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 June 30, 1995
OR
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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Commission File No. 33-2794
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POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
State of Organization: California
IRS Employer Identification No. 94-2985086
201 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 22 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1995
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1995 and
December 31, 1994...............................3
b) Statements of Operations - Three Months and
Six Months Ended June 30, 1995 and 1994.........4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1994
and Six Months Ended June 30, 1995..............5
d) Statements of Cash Flows - Six Months
Ended June 30, 1995 and 1994....................6
e) Notes to Financial Statements...................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......13
Part II. Other Information
Item 1. Legal Proceedings..................................17
Item 5. Other Information..................................20
Item 6. Exhibits and Reports on Form 8-K...................21
Signature.......................................................22
2
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
1995 1994
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 19,279,642 $ 14,662,147
RENT AND OTHER RECEIVABLES 274,910 292,061
NOTES RECEIVABLE, net of allowance for credit
losses of $2,838,245 in 1995 and $1,575,000
in 1994 3,354,290 2,781,432
AIRCRAFT at cost, net of accumulated depreciation
of $89,424,915 in 1995 and $90,004,933 in 1994 84,469,978 91,954,354
AIRCRAFT INVENTORY 748,252 848,613
OTHER ASSETS 29,770 29,770
------------- -------------
$ 108,156,842 $ 110,568,377
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 74,555 $ 702,841
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 75,038 38,663
LESSEE SECURITY DEPOSITS 173,978 171,140
MAINTENANCE RESERVES 821,059 722,690
DEFERRED INCOME 642,742 642,742
------------- -------------
Total Liabilities 1,787,372 2,278,076
------------- -------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,139,102) (1,119,868)
Limited Partners, 499,997 units
issued and outstanding 107,508,572 109,410,169
------------- -------------
Total Partners' Capital 106,369,470 108,290,301
------------- -------------
$ 108,156,842 $ 110,568,377
============= =============
The accompanying notes are an integral part of these statements.
3
<PAGE>
<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,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rent from operating leases $ 4,419,855 $ 3,545,395 $ 6,053,355 $ 7,193,395
Interest 463,247 195,828 753,211 365,309
Other 960 -- 219,131 5,860
----------- ----------- ----------- -----------
Total Revenues 4,884,062 3,741,223 7,025,697 7,564,564
----------- ----------- ----------- -----------
EXPENSES:
Depreciation 2,792,188 2,833,719 5,712,571 5,667,437
Management fees to general partner 209,454 168,270 288,879 341,670
Operating 10,449 926,996 24,472 3,646,213
Administration and other 82,792 57,151 142,845 109,605
----------- ----------- ----------- -----------
Total Expenses 3,094,883 3,986,136 6,168,767 9,764,925
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 1,789,179 $ (244,913) $ 856,930 $(2,200,361)
=========== =========== =========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 142,878 $ 310,018 $ 258,542 $ 602,930
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 1,646,301 $ (554,931) $ 598,388 $(2,803,291)
=========== =========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 3.29 $ (1.11) $ 1.19 $ (5.61)
=========== =========== =========== ===========
</TABLE>
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)
(Unaudited)
Year Ended December 31, 1994 and
Six Months Ended June 30, 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) 258,542 598,388 856,930
Cash distributions to partners (277,776) (2,499,985) (2,777,761)
------------- ------------- -------------
Balance, June 30, 1995 $ (1,139,102) $ 107,508,572 $ 106,369,470
============= ============= =============
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)
Six Months Ended June 30,
1995 1994
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 856,930 $ (2,200,361)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 5,712,571 5,667,437
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables 17,151 (104,077)
Increase in other assets -- (382)
Increase (decrease) in payable to affiliates (628,286) 28,670
Increase (decrease) in accounts payable
and accrued liabilities 36,375 (2,552,450)
Increase (decrease) in lessee security
deposits 2,838 (20,611)
Increase in maintenance reserves 98,369 859,627
------------ ------------
Net cash provided by operating activities 6,095,948 1,677,853
------------ ------------
INVESTING ACTIVITIES:
Increase in notes receivable -- (2,177,533)
Principal payments on notes receivable 1,198,947 256,000
Net proceeds from sale of aircraft inventory 100,361 171,225
------------ ------------
Net cash provided by (used in)
investing activities 1,299,308 (1,750,308)
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (2,777,761) (6,944,403)
------------ ------------
Net cash used in financing activities (2,777,761) (6,944,403)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS AND SHORT-TERM
INVESTMENTS 4,617,495 (7,016,858)
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 $ 19,279,642 $ 15,428,225
============ ============
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).
Aircraft and Depreciation - The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual value is computed using
the straight-line method over the estimated economic life of the aircraft which
was originally estimated to be 30 years from the date of manufacture.
Depreciation in the year of acquisition was calculated based upon the number of
days that the aircraft were in service.
The Partnership periodically reviews the estimated realizability of the residual
values at the end of each aircraft's economic life based on estimated residual
values obtained from an independent party which provides current and future
estimated aircraft values by aircraft type. For any downward adjustment in
estimated residual, or decrease in the projected remaining economic life, the
depreciation expense over the projected remaining life of the aircraft is
increased. If the projected net income generated from the lease (projected
rental revenue, net of management fees, less adjusted depreciation and an
allocation of estimated administrative expense) results in a net loss, that loss
will be recognized currently. Off-lease aircraft are carried at the lower of
depreciated cost or estimated net realizable value. A further adjustment is made
for those aircraft, if any, that require substantial maintenance work.
Capitalized Costs - Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement. These costs are also subject to periodic
evaluation as discussed above.
Financial Accounting Pronouncements - The Partnership adopted Statement of
Financial Accounting Standards (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.
7
<PAGE>
As discussed in Note 4, the Deferral 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 commenced 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 $2,838,245 and $1,575,000 as of
June 30, 1995 and December 31, 1994, respectively.
Reclassification - Certain 1994 balances have been reclassified to conform to
the 1995 presentation.
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 June
30, 1995. The aggregate note receivable balance as of June 30, 1995 and December
31, 1994 was $1,532,092 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 specified 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 June 30, 1995. The note receivable balances as of June 30, 1995 and
December 31, 1994 were $534,302 and $890,265, respectively.
4. TWA Reorganization
As part of the TWA lease extensions negotiated in 1991, the Partnership agreed
to share the cost of meeting certain Airworthiness Directives after TWA
successfully reorganized. The agreement stipulated 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 applicable lease.
Pursuant to this cost-sharing agreement, since TWA emerged from its
reorganization proceedings in 1993, expenses totaling $6.3 million have been
offset against rental payments ($2.7 million in 1993 and $3.6 million in 1994).
Under the terms of this agreement, TWA may offset an additional $2.7 million
against rental payments, subject to annual limitations, over the remaining lease
terms.
8
<PAGE>
In October 1994, TWA notified its creditors, including the Partnership, of
another proposed restructuring of its debt. Subsequently, GE Capital Aviation
Services, Inc. (GECAS) which, as discussed in the Form 10-K, now provides
certain management services to the Partnership's general partner, Polaris
Investment Management Corporation (PIMC), among others, negotiated a standstill
arrangement, as set forth in a letter agreement dated December 16, 1994 (the
Deferral Agreement), with TWA for the 46 aircraft that are managed by GECAS, 18
of which are owned by the Partnership. As required by its terms, the Deferral
Agreement (which has since been amended as discussed below) was approved by PIMC
on behalf of the Partnership with respect to the Partnership's aircraft.
The Deferral Agreement provided for (i) a moratorium on all the rent due to the
Partnership in November 1994 and on 75% of the rents due to the Partnership from
December 1994 through March 1995, and (ii) all of the deferred rents, together
with interest thereon, to be repaid in monthly installments beginning in May
1995 and ending in 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 either the $1.575 million rental amount deferred in 1994 or the
$2.025 million rental amount deferred during the first quarter of 1995 as rental
revenue until it is received. The Partnership has received all scheduled rent
payments beginning in April 1995 and all scheduled deferred rental payments
beginning in May 1995, including interest at a rate of 12% per annum, from TWA
through June 30, 1995 and has recognized $761,755 of the deferred rents as
rental revenue in the second quarter of 1995. The balance of the deferred rents
due from TWA as of June 30, 1995 was $2,838,245.
In consideration for the partial rent moratorium described above, TWA agreed to
make a lump sum payment of $1,000,000 to GECAS for the TWA lessors for whom
GECAS provides management services and who agreed to the Deferral Agreement. The
Partnership received $218,171 in January 1995 as its share of such payment by
TWA. This amount was recognized as other revenue in the accompanying statement
of operations for the six months ended June 30, 1995. In addition, TWA 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 Deferral Agreement) on December 31, 1997, on a fully diluted basis,
equal to the total amount of rent deferred (which agreement has since been
revised, as discussed below). The Partnership has not currently recognized these
stock warrants in its financial statements as the warrants have not been issued
by TWA and their ultimate value cannot currently be accurately estimated.
In order to resolve certain issues that arose after the execution of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995, pursuant to which they agree to amend certain provisions of the Deferral
Agreement (as so amended, the Amended Deferral Agreement). The effect of the
Amended Deferral Agreement, which has been approved by PIMC with respect to the
Partnership's aircraft, is that TWA, in addition to agreeing to repay the
deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable
in warrants, the number of which will be determined by formula) in consideration
for the aircraft owners' agreement to defer rent under the Deferral Agreement,
and, (ii) to the extent the market value of the warrants is less than the
payment amount, to supply maintenance services to the aircraft owners having a
value equal to such deficiency. The payment amount is to be determined by
subtracting certain maintenance reimbursements owed to TWA by certain aircraft
owners, including the Partnership, from the aggregate amount of deferred rents.
The amount of such maintenance reimbursement has not been finally determined.
The market value of the warrants will be determined by reference to the market
price of the underlying TWA Common Stock calculated with reference to the period
falling from 120 days to 210 days after the effective date of TWA's plan of
reorganization.
9
<PAGE>
The Amended Deferral Agreement further provided that if the confirmation date of
TWA's plan of reorganization occurred before September 30, 1995, TWA would
accelerate repayment of all deferred amounts and repay 50% of such amounts on
the plan confirmation date, and the remaining 50% on September 30, 1995.
Moreover, TWA agreed that, upon filing of its prepackaged plan, it would take
all reasonable steps to implement the terms of the Amended Deferral Agreement
and would immediately assume all of the Partnership's leases. TWA also agreed
that, not withstanding the 60-day cure period provided by section 1110 U.S.
Bankruptcy Code, it would remain current on the performance of its obligations
under the leases, as amended by the Amended Deferral Agreement.
On June 30, 1995, TWA filed its prepackaged Chapter 11 bankruptcy in the U.S.
Bankruptcy Court for the Eastern District of Missouri. As discussed in Note 9,
the Bankruptcy Court confirmed TWA's plan of reorganization on August 4, 1995.
While TWA has committed to an uninterrupted flow of lease payments, along with
full repayment of the deferred rents by the end of September 1995, there is no
assurance that TWA will continue to honor its obligations in the future.
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 deferred rents were
recognized as revenue in the period earned. Payments on the deferred rents are
current, and at present, the Partnership considers these deferred rents to be
collectible. The unpaid balances of the deferred rents, which are reflected as
rents receivable in the June 30, 1995 and December 31, 1994 balance sheets, were
$154,718 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 June
30, 1995 and December 31, 1994 balance sheets, were $108,279 and $127,000,
respectively.
Viscount is presently past due on certain rent payments due the Partnership in
April and May 1995. The past due payments aggregate approximately $65,600 and
are included in rents receivable in the June 30, 1995 balance sheet. The
Partnership considers these past due amounts to be collectible. At the present
time, the Partnership is considering a restructuring of Viscount's financial
obligations to the Partnership, which would require Viscount to remain current
on its existing monthly obligations and permit a deferral of the past-due
portion of the April and May 1995 obligations. In the interim, beginning in June
1995, Viscount has undertaken to pay in full, by the end of each month, the
current month's obligations by making partial periodic payments during that
month. Viscount is presently current on these periodic payments. 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 effect on the
Partnership's financial position.
10
<PAGE>
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 June 30, 1995. The note receivable
balance as of June 30, 1995 was $1,179,617.
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.
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.
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
June 30, 1995 June 30, 1995
------------- -------------
Aircraft Management Fees $ 211,366 $ 8,806
Out-of-Pocket Administrative Expense
Reimbursement 49,964 64,825
Out-of-Pocket Maintenance and
Remarketing Expense Reimbursement 1,185 924
--------- ---------
$ 262,515 $ 74,555
========= =========
11
<PAGE>
9. Subsequent Event
TWA Reorganization - On August 4, 1995, the Bankruptcy Court confirmed TWA's
plan of reorganization. The confirmation order remains subject to appeal for ten
days at which time it will become final. The plan will become effective after
the confirmation order becomes final and certain other conditions precedent are
satisfied. It is anticipated that the Plan of Reorganization will become
effective in late August 1995. Pursuant to the Amended Deferral Agreement, on
the confirmation date of the plan, August 4, 1995, the Partnership received a
payment of $1,217,989 from TWA which represented fifty percent (50%) of the
deferred rent outstanding plus interest as of such date. The remaining balance
of deferred rent plus interest is due by September 30, 1995.
12
<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.
Remarketing Update
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 net income of $1,789,179, or $3.29 per limited
partnership unit, for the three months ended June 30, 1995, compared to a net
loss of $244,913, or $1.11 per unit, for the same period in 1994. The
Partnership recorded net income of $856,930, or $1.19 per limited partnership
unit, for the six months ended June 30, 1995, compared to a net loss of
$2,200,361, or $5.61 per unit, for the same period in 1994.
The net loss for the three and six months ended June 30, 1994 resulted primarily
from maintenance expenses incurred from the Partnership's leases to TWA. As
described in Note 4 to the financial statements, 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 three and six
months ended June 30, 1994, the Partnership recognized as operating expense
$900,000 and $2.7 million, respectively, of these AD expenses. No operating
expense was recognized for these ADs during the first two quarters of 1995.
Operating results for the three and six months ended June 30, 1995 were
negatively impacted by a decrease in rental revenue recognized from the leases
with TWA. As discussed in Note 4 to the financial statements, the Partnership
reached an Amended Deferral Agreement with TWA in June 1995, which provides for
a moratorium on the rent due the Partnership in November 1994 and on 75% of the
rents due the Partnership from December 1994 through March 1995. The deferred
rents, which aggregate $3.6 million plus interest at a rate of 12% per annum,
are being repaid by TWA beginning in May 1995 and ending in September 1995. The
Partnership will not recognize the deferred rent as rental revenue until it is
received, including $2,025,000 deferred in the six months ended June 30, 1995.
13
<PAGE>
TWA began repaying the deferred amounts in May 1995 and the Partnership
recognized rental revenue from these deferred rental payments of $761,755 during
the second quarter of 1995. Partially offsetting the decline in rental revenue
during the six months ended June 30, 1995 as compared to the same period in
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.
As discussed below and in Note 5 to the financial statements, as a result of the
uncertainty over Viscount's future performance, the Partnership has begun a
market evaluation for the Boeing 737-200 aircraft currently on lease to
Viscount. Should the Partnership determine that it is in its best interest to
repossess the aircraft and prepare it for lease to another operator, the
negative effects on the Partnership's operating results and liquidity could be
significant.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This Statement will be adopted by the Partnership as of January 1,
1996 and will be applied prospectively. Management is gathering information and
evaluating the requirements of the Statement, but has not determined the impact
of its application on the Partnership's financial position or results of
operations.
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 in July 1994 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 through November 1997. The
deferred rents were recognized as revenue in the period earned. Payments on the
deferred rents are current, and at present, the Partnership considers these
deferred rents to be collectible. 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 payments due the Partnership in
April and May 1995. The past due payments aggregate approximately $65,600 and
are included in rents receivable in the June 30, 1995 balance sheet. The
Partnership considers these past due amounts to be collectible. The Partnership
is considering a restructuring of Viscount's financial obligations to the
Partnership, which would require Viscount to remain current on its existing
monthly obligations and permit a deferral of the past-due portion of the April
and May 1995 obligations. In the interim, beginning in June 1995, Viscount has
undertaken to pay in full, by the end of each month, the current month's
obligations by making partial periodic payments during that month. Viscount is
presently current on these periodic payments. 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 effect 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 and ending in September 1995. Until the deferred rents are
repaid by TWA in full, the negative impact on the Partnership's cash flows is
significant.
14
<PAGE>
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.
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, if any,
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 $821,059 as of June 30, 1995.
Payments of $82,698 and $100,361 have been received during the three and six
months ended June 30, 1995, respectively, 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 June 30, 1995 and 1994 were $1,249,992, or $2.50 per limited
partnership unit and $3,124,981 or $6.25 per unit, respectively. Cash
distributions to limited partners during the six months ended June 30, 1995 and
1994 were $2,499,985, or $5.00 per limited partnership unit and $6,249,962 or
$12.50 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.
15
<PAGE>
Industry Effects on the Partnership's Aircraft
As discussed in Note 1 to the financial statements, the Partnership periodically
reviews the estimated realizability of the residual values at the projected end
of each aircraft's economic life. For any downward adjustment in estimated
residual value, depreciation expense over the projected remaining life of the
aircraft is increased. If the increase in depreciation expense for on-lease
aircraft causes the projected future net income generated from the lease to
result in a net loss, that loss will be recognized currently as additional
depreciation expense. The Partnership made downward adjustments to the estimated
residual value of three of its on-lease aircraft as of December 31, 1994. As a
result of these adjustments to the estimated residual values, the Partnership
will recognize increased depreciation expense of approximately $843,000 per year
beginning in 1995 through the end of the projected economic lives of the
aircraft. The increased depreciation expense over the projected remaining lives
of these aircraft caused the future projected net income generated from the
lease (projected rental revenue, net of management fees, less adjusted
depreciation and an allocation of estimated administrative expense) to result in
a net loss. The Partnership recognized approximately $515,000, or $1.02 per
limited Partnership unit, of this net loss as increased depreciation expense as
of December 31, 1994.
16
<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 (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q for the period ended March 31, 1995, 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.
Pan American World Airways, Inc. (Pan Am) - As discussed in the Partnership's
1990 and 1991 Forms 10-K, Pan Am commenced reorganization proceedings under
Chapter 11 of the federal Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York on January 8, 1991, and, on November 8,
1991, the Partnership filed a proof a claim in Pan Am's bankruptcy proceeding to
recover damages for lost rent and for Pan Am's failure to meet return conditions
with respect to the Partnership's aircraft on lease to Pan Am. Pan Am's
reorganization under Chapter 11 was ultimately unsuccessful, and Pan Am ceased
operations in December 1991. On July 10, 1995, Pan Am entered into a proposed
Stipulation and Order with the Partnership pursuant to which Pan Am agreed to
allow the Partnership $2.5 million as an administrative expense priority claim
and $56 million as a general unsecured claim. This Stipulation and Order remains
subject to approval by the Bankruptcy Court, and a hearing on the matter has
been set for August 17, 1995.
Trans World Airlines, Inc. (TWA) - On June 30, 1995, TWA filed a reorganization
proceeding under Chapter 11 of the federal Bankruptcy Code in the United States
Bankruptcy Court for the Eastern District of Missouri. The filing by TWA is
characterized as a pre-packaged bankruptcy, and no interruption in rent payments
by TWA is expected. Immediately before the filing, the Partnership and TWA
entered into an Amended Deferral Agreement in anticipation of the filing by TWA.
Pursuant to the Amended Deferral Agreement, TWA has agreed to accelerate the
payment of certain rental amounts that were previously deferred and has also
agreed to perform certain maintenance for the benefit of the Partnership. At the
time of filing, TWA was current in its rent payments to the Partnership as set
forth in the Amended Deferral Agreement. TWA's plan of reorganization, in which
TWA confirmed all of its leases with the Partnership, was confirmed by the
Bankruptcy Court on August 4, 1995.
Reuben Riskind, et al. v. Prudential Securities, Inc., et al. - Prudential
Securities, Inc. has reached a settlement with the plaintiffs. The trial of the
claims of one plaintiff, Robert W. Wilson, against Polaris aircraft Income Funds
I - VI, their general partner Polaris Investment Management Corporation and
various affiliates of Polaris Investment Management Corporation, including
General Electric Capital Corporation, was commenced on July 10, 1995. On July
26, 1995, the jury returned a verdict in favor of the defendants on all counts.
Other Proceedings - Item 10 in 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. With the exception of
Novak, et al v. Polaris Holding Company, et al, where the Partnership is named
as a defendant, the Partnership is not a party to these actions. In Novak, a
derivative action, the Partnership is named as a defendant for procedural
purposes, but the plaintiffs in such lawsuit do not seek an award from the
Partnership. Except as described below, there have been no material developments
with respect to any of the actions described therein during the period covered
by this report.
17
<PAGE>
Adams, et al. v. Prudential Securities, Inc., et al. - The Judicial Panel
conditionally transferred the action to the 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. Defendants
time to answer or otherwise respond to the complaint has been extended by the
court until 20 days after the Judicial Panel determines whether to transfer the
case to the Multi-District Litigation.
Moross, et al. v. Polaris Holding Company, et al. - On April 11, 1995, the
action was transferred to the Multi-District Litigation described in Item 10 of
Part III of the Partnership's 1994 Form 10-K. On April 20, 1995, the parties
stipulated that defendants need not answer or otherwise respond to the complaint
at this time.
Kahn v. Polaris Holding Company, et al. - On April 18, 1995, the action was
discontinued without prejudice.
Novak, et al. v. Polaris Holding Company, et al. - On July 7, 1995, defendants
filed briefs in support of their appeal from that portion of the trial court's
order denying the motion to dismiss.
Cohen, et al. v. J.B. Hanauer & Company, et al. - On June 7, 1995, plaintiffs
filed an amended complaint which did not include as defendants General Electric
Capital Corporation, General Electric Financial Services, Inc., and General
Electric Company, thus effectively dismissing without prejudice the case against
these entities.
Bashein, et al. v. Kidder, Peabody & Company Inc., et al. - As previously
disclosed in the Partnership's 1994 Form 10-K and first quarter 1995 Form 10-Q,
a purported class action entitled Cohen, et al. v. Kidder Peabody & Company
Inc., et al. was filed in the Circuit Court of the Fifteenth Judicial Circuit In
And For Palm Beach County, Florida on January 12, 1995, and on March 31, 1995,
the case was removed to the United States District Court for the Southern
District of Florida. An amended class action complaint (the "amended
complaint"), which re-named this action as Bashein, et al. v. Kidder, Peabody &
Company Inc., et al., was filed on June 12, 1995. The amended complaint names
Kidder, Peabody & Company Inc., General Electric Capital Corporation, General
Electric Financial Services, Inc., and General Electric Company. The amended
complaint sets forth various causes of action purportedly arising in connection
with the public offerings of Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund V, and Polaris Aircraft Income Fund
VI. Specifically, plaintiffs assert claims for violation of Sections 12(2) and
15 of the Securities Act of 1933, fraud, negligent misrepresentation, breach of
fiduciary duty, breach of third party beneficiary contract, violation of NASD
Rules of Fair Practice, breach of implied covenant, and breach of contract.
Plaintiffs seek compensatory damages, interest, punitive damages, costs and
attorneys' fees, as well as any other relief the court deems just and proper.
Defendants moved to dismiss the amended complaint on June 26, 1995. The
Partnership is not named as a defendant in this action.
B & L Industries, Inc., et al. v. Polaris Holding Company, et al. - On or around
April 13, 1995, a class action complaint entitled B & L Industries, Inc., et al.
v. Polaris Holding Company, et al. was filed in the Supreme Court of the State
of New York. The complaint names as defendants Polaris Holding Company, Polaris
Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris
Securities Corporation, Peter G. Pfendler, Marc P. Desautels, General Electric
Capital Corporation, General Electric Financial Services, Inc., General Electric
Company, Prudential Securities Inc., and Kidder Peabody & Company Incorporated.
The complaint sets forth various causes of action purportedly arising out of the
public offerings of Polaris Aircraft Income Fund III and Polaris Aircraft Income
Fund IV. Plaintiffs allege claims of fraud, negligent misrepresentation, breach
18
<PAGE>
of fiduciary duty, knowingly inducing or participating in breach of fiduciary
duty, breach of third party beneficiary contract, violation of NASD Rules of
Fair Practice, breach of implied covenant, and unjust enrichment. Plaintiffs
seek compensatory damages, interest, general, consequential and incidental
damages, exemplary and punitive damages, disgorgement, rescission, costs,
attorneys' fees, accountants' and experts' fees, and other legal and equitable
relief as the court deems just and proper. The Partnership is not named as a
defendant in this action.
19
<PAGE>
Item 5. Other Information
Directors and Officers
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 July 31, 1995, Eric Dull resigned as Director of PIMC.
Richard L. Blume, 53, 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 GE Capital Aviation Services, Inc. (GECAS). Prior to
joining GECAS, Mr. Blume was counsel at GE Aircraft Engines since 1987.
Norman Liu, 37, has assumed the position of Vice President of PIMC effective May
1, 1995 and has assumed the position of Director of PIMC effective July 31,
1995. Mr. Liu presently holds the position of Executive Vice President, Capital
Funding and Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was
with General Electric Capital Corporation for nine years. He has held management
positions in corporate Business Development and in Syndications and Leasing for
Transportation and Industrial Funding Corporation (TIFC). Mr. Liu was also at
Kidder, Peabody as a managing director.
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. Prior to joining GECAS, Mr. Sun held various
positions with TIFC since 1990.
Selected Financial Data
For the years ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Cash Distributions per Limited
Partnership Unit $ 25.00 $ 20.00 $ 25.00 $ 35.00 $ 64.39
Amount of Cash Distributions
Included Above Representing
a Return of Capital on a Generally
Accepted Accounting Principle
Basis per Limited Partnership Unit * $ 25.00 $ 20.00 $ 25.00 $ 35.00 $ 27.66
* The portion of such distributions which represents a return of capital on an
economic basis will depend in part on the residual sale value of the
Partnership's aircraft and thus will not be ultimately determinable until the
Partnership disposes of its aircraft. However, such portion may be significant
and may equal, exceed or be smaller than the amount shown in the above table.
20
<PAGE>
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.
21
<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
August 9, 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)
22
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 19279642
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<RECEIVABLES> 6467445
<ALLOWANCES> 2838245
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