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 June 30, 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 14 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1998
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1998 and
December 31, 1997..........................................3
b) Statements of Operations - Three and Six Months
Ended June 30, 1998 and 1997...............................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1997
and Six Months Ended June 30, 1998.........................5
d) Statements of Cash Flows - Six Months
Ended June 30, 1998 and 1997...............................6
e) Notes to Financial Statements..............................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........10
Part II. Other Information
Item 1. Legal Proceedings.....................................12
Item 6. Exhibits and Reports on Form 8-K......................12
Signature ......................................................13
2
<PAGE>
<TABLE>
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS:
CASH AND CASH EQUIVALENTS $ 19,463,980 $ 31,587,494
RENT AND OTHER RECEIVABLES 935,101 935,629
AIRCRAFT, net of accumulated depreciation of
$74,320,776 in 1998 and $70,346,578 in 1997 41,042,533 45,016,731
OTHER ASSETS 5,702 6,571
------------ ------------
$ 61,447,316 $ 77,546,425
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 210,493 $ 142,761
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 475,080 317,799
SECURITY DEPOSITS -- 50,000
DEFERRED INCOME 1,476,309 627,660
NOTES PAYABLE 13,428,019 15,667,509
------------ ------------
Total Liabilities 15,589,901 16,805,729
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,636,813) (3,030,600)
Limited Partners, 499,973 and 499,997 units
outstanding in 1998 and 1997, respectively 49,494,228 63,771,296
------------ ------------
Total Partners' Capital 45,857,415 60,740,696
------------ ------------
$ 61,447,316 $ 77,546,425
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
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,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rent from operating leases $3,145,675 $4,132,342 $6,291,351 $8,500,720
Interest 256,610 388,262 607,294 690,339
Loss on sale of aircraft -- -- -- (26,079)
Other 15,138 88,414 113,590 802,443
---------- ---------- ---------- ----------
Total Revenues 3,417,423 4,609,018 7,012,235 9,967,423
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 1,987,100 2,971,322 3,974,198 6,069,438
Management fees to general partner 121,617 157,284 243,234 366,703
Operating 79,120 37,035 199,425 81,927
Interest 336,503 440,119 699,514 851,985
Administration and other 99,134 113,267 193,635 192,911
---------- ---------- ---------- ----------
Total Expenses 2,623,474 3,719,027 5,310,006 7,562,964
---------- ---------- ---------- ----------
NET INCOME $ 793,949 $ 889,991 $1,702,229 $2,404,459
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 194,049 $ 508,848 $1,052,031 $ 836,459
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 599,900 $ 381,143 $ 650,198 $1,568,000
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 1.20 $ 0.76 $ 1.30 $ 3.13
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
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
Six Months Ended June 30, 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 1,052,031 650,198 1,702,229
Capital redemptions (24 units) -- (3,072) (3,072)
Cash distributions to partners (1,658,244) (14,924,194) (16,582,438)
------------ ------------ ------------
Balance, June 30, 1998 $ (3,636,813) $ 49,494,228 $ 45,857,415
============ ============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
5
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<TABLE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,702,229 $ 2,404,459
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,974,198 6,069,438
Loss on sale of aircraft -- 26,079
Gain on sale of aircraft inventory (48,205) --
Changes in operating assets and liabilities:
Decrease (increase) in rent and other receivables 528 (1,082,360)
Decrease in other assets 869 108,983
Increase in payable to affiliates 67,732 229,910
Increase in accounts payable and accrued liabilities 157,281 290,584
Decrease in security deposits (50,000) (66,000)
Decrease in maintenance reserves -- (6,453)
Increase (decrease) in deferred income 848,649 (597,915)
------------ ------------
Net cash provided by operating activities 6,653,281 7,376,725
------------ ------------
INVESTING ACTIVITIES:
Increase in aircraft capitalized costs -- (4,784,633)
Principal payments on notes receivable -- 622,403
Net proceeds from sale of aircraft -- 2,500,238
Payments to Purchaser related to sale of aircraft -- (1,001,067)
Net proceeds from sale of aircraft inventory 48,205 95,269
------------ ------------
Net cash provided by (used in) investing activities 48,205 (2,567,790)
------------ ------------
FINANCING ACTIVITIES:
Increase in notes payable -- 3,884,633
Principal payments on notes payable (2,239,490) (343,613)
Capital redemptions (3,072) --
Cash distributions to partners (16,582,438) (9,027,724)
------------ ------------
Net cash used in financing activities (18,825,000) (5,486,704)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (12,123,514) (677,769)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 31,587,494 22,224,813
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 19,463,980 $ 21,547,044
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
SUPPLEMENTAL INFORMATION:
Interest paid $ 700,509 $ 746,012
============= =============
The accompanying notes are an integral part of these statements.
7
<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
June 30, 1998 June 30, 1998
------------- -------------
Aircraft Management Fees $ 97,500 $ 117,065
Out-of-Pocket Administrative and Selling
Expense Reimbursement 117,085 91,411
Out-of-Pocket Operating Expense
Reimbursement 18,929 2,017
------------- ------------
$ 233,514 $ 210,493
============= ============
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 amount, $15,385 was allocated
8
<PAGE>
to the Partnership, based on its pro rata share of the total claims, and
recognized as revenue during the quarter ended March 31, 1998, which is included
in other income.
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.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
At June 30, 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.
In August 1998, the Partnership entered into an agreement for the sale of its
remaining inventory of aircraft parts, with a net carrying value of $0, from the
six disassembled aircraft to Soundair, Inc. The remaining inventory was sold
effective February 1, 1998 for $90,000, less amounts previously received for
sales in the month of February of $4,920. The net purchase price will be paid in
four monthly installments commencing in August.
Partnership Operations
The Partnership recorded net income of $793,949, or $1.20 per limited
partnership unit, for the three months ended June 30, 1998, compared to net
income of $889,991, or $0.76 per limited partnership unit, for the three months
ended June 30, 1997. The Partnership recorded net income of $1,702,229, or $1.30
per limited partnership unit, for the six months ended June 30, 1998, compared
to net income of $2,404,459, or $3.13 per limited partnership unit, for the six
months ended June 30, 1997.
The decrease in year to date net income is primarily due to a decrease in other
income. The Partnership recorded other income of $802,443 during the six months
ended June 30, 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 and six months of 1998,
as compared to the same periods in 1997. This decline was the result of an
absence of rental revenues from the aircraft sold to Triton Aviation Services II
LLC 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 June 30, 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 six months ended June 30, 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 six months
of 1997.
Operating expenses increased during the three and six months ended June 30,
1998, as compared to the same periods in 1997, due to an increase in legal
expenses. During the six months ended June 30, 1998, the Partnership recognized
legal expenses of $124,000 related to the Viscount default and Chapter 11
bankruptcy filing, compared to $60,000 during the same period in 1997. The
10
<PAGE>
Partnership also recognized legal expenses of approximately $57,000 during the
six months ended June 30, 1998, related to the sale of aircraft to Triton in
1997.
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 six months ended June
30, 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 quarter ended March 31, 1998, which is included
in other income.
Liquidity and Cash Distributions
Liquidity - The Partnership received all payments due from its sole lessee, TWA,
during 1998, except for the June 1998 lease payment. On July 2, 1998, the
Partnership received its $935,000 rental payment from TWA that was due on June
27, 1998. This amount was included in rent and other receivables on the balance
sheet at June 30, 1998.
Payments totaling $48,205 and $95,270 were received during the first two
quarters 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 June 30, 1998 and 1997 were $1,874,899, or $3.75 per limited
partnership unit and $4,999,970, or $10.00 per unit, respectively. Cash
distributions to limited partners during the six months ended June 30, 1998 and
1997 were $14,924,194, or $29.85 per limited partnership unit and $8,124,951, or
$16.25 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; and the
receipt of rental payments from TWA.
11
<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 (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 (Form 10-Q) for the period ended March 31, 1998,
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.
Ron Wallace v. Polaris Investment Management Corporation, et al. - On April
23, 1998, the Court consolidated for discovery purposes this action with the
action entitled "Accelerated" High Yield Income Fund II, Ltd., L.P. v. Polaris
Investment Management Corporation, et. al. On July 9, 1998, the Court denied
the defendants' demurrer to dismiss the plaintiffs' second amended complaint.
On July 28, 1998, defendants filed an answer to the second amended complaint.
Viscount Air Services, Inc. (Viscount) Bankruptcy - The trial date of the
lawsuit against BAE Aviation, Inc., STS Services, Inc. and Piping Design
Services, Inc. has been reset for October 27, 1998. First Security Bank, N.A.,
as owner trustee for the Partnership, has filed a motion for summary judgment
on all claims. The motion is set for hearing on August 10, 1998.
Other Proceedings - Item 10 in Part III of the Partnership's 1997 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the period ended March 31,
1998 discuss 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
No reports on Form 8-K were filed by the Registrant during the quarter
for which this report is filed.
12
<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 12, 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)
13
<TABLE> <S> <C>
<ARTICLE>5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 19463980
<SECURITIES> 0
<RECEIVABLES> 935101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 115363309
<DEPRECIATION> 74320776
<TOTAL-ASSETS> 61447316
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 45857415
<TOTAL-LIABILITY-AND-EQUITY> 61447316
<SALES> 0
<TOTAL-REVENUES> 7012235
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5310006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1702229
<INCOME-TAX> 0
<INCOME-CONTINUING> 1702229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1702229
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 0
</TABLE>
