-----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, MwlJfQkrdKKSxtoWjBf9y+H3b+j5VIPLM7cH39SxQSDGmIMMhNvkzJ9q28TC/iZp ZipE4GnLfXShmIirhBDeXg== 0000948524-97-000135.txt : 19971115 0000948524-97-000135.hdr.sgml : 19971115 ACCESSION NUMBER: 0000948524-97-000135 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS AIRCRAFT INCOME FUND IV CENTRAL INDEX KEY: 0000818145 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 943039169 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-15551 FILM NUMBER: 97717301 BUSINESS ADDRESS: STREET 1: 201 MISSION ST STREET 2: 27TH FL CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4152847440 MAIL ADDRESS: STREET 1: 201 MISSION ST STREET 2: 27TH FL CITY: SAN FRANCISCO STATE: CA ZIP: 94105 10-Q 1 SEPTEMBER 30, 1997 10-Q 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 September 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 17 pages. POLARIS AIRCRAFT INCOME FUND IV, A California Limited Partnership FORM 10-Q - For the Quarterly Period Ended September 30, 1997 INDEX Part I. Financial Information Page Item 1. Financial Statements a) Balance Sheets - September 30, 1997 and December 31, 1996..........................................3 b) Statements of Operations - Three and Nine Months Ended September 30, 1997 and 1996..........................4 c) Statements of Changes in Partners' Capital (Deficit) - Year Ended December 31, 1996 and Nine Months Ended September 30, 1997...................5 d) Statements of Cash Flows - Nine Months Ended September 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..........................16 Signature ......................................................17 2 Part I. Financial Information ----------------------------- Item 1. Financial Statements POLARIS AIRCRAFT INCOME FUND IV, A California Limited Partnership BALANCE SHEETS (Unaudited) September 30, December 31, 1997 1996 ---- ---- ASSETS: CASH AND CASH EQUIVALENTS $ 18,065,499 $ 23,989,285 RENT AND OTHER RECEIVABLES -- 943,708 NOTE RECEIVABLE 18,545,096 -- AIRCRAFT, net of accumulated depreciation of $88,490,049 in 1996 -- 30,187,395 OTHER ASSETS -- 22,099 ------------ ------------ $ 36,610,595 $ 55,142,487 ============ ============ LIABILITIES AND PARTNERS' CAPITAL (DEFICIT): PAYABLE TO AFFILIATES $ 161,649 $ 216,319 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 415,096 322,513 LESSEE SECURITY DEPOSITS -- 1,124,529 MAINTENANCE RESERVES 1,006 5,409,620 ------------ ------------ Total Liabilities 577,751 7,072,981 ------------ ------------ PARTNERS' CAPITAL (DEFICIT): General Partner (4,095,869) (3,975,366) Limited Partners, 499,964 units issued and outstanding 40,128,713 52,044,872 ------------ ------------ Total Partners' Capital 36,032,844 48,069,506 ------------ ------------ $ 36,610,595 $ 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 OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- REVENUES: Rent from operating leases $ 94,889 $2,361,349 $3,813,721 $8,664,507 Interest 193,370 324,128 756,218 1,077,051 Gain on sale of aircraft 951,579 -- 951,579 -- Other 779,893 15,386 807,388 15,386 ---------- ---------- ---------- ---------- Total Revenues 2,019,731 2,700,863 6,328,906 9,756,944 ---------- ---------- ---------- ---------- EXPENSES: Depreciation and amortization 3,013 1,986,210 2,685,475 6,030,874 Management fees to general partner -- 118,067 106,632 418,225 Provision for credit losses -- 281,902 -- 589,029 Operating 56,807 71,674 113,659 252,222 Administration and other 84,269 74,150 277,562 221,981 ---------- ---------- ---------- ---------- Total Expenses 144,089 2,532,003 3,183,328 7,512,331 ---------- ---------- ---------- ---------- NET INCOME $1,875,642 $ 168,860 $3,145,578 $2,244,613 ========== ========== ========== ========== NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 885,108 $ 314,136 $1,397,721 $ 959,786 ========== ========== ========== ========== NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS $ 990,534 $ (145,276) $1,747,857 $1,284,827 ========== ========== ========== ========== NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ 1.98 $ (0.29) $ 3.50 $ 2.57 ========== ========== ========== ========== 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 Nine Months Ended September 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 1,397,721 1,747,857 3,145,578 Cash distributions to partners (1,518,224) (13,664,016) (15,182,240) ----------- ------------ ------------ Balance, September 30, 1997 $(4,095,869) $ 40,128,713 $ 36,032,844 =========== ============ ============ 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)
Nine Months Ended September 30, ------------------------------- 1997 1996 ---- ---- OPERATING ACTIVITIES: Net income $ 3,145,578 $ 2,244,613 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,685,475 6,030,874 Gain on sale of aircraft (951,579) -- Net provision for credit losses -- (440,689) Changes in operating assets and liabilities, net of effect of sale of aircraft: Decrease in rent and other receivables 3,219 1,010,747 Increase (decrease) in payable to affiliates (2,949) 10,193 Increase (decrease) in accounts payable and accrued liabilities (88,016) 181,852 Decrease in lessee security deposits (1,124,529) (12,768) Increase (decrease) in maintenance reserves (5,408,614) 574,061 Decrease in deferred income -- (382,500) ------------ ------------ Net cash provided by (used in) operating activities (1,741,415) 9,216,383 ------------ ------------ INVESTING ACTIVITIES: Proceeds from sale of aircraft 4,940,755 -- Payments to Purchaser related to sale of aircraft (1,792,380) -- Principal payments on notes receivable 7,851,494 2,740,104 ------------ ------------ Net cash provided by investing activities 10,999,869 2,740,104 ------------ ------------ FINANCING ACTIVITIES: Cash distributions to partners (15,182,240) (10,415,917) ------------ ------------ Net cash used in financing activities (15,182,240) (10,415,917) ------------ ------------ CHANGES IN CASH AND CASH EQUIVALENTS (5,923,786) 1,540,570 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,989,285 23,456,031 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,065,499 $ 24,996,601 ============ ============ 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 had 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 was initially 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. As discussed in the next paragraph, these payment amounts have been adjusted due to the Purchaser's 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 possibility 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 portion of the note payment 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 7 $298,906 on July 10, 1997. The remaining two aircraft closed on July 21, 1997 and the Partnership received the balance of the June 30th note payment on July 29, 1997. The Promissory Note was not reflected in the June 30, 1997 balance sheet due to the Partnership using the deposit method of accounting as discussed in The Accounting Treatment of the Transaction. In August 1997 and September 1997, the Purchaser made prepayments of principal on the Promissory Note of $1,891,402 and $5,000,000, respectively. The $1,891,402 prepayment was the result of the Purchaser selling two aircraft and the $5,000,000 was a voluntary prepayment by the Purchaser. As a result, the remaining quarterly installments of principal and interest have been adjusted to $946,157 and the balloon payment due March 31, 2004 has been adjusted to $3,831,026. 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; and (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 of $5,461,043 related to maintenance reserves and security deposits were transferred to the Purchaser after the Aircraft closing dates. 8 Neither PIMC nor GE Capital Aviation Services, Inc. (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 was not accounted for as a sale at the closing date. This transaction was recorded using the deposit method of accounting which required the Partnership to continue to report on its financial statements the Aircraft, other assets, liabilities and any related debt even if they were assumed by Triton. Cash received from Triton, including the initial down payment and subsequent collection of principal and interest, was reported as a deposit on the contract. In August and September 1997, the Partnership received prepayments of principal from Triton of $1,891,402 and $5,000,000, respectively. As a result, sale treatment was recorded on September 30, 1997. In accordance with GAAP, the Partnership recognized rental income through the closing date for the Aircraft which occurred from May 28, 1997 to July 21, 1997. The Partnership recorded rental income from operating leases, interest and other income totaling $94,889 and $1,603,571 during the three months ended September 30, 1997 and June 30, 1997, respectively, 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 sales proceeds received by the Partnership. Interest collected on the Promissory Note prior to sale accounting treatment was recorded as part of Triton's initial investment and has been subsequently recognized as additional sales proceeds upon sale accounting treatment in accordance with GAAP. The Aircraft transferred pursuant to the definitive documentation executed on May 28, 1997 had 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 was included in depreciation and amortization expense on the statement of operations. 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 the Three Months Ended Payable at September 30, 1997 September 30, 1997 ------------------ ------------------ Out-of-Pocket Administrative Expense Reimbursement $ 98,724 $ 54,198 Out-of-Pocket Operating and Remarketing Expense Reimbursement 56,081 107,451 -------- -------- $154,805 $161,649 ======== ======== 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In May 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 had 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. 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 could be obtained, the terms of the transaction negotiated by GECAS 11 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 was initially 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 possibility 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 was not reflected in the June 30, 1997 balance sheet due to the Partnership using the deposit method of accounting as discussed in The Accounting Treatment of the Transaction. In August 1997 and September 1997, the Purchaser made prepayments of principal on the Promissory Note of $1,891,402 and $5,000,000, respectively. The $1,891,402 prepayment was the result of the Purchaser selling two aircraft and the $5,000,000 was a voluntary prepayment by the Purchaser. As a result, the remaining quarterly installments of principal and interest have been adjusted to $946,157 and the balloon payment due March 31, 2004 has been adjusted to $3,831,026. 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; and (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 12 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 of $5,461,043 related to maintenance reserves and security deposits were transferred to the Purchaser after the Aircraft closing dates. 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 was not accounted for as a sale at the closing date. This transaction was recorded using the deposit method of accounting which required the Partnership to continue to report on its financial statements the Aircraft, other assets, liabilities and any related debt even if they were assumed by Triton. Cash received from Triton, including the initial down payment and subsequent collection of principal and interest, was reported as a deposit on the contract. In August and September 1997, the Partnership received prepayments of principal from Triton of $1,891,402 and $5,000,000, respectively. As a result, sale treatment was recorded on September 30, 1997. In accordance with GAAP, the Partnership recognized rental income through the closing date for the Aircraft which occurred from May 28, 1997 to July 21, 1997. The Partnership recorded rental income from operating leases, interest and other income totaling $94,889 and $1,603,571 during the three months ended September 30, 1997 and June 30, 1997, respectively, related to the Aircraft. However, under the terms of the transaction, Triton was entitled to receive payment of 13 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 sales proceeds received by the Partnership. Interest collected on the Promissory Note prior to sale accounting treatment was recorded as part of Triton's initial investment and has been subsequently recognized as additional sales proceeds upon sale accounting treatment in accordance with GAAP. The Aircraft transferred pursuant to the definitive documentation executed on May 28, 1997 had 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 was included in depreciation and amortization expense on the statement of operations. Partnership Operations The Partnership recorded net income of $1,875,642, or $1.98 per limited partnership unit for the three months ended September 30, 1997, compared to net income of $168,860, or an allocated net loss of $0.29 per limited partnership unit, for the same period in 1996. The Partnership recorded net income of $3,145,578, or $3.50 per limited partnership unit for the nine months ended September 30, 1997, compared to net income of $2,244,613, or $2.57 per limited partnership unit, for the same period in 1996. The Partnership reported decreases in rent from operating leases, management fees and depreciation expense during the three and nine months ended September 30, 1997, as compared to the same period in 1996, due to the sale of the remaining Aircraft to Triton. As discussed in Note 2 to the financial statements, the Partnership did not recognize this transaction as a sale until September 30, 1997, at which time it recognized a gain on sale of $951,579. During 1996, the Partnership recorded provisions for credit losses aggregating $589,029 for certain rent and interest receivables from Viscount and recognized legal expenses aggregating $250,000 incurred during the first three quarters of 1996 related to the Viscount default and Chapter 11 bankruptcy filing. Interest income decreased during the three and nine months ended September 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. The Partnership recognized as other revenue in the third quarter of 1997, maintenance reserves aggregating $779,893 that were previously paid to the Partnership by a former lessee for the aircraft that was sold to Triton in 1997. Administration and other expenses increased during the three and nine months ended September 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 all payments due on the Promissory Note from Triton during the nine months ended September 30, 1997. PIMC has determined that the Partnership maintain cash reserves as a prudent measure to insure that the Partnership has available funds in the event Triton defaults under the Promissory Note and for other contingencies including expenses of the Partnership. 14 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 September 30, 1997 were $8,664,376, or $17.33 per limited partnership unit, compared to $3,124,775, or $6.25 per limited partnership unit for the three months ended September 30, 1996. Cash distributions to limited partners during the nine months ended September 30, 1997 were $13,664,016, or $27.33 per limited partnership unit, compared to $9,374,325, or $18.75 per limited partnership unit for the nine months ended September 30, 1996. The timing and amount of future cash distributions are not yet known and will depend on the Partnership's future cash requirements (including expenses of the Partnership) and need to retain cash reserves, as previously discussed in the Liquidity section, and the receipt of 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 periods ended March 31, 1997 and June 30, 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. - As previously disclosed, on May 23, 1997, the defendants filed a motion to dismiss this action. Subsequently, plaintiffs voluntarily sought dismissal of their suit without prejudice. On September 16, 1997, the court dismissed plaintiffs' complaint without prejudice. Ron Wallace v. Polaris Investment Management Corporation, et al. - On September 2, 1997, an amended complaint was filed adding additional plaintiffs. On September 16, 1997, the Polaris defendants filed a demurrer seeking to dismiss the amended complaint. Simultaneously with the filing of the demurrer, the Polaris defendants sought a stay of discovery. The hearing on the demurrer occurred on November 4, 1997. On November 5, 1997, the court granted the Polaris defendants' demurrer and ordered that plaintiffs be given 10 days leave to amend their complaint to plead demand futility. On or about October 14, 1997, the plaintiffs in this action filed a separate Petition for Writ of Mandate in the San Francisco Superior Court entitled Ron Wallace, et al. v. Polaris Investment Management Corp., et al., seeking to obtain access to all the Partnership's books, records and documents. Subsequently, pursuant to an agreement between the parties, plaintiffs agreed to dismiss their Petition for Writ of Mandate with prejudice and the Polaris defendants agreed to withdraw its motion seeking a stay of discovery. 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 periods ended March 31, 1997 and June 30, 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. There have been no material developments with respect to any of the actions described therein during the period covered by this report. Item 6. Exhibits and Reports on Form 8-K a) Exhibits (numbered in accordance with Item 601 of Regulation S-K) 27. Financial Data Schedules. b) Reports on Form 8-K A Current Report on Form 8-K/A, dated May 28, 1997, amending certain exhibits listed in Item 7, was filed on August 18, 1997. 16 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 November 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) 17 EX-27 2
5 9-MOS DEC-31-1997 SEP-30-1997 18065499 0 18545096 0 0 0 0 0 36610595 0 0 0 0 0 36032844 36610595 0 6328906 0 0 3183328 0 0 3145578 0 3145578 0 0 0 3145578 3.50 0
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