UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
---------------------------
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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. 33-15551
---------------------------
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
State of Organization: California
IRS Employer Identification No. 94-3039169
201 Mission Street, 27th Floor, San Francisco, California 94105
Telephone - (415) 284-7400
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
This document consists of 18 pages.
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1997
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1997 and
December 31, 1996..........................................3
b) Statements of Income - Three and Six Months
Ended June 30, 1997 and 1996...............................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1996
and Six Months Ended June 30, 1997.........................5
d) Statements of Cash Flows - Six Months
Ended June 30, 1997 and 1996...............................6
e) Notes to Financial Statements..............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........11
Part II. Other Information
Item 1. Legal Proceedings.....................................16
Item 6. Exhibits and Reports on Form 8-K......................17
Signature ......................................................18
2
Part I. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 21,826,465 $ 23,989,285
RENT AND OTHER RECEIVABLES -- 943,708
AIRCRAFT, net of accumulated
depreciation of $88,490,049 in 1996 -- 30,187,395
AIRCRAFT AND OTHER ASSETS HELD FOR SALE 28,425,913 --
OTHER ASSETS 250,724 22,099
------------ ------------
$ 50,503,102 $ 55,142,487
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 76,965 $ 216,319
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 321,300 322,513
LESSEE SECURITY DEPOSITS 1,150,734 1,124,529
MAINTENANCE RESERVES 5,169,816 5,409,620
------------ ------------
Total Liabilities 6,718,815 7,072,981
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (4,018,268) (3,975,366)
Limited Partners, 499,964 units
issued and outstanding 47,802,555 52,044,872
------------ ------------
Total Partners' Capital 43,784,287 48,069,506
------------ ------------
$ 50,503,102 $ 55,142,487
============ ============
The accompanying notes are an integral part of these statements.
3
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
REVENUES:
Rent from operating leases $1,586,190 $3,161,395 $3,718,832 $6,303,158
Interest 271,725 341,884 562,848 752,923
Other 11,162 -- 27,495 --
---------- ---------- ---------- ----------
Total Revenues 1,869,077 3,503,279 4,309,175 7,056,081
---------- ---------- ---------- ----------
EXPENSES:
Depreciation and amortization 1,331,496 2,022,332 2,682,462 4,044,664
Management fees to general partner -- 158,070 106,632 300,158
Provision for credit losses -- -- -- 307,127
Operating 51,534 82,873 56,852 180,548
Administration and other 113,907 84,870 193,293 147,831
---------- ---------- ---------- ----------
Total Expenses 1,496,937 2,348,145 3,039,239 4,980,328
---------- ---------- ---------- ----------
NET INCOME $ 372,140 $1,155,134 $1,269,936 $2,075,753
========== ========== ========== ==========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 253,678 $ 323,998 $ 512,613 $ 645,650
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 118,462 $ 831,136 $ 757,323 $1,430,103
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.24 $ 1.66 $ 1.52 $ 2.86
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
4
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1996 and
Six Months Ended June 30, 1997
------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1995 $ (3,651,904) $ 84,055,091 $ 80,403,187
Net income (loss) 1,065,327 (19,511,119) (18,445,792)
Cash distributions to partners (1,388,789) (12,499,100) (13,887,889)
------------ ------------ ------------
Balance, December 31, 1996 (3,975,366) 52,044,872 48,069,506
Net income 512,613 757,323 1,269,936
Cash distributions to partners (555,515) (4,999,640) (5,555,155)
------------ ------------ ------------
Balance, June 30, 1997 $ (4,018,268) $ 47,802,555 $ 43,784,287
============ ============ ============
The accompanying notes are an integral part of these statements.
5
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
OPERATING ACTIVITIES:
Net income $ 1,269,936 $ 2,075,753
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,682,462 4,044,664
Provision for credit losses -- 307,127
Changes in operating assets and liabilities:
Increase in rent and other receivables (6,893) (216,044)
Increase in other assets (250,724) --
Increase (decrease) in payable to affiliates (87,634) 26,902
Increase (decrease) in accounts payable
and accrued liabilities (1,213) 123,530
Increase in lessee security deposits 26,205 24,641
Decrease in maintenance reserves (239,804) (236,823)
Decrease in deferred income -- (382,500)
------------ ------------
Net cash provided by operating activities 3,392,335 5,767,250
------------ ------------
INVESTING ACTIVITIES:
Principal payments on notes receivable -- 2,171,777
------------ ------------
Net cash provided by investing activities -- 2,171,777
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (5,555,155) (6,943,944)
------------ ------------
Net cash used in financing activities (5,555,155) (6,943,944)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (2,162,820) 995,083
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 23,989,285 23,456,031
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 21,826,465 $ 24,451,114
============ ============
The accompanying notes are an integral part of these statements.
6
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Principles and Policies
In the opinion of management, the financial statements presented herein include
all adjustments, consisting only of normal recurring items, necessary to
summarize fairly Polaris Aircraft Income Fund IV's (the Partnership's) financial
position and results of operations. The financial statements have been prepared
in accordance with the instructions of the Quarterly Report to the Securities
and Exchange Commission (SEC) Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto for the years ended December 31, 1996, 1995, and
1994 included in the Partnership's 1996 Annual Report to the SEC on Form 10-K
(Form 10-K).
2. Sale of Aircraft to Triton
On May 28, 1997, Polaris Investment Management Corporation (the "General
Partner" or "PIMC"), on behalf of the Partnership, executed definitive
documentation for the purchase of the Partnership's 13 remaining aircraft (the
"Aircraft") and certain of its notes receivables by Triton Aviation Services IV
LLC, a special purpose company (the "Purchaser" or "Triton"). The closings for
the purchase of 11 of the 13 Aircraft occurred from May 28, 1997 to June 30,
1997. The closings for 2 of the Aircraft occurred on July 21, 1997. The
Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the
"Manager"), a privately held aircraft leasing company which was formed in 1996
by Triton Investments, Ltd., a company which has been in the marine cargo
container leasing business for 17 years and is diversifying its portfolio by
leasing commercial aircraft. Each Aircraft was sold subject to the existing
leases, if any. Although the aforementioned transaction was structured as a
sale, under Generally Accepted Accounting Principles (GAAP), the transaction has
been recorded using the deposit method of accounting as discussed in Note 2
under The Accounting Treatment of the Transaction.
The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser is $29,748,000 which is allocable to the Aircraft and
to certain notes receivable by the Partnership. The Purchaser paid into an
escrow account $3,351,410 of the Purchase Price in cash upon the closing of the
first aircraft and delivered a promissory note (the "Promissory Note") for the
balance of $26,396,590. The Partnership received $2,633,833 from the escrow
account on July 10, 1997 for the pro rata cash portion of the Purchase Price
allocated to the 11 aircraft that closed from May 28, 1997 to June 30, 1997. The
Partnership received the balance of the escrow funds of $717,577 from Triton on
July 31, 1997 for the pro rata cash portion of the Purchase Price allocated to
the 2 aircraft that closed on July 21, 1997. The Partnership is entitled to
interest on the cash portion of the purchase price at 5.3% per annum from April
1, 1997 to the date the Partnership received the funds.
The Promissory Note is due in 28 quarterly installments of principal and
interest commencing June 30, 1997 in the amount of $1,294,663 over a period of
seven years bearing interest at a rate of 12% per annum with a balloon principal
payment in the amount of $4,812,392 due on March 31, 2004. The Purchaser has the
right to voluntarily prepay the Promissory Note in whole or in part at any time
without penalty. In addition, the Promissory Note is subject to mandatory
partial prepayment in certain specified instances. Due to the fact that it was
possible that 4 of the Aircraft (United Kingdom registered aircraft) would not
close by June 30, 1997, the Partnership agreed with the Purchaser to accept a
pro rata note payment on June 30, 1997 of $714,786. The unpaid principal balance
continued to accrue interest at 12% per annum until paid. In fact, two of the
7
four Aircraft closed on June 30, 1997 and the Partnership received $298,906 on
July 10, 1997. The remaining two aircraft closed on July 21, 1997 and the
Partnership received the balance of the note payment on July 29, 1997. The
Promissory Note is not reflected in the balance sheet due to the Partnership
using the deposit method of accounting as discussed in The Accounting Treatment
of the Transaction.
Under the terms of the transaction, the Purchaser's assets, which are limited to
the Aircraft, including any income or proceeds therefrom, and any funds made
available to Purchaser under the working capital line described below constitute
the sole source of payments under the Promissory Note. Although no security
interest over the Aircraft or the leases is granted in favor of the Partnership,
the equity interests in the Purchaser have been pledged to the Partnership. In
connection with that pledge, the Purchaser is prohibited from incurring
indebtedness other than (i) the Promissory Note; (ii) deferred taxes not yet due
and payable; (iii) indebtedness incurred to hushkit Aircraft owned by the
Purchaser; (iv) demand loans to another SPC (defined below) at a market rate of
interest; and (v) debt to trade creditors incurred in the ordinary course of
business. In addition, the Purchaser undertakes to keep the Aircraft and leases
free of any lien, security interest or other encumbrance other than (i) inchoate
taxes and materialmen's liens and the like, (ii) in the event that the Purchaser
elects to install hushkits on any Aircraft, secured debt to the extent of the
full cost of such hushkit and other hushkits acquired with proceeds from the
same loan facility; (iii) liens lessees are customarily permitted to incur that
are required to be removed. The Purchaser has the right to sell any of the
Aircraft without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the sale price is less than the
portion of the outstanding balance of the Promissory Note which is allocable to
the Aircraft in question and the Purchaser does not have sufficient funds to
make up the difference. In the event that any of the Aircraft are sold by the
Purchaser, the Promissory Note is subject to a mandatory prepayment of the
portion of the Promissory Note which is allocable to the Aircraft sold.
Under the terms of the transaction, the Purchaser's Manager has undertaken to
make available a working capital line to the Purchaser of up to approximately
$2,598,000 to fund operating obligations of the Purchaser. This working capital
line is guaranteed by Triton Investments, Ltd., the parent of the Purchaser's
Manager and such guarantor provided the Partnership with a copy of its most
recent balance sheet showing a consolidated net worth (net of minority
interests) of at least $150-million at December 31, 1996. Provided that the
Purchaser is not in default in making payments due under the Promissory Note to
the Partnership, the Purchaser is permitted to dividend to its equity owners an
amount not to exceed approximately $70,000 per month. The Purchaser may
distribute additional dividends to the equity owners to the extent of the
working capital advances made by the Purchaser's Manager provided that the
working capital line available to the Purchaser will be deemed increased to the
extent of such dividends.
Under the purchase agreement, the Purchaser purchased the Aircraft effective as
of April 1, 1997 notwithstanding the actual closing dates. The utilization of an
effective date facilitated the determination of rent and other allocations
between the parties. The Purchaser has the right to receive all income and
proceeds, including rents and receivables, from the Aircraft accruing from and
after April 1, 1997, and the Promissory Note commenced bearing interest as of
April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold
subject to the existing leases, if any, and as part of the transaction the
Purchaser assumes all obligations relating to maintenance reserves and security
deposits relating to such leases. Cash balances related to maintenance reserves
and security deposits are to be transferred to the Purchaser on or after the
Aircraft closing dates. As of June 30, 1997, the Partnership had transferred
$150,000 in security deposits and maintenance reserves to the Purchaser. In July
1997, security deposits and maintenance reserves of $5,010,507 were transferred
to the Purchaser and any remaining cash balances should be transferred to the
Purchaser by the end of the third quarter.
Neither PIMC nor GECAS will receive a sales commission in connection with the
transaction. In addition, PIMC will not be paid a management fee with respect to
the collection of the Promissory Note or on any rents accruing from or after
April 1, 1997. Neither PIMC nor GECAS or any of its affiliates holds any
interest in Triton Aviation or any of Triton Aviation's affiliates. John Flynn,
8
the current President of Triton Aviation, was a Polaris executive until May 1996
and has over 15 years experience in the commercial aviation industry. At the
time Mr. Flynn was employed at PIMC, he had no affiliation with Triton Aviation
or its affiliates.
Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris
Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold
certain aircraft assets to separate special purpose companies under common
management with the Purchaser (collectively, together with the Purchaser, the
"SPC's") on terms similar to those set forth above, with the exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.
The Accounting Treatment of the Transaction - As noted above and in accordance
with GAAP, this transaction has not been accounted for as a sale as of June 30,
1997. This transaction is being recorded using the deposit method of accounting
which requires the Partnership to continue to report on its financial statements
the Aircraft, other assets, liabilities and any related debt even if they have
been assumed by Triton. Cash received from Triton, including initial down
payment and subsequent collection of principal and interest, is reported as a
deposit on the contract. As of June 30, 1997, the balance of the deposit account
included in other assets on the balance sheet was $249,909, representing the net
excess of the amounts transferred to Triton with the Aircraft including; rents,
receivables and other amounts accruing from April 1, 1997 to the closing dates
for each of the Aircraft, and security deposits over the cash received from
Triton for the pro rata down payment and pro rata principal and interest
payments on the Promissory Note. A sale will be recognized with respect to this
transaction if the net cash received from Triton demonstrates that its financial
investment is sufficient to indicate that, for accounting purposes, the risks of
ownership of the Aircraft have transferred to Triton. This amount is estimated
to be approximately $3.2 million.
In accordance with GAAP, the Partnership recognized rental income up until the
closing date for 11 of the 13 aircraft which occurred from May 28, 1997 to June
30, 1997, and recognized rental income through June 30, 1997 for the 2 aircraft
which closed on July 21, 1997. The Partnership recorded rental income from
operating leases, interest and other income totaling $1,603,571 during the three
months ended June 30, 1997 related to the Aircraft. However, under the terms of
the transaction, Triton was entitled to receive payment of the rents,
receivables and other income accruing from April 1, 1997 to the closing dates
for each of the Aircraft, which have been reflected as adjustments to the
deposit account of the Partnership. Interest collected prior to sale accounting
treatment is recorded as part of Triton's initial investment when the
transaction is deemed a sale in accordance with GAAP.
The Aircraft transferred pursuant to the definitive documentation executed on
May 28, 1997 have been classified as aircraft held for sale from that date.
Under GAAP, aircraft held for sale are carried at their fair market value less
estimated costs to sell. The adjustment to the sales proceeds described above
and revisions to estimated costs to sell the Aircraft required the Partnership
to record an adjustment to the net carrying value of the aircraft held for sale
of $1,328,482 during the three months ended June 30, 1997. This adjustment to
the net carrying value of the aircraft held for sale is included in depreciation
and amortization expense on the statement of operations for the three and six
months ended June 30, 1997.
9
3. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
June 30, 1997 June 30, 1997
------------- -------------
Aircraft Management Fees $ 5,250 $ -
Out-of-Pocket Administrative and Selling
Expense Reimbursement 76,109 73,690
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 66,588 3,275
----------- -----------
$ 147,947 $ 76,965
============ ===========
4. Subsequent Event
On August 6, 1997, the Partnership received a mandatory prepayment of principal
on the Promissory Note of $1,891,402 due to the sale of two Aircraft by Triton.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the quarter ended June 30, 1997, Polaris Aircraft Income Fund IV (the
Partnership) executed definitive documentation for the purchase by Triton
Aviation Services IV LLC of the Partnership's remaining 13 used commercial jet
aircraft out of its original portfolio of 33 aircraft. The closings for 11 of
the 13 used commercial jet aircraft were completed during May 1997 and June
1997. In July 1997, the closings for the remaining 2 aircraft were completed.
The 13 aircraft sold consisted of: five DC-9-30 aircraft leased to Continental
Airlines, Inc. (Continental); two Boeing 727-200 Advanced aircraft leased to
American Trans Air, Inc. (ATA); two Boeing 737-200 Advanced aircraft leased to
Independent Aviation Group Limited (IAG); two Boeing 737-200 Advanced aircraft
leased to TBG Airways Limited (TBG Airways); and two Boeing 737-200 aircraft
formerly leased to Viscount Air Services, Inc. (Viscount) which filed for
Chapter 11 bankruptcy protection in January 1996 as discussed below. Out of an
original portfolio of 33 aircraft, one Boeing 727-100 was declared a casualty
loss due to an accident in 1991, fourteen Boeing 727-100 Freighters were sold in
1993, and five Boeing 727-200 aircraft were sold in May 1994. In 1993, ATA
transferred to the Partnership two Boeing 727-100 aircraft as part of the ATA
lease transaction. One of these Boeing 727-100 aircraft was sold in February
1994 and the second Boeing 727-100 aircraft was sold in August 1994.
REMARKETING UPDATE
Sale of Aircraft to Triton
On May 28, 1997, Polaris Investment Management Corporation (the "General
Partner" or "PIMC"), on behalf of the Partnership, executed definitive
documentation for the purchase of the Partnership's 13 remaining aircraft (the
"Aircraft") and certain of its notes receivables by Triton Aviation Services IV
LLC, a special purpose company (the "Purchaser" or "Triton"). The closings for
the purchase of 11 of the 13 Aircraft occurred from May 28, 1997 to June 30,
1997. The closings for 2 of the Aircraft occurred on July 21, 1997. The
Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the
"Manager"), a privately held aircraft leasing company which was formed in 1996
by Triton Investments, Ltd., a company which has been in the marine cargo
container leasing business for 17 years and is diversifying its portfolio by
leasing commercial aircraft. Each Aircraft was sold subject to the existing
leases if any. Although the aforementioned transaction was structured as a sale,
under Generally Accepted Accounting Principles (GAAP), the transaction has been
recorded using the deposit method of accounting as discussed in Note 2 under The
Accounting Treatment of the Transaction.
The General Partner's Decision to Approve the Transaction - In determining
whether the transaction was in the best interests of the Partnership and its
unit holders, the General Partner evaluated, among other things, the risks and
significant expenses associated with continuing to own and remarket the Aircraft
(many of which were subject to leases that were nearing expiration). The General
Partner determined that such a strategy could require the Partnership to expend
a significant portion of its cash reserves for remarketing and that there was a
substantial risk that this strategy could result in the Partnership having to
reduce or even suspend future cash distributions to limited partners. The
General Partner concluded that the opportunity to sell the Aircraft at an
attractive price would be beneficial in the present market where demand for
Stage II aircraft is relatively strong rather than attempting to sell the
aircraft "one-by-one" over the coming years when the demand for such Aircraft
might be weaker. During the months of intense negotiations, GE Capital Aviation
Services, Inc. ("GECAS"), which provides aircraft marketing and management
services to the General Partner, sought to obtain the best price and terms
available for these Stage II aircraft given the aircraft market and the
conditions and types of planes owned by the Partnership. Both the General
Partner and GECAS approved the sale terms of the Aircraft (as described below)
as being in the best interest of the Partnership and its unit holders because
both believe that this transaction will optimize the potential cash
distributions to be paid to limited partners. To ensure that no better offer
11
could be obtained, the terms of the transaction negotiated by GECAS included a
"market-out" provision that permitted the Partnership to elect to accept an
offer for all (but not less than all) of the assets to be sold by it to the
Purchaser on terms which it deemed more favorable, with the ability of the
Purchaser to match the offer or decline to match the offer and be entitled to be
compensated in an amount equal to 1 1/2% of the Purchaser's proposed purchase
price. The Partnership did not receive any other offers and, accordingly, the
General Partner believes that a valid market check has occurred confirming that
the terms of this transaction were the most beneficial that could have been
obtained.
The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser is $29,748,000 which is allocable to the Aircraft and
to certain notes receivable by the Partnership. The Purchaser paid into an
escrow account $3,351,410 of the Purchase Price in cash upon the closing of the
first aircraft and delivered a promissory note (the "Promissory Note") for the
balance of $26,396,590. The Partnership received $2,633,833 from the escrow
account on July 10, 1997 for the pro rata cash portion of the Purchase Price
allocated to the 11 aircraft that closed from May 28, 1997 to June 30, 1997. The
Partnership received the balance of the escrow funds of $717,577 from Triton on
July 31, 1997 for the pro rata cash portion of the Purchase Price allocated to
the 2 aircraft that closed on July 21, 1997. The Partnership is entitled to
interest on the cash portion of the purchase price at 5.3% per annum from April
1, 1997 to the date the Partnership received the funds.
The Promissory Note is due in 28 quarterly installments of principal and
interest commencing June 30, 1997 in the amount of $1,294,663 over a period of
seven years bearing interest at a rate of 12% per annum with a balloon principal
payment in the amount of $4,812,392 due on March 31, 2004. The Purchaser has the
right to voluntarily prepay the Promissory Note in whole or in part at any time
without penalty. In addition, the Promissory Note is subject to mandatory
partial prepayment in certain specified instances. Due to the fact that it was
possible that 4 of the Aircraft (United Kingdom registered aircraft) would not
close by June 30, 1997, the Partnership agreed with the Purchaser to accept a
pro rata note payment on June 30, 1997 of $714,786. The unpaid principal balance
continued to accrue interest at 12% per annum until paid. In fact, two of the
four Aircraft closed on June 30, 1997 and the Partnership received $298,906 on
July 10, 1997. The remaining two aircraft closed on July 21, 1997 and the
Partnership received the balance of the note payment on July 29, 1997. The
Promissory Note is not reflected in the balance sheet due to the Partnership
using the deposit method of accounting as discussed in The Accounting Treatment
of the Transaction.
Under the terms of the transaction, the Purchaser's assets, which are limited to
the Aircraft, including any income or proceeds therefrom, and any funds made
available to Purchaser under the working capital line described below constitute
the sole source of payments under the Promissory Note. Although no security
interest over the Aircraft or the leases is granted in favor of the Partnership,
the equity interests in the Purchaser have been pledged to the Partnership. In
connection with that pledge, the Purchaser is prohibited from incurring
indebtedness other than (i) the Promissory Note; (ii) deferred taxes not yet due
and payable; (iii) indebtedness incurred to hushkit Aircraft owned by the
Purchaser; (iv) demand loans to another SPC (defined below) at a market rate of
interest; and (v) debt to trade creditors incurred in the ordinary course of
business. In addition, the Purchaser undertakes to keep the Aircraft and leases
free of any lien, security interest or other encumbrance other than (i) inchoate
taxes and materialmen's liens and the like, (ii) in the event that the Purchaser
elects to install hushkits on any Aircraft, secured debt to the extent of the
full cost of such hushkit and other hushkits acquired with proceeds from the
same loan facility; (iii) liens lessees are customarily permitted to incur that
are required to be removed. The Purchaser has the right to sell any of the
Aircraft without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the sale price is less than the
portion of the outstanding balance of the Promissory Note which is allocable to
the Aircraft in question and the Purchaser does not have sufficient funds to
make up the difference. In the event that any of the Aircraft are sold by the
Purchaser, the Promissory Note is subject to a mandatory prepayment of the
portion of the Promissory Note which is allocable to the Aircraft sold.
12
Under the terms of the transaction, the Purchaser's Manager has undertaken to
make available a working capital line to the Purchaser of up to approximately
$2,598,000 to fund operating obligations of the Purchaser. This working capital
line is guaranteed by Triton Investments, Ltd., the parent of the Purchaser's
Manager and such guarantor provided the Partnership with a copy of its most
recent balance sheet showing a consolidated net worth (net of minority
interests) of at least $150-million at December 31, 1996. Provided that the
Purchaser is not in default in making payments due under the Promissory Note to
the Partnership, the Purchaser is permitted to dividend to its equity owners an
amount not to exceed approximately $70,000 per month. The Purchaser may
distribute additional dividends to the equity owners to the extent of the
working capital advances made by the Purchaser's Manager provided that the
working capital line available to the Purchaser will be deemed increased to the
extent of such dividends.
Under the purchase agreement, the Purchaser purchased the Aircraft effective as
of April 1, 1997 notwithstanding the actual closing dates. The utilization of an
effective date facilitated the determination of rent and other allocations
between the parties. The Purchaser has the right to receive all income and
proceeds, including rents and receivables, from the Aircraft accruing from and
after April 1, 1997, and the Promissory Note commenced bearing interest as of
April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold
subject to the existing leases, if any, and as part of the transaction the
Purchaser assumes all obligations relating to maintenance reserves and security
deposits with respect to such leases. Cash balances related to maintenance
reserves and security deposits are to be transferred to the Purchaser on or
after the Aircraft closing dates. As of June 30, 1997, the Partnership had
transferred $150,000 in security deposits and maintenance reserves to the
Purchaser. In July 1997, security deposits and maintenance reserves of
$5,010,507 were transferred to the Purchaser and any remaining cash balances
should be transferred to the Purchaser by the end of the third quarter.
Neither PIMC nor GECAS will receive a sales commission in connection with the
transaction. In addition, PIMC will not be paid a management fee with respect to
the collection of the Promissory Note or on any rents accruing from or after
April 1, 1997. Neither PIMC nor GECAS or any of its affiliates holds any
interest in Triton Aviation or any of Triton Aviation's affiliates. John Flynn,
the current President of Triton Aviation, was a Polaris executive until May 1996
and has over 15 years experience in the commercial aviation industry. At the
time Mr. Flynn was employed at PIMC, he had no affiliation with Triton Aviation
or its affiliates.
Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris
Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold
certain aircraft assets to separate special purpose companies under common
management with the Purchaser (collectively, together with the Purchaser, the
"SPC's") on terms similar to those set forth above, with the exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.
The Accounting Treatment of the Transaction - As noted above and in accordance
with GAAP, this transaction has not been accounted for as a sale as of June 30,
1997. This transaction is being recorded using the deposit method of accounting
which requires the Partnership to continue to report on its financial statements
the Aircraft, other assets, liabilities and any related debt even if they have
been assumed by Triton. Cash received from Triton, including initial down
payment and subsequent collection of principal and interest, is reported as a
deposit on the contract. As of June 30, 1997, the balance of the deposit account
included in other assets on the balance sheet was $249,909, representing the net
excess of the amounts transferred to Triton with the Aircraft including; rents,
receivables and other amounts accruing from April 1, 1997 to the closing dates
for each of the Aircraft, and security deposits over the cash received from
Triton for the pro rata down payment and pro rata principal and interest
payments on the Promissory Note. A sale will be recognized with respect to this
transaction if the net cash received from Triton demonstrates that its financial
investment is sufficient to indicate that, for accounting purposes, the risks of
ownership of the Aircraft have transferred to Triton. This amount is estimated
to be approximately $3.2 million.
13
In accordance with GAAP, the Partnership recognized rental income up until the
closing date for 11 of the 13 aircraft which occurred from May 28, 1997 to June
30, 1997, and recognized rental income through June 30, 1997 for the 2 aircraft
which closed on July 21, 1997. The Partnership recorded rental income from
operating leases, interest and other income totaling $1,603,571 during the three
months ended June 30, 1997 related to the Aircraft. However, under the terms of
the transaction, Triton was entitled to receive payment of the rents,
receivables and other income accruing from April 1, 1997 to the closing dates
for each of the Aircraft, which have been reflected as adjustments to the
deposit account of the Partnership. Interest collected prior to sale accounting
treatment is recorded as part of Triton's initial investment when the
transaction is deemed a sale in accordance with GAAP.
The Aircraft transferred pursuant to the definitive documentation executed on
May 28, 1997 have been classified as aircraft held for sale from that date.
Under GAAP, aircraft held for sale are carried at their fair market value less
estimated costs to sell. The adjustment to the sales proceeds described above
and revisions to estimated costs to sell the Aircraft required the Partnership
to record an adjustment to the net carrying value of the aircraft held for sale
of $1,328,482 during the three months ended June 30, 1997. This adjustment to
the net carrying value of the aircraft held for sale is included in depreciation
and amortization expense on the statement of operations for the three and six
months ended June 30, 1997.
PARTNERSHIP OPERATIONS
The Partnership recorded net income of $372,140, or $0.24 per limited
partnership unit, for the three months ended June 30, 1997, compared to net
income of $1,155,134, or $1.66 per limited partnership unit, for the three
months ended June 30, 1996. The Partnership recorded net income of $1,269,936,
or $1.52 per limited partnership unit for the six months ended June 30, 1997,
compared to net income of $2,075,753, or $2.86 per limited partnership unit, for
the six months ended June 30, 1996.
Rental revenues, net of related management fees, decreased during the three and
six months ended June 30, 1997 as compared to the same periods in 1996. One
factor contributing to the decrease during both the three and six months ended
June 30, 1997 was the sale of the Partnership's aircraft to Triton, as
previously discussed under the Remarketing Update section.
Another factor contributing to the decrease in rental revenues for the six
months ended June 30, 1997, was the absence of rental revenues from the two
aircraft formerly leased to Viscount, which were returned to the Partnership in
September and October 1996. In addition, rental revenues decreased from the
Continental leases that were renewed in June 1996 for a one-year term through
June 1997 at the current market lease rate which is approximately 51% of the
prior lease rate. Rental revenues from Continental further decreased during the
three months ended March 31, 1997 as compared to the same period in 1996, due to
Continental having completed its payment of the deferred rental amounts in the
first quarter of 1997, which have been recognized as income when received.
The leases of five McDonnell Douglas DC-9-30 aircraft with Continental were
originally scheduled to expire in June 1996. Continental exercised their right
to extend the leases for the five aircraft for a one-year term commencing in
July 1996 at the current fair market monthly lease rate, which is approximately
65% of the prior lease rate.
The Partnership recorded depreciation adjustments to certain of the
Partnership's aircraft in 1996. The increased depreciation expense reduces the
aircraft's carrying value and reduces the amount of future depreciation expense
that the Partnership will recognize over the projected remaining economic life
of the aircraft. As discussed previously in the Remarketing Update section, the
Partnership's 13 aircraft have been classified as aircraft held for sale in May
1997. During the second quarter of 1997, the Partnership recorded adjustments to
the estimated fair value of aircraft held for sale of $1,328,482, which is
included in depreciation expense for the three and six months ended June 30,
1997.
14
The Partnership recorded an allowance for credit losses during the first quarter
of 1996 for certain unpaid rent and accrued interest receivables from Viscount
during the first quarter of 1996 as a result of Viscount's default on certain
obligations due the Partnership and Viscount's subsequent bankruptcy filing. The
aggregate allowance for credit losses of $307,127 for these obligations was
reflected in the provision for credit losses in the Partnership's statement of
income for the six months ended June 30, 1996. In addition, the Partnership
recognized legal costs of approximately $179,000 related to the Viscount default
and its Chapter 11 bankruptcy filing and are reflected as operating expense in
the Partnership's statement of income for the six months ended June 30, 1996.
Interest income decreased during the three and six months ended June 30, 1997 as
compared to the same periods in 1996 due to the payoff of the ATA note in March
1996 and the Continental note in September 1996, and a decrease in interest
income on the deferred rent payments due from Continental that ended in the
first quarter of 1997.
Administration and other expenses increased during the three and six months
ended June 30, 1997 as compared to the same periods in 1996, due to increases in
printing and postage costs combined with an increase in outside services.
LIQUIDITY AND CASH DISTRIBUTIONS
Liquidity - The Partnership received payments on the Promissory Note due on June
30, 1997 from Triton in June and July of 1997, which was agreed upon by both the
Partnership and the Purchaser as discussed under Sale of Aircraft to Triton .
PIMC has determined that the Partnership maintain cash reserves as a prudent
measure to insure that the Partnership has available funds in the event the
Purchaser defaults under the Promissory Note and for other contingencies
including expenses of the Partnership. The Partnership's cash reserves will be
monitored and may be revised from time to time as further information becomes
available in the future.
Cash Distributions - Cash distributions to limited partners during the three
months ended June 30, 1997 and 1996 were $2,499,820, or $5.00 per limited
partnership unit, and $3,124,775, or $6.25 per limited partnership unit,
respectively. Cash distributions to limited partners during the six months ended
June 30, 1997 and 1996 were $4,999,640, or $10.00 per limited partnership unit,
and $6,249,550, or $12.50 per limited partnership unit, respectively.
In accordance with the Limited Partnership Agreement, cash distributions are to
be allocated 90% to the limited partners and 10% to the general partner. In July
1997, the Partnership made a cash distribution to limited partners of $8,664,376
($17.33 per limited partnership unit) and $962,708 to the general partner. The
timing and amount of future cash distributions are not yet known and will depend
on the Partnership's future cash requirements including expenses of the
Partnership, as previously discussed in the Liquidity section, and the receipt
of note payments from Triton.
15
Part II. Other Information
Item 1. Legal Proceedings
As discussed in Item 3 of Part I of Polaris Aircraft Income Fund IV's (the
Partnership) 1996 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the period ended March 31, 1997,
there are a number of pending legal actions or proceedings involving the
Partnership. Except as discussed below, there have been no material developments
with respect to any such actions or proceedings during the period covered by
this report.
Equity Resources, Inc., et al. v. Polaris Investment Management Corporation, et
al. - On May 12, 1997, plaintiffs appealed the Superior Court's denial of their
motion seeking to enjoin the sale by the Partnership of certain of its aircraft
and notes receivable. On May 15, 1997, the Appellate Court denied plaintiffs'
appeal. On May 19, 1997, plaintiffs appealed the Superior Court's denial of
their motion to the Supreme Court of Massachusetts. The Supreme Court of
Massachusetts denied plaintiffs' appeal on May 29, 1997. On May 23, 1997, the
defendants filed a motion to dismiss the action.
Ron Wallace v. Polaris Investment Management Corporation, et al. - On or about
June 18, 1997, a purported class action entitled Ron Wallace v. Polaris
Investment Management Corporation, et al. was filed on behalf of the unit
holders of Polaris Aircraft Income Funds II through VI in the Superior Court of
the State of California, County of San Francisco. The complaint names each of
Polaris Investment Management Corporation (PIMC), GE Capital Aviation Services,
Inc. (GECAS), Polaris Aircraft Leasing Corporation, Polaris Holding Company,
General Electric Capital Corporation, certain executives of PIMC and GECAS and
John E. Flynn, a former PIMC executive, as defendants. The complaint alleges
that defendants committed a breach of their fiduciary duties with respect to the
Sale Transaction involving the Partnership as described in Item 2, under the
caption "Remarketing Update -- Sale of Aircraft to Triton."
Other Proceedings - Item 10 in Part III of the Partnership's 1996 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the period ended March 31,
1997 discuss certain actions which have been filed against Polaris Investment
Management Corporation and others in connection with the sale of interests in
the Partnership and the management of the Partnership. With the exception of
Novak, et al v. Polaris Holding Company, et al, (which has been dismissed, as
discussed in the 1996 Form 10-K) where the Partnership was named as a defendant
for procedural purposes, the Partnership is not a party to these actions. Except
as discussed below, there have been no material developments with respect to any
of the actions described therein during the period covered by this report.
The following actions have been settled pursuant to a settlement agreement
entered into on June 6, 1997:
- - Thelma Abrams, et al. v. Polaris Holding Company, et al.
- - Sara J. Bishop, et al. v. Kidder, Peabody & Co. Incorporated, et al.
- - Enita V. Elphick, et al. v. Kidder, Peabody & Co. Incorporated, et al.
- - Janet K. Johnson, et al. v. Polaris Holding Company, et al.
- - Wayne W. Kuntz, et al. v. Polaris Holding Company, et al.
- - Joyce H. McDevitt, et al. v. Polaris Holding Company, et al.
- - Mary Grant Tarrer, et al. v. Kidder, Peabody & Co. Incorporated, et al.
- - Harry R. Wilson, et al. v. Polaris Holding Company, et al.
- - George Zicos, et al. v. Polaris Holding Company, et al.
- - Michael J. Ouellette, et al. v. Kidder, Peabody & Co. Incorporated, et al.;
Thelma A. Rolph, et al. v. Polaris Holding Company, et al.; Carl L. Self, et al.
v. Polaris Holding Company, et al. - On or about March 21, 1997, three
complaints were filed in the Superior Court of the State of California,
16
County of Sacramento naming as defendants Kidder, Peabody & Company,
Incorporated, Polaris Holding Company, Polaris Aircraft Leasing Corporation,
Polaris Investment Management Corporation, Polaris Securities Corporation,
Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric
Company, General Electric Capital Services, General Electric Capital
Corporation, GE Capital Aviation Services and Does 1-100. The first complaint,
entitled Michael J. Ouellette, et al. v. Kidder Peabody & Co., et al., was filed
by over 50 individual plaintiffs who purchased limited partnership units in one
or more of Polaris Aircraft Income Funds I-VI. The second complaint, entitled
Thelma A. Rolph, et al. v. Polaris Holding Company, et al., was filed by over
500 individual plaintiffs who purchased limited partnership units in one or more
of Polaris Aircraft Income Funds I-VI. The third complaint, entitled Carl L.
Self, et al. v. Polaris Holding Company, et al., was filed by over 500
individual plaintiffs who purchased limited partnership units in one or more of
Polaris Aircraft Income Funds I-VI. Each complaint alleges violations of state
common law, including fraud, negligent misrepresentation and breach of fiduciary
duty, and violations of the rules of the National Association of Securities
Dealers, Inc. Each complaint seeks to recover compensatory damages and punitive
damages in an unspecified amount, interest and rescission with respect to
Polaris Aircraft Income Funds I-VI and all other limited partnerships alleged to
have been sold by Kidder Peabody to the plaintiffs.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedules (Filed electronically only)
b) Reports on Form 8-K
A Current Report on Form 8-K, dated May 28, 1997, reporting the sale of
assets under Item 2 was filed on June 12, 1997.
17
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
August 12, 1997 By: /S/Marc A. Meiches
- --------------------------------- ------------------
Marc A. Meiches
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
18