UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
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_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 16 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 1997
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1997 and
December 31, 1996...........................................3
b) Statements of Operations - Three Months Ended
March 31, 1997 and 1996.....................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1996
and Three Months Ended March 31, 1997.......................5
d) Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1996...............................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.......................................14
Item 5. Other Information.......................................14
Item 6. Exhibits and Reports on Form 8-K........................15
Signature ........................................................16
2
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1997 1996
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 22,438,531 $ 22,224,813
RENT AND OTHER RECEIVABLES 684,956 6,648
NOTES RECEIVABLE 1,136,962 1,522,956
AIRCRAFT, net of accumulated depreciation of
$118,266,900 in 1997 and $120,260,981 in 1996 64,421,425 63,638,062
AIRCRAFT INVENTORY 86,532 113,248
OTHER ASSETS 39,538 117,015
------------ ------------
$ 88,807,944 $ 87,622,742
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 205,304 $ 66,631
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 222,626 209,781
SECURITY DEPOSITS 50,000 116,000
MAINTENANCE RESERVES -- 223,528
DEFERRED INCOME 26,995 597,915
NOTES PAYABLE 18,045,043 14,193,178
------------ ------------
Total Liabilities 18,549,968 15,407,033
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,500,467) (1,480,858)
Limited Partners, 499,997 units
issued and outstanding 71,758,443 73,696,567
------------ ------------
Total Partners' Capital 70,257,976 72,215,709
------------ ------------
$ 88,807,944 $ 87,622,742
============ ============
The accompanying notes are an integral part of these statements.
3
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
REVENUES:
Rent from operating leases $ 4,368,378 $ 3,518,600
Interest 302,077 392,225
Loss on sale of aircraft (26,079) --
Other 714,029 49,974
----------- -----------
Total Revenues 5,358,405 3,960,799
----------- -----------
EXPENSES:
Depreciation 3,098,116 3,009,927
Management fees to general partner 209,419 162,000
Provision for credit losses -- 100,409
Operating 44,892 75,502
Interest 411,866 --
Administration and other 79,644 59,108
----------- -----------
Total Expenses 3,843,937 3,406,946
----------- -----------
NET INCOME $ 1,514,468 $ 553,853
=========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 327,611 $ 417,995
=========== ===========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 1,186,857 $ 135,858
=========== ===========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 2.37 $ 0.27
=========== ===========
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, 1996 and
Three Months Ended March 31, 1997
---------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1995 $ (1,139,155) $ 107,507,678 $ 106,368,523
Net income (loss) 1,602,730 (16,311,216) (14,708,486)
Cash distributions to partners (1,944,433) (17,499,895) (19,444,328)
------------- ------------- -------------
Balance, December 31, 1996 (1,480,858) 73,696,567 72,215,709
Net income 327,611 1,186,857 1,514,468
Cash distributions to partners (347,220) (3,124,981) (3,472,201)
------------- ------------- -------------
Balance, March 31, 1997 $ (1,500,467) $ 71,758,443 $ 70,257,976
============= ============= =============
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,514,468 $ 553,853
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,098,116 3,009,927
Provision for credit losses -- 100,409
Loss on sale of aircraft 26,079 --
Changes in operating assets and liabilities:
Decrease in marketable securities, trading -- 2,356,506
Increase in rent and other receivables (678,308) (110,247)
Decrease in other assets 77,477 --
Increase (decrease) in payable to affiliates 138,673 (17,339)
Increase in accounts payable and accrued liabilities 12,845 15,797
Decrease in security deposits (66,000) (375,000)
Decrease in maintenance reserves (223,528) --
Decrease in deferred income (570,920) --
------------ ------------
Net cash provided by operating activities 3,328,902 5,533,906
------------ ------------
INVESTING ACTIVITIES:
Increase in aircraft capitalized costs (4,784,633) --
Principal payments on notes receivable 385,994 586,786
Net proceeds from sale of aircraft 877,075 --
Net proceeds from sale of aircraft inventory 26,716 35,861
------------ ------------
Net cash provided by (used in) investing activities (3,494,848) 622,647
------------ ------------
FINANCING ACTIVITIES:
Increase in notes payable 3,884,633 --
Principal payments on notes payable (32,768) --
Cash distributions to partners (3,472,201) (4,583,306)
------------ ------------
Net cash provided by (used in) financing activities 379,664 (4,583,306)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS 213,718 1,573,247
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 22,224,813 25,884,742
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 22,438,531 $ 27,457,989
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
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, 1996, 1995, and
1994 included in the Partnership's 1996 Annual Report to the SEC on Form 10-K
(Form 10-K).
2. Sale of Boeing 737-200 Aircraft
On January 30, 1997, one Boeing 737-200 formerly on lease to Viscount Air
Services, Inc. (Viscount), was sold to American Aircarriers Support,
Inc.(American Aircarriers) on an "as-is, where-is" basis for $660,000 cash. In
addition, the Partnership retained maintenance reserves from the previous lessee
of $217,075, that had been held by the Partnership, which were recognized as
additional sale proceeds. A net loss of $26,079 was recorded on the sale of the
aircraft.
3. TWA Lease Extension
GECAS, on behalf of the Partnership, negotiated with TransWorld Airlines, Inc.
(TWA) for the acquisition of noise-suppression devices, commonly known as
"hushkits," for 14 of the 18 Partnership aircraft currently on lease to TWA, as
well as 18 other aircraft owned by affiliates of Polaris Investment Management
Corporation (PIMC) and leased to TWA. Hushkit installation was completed on 11
of the Partnership's aircraft in November 1996. Installation of hushkits on the
remaining three aircraft was completed during February 1997.
The aggregate cost of the hushkit reconditioning for the 3 aircraft was
$4,784,633 or approximately $1.6 million per aircraft, which was capitalized by
the Partnership during 1997. The Partnership paid $900,000 of the aggregate
hushkit cost and the balance of $3,884,633 was financed by UT Finance
Corporation (UT Finance), a wholly owned subsidiary of United Technologies
Corporation, of which a division is Pratt and Whitney Group, the hushkit
manufacturer, over a 6-year period at an interest rate of approximately 10% per
annum. This accounted for the increase to the notes payable balance at March 31,
1997.
The rent payable by TWA under the leases has been increased by an amount
sufficient to cover the monthly debt service payments on the hushkits and fully
repay, during the term of the TWA leases, the amount borrowed. The loan from UT
Finance is non-recourse to the Partnership and secured by a security interest in
the lease receivables. The leases for these 3 aircraft were extended for a
period of eight years until February 2005.
4. Proposed Sale of Aircraft
7
<PAGE>
During the first quarter of 1997, the Partnership received, and the General
Partner (upon recommendation of its servicer) has determined that it would be in
the best interests of the Partnership to accept an offer to purchase 7 of the
Partnership's remaining aircraft (the "Aircraft") and certain of its notes
receivables by a special purpose company (the "Purchaser"). The Purchaser is
managed by Triton Aviation Services Limited, a privately held aircraft leasing
company (the "Purchaser's Manager") which was formed in 1996. Each Aircraft is
to be sold subject to the existing leases, and as part of the transaction the
Purchaser assumes all obligations relating to maintenance reserves and security
deposits, if any, relating to such leases. At the same time cash balances
related to maintenance reserves and security deposits, if any, will be
transferred to the Purchaser.
The total proposed purchase price (the "Purchase Price") to be paid by the
Purchaser in the contemplated transaction would be $13,988,000 which would be
allocable to the Aircraft and to certain notes receivable by the Partnership.
The Purchaser proposes to pay $1,575,888 of the Purchase Price in cash at the
closing and the balance of $12,412,112 would be paid by delivery of a promissory
note (the "Promissory Note") by the Purchaser. The Promissory Note would be
repaid in equal quarterly installments over a period of seven years bearing
interest at a rate of 12% per annum with a balloon principal payment at the end
of year seven. The Purchaser would have the right to voluntarily prepay the
Promissory Note in whole or in part at any time without penalty. In addition,
the Promissory Note would be subject to mandatory partial prepayment in certain
specified instances.
Under the terms of the contemplated transaction, the Aircraft, including any
income or proceeds therefrom and any maintenance reserves or deposits with
respect thereto, constitute the sole source of payments under the Promissory
Note. No security interest over the Aircraft or the leases would be granted in
favor of the Partnership, but the equity interests in the Purchaser would be
pledged to the Partnership. The Purchaser would have the right to sell the
Aircraft, or any of them, without the consent of the Partnership, except that
the Partnership's consent would be required in the event that the proposed sale
price is less than the portion of the outstanding balance of the Promissory Note
which is allocable to the Aircraft in question and the Purchaser does not have
sufficient funds to make up the difference. The Purchaser would undertake to
keep the Aircraft and leases free of any lien, security interest or other
encumbrance other than (i) inchoate materialmen's liens and the like, and (ii)
in the event that the Purchaser elects to install hushkits on any Aircraft,
secured debt to the extent of the full cost of such hushkit. The Purchaser will
be prohibited from incurring indebtedness other than (i) the Promissory Note;
(ii) deferred taxes not yet due and payable; (iii) indebtedness incurred to
hushkit Aircraft owned by the Purchaser and, (iv) demand loans from another SPC
(defined below) at a market rate of interest.
It is also contemplated that each of Polaris Aircraft Income Fund III, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI would sell certain aircraft assets to separate special purpose
companies under common management with the Purchaser (collectively, together
with the Purchaser, the "SPC's") on terms similar to those set forth above.
Under the terms of the contemplated transaction, Purchaser's Manager would
undertake to make available a working capital line to the Purchaser of up to
approximately $1,222,000 to fund operating obligations of the Purchaser. This
working capital line is to be guaranteed by Triton Investments Limited, the
parent of the Purchaser's Manager and such guarantor will provide the
Partnership with a copy of its most recent balance sheet showing a consolidated
net worth (net of minority interests) of at least $150-million. Furthermore,
pursuant to the respective operating agreements of each SPC, including the
Purchaser, the Purchaser's Manager would provide to each SPC all normal and
customary management services including remarketing, sales and repossession, if
necessary. Provided that the Purchaser is not in default in making payments due
under the Promissory Note to the Partnership, the Purchaser would be permitted
to dividend to its equity owners an amount not to exceed approximately $33,000
per month. The Purchaser may distribute additional dividends to the equity
owners to the extent of the working capital advances made by the Purchaser's
Manager provided that the working capital line available to the Purchaser will
be deemed increased to the extent of such dividends.
The Purchaser would be deemed to have purchased the Aircraft effective as of
April 1, 1997 notwithstanding the actual closing date. The Purchaser would have
8
<PAGE>
the right to receive all income and proceeds, including rents and notes
receivables, from the Aircraft accruing from and after April 1, 1997, and the
Promissory Note would commence bearing interest as of April 1, 1997.
The Partnership has agreed to consult with Purchaser's Manager before taking any
significant action pertaining to the Aircraft after the effective date of the
purchase offer. The Purchaser also has the right to make all significant
decisions regarding the Aircraft from and after the date of completion of
definitive documentation legally binding the Purchaser and the Partnership to
the transaction, even if a delay occurs between the completion of such
documentation and the closing of the title transfer to the Purchaser.
In the event the Partnership receives and elects to accept an offer for all (but
not less than all) of the assets to be sold by it to the Purchaser on terms
which it deems more favorable, the Purchaser has the right to (i) match the
offer, or (ii) decline to match the offer and be entitled to compensation in an
amount equal to 1 1/2% of the Purchaser's proposed Purchase Price.
The Partnership adopted, effective January 1, 1996, SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." That statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The purchase offer constitutes a change in
circumstances which, pursuant to SFAS No. 121, requires the Partnership to
review the Aircraft for impairment. As previously discussed in Note 3 of the
Partnership's financial statements for the year ended December 31, 1996 included
in Form 10-K, the Partnership has determined that an impairment loss must be
recognized. In determining the amount of the impairment loss, the Partnership
estimated the "fair value" of the Aircraft based on the proposed Purchase Price
reflected in the contemplated transaction, less the estimated costs and expenses
of the proposed sale. The Partnership is deemed to have an impairment loss to
the extent that the carrying value exceeded the fair value. Management believes
the assumptions related to the fair value of impaired assets represent the best
estimates based on reasonable and supportable assumptions and projections.
It should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
execution of definitive documentation and various other contingencies.
5. 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, PIMC, in
connection with services rendered or payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
March 31, 1997 March 31, 1997
-------------- --------------
Aircraft Management Fees $112,500 $ 82,410
Out-of-Pocket Administrative Expense
Reimbursement 102,126 122,894
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 7,489 --
-------- --------
$222,115 $205,304
======== ========
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
At March 31, 1997, Polaris Aircraft Income Fund II (the Partnership) owns a
portfolio of 21 used commercial jet aircraft and certain inventoried aircraft
parts out of its original portfolio of 30 aircraft. The portfolio consists of 17
McDonnell Douglas DC-9-30 aircraft and one McDonnell Douglas DC-9-40 aircraft
leased to Trans World Airlines, Inc. (TWA); 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).
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. Of its original
portfolio, the Partnership sold one Boeing 727-200 aircraft in February 1995,
one Boeing 737-200 Combi aircraft in March 1996, and one Boeing 737-200 aircraft
in January 1997.
Remarketing Update
Sale of Boeing 737-200 Aircraft - On January 30, 1997, one Boeing 737-200
formerly on lease to Viscount, was sold to American Aircarriers Support,
Inc.(American Aircarriers) on an "as-is, where-is" basis for $660,000 cash. In
addition, the Partnership retained maintenance reserves from the previous lessee
of $217,075, that had been held by the Partnership, which were recognized as
additional sale proceeds. A net loss of $26,079 was recorded on the sale of the
aircraft.
TWA Lease Extension - GECAS, on behalf of the Partnership, negotiated with TWA
for the acquisition of noise-suppression devices, commonly known as "hushkits,"
for 14 of the 18 Partnership aircraft currently on lease to TWA, as well as 18
other aircraft owned by affiliates of Polaris Investment Management Corporation
(PIMC) and leased to TWA. Hushkit installation was completed on 11 of the
Partnership's aircraft in November 1996. Installation of hushkits on the
remaining three aircraft was completed during February 1997.
The aggregate cost of the hushkit reconditioning completed in February 1997 for
the 3 aircraft was $4,784,633 or approximately $1.6 million per aircraft, which
was capitalized by the Partnership during 1997. The Partnership paid $900,000 of
the aggregate hushkit cost and the balance of $3,884,633 was financed by UT
Finance Corporation (UT Finance), a wholly owned subsidiary of United
Technologies Corporation, of which a division is Pratt and Whitney Group, the
hushkit manufacturer, over a 6-year period at an interest rate of approximately
10% per annum.
The rent payable by TWA under the leases has been increased by an amount
sufficient to cover the monthly debt service payments on the hushkits and fully
repay, during the term of the TWA leases, the amount borrowed. The loan from UT
Finance is non-recourse to the Partnership and secured by a security interest in
the lease receivables. The leases for these 3 aircraft were extended for a
period of eight years until February 2005.
Proposed Sale of Aircraft - During the first quarter of 1997, the Partnership
received, and the General Partner (upon recommendation of its servicer) has
determined that it would be in the best interests of the Partnership to accept
an offer to purchase 7 of the Partnership's remaining aircraft (the "Aircraft")
and certain of its notes receivables by a special purpose company (the
"Purchaser"). The Purchaser is managed by Triton Aviation Services Limited, a
privately held aircraft leasing company (the "Purchaser's Manager") which was
formed in 1996. Each Aircraft is to be sold subject to the existing leases, and
as part of the transaction the Purchaser assumes all obligations relating to
maintenance reserves and security deposits, if any, relating to such leases. At
the same time cash balances related to maintenance reserves and security
deposits, if any, will be transferred to the Purchaser.
The total proposed purchase price (the "Purchase Price") to be paid by the
Purchaser in the contemplated transaction would be $13,988,000 which would be
10
<PAGE>
allocable to the Aircraft and to certain notes receivable by the Partnership.
The Purchaser proposes to pay $1,575,888 of the Purchase Price in cash at the
closing and the balance of $12,412,112 would be paid by delivery of a promissory
note (the "Promissory Note") by the Purchaser. The Promissory Note would be
repaid in equal quarterly installments over a period of seven years bearing
interest at a rate of 12% per annum with a balloon principal payment at the end
of year seven. The Purchaser would have the right to voluntarily prepay the
Promissory Note in whole or in part at any time without penalty. In addition,
the Promissory Note would be subject to mandatory partial prepayment in certain
specified instances.
Under the terms of the contemplated transaction, the Aircraft, including any
income or proceeds therefrom and any maintenance reserves or deposits with
respect thereto, constitute the sole source of payments under the Promissory
Note. No security interest over the Aircraft or the leases would be granted in
favor of the Partnership, but the equity interests in the Purchaser would be
pledged to the Partnership. The Purchaser would have the right to sell the
Aircraft, or any of them, without the consent of the Partnership, except that
the Partnership's consent would be required in the event that the proposed sale
price is less than the portion of the outstanding balance of the Promissory Note
which is allocable to the Aircraft in question and the Purchaser does not have
sufficient funds to make up the difference. The Purchaser would undertake to
keep the Aircraft and leases free of any lien, security interest or other
encumbrance other than (i) inchoate materialmen's liens and the like, and (ii)
in the event that the Purchaser elects to install hushkits on any Aircraft,
secured debt to the extent of the full cost of such hushkit. The Purchaser will
be prohibited from incurring indebtedness other than (i) the Promissory Note;
(ii) deferred taxes not yet due and payable; (iii) indebtedness incurred to
hushkit Aircraft owned by the Purchaser and, (iv) demand loans from another SPC
(defined below) at a market rate of interest.
It is also contemplated that each of Polaris Aircraft Income Fund III, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI would sell certain aircraft assets to separate special purpose
companies under common management with the Purchaser (collectively, together
with the Purchaser, the "SPC's") on terms similar to those set forth above.
Under the terms of the contemplated transaction, Purchaser's Manager would
undertake to make available a working capital line to the Purchaser of up to
approximately $1,222,000 to fund operating obligations of the Purchaser. This
working capital line is to be guaranteed by Triton Investments Limited, the
parent of the Purchaser's Manager and such guarantor will provide the
Partnership with a copy of its most recent balance sheet showing a consolidated
net worth (net of minority interests) of at least $150-million. Furthermore,
pursuant to the respective operating agreements of each SPC, including the
Purchaser, the Purchaser's Manager would provide to each SPC all normal and
customary management services including remarketing, sales and repossession, if
necessary. Provided that the Purchaser is not in default in making payments due
under the Promissory Note to the Partnership, the Purchaser would be permitted
to dividend to its equity owners an amount not to exceed approximately $33,000
per month. The Purchaser may distribute additional dividends to the equity
owners to the extent of the working capital advances made by the Purchaser's
Manager provided that the working capital line available to the Purchaser will
be deemed increased to the extent of such dividends.
The Purchaser would be deemed to have purchased the Aircraft effective as of
April 1, 1997 notwithstanding the actual closing date. The Purchaser would have
the right to receive all income and proceeds, including rents and notes
receivables, from the Aircraft accruing from and after April 1, 1997, and the
Promissory Note would commence bearing interest as of April 1, 1997.
The Partnership has agreed to consult with Purchaser's Manager before taking any
significant action pertaining to the Aircraft after the effective date of the
purchase offer. The Purchaser also has the right to make all significant
decisions regarding the Aircraft from and after the date of completion of
definitive documentation legally binding the Purchaser and the Partnership to
the transaction, even if a delay occurs between the completion of such
documentation and the closing of the title transfer to the Purchaser.
In the event the Partnership receives and elects to accept an offer for all (but
not less than all) of the assets to be sold by it to the Purchaser on terms
which it deems more favorable, the Purchaser has the right to (i) match the
offer, or (ii) decline to match the offer and be entitled to compensation in an
amount equal to 1 1/2% of the Purchaser's proposed Purchase Price.
11
<PAGE>
The Partnership adopted, effective January 1, 1996, SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." That statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The purchase offer constitutes a change in
circumstances which, pursuant to SFAS No. 121, requires the Partnership to
review the Aircraft for impairment. As previously discussed in Note 3, the
Partnership has determined that an impairment loss must be recognized. In
determining the amount of the impairment loss, the Partnership estimated the
"fair value" of the Aircraft based on the proposed Purchase Price reflected in
the contemplated transaction, less the estimated costs and expenses of the
proposed sale. The Partnership is deemed to have an impairment loss to the
extent that the carrying value exceeded the fair value. Management believes the
assumptions related to the fair value of impaired assets represent the best
estimates based on reasonable and supportable assumptions and projections.
It should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
execution of definitive documentation and various other contingencies.
Partnership Operations
The Partnership recorded net income of $1,514,468 or $2.37 per limited
partnership unit for the three months ended March 31, 1997, compared to net
income of $553,853, or $0.27 per limited partnership unit, for the three months
ended March 31, 1996.
Rental revenues, net of related management fees, increased during the first
three months of 1997 as compared to the same period in 1996 primarily as a
result of an increase in rental revenues from TWA. In November 1996 and February
1997, installation of hushkits was completed on 14 of the 18 aircraft leased to
TWA and the leases were extended for eight years. The rent payable by TWA under
the leases has been increased by an amount sufficient to cover the monthly debt
service payments on the hushkits and fully repay, during the term of the TWA
leases, the amount borrowed. The Partnership recorded $411,866 in interest
expense on the amount borrowed to finance the hushkits during the first three
months of 1997.
Partially offsetting the increase in 1997 net income was a net loss recorded on
the sale of the Boeing 737- 200 aircraft to American Aircarriers for $660,000
cash in January 1997. In addition, the Partnership retained maintenance reserves
from the previous lessee of $217,075, which were recognized as additional sale
proceeds. A net loss of $26,079 was recorded on the sale of the aircraft.
The Partnership recorded an increase in other income during the three months
ended March 31, 1997. This increase in other income was the result of the
receipt of $714,029 related to amounts due under the TWA maintenance credit and
rent deferral agreement.
The Partnership received warrants to purchase 227,133 shares of TWA Common Stock
from TWA in November 1995 and exercised the warrants on December 29, 1995. The
Partnership sold the TWA Common Stock by February 1996, net of broker
commissions, for $2,406,479 and recognized a gain on trading securities of
$49,974 during the first quarter of 1996.
During the three months ended March 31, 1996, the Partnership recorded an
allowance for credit losses of $100,409 for certain receivables due from
Viscount Air Services, Inc. (Viscount). Viscount filed a petition for protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court in January 1996.
The Partnership recorded additional depreciation adjustments to certain of the
Partnership's aircraft in the fourth quarter of 1996. The increased depreciation
expense during 1996 reduces the aircraft's net carrying value and reduces the
12
<PAGE>
amount of future depreciation expense that the Partnership will recognize over
the projected remaining economic life of the aircraft. Although depreciation
expense on these aircraft decreased during the three months ended March 31,
1997, the Partnership recorded an increase in depreciation expense on the
Partnership's 14 leases that were fitted with hushkits during 1996, causing
depreciation expense to increase slightly during the three months ended March
31, 1997 as compared to the same period in 1996.
Administration and other expenses increased during the three months ended March
31, 1997 as compared to the same period in 1996, due to increases in printing
and postage costs combined with an increase in outside services.
The Partnership reported an increase in rent and other receivables at March 31,
1997, as compared to December 31, 1996. This increase in rent and other
receivables was the result of certain rental payments due from TWA at the end of
March 1997 that were received by the Partnership in April 1997.
The decrease in the deferred income balance at March 31, 1997 is attributable to
differences between the payments due and the rental income earned on the TWA
leases for 14 of the 18 Partnership aircraft currently on lease to TWA that were
extended in 1996 and 1997. For income recognition purposes, the Partnership
recognizes rental income over the life of the lease in equal monthly amounts. As
a result, the difference between rental income earned and the rental payments
due is recognized as deferred income. The rental income earned on the TWA leases
during the three months ended March 31, 1997 exceeded the rental payments due
from TWA, causing a decrease in the deferred income balance.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all lease payments due from
Continental, Continental Micronesia and TWA, as well as all notes receivable
payments due from AIA and Westjet related to aircraft sales from prior years. As
discussed above, the Partnership received from TWA warrants to purchase 227,133
shares of TWA Common Stock in consideration for the rent deferral. The
Partnership exercised the warrants in 1995 and sold the TWA Common Stock in the
first quarter of 1996, net of broker commissions, for $2,406,479.
The Partnership held maintenance reserve payments from one of its former
lessees, Viscount Air Services, Inc. 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 Partnership recognized the
remaining maintenance reserve balance of $217,075 as additional sale proceeds
upon the sale of the aircraft to American Aircarriers in January 1997. The net
maintenance reserve balances aggregate $0 as of March 31, 1997.
Payments totaling $26,716 were received during the first quarter of 1997 from
the sale of inventoried parts from the six disassembled aircraft and have been
applied against aircraft inventory. The net book value of the Partnership's
aircraft inventory was $86,532 as of March 31, 1997. The Partnership is
retaining cash reserves to meet potential obligations under the TWA, Continental
and Continental Micronesia lease agreements.
Cash Distributions - Cash distributions to limited partners during the three
months ended March 31, 1997 and 1996 were $3,124,981, or $6.25 per limited
partnership unit and $4,124,975 or $8.25 per unit, respectively. The timing and
amount of future cash distributions are not yet known and will depend on the
Partnership's future cash requirements; the receipt of rental payments from TWA,
Continental and Continental Micronesia; the receipt of modification financing
payments from Continental and Continental Micronesia; the receipt of note
receivable payments from AIA and Westjet and payments generated from the sale of
aircraft inventory; and consummation of the Sale Transaction and timely
performance by Purchaser of its obligations to the Partnership under the
Promissory Note.
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) 1996 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K), there are a number of pending legal actions or
proceedings involving the Partnership. There have been no material developments
with respect to any such actions or proceedings during the period covered by
this report except:
Equity Resources, Inc, et al v. Polaris Investment Management Corporation, et al
- - On or about April 18, 1997, an action entitled Equity Resources Group, Inc.,
et al v. Polaris Investment Management Corporation, et al was filed in the
Superior Court for the County of Middlesex, Commonwealth of Massachusetts. The
complaint names each of Polaris Investment Management Corporation, the
Partnership, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV,
Polaris Aircraft Income Fund V and Polaris Aircraft Income Fund VI, as
defendants. The complaint alleges that Polaris Investment Management
Corporation, as general partner of each of the partnerships, committed a breach
of its fiduciary duties, violated applicable partnership law statutory
requirements, and breached provisions of the partnership agreements of each of
the foregoing partnerships by failing to solicit a vote of the limited partners
in each of such partnership in connection with the Sale Transaction described in
Note 4 and in failing to disclose material facts relating to such transaction.
Plaintiffs filed a motion seeking to enjoin the Sale Transaction, which motion
was denied by the court on May 6, 1997.
Other Proceedings - Item 10 in Part III of the Partnership's 1996 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, (which has been dismissed, as
discussed in the Partnership's 1996 Form 10-K) where the Partnership was named
as a defendant for procedural purposes, the Partnership is not a party to these
actions. There have been no material developments with respect to any of the
actions described therein during the period covered by this report except:
In Re Prudential Securities Inc. Limited Partnership Litigation - On April 22,
1997, the Polaris defendants entered into a settlement agreement with plaintiffs
pursuant to which, among other things, the Polaris defendants agreed to pay
$22.5 million to a class of unitholders previously certified by the Court. On
April 29, 1997, Judge Pollack signed an order preliminarily approving the
settlement. Under the terms of the order, (i) lead class counsel is required to
mail a notice to all class members on or before May 13, 1997 describing the
terms of the settlement; (ii) requests for exclusion from the class must be
mailed to the Claims Administrator no later than June 27, 1997; and (iii) a
hearing on the fairness of the settlement and other matters is scheduled to be
held before Judge Pollack on August 1, 1997.
Item 5. Other Information
The General Partner determined that it was necessary, in order to prevent the
Partnership from being treated for tax purposes as an association taxable as a
corporation, rather than being taxable as a partnership, to amend the
Partnership Agreement by adding the following as a new sentence in Paragraph
12.4:
Notwithstanding anything to the contrary contained in this Partnership
Agreement, a Unit Holder wishing to transfer Units may do so only after
giving written notice of such intent to the General Partner, and only
upon obtaining the prior written consent of the General Partner to such
transfer, which consent the General Partner may withhold in its sole
discretion if it deems such action to be necessary to prevent the
Partnership from being treated as a "publicly traded partnership" as
defined in the Code.
14
<PAGE>
Due to the number of transfers which occurred through the end of April 1997, the
General Partner concluded that this action was necessary to prevent the
Partnership from being treated as a "publicly-traded partnership" as defined in
the Internal Revenue Code. A "publicly-traded partnership" is treated as a
corporation for Federal income tax purposes, with the result that such an entity
pays Federal corporate income tax on its taxable income and its partners must
include in their taxable income as dividends all distributions received to the
extent that such distributions are paid out of current and accumulated earnings.
Thus, the General Partner adopted the foregoing amendment in an attempt to
protect the Partnership against the risk of such an adverse tax consequence.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
3. Amendment to Amended and Restated Limited Partnership Agreement
27. Financial Data Schedule.
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 9, 1997 By: /S/Marc A. Meiches
- --------------------------- ------------------
Mark A. Meiches
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
16
Exhibit 3
AMENDMENT
TO
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
POLARIS AIRCRAFT INCOME FUND II,
A CALIFORNIA LIMITED PARTNERSHIP
This AMENDMENT (this Amendment) is entered into as of this 9th
day of May 1997 by and among Polaris Investment Management Corporation, a
California corporation, as General Partner (the General Partner), and the
persons identified on Exhibit I hereto as Limited Partners.
RECITALS:
A. The limited partnership named Polaris Aircraft Income Fund II,
a California Limited Partnership" was originally formed under the Uniform
Limited Partnership Act of the State of California on June 27, 1984, and was
continued on the terms and conditions specified in that certain Amended and
Restated Limited Partnership Agreement dated as of January 31, 1996 (the
"Partnership Agreement") among the General Partner, Marc P. Desautels as Initial
Limited Partner, and the persons identified therein as Additional Limited
Partners. Capitalized terms used but not otherwise defined in this Amendment
have the meanings assigned to them in the Partnership Agreement.
B. The General Partner has determined that it is in the best
interests of the Partnership and the Limited Partners that the Partnership
Agreement be amended to allow the General Partner to restrict transfers of Units
in the Partnership to the extent necessary or desirable to ensure that
Partnership does not become a "publicly traded partnership" as defined in
Section 7704 of the Internal Revenue Code of 1986, as amended (the "Code").
C. The General Partner has authority pursuant to Paragraph
15.1.12 of the Partnership Agreement to amend the Partnership Agreement on the
terms specified herein, without obtaining the consent or approval of the Limited
Partners.
NOW, THEREFORE, in consideration of the premises set forth
herein, it is agreed as follows:
AGREEMENT
1. Amendment of Paragraph 12.4. Paragraph 12.4 of the Partnership
Agreement is hereby amended by adding a new sentence to the end of the existing
text as follows:
<PAGE>
Notwithstanding anything to the contrary contained in this
Partnership Agreement, a Unit Holder wishing to transfer Units
may do so only after giving written notice of such intent to the
General Partner, and only upon obtaining the prior written
consent of the General Partner to such transfer, which consent
the General Partner may withhold in its sole discretion if it
deems such action to be necessary to prevent the Partnership from
being treated as a "publicly traded partnership" as defined in
the Code.
2. Limitation on Amendment. Except as expressly modified by this
Amendment, the Partnership Agreement shall remain in full force and effect.
3. Miscellaneous.
a. Counterparts. This Amendment may be executed in any number of
counterparts, each of such counterparts shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same instrument.
b. Entire Agreement. The Partnership Agreement, as modified by
this Amendment, constitutes the entire agreement of the parties hereto and
supersedes any and all prior or contemporaneous understandings, whether oral or
written, pertaining to the subject matter hereof.
c. Governing Law. This Amendment shall be governed by and
construed in all respects in accordance with the internal laws of the State of
California, without regard to choice of law principles.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed as of the day and year specified in the first paragraph above.
"General Partner" POLARIS INVESTMENT MANAGEMENT
CORPORATION, a California corporation
By: /S/Eric Dull
---------------------------
Name: Eric Dull
---------------------------
Title: President
---------------------------
"Limited Partners": Each of the persons identified on Exhibit I attached
hereto as a "Limited Partner"
By: POLARIS INVESTMENT
MANAGEMENT CORPORATION,
as Attorney-in-Fact
By: /S/ Eric Dull
---------------------------
Name: Eric Dull
---------------------------
Title: President
---------------------------
3
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 22438531
<SECURITIES> 0
<RECEIVABLES> 1821918
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 182774857
<DEPRECIATION> 118266900
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0
0
<COMMON> 0
<OTHER-SE> 70257976
<TOTAL-LIABILITY-AND-EQUITY> 88807944
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<TOTAL-REVENUES> 5358405
<CGS> 0
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<OTHER-EXPENSES> 3432071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 411866
<INCOME-PRETAX> 1514468
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