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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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
State of Organization: California
IRS Employer Identification No. 94-2985086
Four Embarcadero Center, San Francisco, California 94111-4146
Telephone - (415) 362-0333
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
This document consists of 22 pages.<PAGE>
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POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1994
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 3
b) Statements of Operations - Three Months and
Six Months Ended June 30, 1994 and 1993 . . . . . . . . . . 4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1993
and Six Months Ended June 30, 1994 . . . . . . . . . . . . 5
d) Statements of Cash Flows - Six Months
Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . 6
e) Notes to Financial Statements . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 10
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 21
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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<TABLE>
Part 1. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
<CAPTION> June 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS:
CASH AND CASH EQUIVALENTS $ 15,428,225 $ 97,473
SHORT-TERM INVESTMENTS, at cost which approximates market value - 22,347,610
Total Cash and Cash Equivalents and Short-Term
Investments 15,428,225 22,445,083
RENT AND OTHER RECEIVABLES 141,810 37,733
NOTES RECEIVABLE 2,943,841 1,022,308
AIRCRAFT at cost, net of accumulated depreciation of
$82,699,132 in 1994 and $77,031,695 in 1993 99,260,155 104,927,592
AIRCRAFT INVENTORY 1,072,836 1,244,061
OTHER ASSETS 30,152 29,770
$ 118,877,019 $ 129,706,547
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 80,944 $ 52,274
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 3,875 2,556,325
LESSEE SECURITY DEPOSITS 168,953 189,564
MAINTENANCE RESERVES 1,728,990 869,363
DEFERRED INCOME 642,742 642,742
Total Liabilities 2,625,504 4,310,268
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,040,194) (948,683)
Limited Partners, 499,997 units issued and outstanding 117,291,709 126,344,962
Total Partners' Capital 116,251,515 125,396,279
$ 118,877,019 $ 129,706,547
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
REVENUES:
Rent from operating leases $ 3,545,395 $ 3,663,000 $ 7,193,395 $ 6,882,000
Gain on sale of equipment - - - 259,809
Interest and other 195,828 188,757 371,169 359,612
Total Revenues 3,741,223 3,851,757 7,564,564 7,501,421
EXPENSES:
Depreciation and amortization 2,833,719 2,666,847 5,667,437 5,441,422
Management and advisory fees 168,270 174,150 341,670 326,100
Operating 926,996 546,238 3,646,213 687,868
Administration and other 57,151 64,557 109,605 127,257
Total Expenses 3,986,136 3,451,792 9,764,925 6,582,647
NET INCOME (LOSS) $ (244,913) $ 399,965 $ (2,200,361) $ 918,774
NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 310,018 $ 191,480 $ 602,930 $ 384,148
NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS $ (554,931) $ 208,485 $ (2,803,291) $ 534,626
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ (1.11) $ 0.42 $ (5.61) $ 1.07
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1993 and
Six Months Ended June 30, 1994
General Limited
Partner Partners Total
<S> <C> <C> <C>
Balance, December 31, 1992 $ (837,954) $ 137,297,163 $ 136,459,209
Net income (loss) 1,000,375 (952,261) 48,114
Cash distributions to partners (1,111,104) (9,999,940) (11,111,044)
Balance, December 31, 1993 (948,683) 126,344,962 125,396,279
Net income (loss) 602,930 (2,803,291) (2,200,361)
Cash distributions to partners (694,441) (6,249,962) (6,944,403)
Balance, June 30, 1994 $ (1,040,194) $ 117,291,709 $ 116,251,515
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (2,200,361) $ 918,774
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 5,667,437 5,441,422
Gain on sale of equipment - (259,809)
Changes in operating assets and liabilities:
Decrease (increase) in rent and other receivables (104,077) 285,208
Increase in inventory - (558,903)
Decrease (increase) in other assets (382) 6,000
Increase (decrease) in payable to affiliates 28,670 (1,057,967)
Increase (decrease) in accounts payable and accrued liabilities (2,552,450) 29,193
Increase (decrease) in lessee security deposits (20,611) 91,559
Increase in maintenance reserves 859,627 1,173,948
Net cash provided by operating activities 1,677,853 6,069,425
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 171,225 382,266
Increase in notes receivable (2,177,533) -
Principal payments on notes receivable 256,000 666,657
Net cash provided by (used in) investing activities (1,750,308) 1,048,923
FINANCING ACTIVITIES:
Cash distributions to partners (6,944,403) (4,166,642)
Net cash used in financing activities (6,944,403) (4,166,642)
CHANGES IN CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (7,016,858) 2,951,706
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 22,445,083 19,846,799
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 15,428,225 $ 22,798,505
The accompanying notes are an integral part of these statements.
</TABLE>
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POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Principles and Policies
In the opinion of management, the financial statements presented herein include
all adjustments, consisting only of normal recurring items, necessary to
summarize fairly Polaris Aircraft Income Fund II's (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 and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto for the years ended December 31, 1993, 1992, and
1991 included in the Partnership's 1993 Annual Report to the SEC on Form 10-K
(Form 10-K).
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds.
Reclassification - Certain 1993 balances have been reclassified to conform to
the 1994 presentation.
2. Lease to Northwest Territorial Airways, Ltd. (NWT)
The lease of one aircraft to NWT was extended at the original lease rate through
March 1993, and at 80% of the original rate through March 1994. The aircraft
was returned to the Partnership on April 6, 1994 and NWT subsequently paid to
the Partnership approximately $860,000 in lieu of meeting return conditions as
specified in the lease. The Partnership has negotiated a new lease with NWT for
16 months commencing in June 1994. The new lease rate is approximately 108% of
the prior rate. During the off-lease period, the Partnership performed certain
maintenance and modification work on the aircraft estimated at approximately
$590,000, which will be applied against the $860,000 paid to the Partnership by
NWT.
3. Lease to Continental Micronesia, Inc. (Continental Micronesia)
Three Boeing 727-200 Advanced aircraft formerly on lease to Alaska Airlines,
Inc. were leased to Continental Micronesia at approximately 55% of the prior
rate from April and May 1993 until April 1998. The lease stipulates that the
Partnership will reimburse costs for cockpit modifications up to $600,000 per
aircraft, C-check labor costs up to $300,000 per aircraft for two of the
aircraft, and the actual cost of C-check parts for two of the aircraft. In
addition, the Partnership will provide financing for up to $815,000 for new
image modifications to be repaid with interest over the lease term for each
aircraft. In accordance with the cost sharing agreement, in January 1994, the
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Partnership reimbursed Continental Micronesia $1.8 million for cockpit
modifications, which is included in aircraft at cost in the December 31, 1993
balance sheet, and $742,325 for C-check labor and parts, which was included in
operating expense in the year ended December 31, 1993 statement of operations as
discussed in the Form 10-K. In addition, the Partnership financed $2,177,533
for new image modifications, which is being repaid with interest over the lease
terms of the aircraft, beginning in February 1994. The Partnership has received
all scheduled principal and interest payments due from Continental Micronesia
through June 30, 1994. The note receivable balance as of June 30, 1994 was
$1,986,023.
4. Sale of Equipment
One hushkit set from the aircraft formerly leased to Pan American World Airways,
Inc. was sold in January 1993 to ALG, Inc. (ALG) for $1,750,000, which resulted
in a $259,809 gain in the first quarter 1993. ALG paid cash for a portion of
the sale price and issued an interest-bearing promissory note for the balance of
$1,132,363, which specifies 23 equal payments and a balloon payment due in
January 1995. The Partnership has received all payments due under the note.
The note receivable balances as of June 30, 1994 and December 31, 1993 were
$957,818 and $1,022,308, respectively.
5. Trans World Airlines, Inc. (TWA) Reorganization
As part of the TWA lease extension as discussed in the Form 10-K, the
Partnership agreed to share the cost of meeting certain Airworthiness Directives
(ADs) after TWA successfully reorganized. The agreement stipulates that such
costs incurred by TWA may be credited against monthly rentals, subject to annual
limitations and a maximum of $500,000 per aircraft through the end of the lease.
In accordance with the cost sharing agreement, TWA submitted to the Partnership
invoices for expenses paid to date by TWA to meet the ADs. Expenses were offset
against rental payments totaling $2.7 million during 1993. Additional expenses,
which are included in operating expense in the six months ended June 30, 1994
statement of operations, were offset against rental payments totaling $3.6
million that were due to the Partnership in the first four months of 1994. TWA
may offset an additional $2.7 million against rental payments, subject to annual
limitations, over the lease term.
8<PAGE>
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6. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for
Three Months
Ended Payable at
June 30, 1994 June 30, 1994
Aircraft Management Fees $ 164,112 $ 6,560
Out-of-Pocket Administrative
Expense Reimbursement 73,579 55,198
Out-of-Pocket Maintenance and
Remarketing Expense
Reimbursement 182,314 19,186
---------- ---------
$ 420,005 $ 80,944
========== =========
7. Subsequent Event
Viscount Restructuring
Rent Deferral - To assist Viscount with the funding of costs associated with
Federal Aviation Regulation compliance relating to the Partnership's aircraft,
the Partnership has entered into an agreement with Viscount to defer certain
rents due the Partnership on one aircraft for a period of six months. The
deferred rents, which aggregate $196,800, will be repaid by Viscount with
interest at a rate of 6% per annum beginning in October 1994, over the remaining
term of the lease.
Maintenance Advance - The Partnership has also agreed to extend a line of credit
to Viscount for a total of $127,000 to be used primarily for maintenance
expenses relating to the Partnership's aircraft. Payments of interest only at a
variable rate in arrears will be paid during the draw down period beginning in
August 1994 through December 1994. Beginning in January 1995, level payments to
amortize the advance over a 30-month period will be due in arrears, together
with interest at a rate of 4% per annum over the 18-month U.S. Treasury Rate.
In accordance with the agreement, the Partnership advanced Viscount $63,500 in
July 1994.
Option - The Partnership will have the option to acquire approximately 0.6% of
the issued and outstanding shares of Viscount stock as of July 26, 1994 for an
option price of approximately $91,000. The option may be exercised at any time
during the option period, which expires on July 20, 1999.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Polaris Aircraft Income Fund II (the Partnership) owns a portfolio of 24 used
commercial jet aircraft. The portfolio consists of one Boeing 737-200 Combi
aircraft leased to Northwest Territorial Airways, Ltd. (NWT), 17 McDonnell
Douglas DC-9-30 aircraft and one McDonnell Douglas DC-9-40 aircraft leased to
Trans World Airlines, Inc. (TWA), one Boeing 737-200 aircraft leased to Viscount
Air Services, Inc. (Viscount), three Boeing 727-200 Advanced aircraft leased to
Continental Micronesia, Inc. (Continental Micronesia), and one Boeing 727-200
aircraft formerly leased to Delta Airlines, Inc., that is being remarketed for
sale or lease. The Partnership also owns six Boeing 727-200 aircraft,
previously leased to Pan American World Airways, Inc., that were transferred to
aircraft inventory and have been disassembled for sale of their component parts.
Remarketing Update
Lease to NWT - The lease of one aircraft to NWT was extended at the original
lease rate through March 1993, and at 80% of the original rate through March
1994. The aircraft was returned to the Partnership on April 6, 1994 and NWT
subsequently paid to the Partnership approximately $860,000 in lieu of meeting
return conditions as specified in the lease. The Partnership has negotiated a
new lease with NWT for 16 months commencing in June 1994. The new lease rate is
approximately 108% of the prior rate. During the off-lease period, the
Partnership performed certain maintenance and modification work on the aircraft
estimated at approximately $590,000, which will be applied against the
approximately $860,000 paid to the Partnership by NWT.
Viscount Restructuring
Rent Deferral - To assist Viscount with the funding of costs associated with
Federal Aviation Regulation compliance relating to the Partnership's aircraft,
the Partnership has entered into an agreement with Viscount to defer certain
rents due the Partnership on one aircraft for a period of six months. The
deferred rents, which aggregate $196,800, will be repaid by Viscount with
interest at a rate of 6% per annum beginning in October 1994, over the remaining
term of the lease.
Maintenance Advance - The Partnership has also agreed to extend a line of credit
to Viscount for a total of $127,000 to be used primarily for maintenance
expenses relating to the Partnership's aircraft. Payments of interest only at a
variable rate in arrears will be paid during the draw down period beginning in
August 1994 through December 1994. Beginning in January 1995, level payments to
amortize the advance over a 30-month period will be due in arrears, together
with interest at a rate of 4% per annum over the 18-month U.S. Treasury Rate.
In accordance with the agreement, the Partnership advanced Viscount $63,500 in
July 1994.
Option - The Partnership will have the option to acquire approximately 0.6% of
the issued and outstanding shares of Viscount stock as of July 26, 1994 for an
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option price of approximately $91,000. The option may be exercised at any time
during the option period, which expires on July 20, 1999.
Partnership Operations
The Partnership recorded a net loss of $244,913, or $1.11 per limited
partnership unit, for the three months ended June 30, 1994, compared to net
income of $399,965, or $0.42 per unit, for the same period in 1993. The
Partnership recorded a net loss of $2,200,361, or $5.61 per limited partnership
unit for the six months ended June 30, 1994, compared to net income of $918,774,
or $1.07 per unit, for the same period in 1993. The 1994 net losses resulted
from maintenance expenses incurred from the Partnership's leases to TWA. As
described in Item 7 of the Partnership's 1993 Annual Report to the Securities
and Exchange Commission on Form 10-K (Form 10-K), the leases with TWA provide
for the offset against rent, subject to certain limits, of maintenance expenses
incurred to meet certain Airworthiness Directives (ADs). During the three and
six months ended June 30, 1994, TWA offset $900,000 and $3.6 million,
respectively against rental payments due the Partnership for such maintenance
expenses. The Partnership recognizes the $900,000 and $3.6 million offsets as
operating expense. Further impacting 1994 year to date operating results as
compared to 1993, during the first quarter 1993, the Partnership sold one of its
hushkit sets at a gain of $259,809. No equipment sales have been concluded in
1994.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all lease payments due from lessees.
However, to assist Viscount with the funding of costs associated with Federal
Aviation Regulation compliance relating to the Partnership's aircraft, the
Partnership has negotiated an agreement with Viscount under which it agreed to
defer certain rents due the Partnership on one aircraft as previously discussed.
These deferred rents will be repaid by Viscount with interest over the remaining
term of the lease. The agreement with Viscount also stipulates that the
Partnership will advance Viscount $127,000, primarily for certain maintenance
expenses relating to the Partnership's aircraft to be incurred by Viscount. In
accordance with the agreement, the Partnership advanced Viscount $63,500 in July
1994. The Partnership will advance Viscount an additional $63,500 prior to
December 31, 1994.
Payments of $171,225 have been received during the six months ended June 30,
1994 from the sale of parts from the six disassembled aircraft. In January
1994, the Partnership reimbursed Continental Micronesia $1.8 million for cockpit
modifications and $742,325 for C-check labor and parts, the aggregate of which
is included in accounts payable and accrued liabilities in the December 31, 1993
balance sheet. In addition, in January 1994, the Partnership financed
$2,177,533 for new image modifications, which is being repaid with interest over
the lease terms of the aircraft, beginning in February 1994. Cash reserves of
approximately $12.4 million as of June 30, 1994 are being retained to cover
potential costs of maintaining and remarketing the Partnership's off-lease
aircraft in addition to meeting obligations under the TWA and Continental
Micronesia lease agreements and the Viscount restructuring agreement.
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Cash Distributions - Cash distributions to limited partners during the three
months ended June 30, 1994 and 1993 were $3,124,981, or $6.25 per limited
partnership unit, and $1,874,989, or $3.75 per unit, respectively. Cash
distributions to limited partners during the six months ended June 30, 1994 and
1993 were $6,249,962 or $12.50 per limited partnership unit, and $3,749,977, or
$7.50 per unit, respectively. The timing and amount of future cash
distributions will depend upon the Partnership's future cash requirements, the
Partnership's ability to remarket its off-lease aircraft, the receipt of rental
payments from NWT, TWA, Viscount and Continental Micronesia, the receipt of the
deferred rental payments and financing payments from Viscount, and the receipt
of payments generated from the aircraft disassembly process.
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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) 1993 Annual Report to the Securities and Exchange Commission on
Form 10-K (Form 10-K) and in Item I of Part II of the Partnership's Quarterly
Report on Form 10-Q for the period ended March 31, 1994, there are a number of
pending legal actions or proceedings involving the Partnership. Except as
described below, there have been no material developments with respect to any
such actions or proceedings during the period covered by this report.
Vern A. Kepford, et al. v. Prudential Securities, et al. - Certain defendants,
including Polaris Investment Management Corporation and the Partnership, filed a
general denial on June 29, 1994, and a motion for summary judgment on June 17,
1994 on the basis that the statute of limitation has expired. On June 29, 1994,
plaintiffs filed their First Amended Original Petition, which added additional
plaintiffs.
Other Proceedings - Item 10 of Part III of the Partnership's 1993 Form 10-K
discusses certain actions which have been filed against Polaris Investment
Management Corporation and others in connection with the sale of interests in
the Partnership and the management of the Partnership. Except as described
below, there have been no material developments with respect to any of the other
actions described therein during the period covered by this report.
Weisl, et al., v. Polaris Holding Company, et al. - On April 19, 1994, the
Supreme Court of the State of New York, County of New York, granted the
defendants' motion to dismiss the complaint on the grounds that the statute of
limitations barred almost all of the claims in the action. On July 20, 1994,
the Court entered an order dismissing almost all of the claims in the complaint
and amended complaint. Certain claims, however, remain pending.
Reuben Riskind, et al. v. Prudential Securities Inc., et al. - Polaris
Investment Management Corporation and Polaris Aircraft Income Fund I received
service of the Second Amended Original Petition and filed an Original Answer
containing a general denial on June 13, 1994. Subsequently, plaintiffs filed
Third and Fourth Amended Original Petitions, which added additional plaintiffs.
On April 24, 1994, plaintiffs filed motions (i) for joinder and consolidation of
cases in arbitration, (ii) for joinder and consolidation of cases not subject to
arbitration, and (iii) for a pre-trial scheduling order. These motions were
amended on June 29, 1994 and are now pending.
In re Prudential Securities Inc. Limited Partnerships Litigation - On June 8,
1994, a consolidated complaint captioned In re Prudential Securities Inc.
Limited Partnerships Litigation was filed in the United States District Court
for the Southern District of New York, purportedly consolidating cases that had
been transferred from other federal courts by the Multi-District Litigation
Panel. The consolidated complaint names as defendants Prudential entities and
various other sponsors of limited partnerships sold by Prudential, including
Polaris Holding Company, one of its former officers, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation and Polaris Securities
Corporation. The complaint alleges that the Prudential defendants created a
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scheme for the sale of approximately $8-billion of limited partnership interests
in 700 assertedly high-risk limited partnerships, including the Partnership, to
approximately 350,000 investors by means of false and misleading offering
materials; that the sponsoring organizations (including the Polaris entities)
participated with the Prudential defendants with respect to the partnerships
that each sponsored; and that all of the defendants conspired to engage in a
nationwide pattern of fraudulent conduct in the marketing of all limited
partnerships sold by Prudential. The complaint alleges violations of the
federal Racketeer Influenced and Corrupt Organizations Act and the New Jersey
counterpart thereof, fraud, negligent misrepresentation, breach of fiduciary
duty and breach of contract. The complaint seeks rescission, unspecified
compensatory damages, treble damages, disgorgement of profits derived from the
alleged acts, costs and attorneys fees. A further litigation captioned Romano
v. Ball et. al, an action by Prudential Insurance Company policyholders against
many of the same defendants (including Polaris Investment Management Corporation
and Polaris Aircraft Leasing Corporation), has also been commenced by policy
holders of the Prudential Insurance Company as a purported derivative action on
behalf of the Prudential Insurance Company. The case is being coordinated with
In re Prudential. The complaint alleges claims under the federal Racketeer
Influenced and Corrupt Organizations Act, as well as claims for waste,
mismanagement and intentional and negligent misrepresentation, and seeks
unspecified compensatory, treble and punitive damages.
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Item 5. Other Information
Polaris Holding Company (PHC) and its subsidiaries, including Polaris Aircraft
Leasing Corporation (PALC) and Polaris Investment Management Corporation (PIMC),
the general partner of Polaris Aircraft Income Fund II (the Partnership), have
recently restructured their operations and businesses (the Polaris
Restructuring). In connection therewith, PIMC has entered into a services
agreement dated as of July 1, 1994 (the Services Agreement) with GE Capital
Aviation Services, Inc. (the Servicer or GECAS Inc.), a Delaware corporation
which is a wholly owned subsidiary of General Electric Capital Corporation, a
New York corporation (GE Capital). The Polaris Restructuring is part of a
larger restructuring involving the commercial aviation operations of GE Capital,
which has been PHC's parent company since 1986.
The GE Capital Restructuring
GE Capital is in the process of completing a restructuring (the GE Capital
Restructuring) of its commercial aviation operations, and as a result the owned
and managed aircraft portfolios of certain of its affiliates, including its
Polaris affiliates, will be managed by GECAS, subject in the case of Polaris
investment programs to overall management and supervision by PIMC. (As used
herein, the term "Polaris" refers collectively to PHC and its direct and
indirect subsidiaries (including PALC and PIMC), and the term "GECAS" refers
collectively to the Servicer and to its wholly owned subsidiary, GE Capital
Aviation Services, Limited (GECAS Limited), a private limited company
incorporated in Ireland.) When this restructuring is completed, the business of
GECAS will combine commercial aviation activities formerly conducted by GE
Capital's Polaris affiliates and its Transportation and Industrial Funding
Corporation division (the T&I Division). In addition, GECAS will provide a
significant range of management services to GPA Group plc, a public limited
company incorporated in Ireland. (GPA Group plc, together with its consolidated
subsidiaries, are collectively referred to herein as "GPA"). Information
regarding Polaris, the T&I Division and GPA is set forth below.
Polaris - Beginning in the mid-1980s, Polaris has acted as an operating lessor,
acquiring and managing aircraft for its own account and for the account of
investment entities sponsored by PIMC. PIMC has sponsored investment programs,
including the Partnership, for the purpose of acquiring and leasing jet
aircraft. Through such investment programs, as of December 31, 1993, PIMC had
spent approximately $1.3 billion of the funds it raised through such investment
programs to acquire corporate jet and commercial aircraft that were leased
primarily to U.S. domestic carriers. Many of these aircraft have since been
re-leased both domestically and abroad. Since its acquisition by GE Capital in
1986, PHC has acquired aircraft for its own account, which aircraft historically
have been on short to medium-term operating leases to U.S. domestic and
international carriers. As of December 31, 1993, PHC owned 113 aircraft, and
the fleet of additional aircraft managed by PALC and PIMC consisted of 127
aircraft, excluding aircraft in disassembly programs.
T&I Division - The business of GE Capital's T&I Division offered a broad range
of financial products to airlines and aircraft operators and to aircraft owners,
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lenders and investors throughout the world, including financing leases (both
direct financing and leveraged leases), debt (both senior and subordinated) and
equity financing. As of December 31, 1993, the T&I Division's investment
portfolio included 284 aircraft, consisting primarily of aircraft on long-term
financing leases with U.S.-based carriers.
GPA - GPA was founded in 1975 to provide aircraft leasing and related services
to the commercial aviation industry. In 1979, GPA began purchasing aircraft for
its own account and continued to expand its aircraft portfolio throughout the
1980s and into the 1990s. In late 1992 and 1993, GPA experienced financial
difficulties that led to the restructuring of GPA's business (the GPA
Restructuring). As of June 30, 1994, GPA's owned and managed aircraft portfolio
consisted of 458 aircraft, of which 355 were owned by GPA, 82 were leased-in,
and 21 were managed on behalf of third parties. In connection with the GPA
Restructuring, GPA and GECAS Limited entered into a management agreement which
provided for GECAS Limited to act as exclusive manager of substantially all the
aircraft formerly managed by GPA, including aircraft owned by GPA, its
affiliates and certain third parties. As a part of the GPA Restructuring, GPA
also granted to GE Capital an option to acquire certain securities of GPA. This
option effectively gives GE Capital the right to acquire control of GPA if the
option is exercised.
The Polaris Restructuring
In connection with the GE Capital Restructuring, the Servicer has hired many of
the employees who had performed the functions for Polaris and its investment
programs (including the Partnership) that are now performed by the Servicer for
PHC owned aircraft and for Polaris investment programs under the Services
Agreement and under similar services agreements which will be entered into by
PIMC and/or PALC with the Servicer relating to other Polaris investment
programs. The Servicer's employees currently include approximately 36 former
employees of Polaris. The positions of a number of other employees of Polaris
were eliminated in connection with the Polaris Restructuring.
In order to allow it to continue to be able to discharge its responsibilities as
general partner of the Partnership, PIMC has retained certain of its employees.
As of July 1, 1994, PIMC had seven full-time employees. In addition, certain
employees of GECAS Inc. will serve as officers and directors of PIMC. The
following management personnel will serve in the capacities shown opposite their
names:
PIMC
Name Title
Howard L. Feinsand President; Director
Richard J. Adams Vice President; Director
Rodney Sirmons Director
James W. Linnan Vice President
John E. Flynn Vice President
Robert W. Dillon Vice President; Assistant Secretary
James F. Walsh Chief Financial Officer
James T. Caleshu Secretary
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All of these management personnel other than Mr. Linnan will be employed by the
Servicer and will devote only such portion of their time to the business and
affairs of PIMC as they deem necessary or appropriate.
Mr. Feinsand, 46, Senior Vice President and Manager, Capital Markets, Pricing
and Investor Programs of GECAS Inc., joined PIMC and PALC as Vice President,
General Counsel and Assistant Secretary in April 1989. Effective July 1989,
Mr. Feinsand assumed the position of Senior Vice President, and served as
General Counsel and Secretary from July 1989 to August 1992. Mr. Feinsand, an
attorney, was a partner in the New York law firm of Golenbock and Barell from
1987 through 1989. In his previous capacities, Mr. Feinsand served as counsel
to PIMC and PALC. Mr. Feinsand also serves as a director on the board of Duke
Realty Investments, Inc. Effective July 1, 1994, Mr. Feinsand held the positions
of President and Director of PIMC.
Mr. Adams, 60, Senior Vice President, Aircraft Marketing - North America of
GECAS Inc., served as Senior Vice President - Aircraft Sales and Leasing of PIMC
and PALC effective August 1992, having previously served as Vice President -
Aircraft Sales & Leasing, Vice President - North America, and Vice President -
Corporate Aircraft since he joined PALC in August 1986. Effective July 1, 1994,
Mr. Adams held the positions of Vice President and Director of PIMC.
Mr. Sirmons, 48, is Vice President, Portfolio and Risk Management for GECAS Inc.
During the last twenty-one years, he has held a variety of credit, underwriting
and financial positions with several businesses within GE Capital and its
predecessor. Effective July 1, 1994, Mr. Sirmons held the position of Director
of PIMC.
Mr. Linnan, 52, became Vice President - Financial Management of PIMC and PALC
effective April 1991, having previously served as Vice President - Investor
Marketing of PIMC and PALC since July 1986. Effective July 1, 1994, Mr. Linnan
held the position of Vice President of PIMC.
Mr. Flynn, 53, Senior Vice President and Manager, Task Force Marketing and
General Manager, Cargo, of GECAS Inc., served as Senior Vice President, Aircraft
Marketing for PIMC and PALC effective April 1991, having previously served as
Vice President, North America of PIMC and PALC effective July 1989. Mr. Flynn
joined PALC in March 1989 as Vice President, Cargo. For the two years prior to
joining PALC, Mr. Flynn was a transportation consultant. Effective July 1,
1994, Mr. Flynn held the position of Vice President of PIMC.
Mr. Dillon, 52, became Vice President - Aviation Legal and Insurance Affairs
effective April 1989. Previously, he served as General Counsel of PIMC and PALC
effective January 1986. Effective July 1, 1994, Mr. Dillon held the positions
of Vice President and Assistant Secretary of PIMC.
Mr. Walsh, 44, Senior Vice President and Chief Financial Officer of GECAS Inc.,
joined PIMC and PALC in March 1987. He served as Senior Vice President and
Chief Financial Officer, having previously served as Vice President and Chief
Financial Officer. Effective October, 1993, Mr. Walsh resigned as Senior Vice
President and Chief Financial Officer of PIMC to assume new responsibilities at
GE Capital. Effective July 1, 1994, Mr. Walsh held the position of Chief
Financial Officer of PIMC.
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Mr. Caleshu, 54, Senior Vice President and General Counsel of GECAS Inc., joined
PIMC and PALC in August 1992 as Senior Vice President and General Counsel.
Prior to joining PIMC and PALC, Mr. Caleshu, an attorney, was a partner in the
San Francisco firm of Pettit & Martin from 1966 to 1992. Effective July 1,
1994, Mr. Caleshu held the position of Secretary of PIMC.
Through the personnel it has retained, PIMC will oversee the services to be
performed by the Servicer under the Services Agreement, make decisions as to
matters that are effectively reserved to PIMC for decision by the Services
Agreement, receive and analyze reports received from the Servicer, and otherwise
discharge its responsibilities as general partner of the Partnership. (See "The
Services Agreement".) In addition, PIMC will continue to perform investor
relations services for the Partnership and will continue to deal with
ReSource/Phoenix, a division of Phoenix Leasing Incorporated which, since August
1993, has been performing substantially all of the accounting and financial
reporting services previously performed by PIMC, pursuant to a Program
Accounting and Financial Reporting Administration Agreement.
In connection with the Polaris Restructuring, PIMC is relocating its San
Francisco office. On or about September 16, 1994, PIMC's principal office will
be moved to 201 Mission Street, San Francisco, California 94104. PIMC's
telephone numbers will remain (415) 362-0333 and (800) 652-1285.
GECAS
GECAS is a global commercial aviation financial services company that (i) offers
a broad range of financial products to airlines and aircraft operators, aircraft
owners, lenders and investors, including financing leases, operating leases,
tax-advantaged and other incentive-based financing and debt and equity
financing, and (ii) provides management, marketing and technical support
services to aircraft owners, lenders and investors, including GE Capital, GPA
and their respective affiliates, and certain third parties. GECAS has
approximately 230 employees worldwide and operations in Stamford, Connecticut;
Shannon, Ireland; San Francisco, California; and a number of other locations,
including Beijing, Chicago, Dallas, Hong Kong, London and Miami.
GECAS is comprised of two wholly owned subsidiaries of GE Capital, the Servicer
and GECAS Limited (which is a wholly owned subsidiary of the Servicer). In
October 1993, GECAS commenced operations following completion of the GPA
Restructuring and had no operating history prior to that time. Initially,
GECAS's operations consisted solely of managing substantially all of the
aircraft assets owned or leased-in by GPA and aircraft assets that GPA managed
on behalf of its affiliates and third parties. Currently, GECAS's operations
also include commercial aviation activities conducted in the past by the T&I
Division and Polaris. GECAS did not acquire the assets of the T&I Division,
Polaris or GPA, but instead has the responsibility for managing the aircraft
assets owned and/or formerly managed by such entities, subject in the case of
aircraft assets owned by Polaris investment programs to overall management and
supervision by PIMC.
GECAS is the world's largest manager of commercial aircraft. As of June 30,
1994, the portfolio managed by GECAS consisted of approximately 888 aircraft,
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and it is expected that GECAS will enter into an agreement to provide
administrative and marketing services with respect to 63 additional aircraft
that are owned by a limited liability company in which affiliates of GECAS have
an interest. Moreover, from time to time, GE Capital and its affiliates are
likely to acquire additional new and used aircraft which are expected to be
included in the portfolio to be managed by GECAS. The aircraft in GECAS's
managed portfolio are on lease to more than 150 customers in 56 countries
throughout the world. GECAS's managed portfolio includes other aircraft of the
same type as those owned by the Partnership. Accordingly, the Servicer may have
certain conflicts of interest in performing its duties under the Services
Agreement. (See "The Services Agreement", herein.)
The Servicer has represented to PIMC that the Servicer's net worth will be
greater than $25,000,000, and has agreed not to pay or make any dividends or
distributions to its shareholder(s) which would have the effect of reducing the
Servicer's net worth below that amount.
The Services Agreement
PIMC, as general partner of the Partnership, has entered into a Services
Agreement dated as of July 1, 1994, with the Servicer. As subsidiaries of GE
Capital, the Servicer and PIMC are affiliates.
Under the Services Agreement, PIMC has engaged the Servicer to perform, or
arrange for the performance of, aircraft management services, aircraft leasing
and sales services, and certain portfolio management services. These services
will include, inter alia, managing the Partnership's portfolio of Aircraft,
arranging for the re-leasing and sale of Aircraft, preparing certain reports for
the Partnership, employing persons to perform services for the Partnership, and
otherwise performing various portfolio and partnership management functions.
PIMC will continue to serve as general partner of the Partnership and will
retain all of its rights, powers and interests as general partner. In its
capacity as general partner, PIMC will exercise supervisory control over the
Servicer's rendering of services in connection with the Partnership and will
continue to have control and overall management of all matters relating to the
Partnership's ongoing business and operations. The Servicer is not becoming a
general partner of the Partnership and is not assuming any fiduciary duty that
PIMC, as general partner, has had or will have.
As compensation for services provided by the Servicer, PIMC will pay to the
Servicer (i) a portion of the Aircraft Management Fees, Cash Available from
Operations and Cash Available from Sales Proceeds received by PIMC under the
Partnership Agreement, and (ii) all Sales Commissions received by PIMC under the
Partnership Agreement with respect to sales of Partnership Aircraft arranged by
the Servicer. The Servicer will also receive an amount equal to the
reimbursement for Partnership expenses which PIMC receives from the Partnership
on account of expenses incurred by the Servicer in performing services pursuant
to the Services Agreement. The expense reimbursement limitations in the
Partnership Agreement will not be affected by the Services Agreement.
The Services Agreement recognizes that the Servicer will be providing services
with respect to the separate aircraft of GE Capital and its affiliates as well
as with respect to the aircraft of third parties, and that conflicts of interest
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may arise as a result. The Servicer is required to perform services under the
Services Agreement in good faith and, to the extent that a particular
Partnership Aircraft and other aircraft then in the Servicer's managed portfolio
are substantially similar in terms of relevant objectively identifiable
characteristics, the Servicer must not discriminate between such aircraft on the
basis of ownership, fees payable to the Servicer, or on an unreasonable basis.
The Services Agreement also requires the Servicer to perform services in
accordance with all applicable laws, in a manner consistent with all applicable
provisions of the Partnership Agreement, and with such care and in accordance
with such standards of performance as would have been applied to PIMC had PIMC
performed the services directly.
The Services Agreement requires the Servicer to take any actions relating to the
Services Agreement that PIMC may direct so long as such actions are reasonably
deemed by PIMC to be necessary or appropriate in order to permit PIMC to fulfill
its fiduciary duties as general partner of the Partnership or otherwise to be in
the best interest of the Partnership or its limited partners. Furthermore,
certain actions with respect to the Partnership may not be taken by the Servicer
without the prior approval of PIMC. Such prohibited actions include, among
others: (i) selling or otherwise disposing of one or more Aircraft by the
Partnership (including the sale or other disposition of an Aircraft as parts or
scrap); (ii) entering into any new lease (or any renewal or extension of an
existing lease) with respect to any Aircraft; (iii) terminating or modifying any
lease with respect to any Aircraft; (iv) financing or refinancing one or more
Aircraft by the Partnership; (v) making material capital, maintenance or
inspection expenditures for the Partnership; (vi) hiring any broker to sell or
lease any Aircraft; (vii) entering into any contract (including any contract of
sale), agreement or instrument other than a contract, agreement or instrument
entered into in the ordinary course of business that has a term of less than one
year and that does not contemplate payments which will exceed, over the term of
the contract, agreement or instrument, $100,000 in the aggregate; (viii)
changing in any material respect the type or amount of insurance coverage in
place for the Partnership; and (ix) incurring any Partnership expenses for which
the Servicer will seek reimbursement pursuant to the Services Agreement which
exceed in the aggregate, for any calendar month, the sum of $10,000. Absent
PIMC authorization, it is contemplated that the Servicer will not enter into
contracts, agreements or instruments on behalf of the Partnership.
Absent earlier termination based on certain events (including the withdrawal,
removal or replacement of PIMC as general partner of the Partnership), the
Services Agreement will terminate upon the completion of the winding up and
liquidation of the Partnership and the distribution of all of its assets.
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
None
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.
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<TABLE>
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.
<S> <C>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
(Registrant)
By:
Polaris Investment
Management Corporation,
General Partner
August 10, 1994 By: /S/James F. Walsh
James F. Walsh
Chief Financial Officer
(principal financial
officer and principal
accounting officer
of Polaris Investment
Management Corporation,
General Partner of the
Registrant)
</TABLE>
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