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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 March 31, 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 14 pages.<PAGE>
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POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarter Ended March 31, 1994
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1994 and
December 31, 1993 . . . . . . . . . . . . 3
b) Statements of Operations - Three Months Ended
March 31, 1994 and 1994 . . . . . . . . . 4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December
31, 1993 and Three Months Ended March 31,
1994 . . . . . . . . . . . . . . . . . . . 5
d) Statements of Cash Flows - Three Months
Ended March 31, 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 . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 13
Signature . . . . . . . . . . . . . . . . . . . . . . . . 14
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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>
March 31, December 31,
1994 1993
(Unaudited)
ASSETS:
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 15,403,423 $ 97,473
SHORT-TERM INVESTMENTS, at cost which approximates market value - 22,347,610
Total Cash and Cash Equivalents and Short-Term Investments 15,403,423 22,445,083
RENT AND OTHER RECEIVABLES 51,326 37,733
NOTES RECEIVABLE 3,083,462 1,022,308
AIRCRAFT at cost, net of accumulated depreciation of
$79,865,413 in 1994 and $77,031,695 in 1993 102,093,874 104,927,592
AIRCRAFT INVENTORY 1,153,167 1,244,061
OTHER ASSETS 29,770 29,770
$121,815,022 $129,706,547
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 152,397 $ 52,274
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2,500 2,556,325
LESSEE SECURITY DEPOSITS 190,463 189,564
MAINTENANCE RESERVES 858,290 869,363
DEFERRED INCOME 642,742 642,742
Total Liabilities 1,846,392 4,310,268
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,002,991) (948,683)
Limited Partners, 499,997 units issued and outstanding 120,971,621 126,344,962
Total Partners' Capital 119,968,630 125,396,279
$121,815,022 $129,706,547
<FN>
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 March 31,
1994 1993
REVENUES:
<S> <C> <C>
Rent from operating leases $ 3,648,000 $ 3,219,000
Gain on sale of equipment - 259,809
Interest and other 175,341 170,855
Total Revenues 3,823,341 3,649,664
EXPENSES:
Depreciation and amortization 2,833,718 2,774,575
Management and advisory fees 173,400 151,950
Operating 2,719,217 141,630
Administration and other 52,454 62,700
Total Expenses 5,778,789 3,130,855
NET INCOME (LOSS) $ (1,955,448) $ 518,809
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 292,912 $ 192,668
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ (2,248,360) $ 326,141
NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT $ (4.50) $ .65
<FN>
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)
Year Ended December 31, 1993 and
Three Months Ended March 31, 1994
<CAPTION>
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) 292,912 (2,248,360) (1,955,448)
Cash distribution to partners (347,220) (3,124,981) (3,472,201)
Balance, March 31, 1994 $ (1,002,991) $ 120,971,621 $ 119,968,630
<FN>
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)
<CAPTION>
Three Months Ended March 31,
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,955,448) $ 518,809
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,833,718 2,774,575
Gain on sale of equipment - (259,809)
Changes in operating assets and liabilities:
Decrease (increase) in rent and other receivables (13,593) 314,148
Increase in inventory - (278,459)
Decrease in other assets - 6,000
Increase (decrease) in payable to affiliates 100,123 (1,044,616)
Decrease in accounts payable and accrued liabilities (2,553,825) (28,098)
Increase in lessee security deposits 899 240,778
Decrease in maintenance reserves (11,073) (122,349)
Net cash provided by (used in) operating
activities (1,599,199) 2,120,979
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft equipment - 637,428
Net proceeds from sale of aircraft inventory 90,894 16,478
Increase in notes receivable (2,177,533) -
Principal payments on notes receivable 116,379 -
Net cash provided by (used in) investing
activities (1,970,260) 653,906
FINANCING ACTIVITIES:
Cash distribution to partners (3,472,201) (2,083,321)
Net cash used in financing activities (3,472,201) (2,083,321)
CHANGES IN CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (7,041,660) 691,564
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 $ 15,403,423 $ 20,538,363
<FN>
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.
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 Partnership
is negotiating a new lease for the aircraft with NWT as discussed in Note 7.
3. Lease to Continental Micronesia, Inc. (Continental Micronesia)
A total of 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, 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 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 is 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 note balance as of March 31, 1994 was $2,093,261.
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4. Sale of Equipment
One hushkit set from the aircraft formerly leased to Pan American World Airways,
Inc. (Pan Am) 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 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 balance as of March 31, 1994 was $990,201.
5. Trans World Airlines, Inc. (TWA) Reorganization
As part of the TWA lease extension as discussed in the 1993 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 totalling $2.7 million during 1993. Additional
expenses, which are included in operating expense in the statement of
operations, were offset against rental payments totalling $2.7 million that were
due the Partnership in the first three months of 1994. TWA may offset an
additional $3.6 million against rental payments, subject to annual limitations,
over the lease term.
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
March 31, 1994 March 31, 1994
Aircraft Management Fees $ 170,080 $ 3,320
Out-of-Pocket Administrative
Expense Reimbursement 38,983 73,001
Out-of-Pocket Maintenance and
Remarketing Expense
Reimbursement 13,156 76,076
$ 222,219 $152,397
8<PAGE>
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7. Subsequent Events
Lease to NWT - The lease of one aircraft to NWT expired on March 31, 1994. The
aircraft was returned 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 is in the process of negotiating a new
lease with NWT for a minimum of 16 months commencing in May 1994. The new lease
rate will be the same as the prior rate. During the off lease period, the
Partnership is performing 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 Air Services, Inc. (Viscount) Rent Deferral - In order to assist
Viscount with the funding of costs associated with Federal Aviation
Administration compliance, the Partnership is negotiating an agreement with
Viscount under which it may agree to defer certain rents due the Partnership.
These deferred rents would be repaid by Viscount with interest over the
remaining lease terms.
9<PAGE>
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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) and three Boeing 727-200 Advanced aircraft leased
to Continental Micronesia, Inc. (Continental Micronesia). The Partnership also
owns one Boeing 727-200 aircraft, formerly leased to Delta Airlines, Inc.
(Delta) which is being remarketed for sale or lease, and six Boeing 727-200
aircraft, previously leased to Pan American World Airways, Inc. (Pan Am), which
were transferred to aircraft inventory and have been disassembled for sale of
their component parts.
Remarketing Update
Lease to NWT - The aircraft leased to NWT was returned 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 is in the process
of negotiating a new lease with NWT for a minimum of 16 months commencing in May
1994. The new lease rate will be the same as the prior rate. During the off
lease period, the Partnership is performing 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.
Partnership Operations
For the three months ended March 31, 1994, the Partnership's net loss totalled
$1,955,448, or $4.50 per limited partnership unit, a significant decrease from
net income of $518,809, or $.65 per unit, for the same period in 1993. The 1994
net loss 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 first three months of 1994, TWA offset $2.7 million against rental
payments due the Partnership for such maintenance expenses. The Partnership
recognizes the $2.7 million offset as operating expense. Further impacting
first quarter 1994 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 were concluded in 1994.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all lease payments due from lessees
subject to the rent offset discussed above with respect to TWA. However, in
order to assist Viscount with the funding of costs associated with Federal
Aviation Administration compliance, the Partnership is negotiating an agreement
with Viscount under which it may agree to defer certain rents due the
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Partnership. These deferred rents would be repaid by Viscount with interest over
the remaining lease terms.
Payments of $90,894 have been received during the three months ended March 31,
1994 from sales 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 $10.8 million as of March 31, 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, Continental
Micronesia and Viscount lease agreements.
Cash Distributions - Cash distributions to limited partners during the three
months ended March 31, 1994 were $3,124,981, or $6.25 per limited partnership
unit, increased from $1,874,989, or $3.75 per unit, for the same period in 1993.
The timing and amount of future cash distributions will depend upon the
Partnership's ability to remarket the Partnership's off-lease aircraft, receipt
of rental payments and payments received from the sales of parts of the six
disassembled aircraft and the Partnership's future cash requirements.
11<PAGE>
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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), 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. On April 13, 1994, an
action entitled Vern A. Kepford, et al. v. Prudential Securities, Inc. was filed
in the District Court of Harris County, Texas. Plaintiffs' Original Petition
(the Petition) names Polaris Investment Management Corporation (PIMC), Polaris
Securities Corporation (PSC), Polaris Holding Company (PHC), Polaris Aircraft
Leasing Corporation (PALC), Polaris Aircraft Income Funds I - VI (collectively,
the Partnerships), General Electric Capital Corporation (GE Capital), Prudential
Securities, Inc., Prudential Insurance Company of America and James J. Darr, as
defendants. Certain defendants were served with a Summons and the Petition on
or about May 2, 1994. The Petition alleges that defendants violated the Texas
Securities Act, the Texas Deceptive Trade Practices Act (the DTPA), sections 11
and 12 of the Securities Act of 1933 and committed common law fraud, fraud in
the inducement, negligent misrepresentation, negligence, breach of fiduciary
duty and civil conspiracy by misrepresenting and failing to disclose material
facts in connection with the sale of limited partnership units in the
Partnerships. Plaintiffs seek, among other things, an award of compensatory
damages in an unspecified amount plus interest thereon, and double and treble
damages under the DTPA.
Howland, et al. v. Polaris Holding Company, et al. On or about February 4, 1994,
a purported class action entitled Howland, et al. v. Polaris Holding Company, et
al. was filed in the United States District Court for the District of Arizona on
behalf of investors in the Partnerships. The complaint names each of the
Partnerships, PIMC, PHC, PALC, PSC, GE Capital, Prudential Securities, Inc.,
Prudential Securities Group, Inc., Prudential Insurance Company of America,
George W. Ball, Robert J. Sherman, James J. Darr, Paul J. Proscia, Frank W.
Giordano, William A. Pittman, Joseph H. Quinn, Joe W. Defur, James M. Kelso and
Brian J. Martin, as defendants. As of May 11, 1994, neither PIMC nor any of its
affiliates has been served with the complaint. The complaint alleges that
defendants violated federal RICO statutes, committed negligent
misrepresentations, and breached of their fiduciary duties by misrepresenting
and failing to disclose material facts in connection with the sale of limited
partnership units in the Partnerships. Plaintiffs seek, among other things, an
accounting of all monies invested by Plaintiffs and the class and the uses made
thereof by defendants, an award of compensatory, punitive and treble damages in
unspecified amounts plus interest thereon, rescission, attorneys' fees and
costs.
Reuben Riskind, et al. v. Prudential Securities, Inc., et al. An action
entitled Reuben Riskind, et al. v. Prudential Securities, Inc., et al. has been
filed in the District Court of the 165 Judicial District, Maverick County,
Texas. Plaintiffs have subsequently filed a Second Amended Original Petition
(the Amended Petition). As of May 11, 1994, neither PIMC nor any of its
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affiliates has received service of any petition, and the Partnership has not yet
determined when this action was commenced. This action purports to be on behalf
of over one hundred individual investors who purchased units in the
Partnerships. The Amended Petition names PIMC, Polaris Aircraft Income Fund I,
Prudential Securities, Inc. and Jerry Cohn as defendants and alleges that these
defendants violated the Texas Securities Act and the DTPA and committed common
law fraud, fraud in the inducement, negligent misrepresentation, negligent
breach of fiduciary duty and civil conspiracy by misrepresenting and failing to
disclose material facts in connection with the sale of limited partnership units
in the Partnerships. Plaintiffs seek, among other things, an award of
compensatory damages in an unspecified amount plus interest thereon, and double
and treble damages under the DTPA.
Other Proceedings - Item 10 of Part III of the Partnership's 1993 Form 10-K
discusses certain actions which have been filed against PIMC and others in
connection with the sale of interests in the Partnerships and the management of
the Partnerships. With respect to Weisl, et al., v. Polaris Holding Company, et
al., the Supreme Court of the State of New York, County of New York, granted the
defendants' motion to dismiss the complaint on April 19, 1994 on the grounds
that the action was barred by the statute of limitations. In addition, an
amended complaint filed by plaintiffs in Weisl on or about January 25, 1994,
which may contain timely claims, is pending. There have been no material
developments with respect to any of the other 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)
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.
13<PAGE>
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SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND II
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
May 12, 1994 By: /S/Bobbe V. Sabella
Bobbe V. Sabella
Vice President and
Chief Financial Officer
(principal financial
officer and principal
accounting officer
of Polaris Investment
Management Corporation,
General Partner of the
Registrant)
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