the
aircraft that previously had lease expiration dates in 1998 were extended until
November 2004. The leases for three of the aircraft that previously had lease
expiration dates in 1998 were extended in February 1997 for eight years until
February 2005. As a result of the bankruptcy of TWA in 2001, modified terms and
conditions were accepted that were substantially less favorable to the
Partnership than the terms and conditions specified in the Previous Leases (see
Note 5 to the financial statements). In particular, rather than returning the
aircraft at the previously scheduled expiry date under the Previous Leases, TWA
LLC, who, in 2001, assumed 11 of the 14 then existing TWA leases of the
Partnership's aircraft under modified terms, would return each aircraft at the
time when such aircraft required a heavy maintenance check of the airframe,
provided that the aggregate average number of months for which all 11 aircraft
were on lease to TWA LLC was not less than 22 months from and after March 12,
2001. In addition, TWA LLC reduced the rental rate for each of the aircraft to
$40,000 per month. Further, at lease expiry, TWA LLC was required to return each
airframe in a "serviceable" condition, rather than being required to meet the
more stringent maintenance requirements of the Previous Leases. Finally, TWA LLC
22
was 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 was below the 25% target level, a financial adjustment was payable by
TWA LLC to the Partnership (but no payment was owed by the Partnership to TWA
LLC if cycle life remaining at return exceeded the target level). For five of
the six aircraft returned to the Partnership during 2003, $215,460 was paid by
the lessee for engines being returned below such target levels. For three of the
four aircraft returned to the Partnership during 2002, $191,615 was paid by the
lessee for engines being returned below such target levels
As discussed in Note 1, the Partnership periodically reviews the estimated
realizability of the residual values at the projected end of each aircraft's
economic life. The Partnership's future earnings are impacted by the net effect
of the adjustments to the carrying values of the aircraft (which has the effect
of decreasing future depreciation expense) and the downward adjustments to the
estimated residual values (which has the effect of increasing future
depreciation expense).
Aircraft held for sale are carried at the lower of cost or fair value less cost
to sell. During the year ended December 31, 2003, the Partnership recognized
additional depreciation expense of $804,000 on aircraft held for sale due to
changes in estimated fair market values. During the quarter ended September 30,
2003, the Partnership had reduced the carrying value of all the aircraft held
for sale by a total of $853,000 through depreciation expense; however, during
the three months ended December 31, 2003 depreciation expense was reduced and
carrying value increased by $49,000 for four of the aircraft, based on their
estimated future net selling price. Specifically, on November 26, 2003, a Letter
of Intent was signed by Newjet Corporation to purchase four of the DC-9-30
aircraft owned by the Partnership for a total purchase price of $450,000. In
January 2004, the Partnership entered into a Purchase and Sale agreement with
Newjet Corporation and on February 9, 2004, the Partnership received proceeds of
$450,000 for the sale of the four aircraft. Management believes the assumptions
related to the fair value of impaired assets represents the best estimates based
on reasonable and supportable assumptions and projections.
The Partnership made an adjustment to reduce the estimated net book values and
residual values of its aircraft on-lease as of September 30, 2001 as a result of
the anticipated sale of three aircraft. The Partnership recognized an impairment
loss as increased depreciation expense in 2001 of approximately $200,000 or
$0.41 per Limited Partnership unit. The Partnership recorded impairment losses
on aircraft that were deemed impaired to the extent that the carrying value
exceeded the fair value. For aircraft held for sale, the Partnership records
losses to the extent that carrying value exceeds the fair value less cost to
sell. Management believes the assumptions related to the fair value of impaired
assets represented the best estimates based on reasonable and supportable
assumptions and projections.
Note 4. Sale of Aircraft
On October 19, 2001, PIMC, on behalf of the Partnership, sold three DC-9-30
aircraft for $565,000 cash. The Partnership recognized neither a loss nor a
gain on the transaction due to an impairment expense being taken on these
aircraft during 2001 in anticipation of the sales. On February 13, 2002, the
General Partner sold one DC-9-30 for $250,000 for a gain of $65,000. During the
year ended December 31, 2003, the inventory of spare parts owned by the
Partnership carried at a net book value of zero were sold; no proceeds were
received for this sale.
23
Note 5. 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 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.
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 were 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 was
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 were on lease to TWA LLC
was 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 were 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 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 were approved by the
estate with the plan of reorganization on June 25, 2002 (the Plan) and are to be
paid to the Partnership through periodic distributions over the subsequent one
to two years from the date of reorganization. These funds are being recognized
as income on a cash basis as they are received. During the year ended December
31, 2003, the Partnership received payments totaling $111,742 from a portion of
these administrative rent claims distributions. 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. The administrative claims were
settled for $73,448 with the estate under the Plan and settlement was received
by the Partnership on September 26, 2002. Furthermore, the General Partner 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.
24
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 four months to 30 months as of March 31, 2001. As of December 31, 2002, the
Partnership had a deferred revenue balance of $475,788, and a deferred
management fee balance of $22,058 included in Payable to Affiliates on the
Balance Sheet, which would be recognized over the remaining lives of the
aircraft leases, up to 9 months. As of December 31, 2003, deferred revenue and
deferred management fees were fully recognized as all remaining lease terms
ended during 2003.
Note 6. Notes Payable
In connection with reconditioning of certain aircraft to meet noise level
restriction undertaken in 1996 and 1997, the Partnership issued notes payable to
the manufacturer of noise suppression devices to finance the related purchase.
The notes payables bore interest at a rate of 10% per annum and were repaid in
2001. Cash paid for interest in 2001 was $12,841. No debt was outstanding nor
was interest incurred in 2002 and 2003.
Note 7. Claims Related to Lessee Defaults
Braniff, Inc. (Braniff) Bankruptcy. On January 16, 2001, Braniff's bankrupt
estate made a $110,890 final payment in respect of the unsecured claims of the
Partnership and other affiliates of PIMC, of which $8,530 was allocated to the
Partnership based on its pro rata share of the total claims. This matter with
Braniff is now closed.
Note 8. Related Parties
Under the Limited Partnership Agreement (Partnership Agreement), the Partnership
paid or agreed to pay the following amounts to PIMC and/or its affiliates in
connection with services rendered:
a. An aircraft management fee equal to 5% of gross rental revenues with
respect to operating leases or 2% of gross rental revenues with respect
to full payout leases of the Partnership, payable upon receipt of the
rent. In 2003, 2002 and 2001 the Partnership paid management fees to
PIMC of $85,533, $490,933 and $0, respectively. Management fees payable
to PIMC at December 31, 2003 and 2002 were $0 and $34,925,
respectively.
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets.
In 2003, 2002 and 2001, $653,378, $384,423, and $475,321, respectively,
were reimbursed by the Partnership to PIMC for administrative and legal
expenses. Administrative and legal reimbursements of $76,807 and $0
25
were payable at December 31, 2003 and 2002, respectively.
Reimbursements for operational costs of $334,421, $335,851 and $392,194
were paid by the Partnership in 2003, 2002 and 2001, respectively.
Operational reimbursements of $44,060 and $46,226 were payable at
December 31, 2003 and 2002, respectively.
c. A 10% interest to PIMC in all cash distributions and sales proceeds,
gross income in an amount equal to 9.09% of distributed cash available
from operations and 1% of net income or loss and taxable income or
loss, as such terms are defined in the Partnership Agreement. After the
Partnership has sold or disposed of aircraft representing 50% of the
original aircraft cost, gains from additional sales or disposals must
be allocated to the General Partner's capital account until the General
Partner's capital account is no longer in a deficit position.
d. A subordinated sales commission to PIMC of 3% of the gross sales price
of each aircraft for services performed upon disposition and
reimbursement of out-of-pocket and other disposition expenses.
Subordinated sales commissions will be paid only after Limited Partners
have received distributions in an aggregate amount equal to their
capital contributions plus a cumulative non-compounded 8% per annum
return on their adjusted capital contributions, as defined in the
Partnership Agreement. The Partnership did not pay or accrue a sales
commission on any aircraft sales to date as the above subordination
threshold has not been met.
e. In the event that, immediately prior to the dissolution and termination
of the Partnership, the General Partner shall have a deficit balance in
its tax basis capital account, then the General Partner shall
contribute in cash to the capital of the Partnership an amount which is
equal to such deficit (see Note 9).
Note 9. Partners' Capital
The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the General Partner and the Limited Partners
(see Note 8). Such allocations are made using income or loss calculated under
GAAP for book purposes, which, as more fully described in Note 11, 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. Cash distributions of $694,319 and $6,248,876 were paid in 2003 to the
General Partner and the Limited Partners, respectively. Cash distributions paid
in 2002 were $555,518 and $4,999,659 to the General Partner and the Limited
Partners, respectively.
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.
Had all the assets of the Partnership been liquidated at December 31, 2003 at
the current carrying value, the tax basis capital (deficit) accounts of the
General Partner and the Limited Partners is estimated to be $(1,013,827) and
$36,384,162, respectively.
26
Note 10. Income Taxes
Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the financial statements.
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 2003 and 2002 are as
follows (unaudited):
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
2003: Assets $ 5,700,559 $ 35,615,782 $(29,915,223)
Liabilities 245,447 245,447 -
2002: Assets $ 13,905,238 $ 43,177,964 $(29,272,726)
Liabilities 1,108,705 597,992 510,713
Note 11. Reconciliation of Book Net Income to Taxable Net Income (Loss)
The following is a reconciliation between net income (loss) per Limited
Partnership unit reflected in the financial statements and the information
provided to Limited Partners for federal income tax purposes (unaudited):
For the years ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Book net income (loss) per Limited
Partnership unit $(1.99) $ 2.56 $ 6.29
Adjustments for tax purposes represent
differences between book and tax
revenue and expenses:
Rental revenue (0.94) (3.02) (5.93)
Management fee expense (0.07) (0.72) 0.25
Depreciation 1.22 3.77 5.05
Loss on sale of aircraft or inventory - - (1.56)
------ ------ ------
Taxable net income (loss) per Limited
Partnership unit $(1.78) $ 2.59 $ 4.10
====== ====== ======
The differences between net income and loss for book purposes and net income and
loss for tax purposes result from the temporary differences of certain revenue
and deductions.
For book purposes, rental revenue is generally recorded as it is earned on a
straight line basis for operating leases. For tax purposes, certain temporary
differences exist in the recognition of revenue which is generally recognized
when received. For tax purposes, management fee expense is accrued in the same
year as the tax basis rental revenue. Increases in the Partnership's book
maintenance reserve liability were recognized as rental revenue for tax
purposes.
The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
purposes. The Partnership also periodically evaluates the ultimate
27
recoverability of the carrying values and the economic lives of its aircraft for
book purposes and, accordingly, recognized adjustments, which increased book
depreciation expense. As a result, the current year tax depreciation expense is
less than the book depreciation expense. These differences in depreciation
methods result in book to tax differences on the sale of aircraft. In addition,
certain costs were capitalized for tax purposes and expensed for book purposes.
Note 12. Selected Quarterly Financial Data
The following is a summary of the quarterly results of operations for the years
ended December 31, 2003 and 2002 (unauditied):
2003 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Total Revenues $1,007,459 $ 830,108 $ 372,701 $ 95,081
Net Income (Loss) $ 269,488 $ 236,223 $ (919,175) $ 15,238
Net Income (Loss) - General
Partner $ 605,022 $ 2,362 $ (9,192) $ 153
Net Income (Loss) - Limited
Partners $ (335,534) $ 233,861 $ (909,983) $ 15,085
Net Income (Loss) Per Limited
Partnership Unit $ (0.67) $ 0.47 $ (1.82) $ 0.03
2002 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Total Revenues $1,869,320 $1,475,293 $1,425,232 $1,142,467
Net Income $ 638,011 $ 408,164 $ 479,664 $ 287,784
Net Income - General Partner $ 519,800 $ 4,083 $ 4,796 $ 2,878
Net Income - Limited Partners $ 118,211 $ 404,081 $ 474,868 $ 284,906
Net Income Per Limited
Partnership Unit $ 0.24 $ 0.81 $ 0.95 $ 0.56
Note 13. Subsequent Events
On February 15, 2004, the Partnership distributed $874,575 to the Limited
Partners, or $1.75 per Limited Partnership Unit, and $97,175 to the General
Partner.
In January 2004, the Partnership entered into a Sale and Purchase Agreement with
Newjet Corporation for the sale of four DC-9-30 aircraft owned by the
Partnership. On February 9, 2004, the Partnership received cash proceeds of
$450,000 from Newjet Corporation for the sale of the four aircraft. Under the
terms of the agreement, the aircraft were sold in an "as-is, where-is"
condition.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On August 1, 2002, the Board of Directors of the general partner of the
Partnership, on behalf of the Partnership, adopted a resolution dismissing
Arthur Andersen LLP (Andersen) as the Partnership's auditors and appointed Ernst
& Young LLP (E&Y) to replace Andersen.
28
Andersen's reports on the Partnership's financial statements as of and for each
of the years ended December 31, 2001 and 2000 did not contain an adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the years ended December 31, 2001 and 2000 and through the date hereof,
there were no disagreements with Andersen on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to Andersen's satisfaction, would have caused Andersen to
make reference to the subject matter in connection with its report on the
Partnership's financial statements for such years; and there were no reportable
events as described in Item 304(a)(1)(v) of Regulation S-K.
During the years ended December 31, 2001 and 2000 and through the date hereof,
the Partnership did not consult E&Y with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Partnership's
financial statements, or any other matters or reportable events as set forth in
Items 304(a)(2)(i) and (ii) of Regulation S-K.
The Partnership has provided Andersen with a copy of the foregoing statements.
Because the Partnership has been informed by Andersen that as of July 1, 2002 it
would not be providing the letter stating that it was in agreement with the
statements contained herein, no such letter is attached to this filing as an
Exhibit. The inability to obtain such letter from Andersen and not attaching a
letter to this filing is permitted by Item 304T(b)(2) of Regulation S-K.
Item 9A. 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 December 31, 2003, 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.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
Polaris Aircraft Income Fund II, a California Limited Partnership (PAIF-II or
the Partnership) has no directors or officers. Polaris Holding Company (PHC) and
its subsidiaries, including Polaris Aircraft Leasing Corporation (PALC) and
Polaris Investment Management Corporation (PIMC), the General Partner of the
Partnership (collectively Polaris), restructured their operations and businesses
(the Polaris Restructuring) in 1994. In connection therewith, PIMC entered into
a services agreement dated as of July 1, 1994 (the Services Agreement) with GE
Capital Aviation Services, Inc. (GECAS), a Delaware corporation which is a
wholly owned subsidiary of General Electric Capital Corporation, a Delaware
corporation (GE Capital). GE Capital has been PHC's parent company since 1986.
As subsidiaries of GE Capital, GECAS and PIMC are affiliates.
The officers and directors of PIMC are:
Name PIMC Title
----------------- ------------------------
William Carpenter President; Director
Stephen E. Yost Chief Financial Officer
Diarmuid Hogan Vice President; Director
Norman C. T. Liu Vice President; Director
Charles Meyers Secretary
Robert W. Dillon Assistant Secretary
Substantially all of these management personnel will devote only such portion of
their time to the business and affairs of PIMC as deemed necessary or
appropriate.
Mr. Carpenter, 40, assumed the position of President and Director of PIMC
effective October 1, 2001. Mr. Carpenter holds the position of Executive Vice
President and Chief Risk Manager of GECAS, having previously held the position
of Vice President - Chief Risk Manager of GECAS (Acting). Prior to joining GECAS
eight years ago, Mr. Carpenter was an aerospace engineer specializing in
aircraft handling qualities. Prior to that, Mr. Carpenter was a commissioned
officer and pilot in the United States Armed Forces.
Mr. Yost, 42, assumed the position of Chief Financial Officer of PIMC effective
April 17, 2002. Mr. Yost presently holds the position of Senior Vice President
and Manager Transaction Advisory for GECAS. Mr. Yost has been with the General
Electric Company (GE) and its subsidiaries since 1994. Prior to joining GECAS,
Mr. Yost held the position of European Controller for GE Capital Fleet Services
and prior to that, Controller of GE Capital Commercial Finance. Mr. Yost is a
Certified Public Accountant and prior to joining GE was an audit manager with
Coopers & Lybrand.
Mr. Hogan, 35, assumed the position of Vice President and Director of PIMC
effective October 1, 2003. Mr. Hogan presently holds the position of Senior Vice
President, Financial Planning and Analysis for GECAS. Mr. Hogan has been with
the General Electric Company (GE) and its subsidiaries since 1995. Mr. Hogan is
a member of the Institute of Chartered Accountants in Ireland and prior to
joining GE was an audit senior with KPMG.
30
Mr. Liu, 46, assumed the position of Vice President of PIMC effective May 1,
1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the
position of Executive Vice President - Commercial Operations of GECAS, having
previously held the positions of Executive Vice President - Sales and Marketing
and Executive Vice President - Capital Funding and Portfolio Management of
GECAS. Prior to joining GECAS, Mr. Liu was with General Electric Capital
Corporation for nine years. He has held management positions in corporate
Business Development for General Electric Capital Corporation and in
Syndications and Leasing for the Transportation & Industrial Funding division of
General Electric Capital Corporation. Mr. Liu previously held the position of
managing director of Kidder, Peabody & Co., Incorporated.
Mr. Meyer, 51, assumed the position of Secretary on October 1, 2003. Mr. Meyer
presently holds the position of Senior Vice President - Taxes and Senior Tax
Counsel of GECAS. Prior to joining GECAS, Mr. Meyer was the Senior Tax Director
- - Research and Planning for Northwest Airlines.
Mr. Dillon, 62, assumed the position of Assistant Secretary of PIMC on July 1,
1994. Mr. Dillon presently holds the position of Senior Vice President and
Associate General Counsel of GECAS. Mr. Dillon held the position of Vice
President - Aviation Legal and Insurance Affairs of PHC, from April 1989 to
October 1997. Previously, he served as General Counsel of PIMC and PALC
effective January 1986.
Certain Legal Proceedings:
On or around September 27, 1995, a complaint entitled Martha J. Harrison v.
General Electric Company, et. al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and Prudential Securities Incorporated. The Partnership is not
named as a defendant in this action. Plaintiff alleges claims of tort, breach of
fiduciary duty in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning
the inducement and solicitation of purchases arising out of the public offering
of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages,
attorney's fees, interest, costs and general relief.
On or around December 8, 1995, a complaint entitled Overby, et al. v. General
Electric Company, et al. was filed in the Civil District Court for the Parish of
Orleans, State of Louisiana. The complaint names as defendants General Electric
Company and General Electric Capital Corporation. The Partnership is not named
as a defendant in this action. Plaintiffs allege claims of tort, breach of
fiduciary duty, in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in
connection with the public offering of Polaris Aircraft Income Funds III and IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.
In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated, et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. The Partnership is not named as a
defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary
duty, in tort, contract and quasi-contract, violation of sections of the
Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection
with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs
seek compensatory damages, attorneys' fees, interest, costs and general relief.
31
In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v.
Prudential Securities. Incorporated, et al. was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint named as
defendants Prudential Securities Incorporated and Stephen Derby Gisclair. On or
about January 18, 1996, plaintiff filed a First Supplemental and Amending
Petition adding defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of sections of the Louisiana Blue Sky Law and
violation of the Louisiana Civil Code in connection with the public offering of
Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages,
attorneys' fees, interest, costs and general relief.
On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v.
General Electric Co., et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
in connection with the public offering of Polaris Aircraft Income Fund IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.
In or around December 1994, a complaint entitled John J. Jones, Jr. v.
Prudential Securities Incorporated, et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company and General Electric
Capital Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of section of the Louisiana Blue Sky Law and violation
of the Louisiana Civil Code concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund
III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.
On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint named as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
concerning the inducement and solicitation of purchases arising out of the
public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek
compensatory damages, attorneys' fees, interest, costs and general relief.
On or about May 7, 1996, a petition entitled Charles Rich. et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiffs allege claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Funds
III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief.
On or about March 4, 1996, a petition entitled Richard J. McGiven v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
32
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund V.
Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.
On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric
Company and General Electric Capital Corporation was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint names as
defendants General Electric Company and General Electric Capital Corporation.
The Partnership is not named as a defendant in this action. Plaintiff alleges
claims of tort concerning the inducement and solicitation of purchases arising
out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks
compensatory damages, attorneys' fees, interest, costs and general relief.
Item 11. Executive Compensation
The Partnership has no directors or officers. The Partnership is managed by
PIMC, the General Partner. In connection with management services provided,
management and advisory fees of $85,533 were paid to PIMC in 2003, in addition
to a 10% interest in all cash distributions as described in Note 8 to the
financial statements (Item 8).
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) No person owns of record, or is known by the Partnership to own
beneficially, more than five percent of any class of voting securities
of the Partnership.
b) The General Partner of the Partnership owns the equity securities of
the Partnership as set forth in the following table:
Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
-------- ---------------- -------------------- --------
General Polaris Investment Represents a 10.0% interest of all cash 100%
Partner Management distributions, gross income in an
Interest Corporation amount equal to 9.09% of distributed
cash available from operations, and a
1% interest in net income or loss
c) There are no arrangements known to the Partnership, including any
pledge by any person of securities of the Partnership, the operation of
which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
None.
33
Item 14. Principal Accounting Fees and Services
Audit Fees - For audits of the years ended December 31, 2003 and 2002, the
Partnership paid or accrued fees of $22,000 and $27,000, respectively, to its
independent auditors Ernst and Young LLP. Audit fees for 2003 and 2002 were for
professional services provided for the quarterly review of the financial
statements in the Partnership's Form 10-Q and the annual audit of the financial
statements in the Partnership's Form 10-K.
Tax Fees - For the year ended December 31, 2003 and 2002, the Partnership was
billed $0 and $2,750, respectively, by Deloitte & Touche for the review of
Federal and State partnership tax returns.
34
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements.
The following are included in Part II of this report:
Page No.
--------
Report of Independent Auditors 14
Balance Sheets 16
Statements of Operations 17
Statements of Changes in Partners' Capital (Deficit) 18
Statements of Cash Flows 19
Notes to Financial Statements 20
2. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
2003.
3. Exhibits required to be filed by 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.
99.1 Code of Ethics
4. Financial Statement Schedules.
All financial statement schedules are omitted because they are not
applicable, not required or because the required information is
included in the financial statements or notes thereto.
35
SIGNATURES
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
March 30, 2004 By: /S/ William Carpenter
- --------------------------- ----------------------------
Date William Carpenter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/William Carpenter President and Director of Polaris March 30, 2004
- -------------------- Investment Management Corporation, --------------
(William Carpenter) General Partner of the Registrant
/S/Stephen E. Yost Chief Financial Officer of Polaris March 30, 2004
- ------------------ Investment Management Corporation, --------------
(Stephen E. Yost) General Partner of the Registrant
/S/Diarmuid Hogan Vice President and Director of Polaris March 30, 2004
- ----------------- Investment Management Corporation, --------------
(Diarmuid Hogan) General Partner of the Registrant
/S/Norman C. T. Liu Vice President and Director of Polaris March 30, 2004
- ------------------- Investment Management Corporation, --------------
(Norman C. T. Liu) General Partner of the Registrant
36