UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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
201 Mission Street, 27th Floor, San Francisco, California 94105
Telephone - (415) 284-7400
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 16 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 1995
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1995 and
December 31, 1994...................................3
b) Statements of Operations - Three Months Ended
March 31, 1995 and 1994.............................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1994
and Three Months Ended March 31, 1995...............5
d) Statements of Cash Flows - Three Months
Ended March 31, 1995 and 1994.......................6
e) Notes to Financial Statements.......................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........11
Part II. Other Information
Item 1. Legal Proceedings.......................................14
Item 5. Other Information.......................................15
Item 6. Exhibits and Reports on Form 8-K........................15
Signature..........................................................16
2
<PAGE>
<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,
1995 1994
---- ----
(Unaudited)
ASSETS:
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 15,228,769 $ 14,662,147
RENT AND OTHER RECEIVABLES 227,136 292,061
NOTES RECEIVABLE, net of allowance for credit
losses of $3,600,000 in 1995 and $1,575,000 in 1994 4,085,716 2,781,432
AIRCRAFT at cost, net of accumulated depreciation
of $86,632,727 in 1995 and $90,004,933 in 1994 87,262,166 91,954,354
AIRCRAFT INVENTORY 830,950 848,613
OTHER ASSETS 29,770 29,770
------------- -------------
$ 107,664,507 $ 110,568,377
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 44,304 $ 702,841
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 65,109 38,663
LESSEE SECURITY DEPOSITS 172,507 171,140
MAINTENANCE RESERVES 770,674 722,690
DEFERRED INCOME 642,742 642,742
------------- -------------
Total Liabilities 1,695,336 2,278,076
------------- -------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,143,092) (1,119,868)
Limited Partners, 499,997 units
issued and outstanding 107,112,263 109,410,169
------------- -------------
Total Partners' Capital 105,969,171 108,290,301
------------- -------------
$ 107,664,507 $ 110,568,377
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1995 1994
---- ----
REVENUES:
Rent from operating leases $ 1,633,500 $ 3,648,000
Interest 289,964 169,481
Other 218,171 5,860
----------- -----------
Total Revenues 2,141,635 3,823,341
----------- -----------
EXPENSES:
Depreciation 2,920,383 2,833,718
Management and advisory fees 79,425 173,400
Operating 14,023 2,719,217
Administration and other 60,053 52,454
----------- -----------
Total Expenses 3,073,884 5,778,789
----------- -----------
NET LOSS $ (932,249) $(1,955,448)
=========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 115,664 $ 292,912
=========== ===========
NET LOSS ALLOCATED
TO LIMITED PARTNERS $(1,047,913) $(2,248,360)
=========== ===========
NET LOSS PER LIMITED
PARTNERSHIP UNIT $ (2.10) $ (4.50)
=========== ===========
The accompanying notes are an integral part of these statements.
4
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
Year Ended December 31, 1994 and
Three Months Ended March 31, 1995
General Limited
Partner Partners Total
------------- ------------- -------------
Balance, December 31, 1993 $ (948,683) $ 126,344,962 $ 125,396,279
Net income (loss) 1,217,696 (4,434,868) (3,217,172)
Cash distributions to partners (1,388,881) (12,499,925) (13,888,806)
------------- ------------- -------------
Balance, December 31, 1994 (1,119,868) 109,410,169 108,290,301
Net income (loss) 115,664 (1,047,913) (932,249)
Cash distribution to partners (138,888) (1,249,993) (1,388,881)
------------- ------------- -------------
Balance, March 31, 1995 (Unaudited) $ (1,143,092) $ 107,112,263 $ 105,969,171
============= ============= =============
The accompanying notes are an integral part of these statements.
5
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1995 1994
---- ----
OPERATING ACTIVITIES:
Net loss $ (932,249) $ (1,955,448)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 2,920,383 2,833,718
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables 64,925 (13,593)
Increase (decrease) in payable to affiliates (658,537) 100,123
Increase (decrease) in accounts payable
and accrued liabilities 26,446 (2,553,825)
Increase in lessee security deposits 1,367 899
Increase (decrease) in maintenance reserves 47,984 (11,073)
------------ ------------
Net cash provided by (used in)
operating activities 1,470,319 (1,599,199)
------------ ------------
INVESTING ACTIVITIES:
Increase in notes receivable -- (2,177,533)
Principal payments on notes receivable 467,521 116,379
Net proceeds from sale of aircraft inventory 17,663 90,894
------------ ------------
Net cash provided by (used in)
investing activities 485,184 (1,970,260)
------------ ------------
FINANCING ACTIVITIES:
Cash distribution to partners (1,388,881) (3,472,201)
------------ ------------
Net cash used in financing activities (1,388,881) (3,472,201)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS AND SHORT-TERM
INVESTMENTS 566,622 (7,041,660)
CASH AND CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 14,662,147 22,445,083
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 15,228,769 $ 15,403,423
============ ============
The accompanying notes are an integral part of these statements.
6
<PAGE>
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, 1994, 1993, and
1992 included in the Partnership's 1994 Annual Report to the SEC on Form 10-K
(Form 10-K).
Financial Accounting Pronouncements - The Partnership adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and the related SFAS No. 118
as of January 1, 1995. SFAS No. 114 and SFAS No. 118 require that certain
impaired loans be measured based on the present value of expected cash flows
discounted at the loan's effective interest rate; or, alternatively, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. The Partnership had previously measured the allowance
for credit losses using methods similar to that prescribed in SFAS No. 114. As a
result, no additional provision was required by the adoption of this
pronouncement. The Partnership has recorded an allowance for credit losses equal
to the full amount of the following impaired loan as a result of issues
regarding its collection due to cash flow deficiencies of the lessee. The
Partnership recognizes revenue on this loan only as payments are received.
As discussed in Note 4, the standstill agreement with Trans World Airlines, Inc.
(TWA) provides for a deferral of certain rents due the Partnership. The
Partnership recorded a note receivable and an allowance for credit losses equal
to the total of the deferred rents, the net of which is reflected in the
accompanying balance sheets. The note receivable and corresponding allowance for
credit losses will be reduced by the principal portion of payments received
which are scheduled to commence May 31, 1995. In addition, the Partnership
recognizes rental revenue and interest revenue as payments are received. The
deferred rents and corresponding allowance for credit losses were $3.6 million
and $1.575 million as of March 31, 1995 and December 31, 1994, respectively.
Reclassification - Certain 1994 balances have been reclassified to conform to
the 1995 presentation.
7
<PAGE>
2. Continental Airlines, Inc. (Continental) and Continental Micronesia, Inc.
(Continental Micronesia) Cost Sharing Agreements
In accordance with the Continental and Continental Micronesia cost-sharing
agreements as discussed in the Form 10-K, in January 1994, the Partnership
financed $2,177,533 to Continental and Continental Micronesia for new image
modifications, which is being repaid with interest over the lease terms of the
three aircraft. The Partnership has received all scheduled principal and
interest payments due from Continental and Continental Micronesia through March
31, 1995. The aggregate note receivable balance as of March 31, 1995 and
December 31, 1994 was $1,649,436 and $1,764,167, respectively.
3. Promissory Note from ALG, Inc. (ALG)
One hushkit set from the aircraft formerly leased to Pan American World Airways,
Inc. was sold in January 1993 to ALG for a net sales price of $1,750,000. ALG
paid cash for a portion of the sales price and issued an 11% interest-bearing
promissory note for the balance of $1,132,363, which specifies 23 equal monthly
payments and a balloon payment of $897,932 due in January 1995. ALG paid to the
Partnership $19,138 of the balloon payment in January 1995, originating an event
of default under the note. The Partnership and ALG subsequently restructured the
terms of the promissory note. The renegotiated terms specify payment by ALG of
the note balance with interest at a rate of 13% per annum with one lump sum
payment in January 1995 of $254,733, eleven monthly payments of $25,600
beginning in February 1995, and a balloon payment in January 1996 of $416,631.
The Partnership has received all scheduled renegotiated payments due from ALG
through March 31, 1995. The note receivable balance as of March 31, 1995 and
December 31, 1994 were $592,473 and $890,265, respectively.
4. 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
after TWA reorganized in 1993. 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 may offset an additional $2.7
million against rental payments, subject to annual limitations, over the
remaining lease terms.
In addition, as discussed in the Form 10-K, in October 1994, TWA notified its
creditors, including the Partnership, of a proposed restructuring of its debt.
Subsequently, GE Capital Aviation Services, Inc. (which, as discussed in the
Form 10-K, now provides certain management services to Polaris Investment
Management Corporation and Polaris Aircraft Leasing Corporation) negotiated a
proposed standstill agreement with TWA for the 46 aircraft that are managed by
GECAS. That agreement, which was subject to the approval of the owners of these
aircraft, was subsequently approved by PIMC. The agreement provides for a
moratorium on the rent due the Partnership in November 1994 and 75% of the rents
due the Partnership from December 1994 through March 1995, with the deferred
rents, which aggregate $3.6 million plus interest, being repaid in monthly
installments beginning in May 1995 through December 1995. The Partnership
recorded a note receivable and an allowance for credit losses equal to the total
of the deferred rents, the net of which is reflected in the accompanying balance
sheets. The Partnership will not recognize the rental amount deferred in 1994 of
$1.575 million or the amount deferred in the first quarter of 1995 of $2.025
million as rental revenue until it is received.
8
<PAGE>
In consideration for that partial rent moratorium, TWA agreed to make an initial
payment to the TWA lessors for whom GECAS provides management services and who
agreed to the proposed standstill agreement, including the Partnership. The
Partnership received as consideration for the agreement $218,171 in January
1995, which was recognized as other revenue in the accompanying statement of
operations for the three months ended March 31, 1995. In addition, TWA has
agreed to issue warrants to the Partnership for such amount of TWA Common Stock
as would have a value (based on the projected balance sheet provided by TWA in
connection with the restructuring) on December 31, 1997, on a fully diluted
basis, equal to the total amount of rent deferred. TWA has not concluded
agreements with all of its creditors regarding its proposed debt restructuring.
Thus, it remains uncertain whether TWA will file for protection under Chapter 11
of the Federal Bankruptcy Code.
5. Viscount Air Services, Inc. (Viscount) Restructuring
As discussed in the Form 10-K, the Partnership has entered into an agreement
with Viscount to defer certain rents due the Partnership which aggregate
$196,800; 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;
and which gives the Partnership the option to acquire approximately 2.3% of the
issued and outstanding shares of Viscount stock as of July 26, 1994 for an
option price of approximately $91,000.
The deferred rents are being repaid by Viscount with interest at a rate of 6%
per annum over the remaining terms of the leases. The unpaid balances of the
deferred rents, which are reflected as rents receivable in the March 31, 1995
and December 31, 1994 balance sheets, were $168,956 and $182,982, respectively.
The line of credit, which was advanced to Viscount in full during 1994, is being
repaid by Viscount over a 30-month period, beginning in January 1995, with
interest at a rate of 11.53% per annum. The line of credit balances, which are
reflected as notes receivable in the March 31, 1995 and December 31, 1994
balance sheets, were $119,619 and $127,000, respectively. Note 9 contains a
further discussion of the Viscount events subsequent to March 31, 1995.
6. Sale of Aircraft to American International Airways, Inc. (AIA)
The Partnership sold one Boeing 727-200 aircraft and hushkit, formerly leased to
Delta Airlines Inc., to AIA in February 1995 for a sales price of $1,771,805.
The Partnership recorded no gain or loss on the sale as the sales price equalled
the net book value of the aircraft and hushkit. The Partnership agreed to accept
payment of the sales price in 36 monthly installments of $55,000, with interest
at a rate of 7.5% per annum, beginning in March 1995. The Partnership recorded a
note receivable for the sales price and has received all scheduled principal and
interest payments due from AIA through March 31, 1995. The note receivable
balance as of March 31, 1995 was $1,724,188.
7. Continental Restructuring
On January 26, 1995, Continental announced a number of actual and proposed
changes in its operations and financial situation. In connection with those
changes, Continental indicated that it was discussing with certain of its major
lenders modifications to existing debt amortization schedules to enhance the
airline's capital structure. Continental stated that during those discussions it
would not be making payments to such lenders and lessors otherwise required
under the current contracts. The Partnership is not engaged in any such
discussions with Continental at the present time, and Continental has made all
payments due to the Partnership on a current basis to date. Note 9 contains a
further discussion of the Continental events subsequent to March 31, 1995.
9
<PAGE>
8. 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, 1995 March 31, 1995
-------------- --------------
Aircraft Management Fees $ 80,096 $ 10,718
Out-of-Pocket Administrative Expense
Reimbursement 114,299 33,586
Out-of-Pocket Maintenance and
Remarketing Expense Reimbursement 594,372 --
-------- --------
$788,767 $ 44,304
======== ========
9. Subsequent Events
Continental Restructuring - In early April 1995, Continental announced that it
had successfully concluded discussions with The Boeing Company, as well as its
primary lender and the City and County of Denver, that would provide Continental
with approximately $370 million in cash deferrals and savings over the next two
years, and that it had reached a preliminary agreement with certain of its
lessors for additional cash deferrals.
Viscount Payment Delinquency - Viscount is presently past due on certain rent,
deferred rent, maintenance reserve and financing payments due the Partnership in
April and May 1995. The past due payments aggregate approximately $76,000. The
Partnership is currently negotiating an agreement with Viscount whereby certain
of these past due payments, in addition to certain future payments due from
Viscount, may be deferred. Any agreement for a further deferral as well as any
failure by Viscount to perform its financial obligations with the Partnership
will have an adverse affect on the Partnership's financial position.
10
<PAGE>
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 23 used
commercial jet aircraft and certain inventoried aircraft parts out of its
original portfolio of 30 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), two Boeing 727-200 Advanced aircraft leased to
Continental Micronesia, Inc. (Continental Micronesia) and one Boeing 727-200
Advanced aircraft leased to Continental Airlines, Inc. (Continental). One engine
owned by Polaris Aircraft Income Fund I is leased to Viscount through a joint
venture with the Partnership. The Partnership transferred six Boeing 727-200
aircraft, previously leased to Pan American World Airways, Inc., to aircraft
inventory in 1992. These aircraft have been disassembled for sale of their
component parts as discussed in the Partnership's 1994 Annual Report to the
Securities and Exchange Commission on Form 10-K (Form 10-K). The Partnership
sold one Boeing 727-200 aircraft, formerly leased to Delta Airlines, Inc.
(Delta), in February 1995 as discussed below.
Remarketing Update
Sale of Aircraft to American International Airways, Inc. (AIA) - The Partnership
sold one Boeing 727-200 aircraft and hushkit, formerly leased to Delta, to AIA
in February 1995 for a sales price of $1,771,805. The Partnership recorded no
gain or loss on the sale as the sales price equalled the net book value of the
aircraft and hushkit. The Partnership agreed to accept payment of the sales
price in 36 monthly installments of $55,000, with interest at a rate of 7.5% per
annum, beginning in March 1995. The Partnership recorded a note receivable for
the sales price and has received all scheduled principal and interest payments
due from AIA. The note receivable balance as of March 31, 1995 was $1,724,188.
Remarketing of Boeing 737-200 Combi Aircraft - The lease of one Boeing 737-200
Combi aircraft to NWT expires in October 1995. The Partnership is currently
remarketing this aircraft for re-lease.
Partnership Operations
The Partnership recorded a net loss of $932,249, or $2.10 per limited
partnership unit, for the three months ended March 31, 1995, compared to a net
loss of $1,955,448, or $4.50 per unit, for the same period in 1994. The net loss
for the three months ended March 31, 1994 resulted from maintenance expenses
incurred from the Partnership's leases to TWA. As described in Item 7 of the
Form 10-K, the Partnership agreed to share the cost of meeting certain
Airworthiness Directives (ADs) after TWA successfully reorganized in 1993. 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 leases. In accordance with the cost sharing
agreement, during the first quarter of 1994, the Partnership recognized as
operating expense $2.7 million of these AD expenses. No operating expense was
recognized for these ADs during the first quarter of 1995.
11
<PAGE>
The net loss in 1995 resulted primarily from a decrease in rental revenue
recognized from the leases with TWA. As discussed in the Form 10-K, in October
1994, TWA proposed to its creditors, including the Partnership, a restructuring
of its debt. In December 1994, GE Capital Aviation Services, Inc. (which, as
discussed in the Form 10-K, now provides certain management services to Polaris
Investment Management Corporation (PIMC) and Polaris Aircraft Leasing
Corporation) negotiated a proposed standstill agreement with TWA which was
approved on behalf of the Partnership by the general partner, PIMC. That
agreement provides for a moratorium on the rent due the Partnership in November
1994 and 75% of the rents due the Partnership from December 1994 through March
1995, with the deferred rents, which aggregate $3.6 million plus interest, being
repaid by TWA in monthly installments between May 1995 through December 1995.
The Partnership will not recognize the deferred rent as rental revenue until it
is received, including $2,025,000 deferred in the three months ended March 31,
1995. Partially offsetting the decline in rental revenue during 1995 as compared
to 1994, the Partnership received $218,171 as consideration for the agreement
with TWA. The Partnership recognized the $218,171 as other revenue during the
first quarter of 1995.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all lease payments due from NWT,
Continental and Continental Micronesia. As discussed in the Form 10-K, the
Partnership entered into an agreement with Viscount under which it agreed to
defer certain rents due the Partnership on one aircraft. These deferred rents,
which aggregate $196,800, are being repaid by Viscount with interest over the
remaining term of the lease. The agreement with Viscount also stipulates that
the Partnership advance Viscount up to $127,000, primarily for maintenance
expenses incurred by Viscount relating to the Partnership's aircraft. In
accordance with the agreement, the Partnership advanced Viscount $127,000 during
1994 which is being repaid by Viscount with interest over a 30-month period
beginning in January 1995.
Viscount is presently past due on certain rent, deferred rent, maintenance
reserve and financing payments due the Partnership in April and May 1995. The
past due payments aggregate approximately $76,000. The Partnership is currently
negotiating an agreement with Viscount whereby certain of these payments, in
addition to certain future payments due from Viscount, may be deferred. Any
agreement for a further deferral as well as any failure by Viscount to perform
its financial obligations with the Partnership will have an adverse affect on
the Partnership's financial position.
As previously discussed, the Partnership and TWA agreed to defer certain rents
due the Partnership totaling $3.6 million, to be repaid by TWA, with interest
beginning in May 1995 through December 1995. Until the deferred rents are repaid
by TWA in full, the negative impact on the Partnership's cash flows is
significant.
As discussed above and in the Form 10-K, during 1994 and 1993 TWA offset a total
of $6.3 million against rental payments due the Partnership for expenses TWA
incurred for certain ADs on the Partnership's aircraft. TWA may offset rental
payments due the Partnership for the ADs up to an additional $2.7 million,
subject to annual limitations, over the lease terms.
As specified in the Partnership's leases with Continental Micronesia and
Continental, in January 1994, the Partnership reimbursed Continental (partially
on behalf of its affiliate Continental Micronesia) an aggregate of $1.8 million
for cockpit modifications and $742,325 for C-check labor and parts for the three
aircraft. In addition, in January 1994, the Partnership financed an aggregate of
$2,177,533 for new image modifications, which is being repaid with interest over
the terms of the aircraft leases. The leases with Continental and Continental
Micronesia also stipulate that the Partnership share in the cost of meeting
certain ADs, which cannot be estimated at this time.
12
<PAGE>
As discussed in the Form 10-K, ALG, Inc. (ALG) was required to pay to the
Partnership a balloon payment of $897,932 in January 1995 on their promissory
note. ALG paid to the Partnership $19,138 of the balloon payment in January
1995, originating an event of default under the note. The Partnership and ALG
subsequently restructured the terms of the promissory note. The renegotiated
terms specify payment by ALG of the note balance with interest at a rate of 13%
per annum with one lump sum payment in January 1995 of $254,733, eleven monthly
payments of $25,600 beginning in February 1995, and a balloon payment in January
1996 of $416,631. The Partnership has received all scheduled renegotiated
payments due from ALG.
The Partnership sold one Boeing 727-200 aircraft equipped with a hushkit to AIA
in February 1995 as previously discussed. The agreement with AIA specifies
payment of the sales price in 36 monthly installments of $55,000 beginning in
March 1995. The Partnership has received all scheduled payments due from AIA.
The Partnership receives maintenance reserve payments from certain of its
lessees that may be reimbursed to the lessee or applied against certain costs
incurred by the Partnership for maintenance work performed on the Partnership's
aircraft, as specified in the leases. Maintenance reserve balances remaining at
the termination of the lease may be used by the Partnership to offset future
maintenance expenses or recognized as revenue. The net maintenance reserve
balances aggregate $770,674 as of March 31, 1995.
Payments of $17,663 have been received during the three months ended March 31,
1995 from the sale of inventoried parts from the six disassembled aircraft and
have been applied against aircraft inventory. The Partnership's cash reserves
are being retained to cover the Partnership's normal operating and
administrative expenses and to meet obligations under the TWA, Continental and
Continental Micronesia lease agreements.
Cash Distributions - Cash distributions to limited partners during the three
months ended March 31, 1995 and 1994 were $1,249,993, or $2.50 per limited
partnership unit and $3,124,981 or $6.25 per unit, respectively. The timing and
amount of future cash distributions will depend upon the Partnership's future
cash requirements; the receipt of rental payments from NWT, TWA, Viscount,
Continental and Continental Micronesia; the receipt of the deferred rental
payments from TWA; the receipt of the deferred rental payments and financing
payments from Viscount; the receipt of modification financing payments from
Continental and Continental Micronesia; the receipt of renegotiated promissory
note payments from ALG; the receipt of sales proceeds from AIA; and, the receipt
of payments generated from the aircraft disassembly process.
Continental Restructuring
As discussed in Notes 7 and 9 to the financial statements and in the Form 10-K,
in January 1995, Continental announced a number of actual and proposed changes
in its operations and financial situation. In early April 1995, Continental
announced that it had successfully concluded discussions with The Boeing
Company, as well as its primary lender and the City and County of Denver, that
would provide Continental with approximately $370 million in cash deferrals and
savings over the next two years, and that it had reached a preliminary agreement
with certain of its lessors for additional cash deferrals.
13
<PAGE>
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) 1994 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 to which the Partnership is a party or to which any of its
properties are subject. 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.
Reuben Riskind, et al. v. Prudential Securities, Inc., et al. - Kidder, Peabody
& Co. has been added as an additional defendant by virtue of an Intervenor's
Amended Plea in Intervention filed on or about April 7, 1995.
Other Proceedings - Item 10 of Part III of the Partnership's 1994 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.
Cohen, et al. v. Kidder Peabody & Company, Inc., et al. - On or about March 31,
1995, this action was removed to the United States District Court for the
Southern District of Florida.
Adams, et al. v. Prudential Securities, Inc., et al. - On or about March 15,
1995, this action was removed to the United States District Court for the
Northern District of Ohio, Eastern Division. On March 17, 1995, certain
defendants, including Prudential Securities Corporation, filed a tagalong motion
to transfer this action to the consolidated Multi-District Litigation filed in
the United States District Court for the Southern District of New York, which is
described in Item 10 of Part III of the Partnership's 1994 Form 10-K.
14
<PAGE>
Item 5. Other Information
Effective March 31, 1995, Howard L. Feinsand resigned as Director and President
of Polaris Investment Management Corporation (PIMC). James W. Linnan, 53, has
assumed the position of Director and President of PIMC effective March 31, 1995.
Mr. Linnan has served PIMC in various capacities since April 1979, most recently
as Vice President.
Effective March 31, 1995, Rodney Sirmons resigned as Director of PIMC. Eric
Dull, 34, has assumed the position of Director of PIMC effective March 31, 1995.
Mr. Dull presently holds the position of Senior Vice President, Restructuring of
GE Capital Aviation Services, Inc. (GECAS).
Effective May 1, 1995, William C. Bowers resigned as Secretary of PIMC. Richard
L. Blume, 46, has assumed the position of Secretary of PIMC effective May 1,
1995. Mr. Blume presently holds the position of Executive Vice President and
General Counsel of GECAS.
Norman Liu, 38, has assumed the position of Vice President of PIMC effective May
1, 1995. Mr. Liu presently holds the position of Executive Vice President,
Capital Funding and Portfolio Management of GECAS.
Edward Sun, 45, has assumed the position of Vice President of PIMC effective May
1, 1995. Mr. Sun presently holds the position of Senior Managing Director,
Structured Finance of GECAS.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedules (Filed electronically only)
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.
15
<PAGE>
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
May 10, 1995 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)
16
<TABLE> <S> <C>
<ARTICLE>5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 15228769
<SECURITIES> 0
<RECEIVABLES> 4312852
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 174725843
<DEPRECIATION> 86632727
<TOTAL-ASSETS> 107664507
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 105969171
<TOTAL-LIABILITY-AND-EQUITY> 107664507
<SALES> 0
<TOTAL-REVENUES> 2141635
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3073884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (932249)
<INCOME-TAX> 0
<INCOME-CONTINUING> (932249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (932249)
<EPS-PRIMARY> (2.10)
<EPS-DILUTED> 0
</TABLE>
