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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----- to ------
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Commission File No. 33-2794
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POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
State of Organization: California
IRS Employer Identification No. 94-2985086
201 High Ridge Road, Stamford, Connecticut 06927
Telephone - (203) 357-3776
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes [ ] No [X]
This document consists of 15 pages.
POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
FORM 10-Q - FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Condensed Balance Sheets - September 30, 2003 and
December 31, 2002.............................................................................. 3
b) Condensed Statements of Operations - Three and Nine Months
Ended September 30, 2003 and 2002.............................................................. 4
c) Condensed Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2002
and Nine Months Ended September 30, 2003....................................................... 5
d) Condensed Statements of Cash Flows - Nine Months
Ended September 30, 2003 and 2002.............................................................. 6
e) Notes to Condensed Financial Statements........................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10
Item 4. Controls and Procedures.................................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................... 14
Signature ........................................................................................... 15
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 4,635,067 $ 10,605,028
RENT AND OTHER RECEIVABLES 41,612 241,560
AIRCRAFT HELD FOR SALE 900,000 740,000
AIRCRAFT ON OPERATING LEASE,
net of accumulated depreciation of
$8,170,489 in 2003 and $46,906,230 in 2002 100,000 2,318,650
PREPAID EXPENSE 3,871 -
------------- ------------
Total Assets $ 5,680,550 $ 13,905,238
============= ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 120,256 $ 81,151
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 119,755 551,766
DEFERRED INCOME 665 475,788
------------- ------------
Total Liabilities 240,676 1,108,705
------------- ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,651,935) (3,555,808)
Limited Partners, 499,812 units in 2003 and
499,910 units in 2002 issued and outstanding 9,091,809 16,352,341
------------- ------------
Total Partners' Capital 5,439,874 12,796,533
------------- ------------
Total Liabilities and Partners' Capital $ 5,680,550 $ 13,905,238
============= ============
The accompanying notes are an integral part of these condensed statements.
3
POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
REVENUES:
Rent from operating leases $ 305,003 $ 1,255,824 $ 1,924,456 $ 4,319,561
Interest 10,746 40,670 38,769 120,221
Gain on sale of aircraft - - - 65,000
Lessee return condition settlements 56,952 55,290 177,697 191,615
Lessee settlement - 73,448 69,346 73,448
------------- -------------- ------------- ------------
Total Revenues 372,701 1,425,232 2,210,268 4,769,845
------------- -------------- ------------- ------------
EXPENSES:
Depreciation 1,046,155 813,485 2,058,650 2,818,345
Management fees to general partner 8,357 30,149 50,428 98,534
Operating 161,969 50,011 278,423 113,004
Legal 11,822 1,153 13,804 18,728
Administration and other 63,573 50,770 222,427 195,395
------------- -------------- ------------- ------------
Total Expenses 1,291,876 945,568 2,623,732 3,244,006
------------- -------------- ------------- ------------
NET INCOME (LOSS) $ (919,175) $ 479,664 $ (413,464) $ 1,525,839
============= ============== ============= ============
NET INCOME (LOSS) ALLOCATED
TO THE GENERAL PARTNER $ (9,192) $ 4,796 $ 598,192 $ 528,679
============= ============== ============= ============
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ (909,983) $ 474,868 $ (1,011,656) $ 997,160
============= ============== ============= ============
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (1.82) $ 0.95 $ (2.02) $ 1.99
============= ============== ============= ============
The accompanying notes are an integral part of these condensed statements.
4
POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(UNAUDITED)
YEAR ENDED DECEMBER 31, 2002 AND
NINE MONTHS ENDED SEPTEMBER 30, 2003
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- -----
Balance, December 31, 2001 $ (3,531,847) $ 20,069,934 $ 16,538,087
Net income 531,557 1,282,066 1,813,623
Cash distribution to partners (555,518) (4,999,659) (5,555,177)
------------- -------------- -------------
Balance, December 31, 2002 (3,555,808) 16,352,341 12,796,533
Net income (loss) 598,192 (1,011,656) (413,464)
Cash distribution to partners (694,319) (6,248,876) (6,943,195)
------------- -------------- -------------
Balance, September 30, 2003 $ (3,651,935) $ 9,091,809 $ 5,439,874
============= ============== =============
The accompanying notes are an integral part of these condensed statements.
5
POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (413,464) $ 1,525,839
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,058,650 2,818,345
Gain on sale of aircraft - (65,000)
Changes in operating assets and liabilities:
Decrease in rent and other receivables 199,948 123,262
Increase in prepaid expense (3,871) -
Increase (decrease) in payable to affiliates 39,105 (504,208)
Decrease in accounts payable and accrued liabilities (432,011) (117,359)
Decrease in deferred income (475,123) (1,236,894)
------------- -------------
Net cash provided by operating activities 973,234 2,543,985
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft - 250,000
------------- -------------
Net cash provided by investing activities - 250,000
------------- -------------
FINANCING ACTIVITIES:
Cash distributions to partners (6,943,195) (5,555,177)
------------- -------------
Net cash used in financing activities (6,943,195) (5,555,177)
------------- -------------
CHANGES IN CASH AND CASH
EQUIVALENTS (5,969,961) (2,761,192)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 10,605,028 12,639,824
------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,635,067 $ 9,878,632
============= =============
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfer of operating lease assets to assets held for sale $ 500,000 $ -
============= ============
The accompanying notes are an integral part of these condensed statements.
6
POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND THE PARTNERSHIP
Polaris Aircraft Income Fund II, A California Limited Partnership (the
Partnership), was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. The Partnership will terminate no later than December 2010.
Upon organization, both the General Partner and the initial Limited Partner
contributed $500. The Partnership recognized no profits or losses during the
periods ended December 31, 1985 and 1984. The offering of Limited Partnership
units terminated on December 31, 1986, at which time the Partnership had sold
499,997 units of $500, representing $249,998,500. All partners were admitted to
the Partnership on or before December 1, 1986. During January 1998, 24 units
were redeemed by the Partnership in accordance with section 18 of the Limited
Partnership Agreement (the Agreement). During the three months ended September
30, 2003, 28 units were abandoned. At September 30, 2003, there were 499,812
units outstanding, net of redemptions.
Polaris Investment Management Corporation (PIMC), the sole General Partner of
the Partnership (the General Partner), supervises the day-to-day operations of
the Partnership. PIMC is a wholly-owned subsidiary of Polaris Aircraft Leasing
Corporation (PALC). Polaris Holding Company (PHC) is the parent company of PALC.
General Electric Capital Corporation (GE Capital), an affiliate of General
Electric Company, owns 100% of PHC's outstanding common stock. PIMC has entered
into a services agreement dated as of July 1, 1994 with GE Capital Aviation
Services, Inc. (GECAS). Amounts paid and allocations to related parties are
described in Notes 3 and 4.
At September 30, 2003, the Partnership owned a portfolio of 10 used McDonnell
Douglas DC-9-30 commercial jet aircraft, and an inventory of spare parts out of
its original portfolio of 30 aircraft. One of these aircraft was on lease to TWA
Airlines, LLC (TWA LLC), a wholly owned subsidiary of American Airlines, Inc.
(American). The nine remaining aircraft were stored in New Mexico and were being
remarketed for sale.
NOTE 2. ACCOUNTING PRINCIPLES AND POLICIES
In the opinion of management, the condensed financial statements presented
herein include all adjustments, consisting only of normal recurring items,
necessary to summarize fairly the Partnership's financial position and results
of operations. The financial statements have been prepared in accordance with
the instructions of the Quarterly Report to the Securities and Exchange
Commission (SEC) Form 10-Q. The condensed balance sheet at December 31, 2002 has
been derived from the audited financial statements at that date but does not
include all of the information and note disclosures required by accounting
principles generally accepted in the United States (GAAP). These statements
should be read in conjunction with the financial statements and notes thereto
for the years ended December 31, 2002, 2001, and 2000 included in the
Partnership's 2002 Annual Report to the SEC on Form 10-K.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
7
NOTE 3. RELATED PARTIES
Under the Agreement, the Partnership paid or agreed to pay the following amounts
for the current quarter to the General Partner, PIMC, in connection with
services rendered or payments made on behalf of the Partnership:
PAYMENTS MADE DURING THE
THREE MONTHS ENDED PAYABLE AT
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------------ ------------------
Aircraft Management Fees $ 17,267 $ 2,019
Out-of-Pocket Operating
Expense Reimbursement 133,582 113,307
Out-of-Pocket Administrative
Expense Reimbursement 68,740 4,930
---------- ---------
$ 219,589 $ 120,256
========== =========
NOTE 4. PARTNERS' CAPITAL
The Agreement stipulates different methods by which revenue, income and loss
from operations and gain or loss on the sale of aircraft are to be allocated to
the General Partner and the limited partners. Such allocations are made using
income or loss calculated under GAAP for book purposes, which varies from income
or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the General Partner and 90% to the limited
partners.
The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.
NOTE 5. AIRCRAFT AND DEPRECIATION
The Partnership periodically 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 (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),
measurement of an impairment loss will be based on the "fair value" of the asset
as defined in the
8
statement. During the nine months ended September 30, 2003, the Partnership
recognized additional depreciation expense of $88,293 as a result of determining
that future net cash flows were less than the carrying value of aircraft on
operating lease. Aircraft held for sale are carried at the lower of cost or fair
value less cost to sell. During the nine months ended September 30, 2003, the
Partnership also recognized additional depreciation expense of $765,000 on
aircraft held for sale due to changes in estimated fair market values.
Management believes the assumptions related to the fair value of impaired assets
represents the best estimates based on reasonable and supportable assumptions
and projections.
NOTE 6. SALE OF AIRCRAFT
On February 13, 2002, the General Partner, on behalf of the Partnership, sold
one DC-9-30 aircraft to Amtec Corporation for $250,000 in cash. The Partnership
recognized a gain on the sale of $65,000.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
At September 30, 2003, Polaris Aircraft Income Fund II, A California Limited
Partnership (the Partnership), owned a portfolio of 10 used McDonnell Douglas
DC-9-30 commercial jet aircraft, and an inventory of spare parts out of its
original portfolio of 30 aircraft. One of these aircraft was on lease to TWA
Airlines, LLC (TWA LLC), a wholly owned subsidiary of American Airlines Inc.
(American). The one remaining lease will expire by October 3, 2003, after which
this aircraft will be remarketed for sale. The nine remaining aircraft were
being stored in New Mexico and were being remarketed for sale. 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 because the General Partner is unable to
predict when all of the Partnership's remaining assets will be sold. This
discussion should be read in conjunction with the management's discussion
included in the Partnership's 2002 Annual Report to the SEC on Form 10-K.
PARTNERSHIP OPERATIONS
The Partnership recorded a net loss of $919,175, or $1.82 per limited
partnership unit, for the three months ended September 30, 2003, compared to net
income of $479,664, or $0.95 per limited partnership unit, for the three months
ended September 30, 2002. The Partnership recorded a net loss of $413,464, or
$2.02 per limited partnership unit, for the nine months ended September 30,
2003, compared to net income of $1,525,839, or $1.99 per limited partnership
unit, for the nine months ended September 30, 2002. The decreases in net income
are primarily due to write downs on aircraft, decreases in rental and interest
income, and no recognized gains on sale of aircraft along with an increase in
operating expenses, partially offset by decreases in depreciation and management
fees to the General Partner, as discussed below.
Rent from operating leases decreased to $305,003 and $1,924,456 in the three and
nine months ended September 30, 2003, respectively, as compared to $1,255,824
and $4,319,561 for the respective periods in 2002, primarily due to fewer
aircraft on lease. Additionally, the decrease in rent from operating leases was
also caused by lower recognition of deferred revenue of $71,670 and $475,123 in
the three and nine months ended September 30, 2003, respectively, as compared to
$338,490 and $1,236,894 in the respective periods in 2002.
Interest income decreased during the three and nine months ended September 30,
2003, as compared to the same periods in 2002, primarily due to lower average
cash reserves and a lower rate of return on those cash reserves.
There was no recognized gain on sale of aircraft during the nine months ended
September 30, 2003, as compared to the same period in 2002, due to the sale of
one of the Partnership's aircraft on February 13, 2002 for $250,000 resulting in
a gain on the sale of $65,000. There were no aircraft sales during the nine
months ended September 30, 2003.
Lessee return condition settlements increased slightly during the three months
ended September 30, 2003, as compared to the same period in 2002. Two aircraft
were returned to the Partnership during the 2003 period as compared to one
aircraft during the 2002 period; however, one of the aircraft returned during
the 2003 period was not assessed a return condition settlement. Lessee return
condition
10
settlements decreased during the nine months ended September 30, 2003, as
compared to the same period in 2002. Five aircraft were returned to the
Partnership during the 2003 period as compared to three aircraft during the 2002
period. 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).
Lessee settlement income decreased during the three and nine months ended
September 30, 2003, as compared to the same periods in 2002, due to a payment
received during the three and nine months ended September 30, 2002 in the amount
of $73,448 as compared to $0 and $69,346 received during the three and nine
months ended September 30, 2003, respectively. The payment during the 2002
period represents settlement of an administrative claim filed in the TWA
bankruptcy proceeding in connection with certain legal expenses incurred by the
Partnership. The payment received during the 2003 period resulted from a
distribution by TWA's bankrupt estate of a portion of the $422,989
administrative rent claims.
Depreciation expense increased during the three months ended September 30, 2003,
as compared to the same period in 2002. The increase during the 2003 period
occurred because the General Partner determined that the carrying value of the
aircraft on lease and held for sale exceeded current fair market value based on
recent purchase offers on the aircraft held for sale and therefore recognized
additional depreciation expense. Depreciation expense decreased during the nine
months ended September 30, 2003, as compared to the same period in 2002,
primarily due to fewer aircraft remaining on lease, partly offset by the
additional depreciation expense due to changes in fair market value during the
2003 period. No such adjustments to market value through additional depreciation
expense were made during the 2002 periods.
Operating expenses increased during the three and nine months ended September
30, 2003, primarily due to increased maintenance and storage related costs
associated with the aircraft as they come off lease and are held for sale. As of
September 30, 2003, nine aircraft remain in storage while being remarketed for
sale.
Administration and other expense increased during the three and nine months
ended September 30, 2003, as compared to the same periods in 2002, primarily due
to increased audit fees. Legal fees increased during the three months ended
September 30, 2003, as compared to the same period in 2002, primarily due to
higher legal costs related to various SEC and investor reporting matters. Legal
expense decreased during the nine months ended September 30, 2003, as compared
to the same period in 2002. In the 2002 period, legal fees were incurred in
connection with an SEC prompted court order related to transfers of units to
entities owned by an investor. There were no such fees incurred in the 2003
period.
LIQUIDITY AND CASH DISTRIBUTIONS
LIQUIDITY - The Partnership received all payments due from its sole lessee, TWA
Airlines LLC, for the aircraft remaining on lease during the nine months ended
September 30, 2003.
PIMC, the General Partner, has determined that cash reserves be maintained as a
prudent measure to ensure that the Partnership has available funds for winding
up the affairs of the Partnership and for
11
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 because
the General Partner is unable to predict when all of the Partnership's remaining
assets will be sold. The Partnership's cash reserves will be monitored and may
be revised from time to time as further information becomes available in the
future.
CASH DISTRIBUTIONS - Cash distributions to limited partners during the nine
months ended September 30, 2003 and 2002 were $6,248,876, or $12.50 per limited
partnership unit, and $4,999,659, or $10.00 per unit, respectively. The timing
and amount of future cash distributions are not yet known and will depend on the
Partnership's future cash requirements (including expenses of the Partnership),
the need to retain cash reserves as previously discussed in the Liquidity
section, the receipt of rental payments from TWA LLC, and payments generated
from aircraft sales proceeds.
12
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b), PIMC management, including the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation as of the end of
the period covered by this report, of the effectiveness of the Partnership's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Partnership's disclosure controls and procedures were
effective as of the end of the period covered by this report. As required by
Rule 13a-15(d), PIMC management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the Partnership's internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Partnership's internal control over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in Item 3 of Part I of Polaris Aircraft Income Fund II's (the
Partnership) 2002 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the period ended June 30, 2003,
all legal actions or proceedings involving the Partnership have been resolved or
disposed of by the respective courts.
OTHER PROCEEDINGS - Item 10 in Part III of the Partnership's 2002 Form 10-K and
Item 1 of Part II of the Partnership's Quarterly Report to the SEC on Form 10-Q
for the period ended June 30, 2003 discuss certain actions which have been filed
against Polaris Investment Management Corporation and others in connection with
the sale of interests in the Partnership and the management of the Partnership.
The Partnership is not a party to these actions. There have been no material
developments with respect to any of the actions described therein during the
period covered by this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
31.1 CEO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 CFO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter for which this report is filed.
14
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
November 14, 2003 By: /s/ Stephen E. Yost
-----------------------------------------
Stephen E. Yost, Chief Financial Officer
15