-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DpDNdinRKRuuqVB63qF/zKvXHlwuGngABCF0V3HO763hkGkFawiGJOYwd88HdMwe U57wwU0pzFuEKSdOEsrT9w== 0000948524-04-000009.txt : 20040330 0000948524-04-000009.hdr.sgml : 20040330 20040330123125 ACCESSION NUMBER: 0000948524-04-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS AIRCRAFT INCOME FUND II CENTRAL INDEX KEY: 0000789895 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 942985086 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-02794 FILM NUMBER: 04699175 BUSINESS ADDRESS: STREET 1: 201 HIGH RIDGE ROAD STREET 2: 27TH FL CITY: STAMFORD STATE: CT ZIP: 06927 BUSINESS PHONE: (203) 357- MAIL ADDRESS: STREET 1: 201 HIGH RIDGE ROAD STREET 2: 27TH FL CITY: STAMFORD STATE: CT ZIP: 06927 10-K 1 if2_4q03.txt DECEMBER 31, 2003 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K -------------------- _X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ___ Commission File No.33-2794 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership -------------------------------- (Exact name of registrant as specified in its charter) California 94-2985086 ------------------------------- ----------------------- (State or other jurisdiction of (IRS Employer I.D. No.) incorporation or organization) 201 High Ridge Road, Stamford, Connecticut 06927 ------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 357-3776 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X --- --- No formal market exists for the units of limited partnership interest and therefore there exists no aggregate market value at December 31, 2003. Documents incorporated by reference: None This document consists of 36 pages. PART I Item 1. Business Polaris Aircraft Income Fund II, a California Limited Partnership (PAIF-II or the Partnership), was formed primarily to purchase and lease used commercial jet aircraft in order to provide quarterly distributions of cash from operations, to maximize the residual values of aircraft upon sale and to protect Partnership capital through experienced management and diversification. PAIF-II was organized as a California Limited Partnership on June 27, 1984 and will terminate no later than December 2010. PAIF-II has many competitors in the aircraft leasing market, including airlines, aircraft leasing companies, other limited partnerships, banks and several other types of financial institutions. This market is highly competitive and there is no single competitor who has a significant influence on the industry. In addition to other competitors, Polaris Investment Management Corporation (PIMC or the General Partner), and its affiliates, including GE Capital Aviation Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris Holding Company (PHC) and General Electric Capital Corporation (GE Capital), acquire, lease, finance, sell and remarket aircraft for their own accounts and for existing aircraft and aircraft leasing programs managed by them. Further, GECAS provides a significant range of aircraft management services to third parties, including without limitation, Airplanes Group, together with its subsidiaries (APG), which leases and sells aircraft. Accordingly, in seeking to re-lease and sell its aircraft, the Partnership may be in competition with the General Partner, its affiliates, APG, and other third parties to whom GECAS provides aircraft management services from time to time. As of December 31, 2003, the Partnership had 10 McDonnell Douglas DC-9-30 aircraft held for sale previously on operating lease to TWA Airlines LLC (TWA LLC) a wholly owned subsidiary of American Airlines, Inc. (American). The ten aircraft are being stored in New Mexico and remarketed for sale. Upon completion of such sales, the Partnership plans to liquidate all its assets in an orderly manner, make a final distribution, and terminate the Partnership thereafter; however, it is uncertain when this liquidation will occur. The General Partner is actively seeking buyers for the aircraft; however the actual timing for completing such sales and the prices obtained will depend upon a number of factors outside the control of the General Partner, including market conditions. Thus, there can be no assurance as to either the timing of such sales or whether such sales may be completed on terms deemed favorable to the Partnership. However, the General Partner intends to seek to complete such sales during calendar year 2004 (see Note 13). See additional discussion of TWA LLC and Trans World Airlines, Inc. ("TWA") in Note 5 to the financial statements. Item 2. Properties At December 31, 2003, the Partnership owned 10 McDonnell Douglas DC-9-30 (DC-9-30) aircraft held for sale on the ground in New Mexico. Originally, the portfolio consisted of 30 aircraft. The Partnership sold three DC-9-30 aircraft to Aeroturbine, Inc. in October 2001. The Partnership sold one DC-9-30 aircraft to Amtec Corp. in February 2002 (see Note 13). 2 The following table describes the Partnership's aircraft portfolio at December 31, 2003: Year of Cycles Aircraft Type Serial Number Manufacture As of 12/31/03 - ------------- ------------- ----------- -------------- McDonnell Douglas DC-9-30 47107 1968 88,776 McDonnell Douglas DC-9-30 47135 1968 85,853 McDonnell Douglas DC-9-30 47137 1968 85,637 McDonnell Douglas DC-9-30 47249 1968 91,605 McDonnell Douglas DC-9-30 47251 1968 89,725 McDonnell Douglas DC-9-30 47343 1969 88,520 McDonnell Douglas DC-9-30 47345 1969 86,860 McDonnell Douglas DC-9-30 47357 1969 83,337 McDonnell Douglas DC-9-30 47411 1969 84,397 McDonnell Douglas DC-9-30 47412 1969 83,504 The DC-9-30 is a short- to medium-range twin-engine jet that was introduced in 1967. Providing reliable, inexpensive lift, these aircraft fill thin niche markets, mostly in the United States. Hushkits are available to bring these aircraft into compliance with Stage 3 noise restrictions. Hushkits have been installed on the remaining Partnership aircraft. Certain Airworthiness Directives (ADs) applicable to the DC-9-30 have been issued to prevent fatigue cracks and control corrosion. Item 3. Legal Proceedings Please refer to Note 5 to the Financial Statements for the only legal proceedings in which the Partnership is a party. Other Proceedings - Part III, Item 10 discusses certain other actions which have been filed against the General Partner in connection with certain public offerings, including that of the Partnership. The Partnership is not a party to these actions. Item 4. Submission of Matters to a Vote of Security Holders None. 3 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters a) PAIF-II's Limited Partnership Interests (Units) are not publicly traded. Currently there is no market for PAIF-II's Units and it is unlikely that any market will develop. b) Number of Security Holders: Number of Record Holders Title of Class as of December 31, 2003 ------------------ ---------------------------- Limited Partnership Interest: 13,194 General Partnership Interest: 1 c) Dividends: The Partnership distributed cash to partners on a quarterly basis beginning July 1986. As of January 2002, the Partnership switched to making distributions on an annual basis. Cash distributions to Limited Partners during 2003 and 2002 totaled $6,248,876 and $4,999,659, respectively. Cash distributions per Limited Partnership Unit were $12.50 and $10.00 in 2003 and 2002, respectively. 4 Item 6. Selected Financial Data
For the years ended December 31, -------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Revenues $ 2,305,349 $ 5,912,312 $ 10,034,851 $ 13,729,468 $ 13,559,480 Net Income (Loss) $ (398,226) $ 1,813,623 $ 4,325,509 $ (7,634,415) $ 6,622,183 Net Income (Loss) Allocated to Limited Partners $ (996,571) $ 1,282,066 $ 3,142,429 $ (8,317,954) $ 5,742,360 Net Income (Loss) per Limited Partnership Unit $ (1.99) $ 2.56 $ 6.29 $ (16.64) $ 11.49 Cash Distributions per Limited Partnership Unit $ 12.50 $ 10.00 $ 22.80 $ 15.20 $ 16.40 Limited Partnership Units 499,757 499,910 499,966 499,973 499,973 Amount of Cash Distributions Included Above Representing a Return of Capital on a Generally Accepted Accounting Principle Basis per Limited Partnership Unit* $ 0.00 $ 0.00 $ 0.00 $ 1.46** $ 16.40 Total Assets $ 5,700,559 $ 13,905,238 $ 19,794,199 $ 31,992,732 $ 51,760,515 Partners' Capital $ 5,455,112 $ 12,796,533 $ 16,538,087 $ 24,878,560 $ 40,956,964
* 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. ** During 2000, total cumulative distributions, per unit, reached $500, the initial capital contribution per unit, such that all further distributions would be considered a return on capital. 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies In response to the Securities and Exchange Commission's (SEC) Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we identified the most critical accounting principles upon which our financial reporting depends. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to lease revenue recognition, depreciation policies, and valuation of aircraft. We state these accounting policies in the notes to the financial statements and in relevant sections in this discussion and analysis. Business Overview At December 31, 2003, Polaris Aircraft Income Fund II (PAIF-II or the Partnership) owned a portfolio of 10 used McDonnell Douglas DC-9-30 commercial jet aircraft (DC-9-30) out of its original portfolio of 30 aircraft. These DC-9-30 aircraft were being stored in New Mexico and were being marketed for sale. The Partnership sold three DC-9-30 aircraft to Aeroturbine, Inc. in October 2001. The Partnership sold one DC-9-30 aircraft to Amtec Corporation in February 2002 that resulted in a net gain of $65,000 to the Partnership. On November 26, 2003, a Letter of Intent was signed by Newjet Corporation to purchase four of the DC-9-30 aircraft owned by the Partnership. In January 2004, the Partnership entered into a sale and purchase agreement with Newjet Corporation and on February 9, 2004 the Partnership received proceeds of $450,000 for the sale of the four aircraft. The Partnership plans to liquidate all its assets in an orderly manner, make a final distribution, and terminate the Partnership thereafter; however, it is uncertain when this liquidation will occur. The General Partner is actively seeking buyers for the aircraft; however the actual timing for completing such sales and the prices obtained will depend upon a number of factors outside the control of the General Partner, including market conditions. Thus, there can be no assurance as to either the timing of such sales or whether such sales may be completed on terms deemed favorable to the Partnership. However, the General Partner intends to seek to complete such sales during calendar year 2004. Industry Update Demand for Aircraft - At year end 2003, there were approximately 17,300 western built passenger and freighter jet aircraft in the world fleet. As a result of a slowdown in travel that began in the spring of 2001 as well as the large shift in travel levels in the wake of the September 11th tragedy, 2,125 of those aircraft are currently stored or out of active service. Air travel as measured by global revenue passenger miles for 2003 is expected to be approximately 1% less than the poor results from the year 2002 when the final numbers are compiled. The traffic levels in 2004 are expected to show growth from this low base as evidenced by growth shown in the fourth quarter 2003. The war with Iraq, SARS and continued threat of global terrorism impacted 2003 traffic levels, particularly through spring and summer. While production rates are relatively low and retirements are fairly high, the number of surplus aircraft is still at record levels. The unprecedented, sustained and worldwide decrease in demand has had profound implications to airlines as well as aircraft owners and manufacturers. Network airlines are still experiencing losses, and are struggling to match capacity and pricing to demand. Manufacturers have attempted to deliver the aircraft that were in the backlog and the modest orders in 2002-2003, and achieve some 6 stability in their production lines. Trading values and lease rates have declined further, particularly on older aircraft as the demand shock took a cyclical downturn into a deep trough. As manufacturers reduce production, airlines accelerate retirements of older aircraft, and as a recovering air travel market begins to reduce the aircraft surplus, this cyclical downturn is expected to reverse itself and the market is expected to return to a stable condition. This will take more time as manufacturers cannot drop production overnight and owners will be reluctant to scrap aircraft that they own despite the lack of a current market for them. Low cost carriers were able to prosper in this environment of commoditized airfare pricing. The bulk of the orders that were actually placed during 2002-2003 came from low cost carriers such as Easyjet. Asia is recovering well from the SARS epidemic and is now showing traffic growth again after a sharp decline for carriers in affected areas last year. Maintenance of Aging Aircraft - The process of aircraft maintenance begins at the aircraft design stage. For aircraft operating under Federal Aviation Administration (FAA) regulations, a review board consisting of representatives of the manufacturer, FAA representatives and operating airline representatives is responsible for specifying the aircraft's initial maintenance program. The General Partner understands that this program is constantly reviewed and modified throughout the aircraft's operational life. Since 1988, the FAA, working with the aircraft manufacturers and operators, has issued a series of Airworthiness Directives (ADs), which mandate that operators conduct more intensive inspections, primarily of the aircraft fuselages. The results of these mandatory inspections may result in the need for repairs or structural modifications that may not have been required under pre-existing maintenance programs. Under the Previous Leases (see Note 5 to the financial statements), TWA was generally required to return the aircraft in airworthy condition including compliance with all ADs for which action is mandated by the FAA during the lease term. Three of the Partnership's Aircraft were returned by TWA without meeting the return conditions specified in the Previous Leases, and the return conditions under the modified lease terms and conditions for the Partnership's remaining Aircraft were quite limited. The costs of compliance with FAA maintenance standards caused the Partnership to sell for scrap value the three Aircraft being returned by TWA under the Rejected Leases (see Note 5), and the aircraft returned in 2001 was likewise marketed at scrap value. Similarly, such costs will likely cause the Partnership to sell for scrap value the Partnership's ten remaining Aircraft. Aircraft Noise - Another issue, which has affected the airline industry, is that of aircraft noise levels. The FAA has categorized aircraft according to their noise levels. Stage 1 aircraft, which have the highest noise level, are no longer allowed to operate from civil airports in the United States. Stage 2 aircraft meet current FAA requirements, subject to the phase-out rules discussed below. Stage 3 aircraft are the most quiet and are the standard for all new aircraft. Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3 requirements, are currently available for the Partnership's aircraft and were added to the Partnership's aircraft in 1996 and 1997. Other countries have also adopted noise policies. The European Union (EU) adopted a non-addition rule in 1989, which directed each member country to pass the necessary legislation to prohibit airlines from adding Stage 2 aircraft to their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the year 2002. The International Civil Aviation Organization has also endorsed the phase-out of Stage 2 aircraft on a world-wide basis by the year 2002. Legislation had been drafted and was under review by the EU for sometime to 7 adopt anti-hushkitting regulations within member states. The legislation sought to ban hushkitted aircraft from being added to member states registers and precluded all operation of hushkitted aircraft within the EU after certain specific dates. Due to criticism by the US Government, the enactment of this legislation has been withheld. However, the effect of this proposal has been to reduce the demand for hushkitted aircraft within the EU and its neighboring states, including the former Eastern Block states. Partnership Operations The Partnership reported a net loss of $398,226 which resulted in a net loss per Limited Partnership unit of $1.99 for the year ended December 31, 2003, as compared to net income of $1,813,623 and $2.56 per Limited Partnership unit, respectively, for the year ended December 31, 2002, and net income of $4,325,509 and $6.29 per Limited Partnership unit, respectively, for the year ended December 31, 2001. Variances in net income may not correspond to variances in net income per Limited Partnership unit due to the allocation of components of income and loss in accordance with the Partnership Agreement. The decrease in net income in 2003, as compared to 2002, is primarily due to decreases in rental and interest income, and an absence of any recognized gains on sale of aircraft, along with an increase in operating and administration expenses, partially offset by decreases in depreciation and management fees to the General Partner, as discussed below. The decrease in net income in 2002, as compared to 2001, is primarily due to decreases in rental and interest income, partially offset by increases in gain on sale of aircraft inventory and other income and decreases in depreciation, legal, operating, interest and administration and other expenses. Rent from operating leases decreased in 2003, as compared to 2002, primarily due to fewer aircraft on lease. Additionally, the decrease in rent from operating leases was also caused by lower recognition of deferred revenue in 2003, as compared to 2002. Rental income decreased in 2002, as compared to 2001, primarily due to the lower lease rates and fewer aircraft on lease as a result of the 2001 TWA bankruptcy. Additionally, the decrease in rent from operating leases was also caused by lower recognition of deferred revenue. As discussed in Note 5 to the financial statements, the deferred revenue balance existing at the time of the lease revisions in March 2001 was recognized over the new lease terms for the Assumed Leases, while it was recognized upon lease rejection for the three Rejected Aircraft. Interest income decreased in 2003 as compared to 2002, and in 2002, as compared to 2001, primarily due to lower interest rates and lower average cash balances. There were no sales of aircraft in 2003. In 2002, a gain of $65,000 was recorded from the sale of an aircraft. In 2001, three aircraft were sold at their book value resulting in no overall gain or loss. Lessee return condition settlements increased during 2003, as compared to 2002, and in 2002, as compared to 2001. The increases during 2003, and 2002, are primarily due to the number of aircraft being returned as the lease terms expire. The amount of return condition settlement for each aircraft can vary significantly due to the fact that TWA LLC is required to return the installed engines on each aircraft with a target level of average cycle life remaining to replacement for all life limited parts. If the average cycle life remaining on the installed engines on an aircraft is below the target level, a financial adjustment is payable by TWA LLC to the Partnership (but no payment will be owed by the Partnership to TWA LLC if cycle life remaining at return exceeds the target level). 8 Lessee settlement income increased during 2003, as compared to 2002, and in 2002 as compared to 2001. The payments received during 2003 resulted from two distributions by TWA's bankrupt estate representing a portion of the $422,989 administrative rent claims initially filed by the Partnership pursuant to the bankruptcy. The payment made during 2002 represents settlement of an administrative claim filed in the TWA bankruptcy proceeding in connection with certain legal expenses incurred by the Partnership. Note 5 to the financial statements includes a further discussion of these items. The payment in 2001 was the Partnership's pro rata share of the final distribution from Braniff's bankrupt estate in respect of the unsecured claims of the Partnership and other affiliates of PIMC. There was an absence of other income in 2003 and 2002, as compared to 2001, due to the receipt of default interest in 2001 from TWA resulting from late rental payments subsequent to the TWA bankruptcy filing. Note 5 to the financial statements includes a further discussion of this item. Depreciation expense decreased in 2003, as compared to 2002, and in 2002, as compared to 2001 primarily as a result of fewer aircraft remaining on lease and being depreciated; however, as discussed below, 2003 depreciation expense also includes a fair market adjustment for aircraft held for sale as compared to 2002, which had no such impairment expense. The Partnership periodically reviews the estimated realizability of the residual values at the projected end of each aircraft's economic life based on estimated fair values at that time. The Partnership's future earnings are impacted by the net effect of the adjustments to the carrying value of the aircraft (which has the effect of decreasing future depreciation expense), and the downward adjustments to the estimated residual values (which has the effect of increasing future depreciation expense). Aircraft held for sale are carried at the lower of cost or fair value less cost to sell. During the year ended December 31, 2003, the Partnership recognized additional depreciation expense of $804,293, or $1.61 per Limited Partnership Unit, on aircraft held for sale due to changes in estimated fair market values. No such adjustments to market value through additional depreciation expense were made during 2002. If the projected net cash flow for each aircraft on operating lease (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) is less than the carrying value of the aircraft, the Partnership recognizes an impairment loss for the amount by which the carrying amount exceeds its fair value. The impairment loss is recognized as depreciation expense. The Partnership recognized impairment losses aggregating approximately $200,000, or $0.41 per Limited Partnership unit, in 2001, as increased depreciation expense as a result of the TWA bankruptcy and the modified lease terms with TWA LLC. The Partnership decided to accept American's proposal to take assignment of eleven of the fourteen existing leases on modified terms and conditions. This acceptance constituted an event that required the Partnership to review the aircraft carrying values pursuant to Statement of Financial Accounting Standards 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (as amended by SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"). As a result of a review of the aircraft, future cash flows expected to be derived from the aircraft over projected lease terms were less than the carrying values of the aircraft, so the Partnership has recorded impairment losses as of September 30, 2001. Management believes the assumptions related to fair value of impaired assets represented the best estimates based on reasonable and supportable assumptions and projections. Management fees to the General Partner decreased in 2003, as compared to 2002, primarily as a result of fewer aircraft being on lease during 2003 and all aircraft being off-lease as of December 31, 2003. Management fees to the General 9 Partner increased slightly in 2002, as compared to 2001, primarily as a result of the deferred management fees being recognized for three rejected leases and leases expiring during 2001 due to the TWA bankruptcy. There was no interest expense in 2003 and 2002 due to outstanding debt being fully repaid in 2001. The interest expense in 2001 was from debt incurred to install hushkits on the Partnership's aircraft. In November 1996 and February 1997, hushkits were installed on the 14 Partnership aircraft. The leases then in place for these 14 aircraft were then extended for a period of eight years. The rent payable by TWA under the leases was 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. Operating expenses increased during 2003, as compared to 2002, primarily due to maintenance and storage related costs associated with the aircraft as they come off lease and are prepared for and kept in storage while being held for sale. During 2003, six aircraft were returned and prepared for storage. As of December 31, 2003, ten aircraft remain in storage while being marketed for sale. Operating expense decreased in 2002, as compared to 2001, primarily due to reduced costs associated with the storage of aircraft from the time of their return to the time of their sale. During 2002, four aircraft were prepared for storage and stored for an average of 5 months each. During 2001, four aircraft were prepared for storage and stored for an average of 6 months each at a facility that was more expensive than the facility aircraft are now flown to at lease expiration. Legal expenses were significantly higher in 2001, as compared to 2003 and 2002, primarily due to the costs incurred in connection with the TWA bankruptcy. Administration and other expense increased slightly during 2003, as compared to 2002, primarily due to increased audit fees and printing and postage costs. Administration and other expenses decreased in 2002, as compared to 2001, primarily due to costs incurred in 2001 that were related to the TWA bankruptcy. This includes audit fees, as well as additional printing and postage expenses. Liquidity and Cash Distributions Liquidity - The Partnership received all rent payments due in 2003 and 2002 from its sole lessee, TWA Airlines LLC for the aircraft while on lease. As of December 31, 2003, no further rent payments will be received since all lease terms have expired. PIMC, the General Partner, has determined that cash reserves be maintained as a prudent measure to ensure that the Partnership has available funds for winding up the affairs of the Partnership and for other contingencies. The Partnership plans to liquidate all its assets in an orderly manner, make a final distribution, and terminate the Partnership thereafter; however, it is uncertain when this liquidation will occur. The General Partner is actively seeking buyers for the aircraft; however the actual timing for completing such sales and the prices obtained will depend upon a number of factors outside the control of the General Partner, including market conditions. Thus, there can be no assurance as to either the timing of such sales or whether such sales may be completed on terms deemed favorable to the Partnership. However, the General Partner intends to seek to complete such sales during calendar year 2004. 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 were $6,248,876, $4,999,659 and $11,399,384, in 2003, 2002 and 2001, respectively. Cash 10 distributions per Limited Partnership unit were $12.50, $10.00 and $22.80, in 2003, 2002 and 2001, respectively. The General Partner has determined that it is in the best interests of the Partnership to suspend any further cash distributions until the Partnership is in a position to dissolve, wind up and terminate, and make a final distribution of its remaining cash. In reaching this conclusion, the General Partner considered the anticipated costs of storing and insuring the aircraft pending sale, the anticipated costs of marketing and preparing the aircraft for sale, the anticipated costs of winding up the Partnership's business, the uncertainty as to the period of time required to sell the aircraft and wind up the Partnership, the uncertainty as to the terms on which the Partnership's aircraft may be sold and the desirability of maintaining a prudent level of cash reserves for Partnership needs and contingencies. The Partnership does not have any material off balance sheet commitments or obligations. Sale of Aircraft On October 19, 2001, PIMC, on behalf of the Partnership, sold three DC-9-30 aircraft. for $565,000 cash. The Partnership recognized neither a loss nor a gain on the transaction due to an impairment expense being taken during 2001 in anticipation of the sales. On February 13, 2002, the General Partner sold one DC-9-30 for $250,000, resulting in a gain of $65,000. On November 26, 2003, a Letter of Intent was signed by Newjet Corporation to purchase four of the DC-9-30 aircraft owned by the Partnership. In January 2004, the Partnership entered into a sale and purchase agreement with Newjet Corporation and on February 9, 2004, the Partnership received proceeds of $450,000 for the sale of the four aircraft. Aircraft Impairment Assessment 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 or decrease in the projected remaining economic life, the depreciation expense over the projected remaining economic life of the aircraft is increased. If the projected net cash flow for each aircraft on operating lease (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) is less than the carrying value of the aircraft, an impairment loss is recognized for the amount by which the carrying amount exceeds its fair values. The Partnership uses available information and estimates related to the Partnership's aircraft, to determine an estimate of fair value to measure impairment as required by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144) and to determine residual values. The estimates of fair value can vary dramatically depending on the condition of the specific aircraft and the actual marketplace conditions at the time of the actual disposition of the asset. If assets are deemed impaired, there could be substantial write-downs in the future. Aircraft held for sale are carried at the lower of cost or fair value less cost to sell. During the year ended December 31, 2003, the Partnership recognized additional depreciation expense of $804,293, or $1.61 per Limited Partnership Unit, on aircraft held for sale due to decreases in estimated fair market values. The Partnership made downward adjustments to the estimated residual value of certain of its aircraft on-lease as of September 30, 2001. This decrease reflected the weakening used aircraft market and reflected the additional facts 11 and circumstances resulting from the advanced negotiations with a buyer, which resulted in a sale of three held for sale aircraft on October 19, 2001. As a result, the Partnership decreased the residual values as of September 30, 2001 to reflect the depressed market. This decrease in residual values was reflected in greater depreciation expense over the remaining life of the aircraft. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The following discussion about market risk disclosures involves forward-looking statements. Market risks may include exposure to changes in equity prices, interest rates and foreign currency exchange rates. Actual results could differ materially from those projected in the forward-looking statements. The Partnership does not use derivative financial instruments for speculative, trading or any other purpose. Equity Price Risk - The potential for changes in the market value of marketable securities is referred to as "market risk". The Partnership does not own any marketable securities. Interest Rate Risk - Exposure to market risk resulting from changes in interest rates relates primarily to the Partnership's lease portfolio. Income and cash flows would not be impacted by changes in the general level of U.S. interest rates since the Partnership's leases are fixed rate. The General Partner would not expect an immediate 10% increase or decrease in current interest rates to have a material effect on the fair market value of the Partnership's lease portfolio. Foreign Currency Risk - The Partnership does not have any foreign currency denominated assets or liabilities or purchase commitments and have not entered into any foreign currency contracts. Accordingly, the Partnership is not exposed to fluctuations in foreign currency exchange rates. 12 Item 8. Financial Statements and Supplementary Data POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003 AND 2002 AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 TOGETHER WITH THE REPORT OF INDEPENDENT AUDITORS 13 REPORT OF INDEPENDENT AUDITORS The Partners Polaris Aircraft Income Fund II We have audited the accompanying balance sheets of Polaris Aircraft Income Fund II (a California Limited Partnership), as of December 31, 2003 and 2002, and the related statements of operations, changes in partners' capital (deficit) and cash flows for years then ended. These financial statements are the responsibility of the General Partner. Our responsibility is to express an opinion on these financial statements based on our audits. The 2001 financial statements were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 1, 2002. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the financial position of Polaris Aircraft Income Fund II as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP San Francisco, California, February 13, 2004 14 This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the Polaris Aircraft Income Fund II's filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Polaris Aircraft Income Fund II, A California Limited Partnership: We have audited the accompanying balance sheets of Polaris Aircraft Income Fund II, A California Limited Partnership as of December 31, 2001 and 2000, and the related statements of operations, changes in partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the General Partner. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Polaris Aircraft Income Fund II, A California Limited Partnership as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP San Francisco, California, February 1, 2002 (except with respect to the matter discussed in Note 12, as to which the date is February 13, 2002) 15 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership BALANCE SHEETS DECEMBER 31, 2003 AND 2002 2003 2002 ---- ---- ASSETS: CASH AND CASH EQUIVALENTS $ 4,649,947 $ 10,605,028 RENT AND OTHER RECEIVABLES 1,612 241,560 AIRCRAFT HELD FOR SALE 1,049,000 740,000 AIRCRAFT ON OPERATING LEASE, net of accumulated depreciation of $0 in 2003 and $46,906,230 in 2002 -- 2,318,650 ------------ ------------ Total Assets $ 5,700,559 $ 13,905,238 ============ ============ LIABILITIES AND PARTNERS' CAPITAL (DEFICIT): PAYABLE TO AFFILIATES $ 120,867 $ 81,151 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 124,580 551,766 DEFERRED INCOME -- 475,788 ------------ ------------ Total Liabilities 245,447 1,108,705 ------------ ------------ PARTNERS' CAPITAL (DEFICIT): General Partner (3,651,782) (3,555,808) Limited Partners, 499,757 units (499,910 in 2002) issued and outstanding 9,106,894 16,352,341 ------------ ------------ Total Partners' Capital 5,455,112 12,796,533 ------------ ------------ Total Liabilities and Partners' Capital $ 5,700,559 $ 13,905,238 ============ ============ The accompanying notes are an integral part of these statements. 16 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 2003 2002 2001 ---- ---- ---- REVENUES: Rent from operating leases $ 1,929,121 $ 5,424,084 $ 9,341,022 Interest 49,026 158,165 647,909 Gain on sale of aircraft inventory -- 65,000 -- Lessee return condition settlements 215,460 191,615 4,864 Lessee settlement 111,742 73,448 8,530 Other -- -- 32,526 ----------- ----------- ----------- Total Revenues 2,305,349 5,912,312 10,034,851 ----------- ----------- ----------- EXPENSES: Depreciation 2,009,650 3,505,903 4,616,341 Management fees to General Partner 50,609 126,059 124,065 Interest -- -- 13,525 Operating 347,040 178,072 376,626 Legal 16,110 24,483 229,465 Administration and other 280,166 264,172 349,320 ----------- ----------- ----------- Total Expenses 2,703,575 4,098,689 5,709,342 ----------- ----------- ----------- NET INCOME (LOSS) $ (398,226) $ 1,813,623 $ 4,325,509 =========== =========== =========== NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 598,345 $ 531,557 $ 1,183,080 =========== =========== =========== NET INCOME (LOSS) ALLOCATED TO THE LIMITED PARTNERS $ (996,571) $ 1,282,066 $ 3,142,429 =========== =========== =========== NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ (1.99) $ 2.56 $ 6.29 =========== =========== =========== UNITS USED TO CALCULATE NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT 499,757 499,910 499,966 The accompanying notes are an integral part of these statements. 17 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 General Limited Partner Partners Total ------- -------- ----- Balance, December 31, 2000 $ (3,448,329) $ 28,326,889 $ 24,878,560 Net income 1,183,080 3,142,429 4,325,509 Cash distributions to partners (1,266,598) (11,399,384) (12,665,982) ------------ ------------ ------------ Balance, December 31, 2001 (3,531,847) 20,069,934 16,538,087 Net income 531,557 1,282,066 1,813,623 Cash distributions to partners (555,518) (4,999,659) (5,555,177) ------------ ------------ ------------ Balance, December 31, 2002 (3,555,808) 16,352,341 12,796,533 Net income (loss) 598,345 (996,571) (398,226) Cash distributions to partners (694,319) (6,248,876) (6,943,195) ------------ ------------ ------------ Balance, December 31, 2003 $ (3,651,782) $ 9,106,894 $ 5,455,112 ============ ============ ============ The accompanying notes are an integral part of these statements. 18 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001 ---- ---- ---- OPERATING ACTIVITIES: Net income (loss) $ (398,226) $ 1,813,623 $ 4,325,509 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 2,009,650 3,505,903 4,616,341 Gain on sale of aircraft inventory -- (65,000) -- Changes in operating assets and liabilities: Decrease in rent and other receivables 239,948 163,262 447,796 Decrease in other assets -- -- 13,915 Increase (decrease) in payable to affiliates 39,716 (556,500) 342,317 Increase (decrease) in accounts payable and accrued liabilities (427,186) (66,823) 12,693 Decrease in deferred income (475,788) (1,524,084) (3,719,682) ------------ ------------ ------------ Net cash provided by operating activities 988,114 3,270,381 6,038,889 ------------ ------------ ------------ INVESTING ACTIVITIES: Net proceeds from sale of aircraft inventory -- 250,000 565,000 ------------ ------------ ------------ Net cash provided by investing activities -- 250,000 565,000 ------------ ------------ ------------ FINANCING ACTIVITIES: Principal payments on notes payable -- -- (493,388) Cash distributions to partners (6,943,195) (5,555,177) (12,665,982) ------------ ------------ ------------ Net cash used in financing activities (6,943,195) (5,555,177) (13,159,370) ------------ ------------ ------------ CHANGES IN CASH AND CASH EQUIVALENTS (5,955,081) (2,034,796) (6,555,481) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,605,028 12,639,824 19,195,305 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,649,947 $ 10,605,028 $ 12,639,824 ============ ============ ============ Supplemental Disclosure of Non-Cash Investing - --------------------------------------------- Activities: - ---------- Reclassification of aircraft on operating leases to aircraft held for sale $ 1,025,000 $ 740,000 $ 185,000 ============ ============ ============
The accompanying notes are an integral part of these statements. 19 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 Note 1. Organization and the Partnership Polaris Aircraft Income Fund II, a California Limited Partnership (PAIF-II or the Partnership) was formed on June 27, 1984 for the purpose of acquiring and leasing aircraft. The Partnership will terminate no later than December 2010. Upon organization, both the General Partner of the Partnership (the General Partner) and the initial Limited Partner contributed $500. The Partnership recognized no profits or losses during the periods ended December 31, 1984 and 1985. The offering of Limited Partnership units terminated on December 31, 1986, at which time the Partnership had sold 499,997 units of $500, representing $249,998,500. All partners were admitted to the Partnership on or before December 1, 1986. During January 1998, 24 units were redeemed by the Partnership in accordance with section 18 of the Limited Partnership Agreement. During 2002 and 2003, 56 and 153 units were abandoned, respectively. At December 31, 2003, there were 499,757 units outstanding. As of December 31, 2003, the Partnership owned ten aircraft, which are being marketed for sale. Upon completion of such sales, the Partnership plans to liquidate all its assets in an orderly manner, make a final distribution, and terminate the Partnership thereafter; however, it is uncertain when this liquidation will occur. The General Partner is actively seeking buyers for the aircraft; however the actual timing for completing such sales and the prices obtained will depend upon a number of factors outside the control of the General Partner, including market conditions. Thus, there can be no assurance as to either the timing of such sales or whether such sales may be completed on terms deemed favorable to the Partnership. However, the General Partner intends to seek to complete such sales during calendar year 2004 (see Note 13). Polaris Investment Management Corporation (PIMC), the sole General Partner of the Partnership, supervises the day-to-day operations of the Partnership. PIMC is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC). Polaris Holding Company (PHC) is the parent company of PALC. General Electric Capital Corporation (GE Capital), an affiliate of General Electric Company, owns 100% of PHC's outstanding common stock. PIMC has entered into a services agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc. (GECAS). Allocations to related parties are described in Notes 8 and 9. Note 2. Accounting Principles and Policies Accounting Method - The Partnership maintains its accounting records, and prepares its financial statements on the accrual basis of accounting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The most significant estimates with regard to these financial statements are the residual values of the aircraft, the useful lives of the aircraft and the estimated amount and timing of cash-flows associated with each aircraft which are used to determine impairment, if any. 20 Cash and Cash Equivalents - This includes deposits at banks and investments in money market funds. Cash and cash equivalents are stated at cost, which approximates fair value. 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 or the end of the remaining lease term if beyond the 30 year life. 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 projected end of each aircraft's economic life. For any downward adjustment in estimated residual value or decrease in the projected remaining economic life, the depreciation expense over the projected remaining economic life of the aircraft will be increased. If the projected net cash flow for each aircraft on lease (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) is less than the carrying value of the aircraft, an impairment loss is recognized. Pursuant to Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), as discussed in Note 3, measurement of an impairment loss will be based on the "fair value" of the asset as defined in the statement. Aircraft held for sale are carried at the lower of cost or fair value less cost to sell. 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 or the remaining lease term, if shorter. These costs are also subject to periodic impairment evaluation as discussed above. Operating Leases - The aircraft leases are accounted for as operating leases. Lease revenues are recognized in equal installments over the terms of the leases. Due to the fact that the Partnership received greater payments in the beginning of the lease than at the end of the lease under the terms of the leases in effect at the time of the TWA bankruptcy filing (the Previous Leases) (See Note 5), this has resulted in deferred income on the balance sheet. As of December 31, 2003, deferred income and deferred management fees were fully amortized as all remaining lease terms ended during 2003. As of December 31, 2003, there are no leases in place. Operating Expenses - Operating expenses include costs incurred to maintain, insure, lease and sell the Partnership's aircraft, including costs related to lessee defaults and costs of disassembling aircraft inventory. Net Income (Loss) Per Limited Partnership Unit - Net income per Limited Partnership unit is based on the Limited Partners' share of net income or loss, allocated in accordance with the Partnership Agreement, and the number of units outstanding of 499,757 for the year ended December 2003, 499,910 for the year ended December 2002 and 499,966 for the year ended December 2001. Income Taxes - The Partnership files federal and state information income tax returns only. Taxable income or loss is reportable by the individual partners. Fair Value of Financial Instruments - The recorded amounts of the Partnership's cash and cash equivalents, rent and other receivables, payable to affiliates, accounts payable and accrued liabilities as of December 31, 2003 approximate 21 their fair value because of the liquidity and/or short-term maturity of these instruments. Reclassification - Certain 2002 and 2001 amounts have been reclassified to conform to the 2003 presentation. These reclassifications had no impact on previously reported net income or partners' capital. Note 3. Aircraft At December 31, 2003, the Partnership owned a portfolio of 10 used commercial jet aircraft out of its original portfolio of 30 aircraft, which were acquired, leased or sold as discussed below. The remaining 10 aircraft are off lease and held for sale as of December 31, 2003. The aircraft leases were net operating leases, requiring the lessees to pay all operating expenses associated with the aircraft during the lease term. The leases generally stated a minimum acceptable return condition for which the lessee is liable under the terms of the lease agreement. The following table describes the Partnership's aircraft portfolio at December 31, 2003: Year of Aircraft Type Serial Number Manufacture - ------------- ------------- ----------- McDonnell Douglas DC-9-30 47107 1968 McDonnell Douglas DC-9-30 47135 1968 McDonnell Douglas DC-9-30 47137 1968 McDonnell Douglas DC-9-30 47249 1968 McDonnell Douglas DC-9-30 47251 1968 McDonnell Douglas DC-9-30 47343 1969 McDonnell Douglas DC-9-30 47345 1969 McDonnell Douglas DC-9-30 47357 1969 McDonnell Douglas DC-9-30 47411 1969 McDonnell Douglas DC-9-30 47412 1969 Initially there were 17 McDonnell Douglas DC-9-30 and one McDonnell Douglas DC-9-40 which were acquired for $122,222,040 during 1986, and leased to Ozark Air Lines, Inc. (Ozark). In 1987, Trans World Airlines, Inc. (TWA) merged with Ozark and assumed the leases. The leases were modified and extended in 1991. Two of the aircraft had a lease expiration date of February 1998 and two other aircraft had a lease expiration date of November 1998. These four aircraft were sold to Triton Aviation Services II LLC in June 1997. The leases for 11 of the aircraft that previously had lease expiration dates in 1998 were extended until November 2004. The leases for three of the aircraft that previously had lease expiration dates in 1998 were extended in February 1997 for eight years until February 2005. As a result of the bankruptcy of TWA in 2001, modified terms and conditions were accepted that were substantially less favorable to the Partnership than the terms and conditions specified in the Previous Leases (see Note 5 to the financial statements). In particular, rather than returning the aircraft at the previously scheduled expiry date under the Previous Leases, TWA LLC, who, in 2001, assumed 11 of the 14 then existing TWA leases of the Partnership's aircraft under modified terms, would return each aircraft at the time when such aircraft required a heavy maintenance check of the airframe, provided that the aggregate average number of months for which all 11 aircraft were on lease to TWA LLC was not less than 22 months from and after March 12, 2001. In addition, TWA LLC reduced the rental rate for each of the aircraft to $40,000 per month. Further, at lease expiry, TWA LLC was required to return each airframe in a "serviceable" condition, rather than being required to meet the more stringent maintenance requirements of the Previous Leases. Finally, TWA LLC 22 was required to return the installed engines on each aircraft with a target level of average cycle life remaining to replacement for all life limited parts of 25%. If the average cycle life remaining on the installed engines on an aircraft was below the 25% target level, a financial adjustment was payable by TWA LLC to the Partnership (but no payment was owed by the Partnership to TWA LLC if cycle life remaining at return exceeded the target level). For five of the six aircraft returned to the Partnership during 2003, $215,460 was paid by the lessee for engines being returned below such target levels. For three of the four aircraft returned to the Partnership during 2002, $191,615 was paid by the lessee for engines being returned below such target levels As discussed in Note 1, the Partnership periodically reviews the estimated realizability of the residual values at the projected end of each aircraft's economic life. The Partnership's future earnings are impacted by the net effect of the adjustments to the carrying values of the aircraft (which has the effect of decreasing future depreciation expense) and the downward adjustments to the estimated residual values (which has the effect of increasing future depreciation expense). Aircraft held for sale are carried at the lower of cost or fair value less cost to sell. During the year ended December 31, 2003, the Partnership recognized additional depreciation expense of $804,000 on aircraft held for sale due to changes in estimated fair market values. During the quarter ended September 30, 2003, the Partnership had reduced the carrying value of all the aircraft held for sale by a total of $853,000 through depreciation expense; however, during the three months ended December 31, 2003 depreciation expense was reduced and carrying value increased by $49,000 for four of the aircraft, based on their estimated future net selling price. Specifically, on November 26, 2003, a Letter of Intent was signed by Newjet Corporation to purchase four of the DC-9-30 aircraft owned by the Partnership for a total purchase price of $450,000. In January 2004, the Partnership entered into a Purchase and Sale agreement with Newjet Corporation and on February 9, 2004, the Partnership received proceeds of $450,000 for the sale of the four aircraft. Management believes the assumptions related to the fair value of impaired assets represents the best estimates based on reasonable and supportable assumptions and projections. The Partnership made an adjustment to reduce the estimated net book values and residual values of its aircraft on-lease as of September 30, 2001 as a result of the anticipated sale of three aircraft. The Partnership recognized an impairment loss as increased depreciation expense in 2001 of approximately $200,000 or $0.41 per Limited Partnership unit. The Partnership recorded impairment losses on aircraft that were deemed impaired to the extent that the carrying value exceeded the fair value. For aircraft held for sale, the Partnership records losses to the extent that carrying value exceeds the fair value less cost to sell. Management believes the assumptions related to the fair value of impaired assets represented the best estimates based on reasonable and supportable assumptions and projections. Note 4. Sale of Aircraft On October 19, 2001, PIMC, on behalf of the Partnership, sold three DC-9-30 aircraft for $565,000 cash. The Partnership recognized neither a loss nor a gain on the transaction due to an impairment expense being taken on these aircraft during 2001 in anticipation of the sales. On February 13, 2002, the General Partner sold one DC-9-30 for $250,000 for a gain of $65,000. During the year ended December 31, 2003, the inventory of spare parts owned by the Partnership carried at a net book value of zero were sold; no proceeds were received for this sale. 23 Note 5. TWA Bankruptcy Filing and Transaction with American Airlines Trans World Airlines, Inc. (TWA) filed a voluntary petition in the United States Bankruptcy Court of the District of Delaware (the Bankruptcy Court) for reorganization relief under Chapter 11 of the Bankruptcy Code on January 10, 2001. One day prior to filing its bankruptcy petition, TWA entered into an Asset Purchase Agreement with American Airlines, Inc. (American) that provided for the sale to American of substantially all of TWA's assets and permitted American to exclude certain TWA contracts (including aircraft leases) from the assets of TWA to be acquired by American. On February 28, 2001, American presented the General Partner with a written proposal to assume, on modified terms and conditions, eleven of the fourteen then existing leases (collectively, the Previous Leases). The General Partner decided to accept American's proposal. On April 9, 2001, the American acquisition of the selected TWA assets was consummated. As a result of this closing, TWA LLC, assumed the Previous Leases applicable to eleven of the fourteen Aircraft, and simultaneously, such Previous Leases were amended to incorporate modified terms (as so assumed and amended, the Assumed Leases). The Assumed Leases were substantially less favorable to the Partnership than the Previous Leases. In particular, the monthly rental rate for each aircraft was reduced from $85,000 to $40,000, and the reduced rate was made effective as of March 12, 2001 by a rent credit granted to TWA LLC for the amount of rent above $40,000 previously paid by TWA in respect of the period from and after March 12, 2001. In addition, the term of each Assumed Lease was scheduled to expire at the time of the next scheduled heavy maintenance check of the applicable aircraft, compared to the scheduled expiry dates of November 27, 2004 and February 7, 2005 under the Previous Leases, provided that the aggregate average number of months for which all eleven aircraft were on lease to TWA LLC was not less than 22 months from and after March 12, 2001. Finally, the maintenance condition of the aircraft to be met at lease expiry was eased in favor of TWA LLC, as compared to the corresponding conditions required under the Previous Leases. With respect to the three aircraft that TWA LLC did not elect to acquire, TWA officially rejected the Previous Leases applicable to these aircraft (collectively, the Rejected Leases) as of April 20, 2001. One of these aircraft was leased to TWA for the period of March 12, 2001 to April 12, 2001 for $85,000. All three aircraft were returned to the Partnership. As aircraft were returned to the Partnership they were parked in storage in Arizona while the General Partner remarketed them for sale. The three aircraft were sold on October 19, 2001, for $565,000, resulting in neither a gain nor a loss for the Partnership. In addition, the General Partner filed administrative rent claims in the amount of $422,989 in the TWA bankruptcy proceeding in an effort to recover the fair value of TWA's actual use, if any, of these three aircraft under the Rejected Leases during the 60-day period following TWA's filing of its bankruptcy petition. These administrative rent claims were approved by the estate with the plan of reorganization on June 25, 2002 (the Plan) and are to be paid to the Partnership through periodic distributions over the subsequent one to two years from the date of reorganization. These funds are being recognized as income on a cash basis as they are received. During the year ended December 31, 2003, the Partnership received payments totaling $111,742 from a portion of these administrative rent claims distributions. The General Partner also filed administrative claims in the amount of $95,359 in the TWA bankruptcy proceeding in connection with certain legal expenses incurred by the Partnership in connection with the bankruptcy proceeding. The administrative claims were settled for $73,448 with the estate under the Plan and settlement was received by the Partnership on September 26, 2002. Furthermore, the General Partner filed general unsecured claims for damages arising from TWA's breach of the Rejected Leases. However, there can be no assurances as to whether, or when, the General Partner will be successful in asserting the value of the general unsecured claims or be able to collect any amounts out of the TWA bankruptcy estate. 24 The Accounting Treatment of the TWA Transaction In accordance with GAAP, the Partnership recognized rental income and management fees on a straight line basis over the original lease terms of the Previous Leases. As a result, deferred revenue and accrued management fees were recorded each month since the inception of each Previous Lease, resulting in balances of deferred rental income and accrued management fees of $5,068,954 and $232,533, respectively, as of March 12, 2001. Since the Previous Leases were effectively modified on March 12, 2001, the Partnership recognized the balances of deferred revenue and accrued management fees over the new lease terms, from the date the leases were modified. For the three Rejected Leases, the deferred revenue and accrued management fees amounting to $950,130 and $38,432 were recognized as rental revenue and a reduction of management fee, respectively, in March 2001. For the Assumed Leases, the deferred revenue and accrued management fees associated with each aircraft were recognized over the new lease terms, ranging from four months to 30 months as of March 31, 2001. As of December 31, 2002, the Partnership had a deferred revenue balance of $475,788, and a deferred management fee balance of $22,058 included in Payable to Affiliates on the Balance Sheet, which would be recognized over the remaining lives of the aircraft leases, up to 9 months. As of December 31, 2003, deferred revenue and deferred management fees were fully recognized as all remaining lease terms ended during 2003. Note 6. Notes Payable In connection with reconditioning of certain aircraft to meet noise level restriction undertaken in 1996 and 1997, the Partnership issued notes payable to the manufacturer of noise suppression devices to finance the related purchase. The notes payables bore interest at a rate of 10% per annum and were repaid in 2001. Cash paid for interest in 2001 was $12,841. No debt was outstanding nor was interest incurred in 2002 and 2003. Note 7. Claims Related to Lessee Defaults Braniff, Inc. (Braniff) Bankruptcy. On January 16, 2001, Braniff's bankrupt estate made a $110,890 final payment in respect of the unsecured claims of the Partnership and other affiliates of PIMC, of which $8,530 was allocated to the Partnership based on its pro rata share of the total claims. This matter with Braniff is now closed. Note 8. Related Parties Under the Limited Partnership Agreement (Partnership Agreement), the Partnership paid or agreed to pay the following amounts to PIMC and/or its affiliates in connection with services rendered: a. An aircraft management fee equal to 5% of gross rental revenues with respect to operating leases or 2% of gross rental revenues with respect to full payout leases of the Partnership, payable upon receipt of the rent. In 2003, 2002 and 2001 the Partnership paid management fees to PIMC of $85,533, $490,933 and $0, respectively. Management fees payable to PIMC at December 31, 2003 and 2002 were $0 and $34,925, respectively. b. Reimbursement of certain out-of-pocket expenses incurred in connection with the management of the Partnership and supervision of its assets. In 2003, 2002 and 2001, $653,378, $384,423, and $475,321, respectively, were reimbursed by the Partnership to PIMC for administrative and legal expenses. Administrative and legal reimbursements of $76,807 and $0 25 were payable at December 31, 2003 and 2002, respectively. Reimbursements for operational costs of $334,421, $335,851 and $392,194 were paid by the Partnership in 2003, 2002 and 2001, respectively. Operational reimbursements of $44,060 and $46,226 were payable at December 31, 2003 and 2002, respectively. c. A 10% interest to PIMC in all cash distributions and sales proceeds, gross income in an amount equal to 9.09% of distributed cash available from operations and 1% of net income or loss and taxable income or loss, as such terms are defined in the Partnership Agreement. After the Partnership has sold or disposed of aircraft representing 50% of the original aircraft cost, gains from additional sales or disposals must be allocated to the General Partner's capital account until the General Partner's capital account is no longer in a deficit position. d. A subordinated sales commission to PIMC of 3% of the gross sales price of each aircraft for services performed upon disposition and reimbursement of out-of-pocket and other disposition expenses. Subordinated sales commissions will be paid only after Limited Partners have received distributions in an aggregate amount equal to their capital contributions plus a cumulative non-compounded 8% per annum return on their adjusted capital contributions, as defined in the Partnership Agreement. The Partnership did not pay or accrue a sales commission on any aircraft sales to date as the above subordination threshold has not been met. e. In the event that, immediately prior to the dissolution and termination of the Partnership, the General Partner shall have a deficit balance in its tax basis capital account, then the General Partner shall contribute in cash to the capital of the Partnership an amount which is equal to such deficit (see Note 9). Note 9. 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 (see Note 8). Such allocations are made using income or loss calculated under GAAP for book purposes, which, as more fully described in Note 11, 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. Cash distributions of $694,319 and $6,248,876 were paid in 2003 to the General Partner and the Limited Partners, respectively. Cash distributions paid in 2002 were $555,518 and $4,999,659 to the General Partner and the Limited Partners, respectively. 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. Had all the assets of the Partnership been liquidated at December 31, 2003 at the current carrying value, the tax basis capital (deficit) accounts of the General Partner and the Limited Partners is estimated to be $(1,013,827) and $36,384,162, respectively. 26 Note 10. Income Taxes Federal and state income tax regulations provide that taxes on the income or loss of the Partnership are reportable by the partners in their individual income tax returns. Accordingly, no provision for such taxes has been made in the financial statements. The net differences between the tax basis and the reported amounts of the Partnership's assets and liabilities at December 31, 2003 and 2002 are as follows (unaudited): Reported Amounts Tax Basis Net Difference ---------------- --------- -------------- 2003: Assets $ 5,700,559 $ 35,615,782 $(29,915,223) Liabilities 245,447 245,447 - 2002: Assets $ 13,905,238 $ 43,177,964 $(29,272,726) Liabilities 1,108,705 597,992 510,713 Note 11. Reconciliation of Book Net Income to Taxable Net Income (Loss) The following is a reconciliation between net income (loss) per Limited Partnership unit reflected in the financial statements and the information provided to Limited Partners for federal income tax purposes (unaudited): For the years ended December 31, -------------------------------- 2003 2002 2001 ---- ---- ---- Book net income (loss) per Limited Partnership unit $(1.99) $ 2.56 $ 6.29 Adjustments for tax purposes represent differences between book and tax revenue and expenses: Rental revenue (0.94) (3.02) (5.93) Management fee expense (0.07) (0.72) 0.25 Depreciation 1.22 3.77 5.05 Loss on sale of aircraft or inventory - - (1.56) ------ ------ ------ Taxable net income (loss) per Limited Partnership unit $(1.78) $ 2.59 $ 4.10 ====== ====== ====== The differences between net income and loss for book purposes and net income and loss for tax purposes result from the temporary differences of certain revenue and deductions. For book purposes, rental revenue is generally recorded as it is earned on a straight line basis for operating leases. For tax purposes, certain temporary differences exist in the recognition of revenue which is generally recognized when received. For tax purposes, management fee expense is accrued in the same year as the tax basis rental revenue. Increases in the Partnership's book maintenance reserve liability were recognized as rental revenue for tax purposes. The Partnership computes depreciation using the straight-line method for financial reporting purposes and generally an accelerated method for tax purposes. The Partnership also periodically evaluates the ultimate 27 recoverability of the carrying values and the economic lives of its aircraft for book purposes and, accordingly, recognized adjustments, which increased book depreciation expense. As a result, the current year tax depreciation expense is less than the book depreciation expense. These differences in depreciation methods result in book to tax differences on the sale of aircraft. In addition, certain costs were capitalized for tax purposes and expensed for book purposes. Note 12. Selected Quarterly Financial Data The following is a summary of the quarterly results of operations for the years ended December 31, 2003 and 2002 (unauditied): 2003 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Total Revenues $1,007,459 $ 830,108 $ 372,701 $ 95,081 Net Income (Loss) $ 269,488 $ 236,223 $ (919,175) $ 15,238 Net Income (Loss) - General Partner $ 605,022 $ 2,362 $ (9,192) $ 153 Net Income (Loss) - Limited Partners $ (335,534) $ 233,861 $ (909,983) $ 15,085 Net Income (Loss) Per Limited Partnership Unit $ (0.67) $ 0.47 $ (1.82) $ 0.03 2002 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Total Revenues $1,869,320 $1,475,293 $1,425,232 $1,142,467 Net Income $ 638,011 $ 408,164 $ 479,664 $ 287,784 Net Income - General Partner $ 519,800 $ 4,083 $ 4,796 $ 2,878 Net Income - Limited Partners $ 118,211 $ 404,081 $ 474,868 $ 284,906 Net Income Per Limited Partnership Unit $ 0.24 $ 0.81 $ 0.95 $ 0.56 Note 13. Subsequent Events On February 15, 2004, the Partnership distributed $874,575 to the Limited Partners, or $1.75 per Limited Partnership Unit, and $97,175 to the General Partner. In January 2004, the Partnership entered into a Sale and Purchase Agreement with Newjet Corporation for the sale of four DC-9-30 aircraft owned by the Partnership. On February 9, 2004, the Partnership received cash proceeds of $450,000 from Newjet Corporation for the sale of the four aircraft. Under the terms of the agreement, the aircraft were sold in an "as-is, where-is" condition. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On August 1, 2002, the Board of Directors of the general partner of the Partnership, on behalf of the Partnership, adopted a resolution dismissing Arthur Andersen LLP (Andersen) as the Partnership's auditors and appointed Ernst & Young LLP (E&Y) to replace Andersen. 28 Andersen's reports on the Partnership's financial statements as of and for each of the years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2001 and 2000 and through the date hereof, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused Andersen to make reference to the subject matter in connection with its report on the Partnership's financial statements for such years; and there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K. During the years ended December 31, 2001 and 2000 and through the date hereof, the Partnership did not consult E&Y with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Partnership's financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K. The Partnership has provided Andersen with a copy of the foregoing statements. Because the Partnership has been informed by Andersen that as of July 1, 2002 it would not be providing the letter stating that it was in agreement with the statements contained herein, no such letter is attached to this filing as an Exhibit. The inability to obtain such letter from Andersen and not attaching a letter to this filing is permitted by Item 304T(b)(2) of Regulation S-K. Item 9A. Controls and Procedures (a) Evaluation of disclosure controls and procedures PIMC management reviewed the Partnership's internal controls and procedures and the effectiveness of these controls. As of December 31, 2003, PIMC management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures pursuant to Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures are effective in timely alerting them to material information relating to the Partnership required to be included in its periodic SEC filings. (b) Change to internal controls There was no change in the Partnership's internal controls over financial reporting or in other factors during the Partnership's last quarter that materially affected, or are reasonably likely to materially affect, the Partnership's internal controls over financial reporting. There were no significant deficiencies or material weaknesses, and therefore no corrective actions taken. 29 PART III Item 10. Directors and Executive Officers of the Registrant Polaris Aircraft Income Fund II, a California Limited Partnership (PAIF-II or the Partnership) has no directors or officers. Polaris Holding Company (PHC) and its subsidiaries, including Polaris Aircraft Leasing Corporation (PALC) and Polaris Investment Management Corporation (PIMC), the General Partner of the Partnership (collectively Polaris), restructured their operations and businesses (the Polaris Restructuring) in 1994. In connection therewith, PIMC entered into a services agreement dated as of July 1, 1994 (the Services Agreement) with GE Capital Aviation Services, Inc. (GECAS), a Delaware corporation which is a wholly owned subsidiary of General Electric Capital Corporation, a Delaware corporation (GE Capital). GE Capital has been PHC's parent company since 1986. As subsidiaries of GE Capital, GECAS and PIMC are affiliates. The officers and directors of PIMC are: Name PIMC Title ----------------- ------------------------ William Carpenter President; Director Stephen E. Yost Chief Financial Officer Diarmuid Hogan Vice President; Director Norman C. T. Liu Vice President; Director Charles Meyers Secretary Robert W. Dillon Assistant Secretary Substantially all of these management personnel will devote only such portion of their time to the business and affairs of PIMC as deemed necessary or appropriate. Mr. Carpenter, 40, assumed the position of President and Director of PIMC effective October 1, 2001. Mr. Carpenter holds the position of Executive Vice President and Chief Risk Manager of GECAS, having previously held the position of Vice President - Chief Risk Manager of GECAS (Acting). Prior to joining GECAS eight years ago, Mr. Carpenter was an aerospace engineer specializing in aircraft handling qualities. Prior to that, Mr. Carpenter was a commissioned officer and pilot in the United States Armed Forces. Mr. Yost, 42, assumed the position of Chief Financial Officer of PIMC effective April 17, 2002. Mr. Yost presently holds the position of Senior Vice President and Manager Transaction Advisory for GECAS. Mr. Yost has been with the General Electric Company (GE) and its subsidiaries since 1994. Prior to joining GECAS, Mr. Yost held the position of European Controller for GE Capital Fleet Services and prior to that, Controller of GE Capital Commercial Finance. Mr. Yost is a Certified Public Accountant and prior to joining GE was an audit manager with Coopers & Lybrand. Mr. Hogan, 35, assumed the position of Vice President and Director of PIMC effective October 1, 2003. Mr. Hogan presently holds the position of Senior Vice President, Financial Planning and Analysis for GECAS. Mr. Hogan has been with the General Electric Company (GE) and its subsidiaries since 1995. Mr. Hogan is a member of the Institute of Chartered Accountants in Ireland and prior to joining GE was an audit senior with KPMG. 30 Mr. Liu, 46, assumed the position of Vice President of PIMC effective May 1, 1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the position of Executive Vice President - Commercial Operations of GECAS, having previously held the positions of Executive Vice President - Sales and Marketing and 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 for General Electric Capital Corporation and in Syndications and Leasing for the Transportation & Industrial Funding division of General Electric Capital Corporation. Mr. Liu previously held the position of managing director of Kidder, Peabody & Co., Incorporated. Mr. Meyer, 51, assumed the position of Secretary on October 1, 2003. Mr. Meyer presently holds the position of Senior Vice President - Taxes and Senior Tax Counsel of GECAS. Prior to joining GECAS, Mr. Meyer was the Senior Tax Director - - Research and Planning for Northwest Airlines. Mr. Dillon, 62, assumed the position of Assistant Secretary of PIMC on July 1, 1994. Mr. Dillon presently holds the position of Senior Vice President and Associate General Counsel of GECAS. Mr. Dillon held the position of Vice President - Aviation Legal and Insurance Affairs of PHC, from April 1989 to October 1997. Previously, he served as General Counsel of PIMC and PALC effective January 1986. Certain Legal Proceedings: On or around September 27, 1995, a complaint entitled Martha J. Harrison v. General Electric Company, et. al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and Prudential Securities Incorporated. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages, attorney's fees, interest, costs and general relief. On or around December 8, 1995, a complaint entitled Overby, et al. v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v. Prudential Securities Incorporated, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition adding as additional defendants General Electric Company, General Electric Capital Corporation and Smith Barney, Inc. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. 31 In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v. Prudential Securities. Incorporated, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities Incorporated and Stephen Derby Gisclair. On or about January 18, 1996, plaintiff filed a First Supplemental and Amending Petition adding defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v. General Electric Co., et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. In or around December 1994, a complaint entitled John J. Jones, Jr. v. Prudential Securities Incorporated, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition adding as additional defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of section of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about May 7, 1996, a petition entitled Charles Rich. et al. v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about March 4, 1996, a petition entitled Richard J. McGiven v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital 32 Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. Item 11. Executive Compensation The Partnership has no directors or officers. The Partnership is managed by PIMC, the General Partner. In connection with management services provided, management and advisory fees of $85,533 were paid to PIMC in 2003, in addition to a 10% interest in all cash distributions as described in Note 8 to the financial statements (Item 8). Item 12. Security Ownership of Certain Beneficial Owners and Management a) No person owns of record, or is known by the Partnership to own beneficially, more than five percent of any class of voting securities of the Partnership. b) The General Partner of the Partnership owns the equity securities of the Partnership as set forth in the following table:
Title Name of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership of Class -------- ---------------- -------------------- -------- General Polaris Investment Represents a 10.0% interest of all cash 100% Partner Management distributions, gross income in an Interest Corporation amount equal to 9.09% of distributed cash available from operations, and a 1% interest in net income or loss
c) There are no arrangements known to the Partnership, including any pledge by any person of securities of the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership. Item 13. Certain Relationships and Related Transactions None. 33 Item 14. Principal Accounting Fees and Services Audit Fees - For audits of the years ended December 31, 2003 and 2002, the Partnership paid or accrued fees of $22,000 and $27,000, respectively, to its independent auditors Ernst and Young LLP. Audit fees for 2003 and 2002 were for professional services provided for the quarterly review of the financial statements in the Partnership's Form 10-Q and the annual audit of the financial statements in the Partnership's Form 10-K. Tax Fees - For the year ended December 31, 2003 and 2002, the Partnership was billed $0 and $2,750, respectively, by Deloitte & Touche for the review of Federal and State partnership tax returns. 34 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 1. Financial Statements. The following are included in Part II of this report: Page No. -------- Report of Independent Auditors 14 Balance Sheets 16 Statements of Operations 17 Statements of Changes in Partners' Capital (Deficit) 18 Statements of Cash Flows 19 Notes to Financial Statements 20 2. Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 2003. 3. Exhibits required to be filed by Item 601 of Regulation S-K. 31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Code of Ethics 4. Financial Statement Schedules. All financial statement schedules are omitted because they are not applicable, not required or because the required information is included in the financial statements or notes thereto. 35 SIGNATURES 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 March 30, 2004 By: /S/ William Carpenter - --------------------------- ---------------------------- Date William Carpenter, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /S/William Carpenter President and Director of Polaris March 30, 2004 - -------------------- Investment Management Corporation, -------------- (William Carpenter) General Partner of the Registrant /S/Stephen E. Yost Chief Financial Officer of Polaris March 30, 2004 - ------------------ Investment Management Corporation, -------------- (Stephen E. Yost) General Partner of the Registrant /S/Diarmuid Hogan Vice President and Director of Polaris March 30, 2004 - ----------------- Investment Management Corporation, -------------- (Diarmuid Hogan) General Partner of the Registrant /S/Norman C. T. Liu Vice President and Director of Polaris March 30, 2004 - ------------------- Investment Management Corporation, -------------- (Norman C. T. Liu) General Partner of the Registrant 36 EX-31 2 if2_4q03ex311.txt CERTIFICATION - WILLIAM R. CARPENTER Exhibit 31.1 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership Certification I, William R Carpenter, certify that: 1. I have reviewed this annual report on Form 10-K of Polaris Aircraft Income Fund II (A California Limited Partnership); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 30, 2004 -------------- By: Polaris Investment Management Corporation General Partner /s/ William R. Carpenter - ------------------------ William R. Carpenter President EX-31 3 if2_4q03ex312.txt CERTIFICATION - STEPHEN E. YOST Exhibit 31.2 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership Certification I, Stephen E. Yost, certify that: 1. I have reviewed this annual report on Form 10-K of Polaris Aircraft Income Fund II (A California Limited Partnership); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 30, 2004 -------------- By: Polaris Investment Management Corporation General Partner /s/ Stephen E. Yost - ------------------- Steven E. Yost Chief Financial Officer EX-32 4 if2_4q03ex321.txt CERTIFICATION - CARPENTER AND YOST Exhibit 32.1 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Polaris Investment Management Corporation (the General Partner), does hereby certify, to such officer's knowledge, that: The Annual Report on Form 10-K for the year ended December 31, 2003 of Polaris Aircraft Income Fund II (A California Limited Partnership) (the Partnership) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Partnership. Dated: March 30, 2004 -------------- /s/ William R Carpenter - ----------------------- Name: William R. Carpenter Title: President of Polaris Investment Management Corporation (the General Partner) Dated: March 30, 2004 -------------- /s/ Stephen E. Yost - ------------------- Name: Stephen E Yost Title: Chief Financial Officer of Polaris Investment Management Corporation (the General Partner) A signed original of this written statement required by Section 906 or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Partnership and will be retained by the Partnership and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 5 if2_4q03ex991.txt CODE OF ETHICS Exhibit 99.1 POLARIS AIRCRAFT INCOME FUND II, A California Limited Partnership CODE OF ETHICS To All Persons or Entities Acting on Behalf of the Partnership: Polaris Aircraft Income Fund II (the "Partnership") is committed to the highest standards in all aspects of its business. To confirm that commitment, attached is the Partnership Code of Ethics (the "Code"). The Code, which emphasizes integrity, ethics, and fairness, elaborates on many of the legal and ethical principles to which we must all adhere. We expect that all persons or entities acting in a significant manner on behalf of the Partnership, but not otherwise affiliated with the Partnership, including but not limited to consultants and third parties (each such non-affiliated person or entity is hereinafter referred to as a "Partnership Agent" or "Partnership Agents") to comply in every respect with all applicable laws and regulations and to conduct the Partnership's business in a way that protects and promotes our valuable reputation. We will continue to compete vigorously in the marketplace, but we will not deviate from these fundamental principles in doing so. The General Partner of the Partnership, Polaris Investment Management Corporation, and GE Capital Aviation Services, Inc. and their respective officers and directors are not considered to be "Partnership Agents" hereunder and, thus, are not subject to the Code because each is subject to General Electric Company's integrity guidelines, "The Spirit & The Letter Of Our Commitment" or any successor guidelines. Similarly, the independent public accounting firm of the Partnership and its principals are not considered to be "Partnership Agents" hereunder because it is subject to its own set of ethical guidelines. All Partnership Agents are responsible for complying with this Code. The General Partner will be responsible for ensuring that all Partnership Agents receive a copy of the Code and will be asked annually to certify compliance with it. Obviously, the Code cannot address every conceivable situation we face. It can only set out general legal and ethical principles, and the Partnership Agents must use good judgment in applying them. If a Partnership Agent needs further guidance regarding compliance with applicable laws and this Code, he or she should contact a member of the Partnership Compliance Committee. CODE OF ETHICS All Partnership Agents are required to promote honest and ethical conduct and to conduct business activities and operations in an ethical manner and in compliance with applicable laws, rules, regulations, Partnership policies, and the standards set forth in this Code. It is the responsibility of each Partnership Agent to ensure that the individuals under his or her supervision understand the laws and policies (including this Code) that apply to such individuals, to apply such policies fairly and consistently, and to respond appropriately to any inquiries or reports of suspected violations. It is the responsibility of all Partnership Agents to comply with this Code and all related policies. It is the policy of the Partnership to prevent the occurrence of unethical or unlawful behavior and to halt any such behavior that may occur as soon as reasonably possible after its discovery. Violations of this Code may result in serious consequences for the violator, including termination of his or her relationship with the Partnership. I. COMPLIANCE WITH LAWS The activities of the Partnership and each Partnership Agent are expected to be in full compliance with the letter and spirit of all applicable laws, rules and regulations. It would be impossible to summarize here all the laws, rules and regulations with which the Partnership and the Partnership Agents must comply; this Code refers to only a few of them. Any Partnership Agent with questions about his or her obligations under applicable laws should seek advice from the General Partner or a member of the Partnership Compliance Committee (see Section XIV of this Code). II. CONFLICTS OF INTEREST Partnership Agents have a significant business responsibility to the Partnership and must avoid any activity that may interfere materially with the performance of this responsibility. Business decisions must be based solely on the best interests of the Partnership, without regard to personal, family or other extraneous considerations. Conflicts of interest can arise when a Partnership Agent's position or responsibilities with the Partnership present an opportunity for gain apart from the normal rewards of being associated with the Partnership. They can also arise when a Partnership Agent's personal or family interests are, or may be viewed as being, inconsistent with those of the Partnership and therefore as creating conflicting loyalties. Such conflicting loyalties can cause a Partnership Agent to give preference to personal interests, either internal or external, in situations where Partnership responsibilities come first. No Partnership Agent may personally benefit from his or her association with the Partnership except through payments received directly from the Partnership. This prohibition does not apply to discounts, if any, offered by merchants that are generally available to all those associated with the Partnership. Any Partnership Agent who believes he or she may have a conflict of interest should disclose it immediately to, and seek guidance from, a member of the Partnership Compliance Committee who is not involved in the potential conflict. The Partnership Compliance Committee and the Partnership's counsel have sufficient authority to adequately deal with conflict of interest transactions, including the authority to disclose such transactions (or potential transactions) to the Partnership's General Partner or Principal Executive Officer and, if necessary, to the Principal Financial Officer of the Partnership. Please be advised that the General Partner may have conflicts of interests with the Partnership and other related partnerships. Nevertheless, the General Partner intends to represent the interests of the Partnership and related partnerships to the best of its ability taking into account such conflicts which are being disclosed in public filings including those made by the Partnership with the Securities and Exchange Commission. III. PARTNERSHIP OPPORTUNITIES No Partnership Agent may take personal advantage or obtain personal gain from an opportunity learned of or discovered during the course and scope of his or her association with the Partnership when that opportunity or discovery could be of benefit or interest to the Partnership. Likewise, no Partnership Agent may use Partnership property, information or position for personal gain. IV. PARTNERSHIP RECORDS Partnership records must always be prepared accurately and maintained properly, in accordance with all applicable laws and regulations. No false, artificial or deceptive entries may be made in the Partnership's records for any reason. The simple rule of thumb is that the Partnership's books must accurately reflect the transactions they record. In addition, the Partnership records belong to the Partnership. The General Partner has the primary responsibility for establishing and monitoring adequate systems of internal accounting and controls, and all Partnership Agents must adhere to these controls. The Partnership's auditors monitor and document compliance with these internal controls. All Partnership Agents shall cooperate completely and forthrightly with the Partnership's internal and independent auditors. No Partnership Agent may engage in, allow or conceal any financial or bookkeeping irregularity. V. PARTNERSHIP FUNDS AND PROPERTY Partnership Agents must protect the Partnership's assets and ensure their efficient use for legitimate business purposes. Each Partnership Agent is personally accountable for Partnership funds and property over which he or she has control. Purchases of products and services from suppliers must be made solely on the basis of quality, price, service and other relevant considerations. No Partnership funds or other property shall be used for any unlawful purpose, such as to secure special privileges or benefits through the payment of bribes or other illegal payments. No Partnership Agent may engage in any act that involves theft, fraud, embezzlement, misappropriation or wrongful conversion of any property, including Partnership property, regardless of whether or not such act could result in a criminal proceeding. This prohibition includes unauthorized use of the Partnership's communications equipment, computers and related facilities or other Partnership assets, including proprietary information and trade secrets. Gifts, favors and entertainment may be given to others at Partnership expense only if they are consistent with law and accepted business practices and if they are of sufficiently limited value and in a form that could not reasonably be construed as a bribe or payoff. Gifts in the form of cash or its equivalent are prohibited. Likewise, secret commissions or other compensation to employees of customers or their family members or associates are prohibited. VI. SAFETY AND HEALTH Workplace safety and health are paramount concerns and are reflective of conditions at the Partnership's premises. Partnership Agents must adhere to applicable health and safety laws and regulations and all related Partnership policies designed to ensure safe working conditions. VII. EQUAL OPPORTUNITY AND HARASSMENT-FREE CONDITIONS The Partnership is an equal opportunity entity. The Partnership's policy is to select and place employees, if any, and Partnership Agents on the basis of qualification for work to be performed, as required by applicable laws, without discrimination in terms of race, religion, national origin, color, sex, age, status as a qualified individual with a disability or other status protected by law. The Partnership insists that all employees, if any, and Partnership Agents refrain from any act that is designed to cause or does cause unlawful employment discrimination with respect to any term or condition of employment. The Partnership is also committed to the goal of providing a safe, secure, productive and healthy work environment free from harassment of any kind. The Partnership insists that all Partnership Agents refrain from any act that is designed to cause or does cause harassment or intimidation, including sexual harassment. The Partnership will not tolerate any form of harassment or intimidation by any employee, if any, or Partnership Agent. VIII. ENVIRONMENTAL PROTECTION The Partnership is committed to full compliance with national, state and local environmental laws and regulations at all operating facilities. The Partnership's environmental obligations include, but are not limited to, obtaining and maintaining all environmental permits and approvals required for the conduct of the Partnership's operations, the proper handling, storage and disposal of regulated materials and timely and accurate submission of required reports to the proper government agencies. All Partnership Agents are expected to understand and act in accordance with their obligations under environmental laws, including any new or modified obligations as they are established. Partnership Agents must report suspected violations of those laws to the General Partner. It shall be the obligation of the General Partner to investigate any reported violation and to ensure that timely and effective remedial action is taken where appropriate. The Partnership will ensure compliance with this Code through vigilant self-monitoring and, where necessary, discipline of Partnership Agents at all levels. The Partnership will not tolerate the falsification of data or the reporting of false information regarding environmental compliance within the Partnership or to government agencies. The Partnership is also committed to full compliance with all laws and regulations governing its services and products, including all applicable national and local laws governing product safety and related issues. The Partnership has adopted policies regarding environmental compliance. IX. COMPETITION AND CONTACTS WITH COMPETITORS The concept of free and open competition underlies the antitrust laws in the United States. Compliance with such laws is mandatory. The Sherman Act and its state law counterparts prohibit businesses from entering into agreements, express or implied, that unreasonably restrain trade. Partnership Agents may not enter into discussions or agreements with competitors or suppliers that would in any way violate or be construed as a violation of such laws. Certain agreements are considered so inherently anticompetitive as to be criminal in nature (e.g., price fixing, bid rigging, customer or territorial allocation, group boycotts) and can result in the imposition of substantial monetary penalties and jail sentences. Partnership Agents are encouraged to contact a member of the Partnership Compliance Committee if they have any doubt about the legality of a proposed course of action. If any Partnership Agent becomes aware of possible violations of any antitrust laws, such Partnership Agent should report the suspected violations to a member of the Partnership Compliance Committee immediately. X. FAIR DEALING Each Partnership Agent is expected to deal fairly with the Partnership's customers, suppliers, competitors and other agents. It is a violation of Partnership policy to take unfair advantage of anyone through manipulation, concealment, abuse of confidential information, misrepresentation of material facts or any other unfair or deceptive practice. XI. SECURITIES AND INSIDER TRADING The Partnership is committed to complying with all federal and state securities laws and regulations. These laws impose certain obligations on publicly-held corporations and the persons associated with them. It is important that Partnership Agents in no way compromise the position of the Partnership with the disclosure ("leaking" or "tipping") of non-public information to outsiders or to other Partnership Agents who do not require the information in the performance of their duties. No Partnership Agent with knowledge of non-public ("inside") information should use the information for his or her own benefit. This means that no Partnership Agent may trade in Partnership or other securities when he or she has knowledge of material inside information. "Material" information is any information that an investor might consider important in deciding whether to buy, sell or hold securities. Examples of some types of material information are financial results, financial forecasts, possible mergers, acquisitions, joint ventures, other purchases or sales of or investments in companies, obtaining or losing important contracts, important product developments, major litigation developments and major changes in business direction. Information is considered to be "non-public" unless it has been adequately disclosed to the public. Examples of effective disclosure include public filings with securities regulatory authorities and issuance of press releases. The information must not only be disclosed; all such disclosures must be full, fair, accurate, timely and made in an understandable manner to provide adequate opportunity for the market as a whole to digest the information. XII. DEALING WITH GOVERNMENT OFFICIALS All dealings with government officials, including, but not limited to lobbying, political contributions to candidates, meetings with government agencies, communications with public officials and contracting with government agencies, shall be done in accordance with all applicable national, state and local laws and regulations in each country in which the Partnership conducts business. No Partnership Agent shall offer or promise a payment or reward of any kind, directly or indirectly, to any federal, state or local government official in order to secure preferential treatment for the Partnership or the Partnership Agents. No Partnership Agent shall offer or promise a payment or reward of any kind, directly or indirectly, to a federal, state or local government official for or because of an official act performed or to be performed by that official. No Partnership Agent shall offer or promise any federal, state or local government official gifts, entertainment, gratuities, meals, lodging, travel or similar items that are designed to influence such official. It is the policy of the Partnership to cooperate fully with all legal and reasonable government investigations. Accordingly, Partnership Agents shall comply with any and all lawful requests from government investigators and, consistent with preserving the Partnership's legal rights, shall cooperate in lawful government inquiries. No Partnership Agent shall make a false or misleading written or oral statement to a government official with regard to any matter involving a government inquiry into Partnership matters. Partnership Agents should contact a member of the Partnership Compliance Committee when presented with any such government request or inquiry. Partnership Agents with questions about contacts with government officials should seek guidance from a member of the Partnership Compliance Committee. Individual Partnership Agents are free to participate in political activities or make personal political contributions, but may not use Partnership funds or other resources. No Partnership Agent may make a political contribution on behalf of the Partnership without permission from a member of the Partnership Compliance Committee, and then only after a member of the Partnership Compliance Committee has affirmed the legality and propriety of such a contribution. XIII. CONFIDENTIAL INFORMATION In the normal course of business, there will be instances in which Partnership Agents may be entrusted with confidential or privileged information. That information most often will involve facts, plans or other aspects of the Partnership's business that are not in the public domain and will, on occasion, involve information that has been entrusted to the Partnership by customers, suppliers or others with whom the Partnership has a relationship. All Partnership Agents possessing confidential information regarding the Partnership or any of its customers or suppliers have a duty not to disclose such information outside the Partnership or to Partnership Agents who do not have a need to know such information, except where disclosure is authorized or legally required. Partnership Agents possessing confidential information shall not use such information for personal gain. All Partnership Agents are expected to comply with the terms and conditions of any and all confidentiality, non-disclosure and patent agreements signed by them when accepting employment or association with the Partnership. Questions regarding what is or is not confidential or privileged information should be directed by the Partnership Agent to the General Partner. XIV. COMPLIANCE AND REPORTING The Partnership has appointed a committee (the "Partnership Compliance Committee") to ensure that this Code and the Partnership's related policies will govern the business activities of all Partnership Agents. The membership of the Partnership Compliance Committee will consist of senior executives and/or directors of the General Partner. Any Partnership Agent who has questions about this Code or how it applies in particular circumstances is encouraged to seek guidance from his or her supervisor or the Partnership Compliance Committee. Partnership Agents should promptly report any suspected noncompliance with these policies to the General Partner or any member of the Partnership Compliance Committee. The Partnership will promptly undertake an investigation into any report that it receives. The investigation will be sufficient in size and scope to address the report, and will be handled discreetly and with due sensitivity to all persons involved in the investigation. If requested, and to the extent possible, the Partnership will keep the identity of the reporting Partnership Agent and all disclosures made in accordance with this Code confidential. No Partnership Agent will be subject to any disciplinary or retaliatory action for reasonably and in good faith reporting any suspected violation. Submission of knowingly false reports, however, constitutes a violation of this Code and will result in disciplinary action. Failure to comply with this Code can have severe consequences for both the individuals involved and the Partnership. The Partnership will take appropriate disciplinary action for violations of this Code, including termination of employment or association with the Partnership. Disciplinary action may be taken: - Against Partnership Agents who authorize or participate directly and, in appropriate circumstances, indirectly in actions that are a violation of this Code or any related policies. - Against Partnership Agents who fail to report a violation of this Code or any related policy or who withhold any relevant information concerning a violation of which they became aware. - Against the violator's supervisor or the General Partner, to the extent the circumstances of the violation reflect inadequate supervision or lack of diligence. - Against any Partnership Agent who attempts to retaliate, directly or indirectly, or encourages others to do so, against Partnership Agent who reports a violation or cooperates with an investigation of such violation. If Partnership Agent believes that the General Partner to whom a suspected violation has been reported has not taken appropriate action, the Partnership Agent should contact a member of the Partnership Compliance Committee. The Partnership Compliance Committee can be reached by contacting Diarmuid Hogan at 203-961-5171. The General Partner (and not the Partnership Compliance Committee) is the only body authorized to waive compliance with this Code as it relates to the Partnership's Principal Executive Officer and Principal Financial Officer. With respect to the Partnership's Principal Executive Officer and Principal Financial Officer, the General Partner also has the authority to investigate (or supervise the investigation of) alleged violations of this Code and to determine the appropriate consequences for violations by such individual -----END PRIVACY-ENHANCED MESSAGE-----