UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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 High Ridge Road, Stamford, Connecticut 06927
Telephone - (203) 357-3776
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 12 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 1998
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1998 and
December 31, 1997.........................................3
b) Statements of Operations - Three Months Ended
March 31, 1998 and 1997...................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1997
and Three Months Ended March 31, 1998.....................5
d) Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997.............................6
e) Notes to Financial Statements.............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........9
Part II. Other Information
Item 1. Legal Proceedings....................................11
Item 6. Exhibits and Reports on Form 8-K.....................11
Signature .....................................................12
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,
1998 1997
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 19,393,120 $ 31,587,494
RENT AND OTHER RECEIVABLES 950,858 935,629
AIRCRAFT, net of accumulated depreciation of
$72,333,676 in 1998 and $70,346,578 in 1997 43,029,633 45,016,731
OTHER ASSETS 6,142 6,571
------------ ------------
$ 63,379,753 $ 77,546,425
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 172,953 $ 142,761
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 447,116 317,799
SECURITY DEPOSITS - 50,000
DEFERRED INCOME 1,051,984 627,660
NOTES PAYABLE 14,561,012 15,667,509
------------ ------------
Total Liabilities 16,233,065 16,805,729
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,622,540) (3,030,600)
Limited Partners, 499,973 and 499,997 units
outstanding in 1998 and 1997, respectively 50,769,228 63,771,296
------------ ------------
Total Partners' Capital 47,146,688 60,740,696
------------ ------------
$ 63,379,753 $ 77,546,425
============ ============
The accompanying notes are an integral part of these statements.
3
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
REVENUES:
Rent from operating leases $ 3,145,676 $ 4,368,378
Interest 350,684 302,077
Loss on sale of aircraft - (26,079)
Gain on sale of aircraft inventory 33,067 -
Other 65,385 714,029
----------- -----------
Total Revenues 3,594,812 5,358,405
----------- -----------
EXPENSES:
Depreciation 1,987,098 3,098,116
Management fees to general partner 121,617 209,419
Operating 120,305 44,892
Interest 363,011 411,866
Administration and other 94,501 79,644
----------- -----------
Total Expenses 2,686,532 3,843,937
----------- -----------
NET INCOME $ 908,280 $ 1,514,468
=========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 857,982 $ 327,611
=========== ===========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 50,298 $ 1,186,857
=========== ===========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.10 $ 2.37
=========== ===========
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<CAPTION>
Year Ended December 31, 1997 and
Three Months Ended March 31, 1998
---------------------------------
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Balance, December 31, 1996 $(1,480,858) $ 73,696,567 $ 72,215,709
Net income 44,693 4,424,643 4,469,336
Cash distributions to partners (1,594,435) (14,349,914) (15,944,349)
----------- ------------ ------------
Balance, December 31, 1997 (3,030,600) 63,771,296 60,740,696
Net income 857,982 50,298 908,280
Capital redemptions (24 units) -- (3,072) (3,072)
Cash distributions to partners (1,449,922) (13,049,294) (14,499,216)
----------- ------------ ------------
Balance, March 31, 1998 $(3,622,540) $ 50,769,228 $ 47,146,688
=========== ============ ============
The accompanying notes are an integral part of these statements.
5
</TABLE>
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 908,280 $ 1,514,468
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,987,098 3,098,116
Gain on sale of aircraft inventory (33,067) --
Loss on sale of aircraft -- 26,079
Changes in operating assets and liabilities:
Increase in rent and other receivables (15,229) (678,308)
Decrease in other assets 429 77,477
Increase in payable to affiliates 30,192 138,673
Increase in accounts payable and accrued liabilities 129,317 12,845
Decrease in security deposits (50,000) (66,000)
Decrease in maintenance reserves -- (223,528)
Increase (decrease) in deferred income 424,324 (570,920)
------------ ------------
Net cash provided by operating activities 3,381,344 3,328,902
------------ ------------
INVESTING ACTIVITIES:
Increase in aircraft capitalized costs -- (4,784,633)
Principal payments on notes receivable -- 385,994
Net proceeds from sale of aircraft -- 877,075
Net proceeds from sale of aircraft inventory 33,067 26,716
------------ ------------
Net cash provided by (used in) investing activities 33,067 (3,494,848)
------------ ------------
FINANCING ACTIVITIES:
Increase in notes payable -- 3,884,633
Principal payments on notes payable (1,106,497) (32,768)
Capital redemptions (3,072) --
Cash distributions to partners (14,499,216) (3,472,201)
------------ ------------
Net cash provided by (used in) financing activities (15,608,785) 379,664
CHANGES IN CASH AND CASH
EQUIVALENTS (12,194,374) 213,718
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 31,587,494 22,224,813
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 19,393,120 $ 22,438,531
============ ============
The accompanying notes are an integral part of these statements.
6
</TABLE>
<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 (GAAP). These statements should be read in conjunction with the
financial statements and notes thereto for the years ended December 31, 1997,
1996, and 1995 included in the Partnership's 1997 Annual Report to the SEC on
Form 10-K.
2. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
March 31, 1998 March 31, 1998
-------------- --------------
Aircraft Management Fees $ 105,000 $ 92,947
Out-of-Pocket Administrative Expense
Reimbursement 61,817 64,075
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 18,573 15,931
------------- ------------
$ 185,390 $ 172,953
============= ============
3. Claims Related to Lessee Defaults
Braniff, Inc.(Braniff) Bankruptcy - As previously reported, the Bankruptcy Court
disposed of the Partnership's claim in this Bankruptcy proceeding by permitting
the Partnership to exchange a portion of its unsecured claim for Braniff's right
(commonly referred to as a "Stage 2 Base Level right") under the Federal
Aviation Administration noise regulations to operate one Stage 2 aircraft and by
allowing the Partnership a net remaining unsecured claim of $769,231 in the
proceedings.
Braniff's bankrupt estate has made a payment in the amount of $200,000 in
respect of the unsecured claims of the Partnership and other affiliates of
Polaris Investment Management Corporation. Of this
7
<PAGE>
amount, $15,385 was allocated to the Partnership, based on its pro rata share of
the total claims, and recognized as revenue during the three months ended March
31, 1998.
4. Partners' Capital
The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the general partner and the limited partners.
Such allocations are made using income or loss calculated under GAAP for book
purposes, which varies from income or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the general partner and 90% to the limited
partners.
The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
At March 31, 1998, Polaris Aircraft Income Fund II (the Partnership) owned a
portfolio of 14 used commercial jet aircraft and certain inventoried aircraft
parts out of its original portfolio of 30 aircraft. The portfolio consists of 14
McDonnell Douglas DC-9-30 aircraft leased to Trans World Airlines, Inc.(TWA).
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.
Partnership Operations
The Partnership recorded net income of $908,280 or $0.10 per limited partnership
unit, for the three months ended March 31, 1998, compared to net income of
$1,514,468, or $2.37 per limited partnership unit, for the three months ended
March 31, 1997.
The decrease in net income is primarily due to a decrease in other income. The
Partnership recorded other income of $714,029 during the three months ended
March 31, 1997, as a result of the receipt of amounts due under a TWA
maintenance credit and rent deferral agreement.
Further impacting the decrease in net income was a decline in rental revenues,
net of related management fees, during the first three months of 1998, as
compared to the same period in 1997. This decline was the result of an absence
of rental revenues from the aircraft sold to Triton in 1997. The decrease in
depreciation expense related to the sold aircraft partially offset the decline
in rental revenues.
The increase in the deferred income balance at March 31, 1998 is attributable to
differences between the payments due and the rental income earned on the TWA
leases for the 14 aircraft currently on lease to TWA. 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
payments due from TWA during the three months ended March 31, 1998 exceeded the
rental income earned, causing an increase in the deferred income balance.
On January 30, 1997, one Boeing 737-200, formerly on lease to Viscount Air
Services, Inc. (Viscount), was sold to American Aircarriers Support, Inc. 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 during the first three
months of 1997.
Operating expenses increased during the three months ended March 31, 1998, as
compared to the same period in 1997, due to an increase in legal expenses.
During the three months ended March 31, 1998, the Partnership recognized legal
expenses of $69,000 related to the Viscount default and Chapter 11 bankruptcy
filing, compared to $37,000 during the same period in 1997. The Partnership also
recognized legal expenses of approximately $41,000 during the three months ended
March 31, 1998, related to the sale of aircraft to Triton in 1997.
Administration and other expenses increased during the three months ended March
31, 1998 as compared to the same period in 1997, due to increases in printing
and postage costs related to an additional distribution.
9
<PAGE>
The Partnership had been holding a security deposit, received from Jet Fleet in
1992, pending the outcome of bankruptcy proceedings. The bankruptcy proceeding
of Jet Fleet Corporation was closed on August 6, 1997, and the bankruptcy
proceeding of Jet Fleet International Airlines, Inc. was closed on February 10,
1998. Consequently, the Partnership recognized, during the three months ended
March 31, 1998, revenue of $50,000 that had been held as a deposit.
Claims Related to Lessee Defaults
Braniff, Inc.(Braniff) Bankruptcy - As discussed more fully in Note 3, Braniff's
bankrupt estate has made a payment in the amount of $200,000 in respect of the
unsecured claims of the Partnership and other affiliates of Polaris Investment
Management Corporation. Of this amount, $15,385 was allocated to the
Partnership, based on its pro rata share of the total claims, and recognized as
revenue during the three months ended March 31, 1998.
Liquidity and Cash Distributions
Liquidity - The Partnership received all payments due from its sole lessee, TWA,
during 1998, except for the March 1998 lease payment. On April 1, 1998, the
Partnership received its $935,000 rental payment from TWA that was due on March
27, 1998. This amount was included in rent and other receivables on the balance
sheet at March 31, 1998.
Payments totaling $33,067 and $26,716 were received during the first quarter of
1998 and 1997, respectively, from the sale of inventoried parts from the six
disassembled aircraft.
Polaris Investment Management Corporation, the general partner, has determined
that the Partnership maintain cash reserves as a prudent measure to ensure that
the Partnership has available funds in the event that the aircraft presently on
lease to TWA require remarketing and for other contingencies, including expenses
of the Partnership. The Partnership's cash reserves will be monitored and may be
revised from time to time as further information becomes available in the
future.
Cash Distributions - Cash distributions to limited partners during the three
months ended March 31, 1998 and 1997 were $13,049,294, or $26.10 per limited
partnership unit and $3,124,981, or $6.25 per unit, respectively. The increase,
as compared to 1997, is due to the distribution of the proceeds received from
the prepayment of a note due from Triton Aviation Services II LLC on December
30, 1997. The timing and amount of future cash distributions are not yet known
and will depend on the Partnership's future cash requirements (including
expenses of the Partnership) and need to retain cash reserves as previously
discussed in the Liquidity section; the receipt of rental payments from TWA; and
payments generated from the aircraft disassembly process.
10
<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) 1997 Annual Report to the Securities and Exchange Commission on
Form 10-K (Form 10-K), there are a number of pending legal actions or
proceedings involving the Partnership. Except as described below, there have
been no material developments with respect to any such actions or proceedings
during the period covered by this report.
Braniff, Inc. (Braniff) Bankruptcy - Braniff's bankrupt estate has made a
payment in the amount of $200,000 in respect of the unsecured claims of the
Partnership and other affiliates of Polaris Investment Management Corporation.
Of this amount, $15,385 was allocated to the Partnership based on its pro rata
share of the total claims.
Viscount Air Services, Inc. Bankruptcy - The trial date of the lawsuit against
BAE Aviation, Inc., STS Services, Inc. and Piping Design Services, Inc. has been
reset for July 14, 1998.
The lawsuit against Thomas Cook and Hamilton Aviation, Inc. has been settled.
Mr. Cook has agreed to release the Partnership's elevator in exchange for a
settlement payment of $3,000 by the Partnership, and the parties have stipulated
to dismissal of the lawsuit.
Other Proceedings - Item 10 in Part III of the Partnership's 1997 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. 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.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedule (in electronic format only).
b) Reports on Form 8-K
A Current Report on Form 8-K, dated December 30, 1997, reporting a
prepayment in full of the Promissory Note from Triton Aviation Services
II LLC, was filed on January 5, 1998.
11
<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 13, 1998 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)
12
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<ARTICLE>5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 19393120
<SECURITIES> 0
<RECEIVABLES> 950858
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 115363309
<DEPRECIATION> 72333676
<TOTAL-ASSETS> 63379753
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 47146688
<TOTAL-LIABILITY-AND-EQUITY> 63379753
<SALES> 0
<TOTAL-REVENUES> 3594812
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2323521
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 363011
<INCOME-PRETAX> 908280
<INCOME-TAX> 0
<INCOME-CONTINUING> 908280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 908280
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0
</TABLE>
