<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
--------------------
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
----- -----
Commission File No. 33-2794
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2985086
----------------------------- ------------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
201 Mission Street, 27th Floor, San Francisco, California 94105
--------------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 284-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
---
No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 1994.
Documents incorporated by reference: None
This document consists of 45 pages.<PAGE>
<PAGE>
PART I
Item 1. Business
The principal objectives of Polaris Aircraft Income Fund II, A California
Limited Partnership (PAIF-II or the Partnership) are to purchase and lease used
commercial jet aircraft in order to provide quarterly distributions of cash
from operations, to maximize the residual values of aircraft upon sale and to
protect Partnership capital through experienced management and diversification.
PAIF-II was organized as a California limited partnership on June 27, 1984 and
will terminate no later than December 2010.
PAIF-II has many competitors in the aircraft leasing market, including
airlines, aircraft leasing companies, other limited partnerships, banks and
several other types of financial institutions. This market is highly
competitive and there is no single competitor who has a significant influence
on the industry. In addition to other competitors, the general partner,
Polaris Investment Management Corporation (PIMC), and its affiliates, including
GE Capital Aviation Services, Inc. (GECAS), Polaris Aircraft Leasing
Corporation (PALC), Polaris Holding Company (PHC) and General Electric Capital
Corporation (GE Capital), acquire, lease, finance and sell aircraft for their
own accounts and for existing aircraft leasing programs sponsored by them.
Further, GECAS provides a significant range of management services to GPA Group
plc, a public limited company organized in Ireland, together with its
consolidated subsidiaries (GPA), which acquires, leases and sells aircraft.
Accordingly, in seeking to re-lease and sell its aircraft, the Partnership may
be in competition with the general partner and its affiliates and GPA.
A brief description of the aircraft owned by the Partnership is set forth in
Item 2. The following table describes certain material terms of the
Partnership's leases to Northwest Territorial Airways, Ltd. (NWT), Trans World
Airlines, Inc. (TWA), Viscount Air Services, Inc. (Viscount) and Continental
Micronesia, Inc. (Continental Micronesia) and Continental Airlines, Inc.
(Continental) as of December 31, 1994:
Number of Lease
Lessee Aircraft Type Aircraft Expiration Renewal Options (1)
------ ------------- -------- ---------- -------------------
NWT Boeing 737-200
Combi 1 10/95 (2) 18 months
TWA McDonnell Douglas
DC-9-30 16 2/98 (3) none
McDonnell Douglas
DC-9-40 1 11/98 (3) none
McDonnell Douglas
DC-9-30 1 11/98 (3) none
Viscount Boeing 737-200 1 11/97 (4) none
Continental Boeing 727-200 Advanced 1 4/98 (5) none
Continental
Micronesia Boeing 727-200 Advanced 2 4/98 (6) none
(1) The rental rate during the renewal term remains the same as the current
rate unless otherwise noted.
2<PAGE>
<PAGE>
(2) This aircraft was previously on lease to Air Zaire, Inc. (Air Zaire).
The aircraft was re-leased to NWT at approximately 45% of the prior rental
rate through February 1993, then extended through December 1993 at 80% of
the previous rental rate, and again extended through March 1994 at the
same rental rate. The Partnership negotiated a new lease with NWT for 16
months commencing in June 1994 at approximately 108% of NWT's prior rental
rate.
(3) TWA may specify a lease expiration date for each aircraft up to six months
before the date shown, provided the average date for the 16 aircraft is
February 1998, and the average expiration date for the remaining two
aircraft is November 1998.
The TWA leases were modified in 1991. The leases for the 16 aircraft were
extended for an aggregate of 75 months beyond the initial lease expiration
date in November 1991 at approximately 46% of the original lease rates.
The leases for the remaining two aircraft were extended for 72 months
beyond the initial lease expiration dates in November 1992 at
approximately 42% of the original lease rates. The Partnership also
agreed to share in the costs of certain Airworthiness Directives (ADs).
If such costs are incurred by TWA, they will be credited against rental
payments, subject to annual limitations with a maximum of $500,000 per
aircraft over the lease terms. On January 31, 1992, TWA commenced
reorganization proceedings under Chapter 11 of the Federal Bankruptcy Code
as discussed further in Note 6 to the financial statements (Item 8). TWA
emerged from bankruptcy protection in November 1993 and affirmed all of
the Partnership's aircraft leases.
As discussed in Item 7, in October 1994, TWA notified its creditors,
including the Partnership, of a proposed restructuring of its debt.
Subsequently, GECAS (which as discussed in Part III, Item 10 now provides
certain management services to PIMC and PALC) negotiated a proposed
standstill agreement with TWA which was approved on behalf of the
Partnership by PIMC. That agreement provides for a moratorium of the rent
due the Partnership in November 1994 and 75% of the rents due the
Partnership from December 1994 through March 1995, with the deferred
rents, which aggregate $3.6 million, plus interest being repaid in monthly
installments beginning in May 1995 through December 1995. The Partnership
received as consideration for the agreement $218,071 and warrants for such
amount of TWA Common Stock as would have a value on December 31, 1997, on
a fully diluted basis, equal to the total amount of rent deferred (Item
7).
(4) This aircraft was previously on lease to SABA Airlines, S.A. (SABA). The
lease rate to Viscount is approximately 56% of the prior lease rate. As
discussed in Item 7, the Partnership has negotiated an agreement with
Viscount to defer certain rents due the Partnership and to provide
financing to Viscount for maintenance expenses relating to the
Partnership's aircraft.
(5) This aircraft, previously on lease to Alaska Airlines, Inc. (Alaska), was
leased to Continental in April 1993. The lease rate is approximately 55%
of the prior lease rate. The lease stipulates that Continental may assign
the lease to its affiliate Continental Micronesia under certain
conditions. The lease also stipulates that the Partnership will reimburse
costs for cockpit modifications up to $600,000, C-check labor costs up to
$300,000 and the actual cost of C-check parts for the aircraft. In
addition, the Partnership will provide financing up to $815,000 for new
image modifications to be repaid with interest over the lease term. In
accordance with the cost sharing agreement, in January 1994, the
3<PAGE>
<PAGE>
Partnership reimbursed Continental $600,000 for cockpit modifications and
$338,189 for C-check labor and parts. In addition, the Partnership
financed $719,784 for new image modifications, which is being repaid with
interest over the lease term of the aircraft. The lease also stipulates
that the Partnership share in the cost of meeting certain ADs, which
cannot be estimated at this time.
(6) These two aircraft, previously on lease to Alaska, were leased to
Continental Micronesia in May and June 1993. The lease rates are
approximately 55% of the prior lease rates. The leases stipulate that the
Partnership will reimburse costs for cockpit modifications up to $600,000
per aircraft, C-check labor costs up to $300,000 for one of the aircraft
and the actual cost of C-check parts for one of the aircraft. In
addition, the Partnership will provide financing up to $815,000 for new
image modifications to be repaid with interest over the lease term for
each aircraft. In accordance with the cost sharing agreement, in January
1994, the Partnership reimbursed Continental (on behalf of its affiliate
Continental Micronesia) $1.2 million for cockpit modifications and
$404,136 for C-check labor and parts. In addition, the Partnership
financed $1,457,749 for new image modifications, which is being repaid
with interest over the lease terms of the aircraft. The leases also
stipulate that the Partnership share in the cost of meeting certain ADs,
which cannot be estimated at this time.
The Partnership transferred six Boeing 727-200 aircraft, formerly leased to Pan
American World Airways, Inc. (Pan Am), to aircraft inventory in 1992. These
aircraft were disassembled for sale of their component parts as discussed in
Item 7. The Partnership sold one Boeing 727-200 aircraft equipped with a
hushkit (described below), formerly leased to Delta Airlines, Inc. (Delta), to
American International Airways, Inc. (AIA) in February 1995 as discussed in
Item 7.
Approximately 600 commercial aircraft are currently available for sale or
lease, approximately 100 less than a year ago. The current surplus has
negatively affected market lease rates and fair market values of both new and
used aircraft. Current depressed demand for air travel has limited airline
expansion plans, with new aircraft orders and scheduled delivery being
cancelled or substantially deferred. As profitability has declined, many
airlines have taken action to downsize or liquidate assets and many airlines
have filed for bankruptcy protection. The Partnership has been forced to adjust
its estimates of the residual values realizable from its aircraft and aircraft
inventory, which resulted in an increase in depreciation expense in 1994, 1993
and 1992, as discussed in Item 7. A discussion of the current market condition
for the type of aircraft owned by the Partnership follows:
Boeing 727-200 Advanced - The Boeing 727 was the first tri-jet introduced into
commercial service. The Boeing 727 is a short- to medium-range jet used for
trips of up to 1,500 nautical miles. In 1972, Boeing introduced the Boeing
727-200 Advanced model, a higher gross weight version with increased fuel
capacity. Noise suppression hardware, commonly known as a "hushkit," has been
developed which, when installed on the aircraft, bring the Boeing 727-200
Advanced into compliance with Federal Aviation Administration (FAA) Stage 3
noise restrictions. The cost of the hushkit is approximately $2.5 million for
the Boeing 727-200 Advanced aircraft. Hushkits may not be cost effective on
all aircraft due to the age of some of the aircraft and the time required to
fully amortize the additional investment. Certain ADs applicable to all models
of the Boeing 727 have been issued to prevent fatigue cracks and control
corrosion. The market for this type of aircraft, as for all Stage 2 narrowbody
aircraft, remains very soft.
4<PAGE>
<PAGE>
Boeing 737-200 - The Boeing 737-200 aircraft was introduced in 1967 and 150
were delivered from 1967 through 1971. This two-engine, two-pilot aircraft
provides operators with 107 to 130 seats, meeting their requirements for
economical lift in the 1,100 nautical mile range. Hushkits, that bring Boeing
737-200 aircraft into compliance with FAA Stage 3 noise restrictions, are now
available at a cost of approximately $1.7 million for lighter weight aircraft
and up to $3.0 million for aircraft with heavier takeoff weights. Hushkits may
not be cost effective on all aircraft due to the age of some of the aircraft
and the time required to fully amortize the additional investment. Certain ADs
applicable to all models of the Boeing 737 have been issued to prevent fatigue
cracks and control corrosion. The market for this type of aircraft, as for all
Stage 2 narrowbody aircraft, remains very soft.
McDonnell Douglas DC-9-30/40 - The McDonnell Douglas DC-9-30/40 is a short- to
medium-range twin-engine jet that was introduced in 1967. Providing reliable,
inexpensive lift, these aircraft fill thin niche markets, mostly in the United
States. Hushkits are available to bring these aircraft into compliance with
Stage 3 requirements at a cost of approximately $1.6 million per aircraft.
Hushkits may not be cost effective on all aircraft due to the age of some of
the aircraft and the time required to fully amortize the additional investment.
The market for this type of aircraft, as for all Stage 2 narrowbody aircraft,
remains very soft. It is expected that the FAA will continue to propose and
adopt ADs for the McDonnell Douglas DC-9 aircraft similar to those discussed
above for the Boeing 737s and Boeing 727s, which will require modifications at
some point in the future to prevent fatigue cracks and control corrosion. The
demand for and the value of these aircraft may be diminished to the extent that
the costs of bringing McDonnell Douglas DC-9 aircraft into compliance with any
ADs reduces the economic efficiency of operating these aircraft.
The general partner believes that in addition to the factors cited above, the
current soft market for the Partnership's aircraft reflects the airline
industry's reaction to the significant expenditures potentially necessary to
bring these aircraft into compliance with certain ADs issued by the FAA
relating to aging aircraft, corrosion prevention and control and structural
inspection and modification, as discussed in the Industry Update section of
Item 7.
Item 2. Properties
PAIF-II owns one Boeing 737-200 Combi aircraft leased to NWT, 17 McDonnell
Douglas DC-9-30 and one McDonnell Douglas DC-9-40 aircraft leased to TWA, one
Boeing 737-200 aircraft leased to Viscount, one Boeing 727-200 Advanced
aircraft leased to Continental and two Boeing 727-200 Advanced aircraft leased
to Continental Micronesia. All leases are operating leases. The Partnership
transferred six Boeing 727-200 aircraft, previously leased to Pan Am, to
aircraft inventory in 1992. These aircraft, which are not included in the
following table, have been disassembled for sale of their component parts. The
Partnership sold one Boeing 727-200 aircraft equipped with a hushkit to AIA in
February 1995.
5<PAGE>
<PAGE>
The following table describes the Partnership's current aircraft portfolio in
greater detail:
Year of Cycles
Aircraft Type Serial Number Manufacture As of 9/30/94 (1)
------------- ------------- ----------- -----------------
Boeing 727-200 Advanced 21426 1977 29,691
Boeing 727-200 Advanced 21427 1977 28,331
Boeing 727-200 Advanced 21947 1979 24,947
Boeing 737-200 19609 1968 62,323
Boeing 737-200 Combi 19743 1969 63,674
McDonnell Douglas DC-9-30 47082 1967 71,904
McDonnell Douglas DC-9-30 47096 1967 72,506
McDonnell Douglas DC-9-30 47135 1968 73,198
McDonnell Douglas DC-9-30 47137 1968 72,571
McDonnell Douglas DC-9-30 47249 1968 78,499
McDonnell Douglas DC-9-30 47251 1968 76,793
McDonnell Douglas DC-9-30 47343 1969 75,679
McDonnell Douglas DC-9-30 47345 1969 73,838
McDonnell Douglas DC-9-30 47411 1969 71,231
McDonnell Douglas DC-9-30 47412 1969 71,222
McDonnell Douglas DC-9-30 47027 1967 77,358
McDonnell Douglas DC-9-30 47107 1968 77,081
McDonnell Douglas DC-9-30 47108 1968 73,836
McDonnell Douglas DC-9-30 47174 1968 74,623
McDonnell Douglas DC-9-30 47324 1969 71,249
McDonnell Douglas DC-9-30 47357 1969 70,635
McDonnell Douglas DC-9-30 47734 1977 41,767
McDonnell Douglas DC-9-40 47617 1975 40,310
(1) Cycle information as of 12/31/94 is not yet available.
6<PAGE>
<PAGE>
Item 3. Legal Proceedings
Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a
petition under Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Middle District of Florida, Orlando Division. On
September 26, 1990 the Partnership filed a proof of claim to recover unpaid
rent and other damages, and on November 27, 1990, the Partnership filed a proof
of administrative claim to recover damages for detention of aircraft, non-
compliance with court orders and post-petition use of engines as well as
liquidated damages. On July 27, 1992, the Bankruptcy Court approved a
stipulation embodying a settlement among the Partnership, the Braniff creditor
committees and Braniff in which it was agreed that the Partnership would be
allowed an administrative claim in the bankruptcy proceeding of approximately
$230,769. The Partnership has received a check from the bankruptcy estate in
full payment of the allowed administrative claim, subject, however, to the
requirement of the stipulation that 25% of such proceeds be held in a separate,
interest-bearing account pending notification by Braniff that all the allowed
administrative claims have been satisfied. The Partnership recognized 75% of
the total claim as other revenue in the statement of operations in 1992 (Item
8). In the third quarter of 1994, the Partnership was authorized to release
one-half of the 25% portion of the Partnership's administrative claim
segregated pursuant to the stipulation approved in 1992. At the end of 1994,
the Partnership was advised that the remaining one-half balance of the 25%
segregated portion of the administrative claim payment could be released. As
the final disposition of the Partnership's claim in the Bankruptcy proceedings,
the Partnership was permitted by the Bankruptcy Court to exchange a portion of
its unsecured claim for Braniff's right (commonly referred to as a "Stage 2
Base Level right") under the FAA noise regulations to operate one Stage 2
aircraft and has been allowed a net remaining unsecured claim of $769,231 in
the proceedings.
Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, an action
entitled Kepford, et al. v. Prudential Securities, Inc. was filed in the
District Court of Harris County, Texas. The complaint names Polaris Investment
Management Corporation, Polaris Securities Corporation, Polaris Holding
Company, Polaris Aircraft Leasing Corporation, the Partnership, Polaris
Aircraft Income Fund I, Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund
VI, General Electric Capital Corporation, Prudential Securities, Inc.,
Prudential Insurance Company of America and James J. Darr, as defendants.
Certain defendants were served with a summons and original petition on or about
May 2, 1994. Plaintiffs' original petition alleges that defendants violated
the Texas Securities Act, the Texas Deceptive Trade Practices Act, sections 11
and 12 of the Securities Act of 1933 and committed common law fraud, fraud in
the inducement, negligent misrepresentation, negligence, breach of fiduciary
duty and civil conspiracy by misrepresenting and failing to disclose material
facts in connection with the sale of limited partnership units in the
Partnership and the other Polaris Aircraft Income Funds. Plaintiffs seek,
among other things, an award of compensatory damages in an unspecified amount
plus interest thereon, and double and treble damages under the Texas Deceptive
Trade Practices Act.
Certain defendants, including Polaris Investment Management Corporation and the
Partnership, filed a general denial on June 29, 1994 and a motion for summary
judgment on June 17, 1994 on the basis that the statute of limitations has
expired. On June 29, 1994 and July 14, 1994, respectively, plaintiffs filed
their first amended original petition and second amended original petition,
both of which added plaintiffs. On July 18, 1994, plaintiffs filed their
response and opposition to defendants' motion for partial summary judgment and
also moved for a continuance on the motion for partial summary judgment. On
7<PAGE>
<PAGE>
August 11, 1994, after plaintiffs again amended their petition to add numerous
plaintiffs, the defendants withdrew their summary judgment motion and motion to
stay discovery, without prejudice to refiling these motions at a later date.
Riskind, et al. v. Prudential Securities, Inc., et al. - An action entitled
Riskind, et al. v. Prudential Securities, Inc., et al. has been filed in the
District Court of the 165 Judicial District, Maverick County, Texas. This
action is on behalf of over 3,000 individual investors who purchased units in
"various Polaris Aircraft Income Funds," including the Partnership. Polaris
Aircraft Income Fund I and Polaris Investment Management Corporation received
service of plaintiffs' second amended original petition and, on June 13, 1994,
filed an original answer containing a general denial.
The second amended original petition names Polaris Aircraft Income Fund I,
Polaris Investment Management Corporation, Prudential Securities, Inc. and
others as defendants and alleges that these defendants violated the Texas
Securities Act and the Texas Deceptive Trade Practices Act and committed common
law fraud, fraud in the inducement, negligent misrepresentation, negligent
breach of fiduciary duty and civil conspiracy by misrepresenting and failing to
disclose material facts in connection with the sale of limited partnership
units in the Partnership and the other Polaris Aircraft Income Funds.
Plaintiffs seek, among other things, an award of compensatory damages in an
unspecified amount plus interest thereon, and double and treble damages under
the Texas Deceptive Trade Practices Act.
On April 29, 1994 and June 30, 1994, plaintiffs filed third and fourth amended
original petitions which added additional plaintiffs. On April 24, 1994,
plaintiffs filed motions for (i) joinder and consolidation of cases in
arbitration, (ii) joinder and consolidation of cases not subject to
arbitration, and (iii) a pre-trial scheduling order. These motions were
amended on June 29, 1994 and, on August 22, 1994, plaintiffs filed a renewed
motion for consolidation and motion to set for jury. On August 31, 1994,
plaintiffs filed their fifth amended original petition which added additional
plaintiffs and also filed their second plea in intervention adding nearly 2,000
intervenors. On September 7, 1994, the court denied plaintiffs' motion to
consolidate and motion to set for jury, but determined to sever from the
primary lawsuit four plaintiffs and set the action for trial on November 7,
1994. On October 4, 1994, plaintiffs filed their sixth amended petition adding
as defendants: the Partnership, Polaris Aircraft Income Fund III, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft
Income Fund VI, Polaris Holding Company, Polaris Aircraft Leasing Corporation,
Polaris Securities Corporation, General Electric Capital Corporation, General
Electric Financial Services, Inc., and General Electric Company.
On October 14, 1994, defendants filed motions for summary judgment on the
grounds of, inter alia, statute of limitations and failure to state a claim.
The motions have been fully briefed and the parties are waiting for a decision
by the Texas trial court. On October 20, 1994, certain Polaris and General
Electric entities filed a motion to transfer venue, plea in abatement and
motion to dismiss the claims of non-Texas residents on the basis of forum non
conveniens. On November 1, 1994 and November 7, 1994, plaintiffs filed their
seventh and eighth amended original petitions. On November 4, 1994, plaintiffs
filed a motion for summary judgment, motion for collateral estoppel, and motion
for summary judgment on the issue of fraudulent concealment. On November 7,
1994, plaintiffs filed a second motion for summary judgment. These motions
were supplemented on November 10, 1994. Defendants filed responses to these
motions on November 23, 1994.
On November 7, 1994, the Partnership and other Polaris and General Electric
entities filed in the Court of Appeals for the 4th Judicial District San
8<PAGE>
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Antonio, Texas: (1) an emergency motion to stay trial court proceedings, and
(2) a motion for leave to file petition for writ of mandamus, together with
relator's petition for writ of mandamus, supporting brief and record. These
motions, which concern trial court rulings regarding venue, discovery, and
trial settings, were denied by the Court of Appeals on November 9, 1994. On
November 14, 1994, the Partnership and other Polaris and General Electric
entities filed in the Texas Supreme Court motions (a) for emergency stay of
trial court proceedings, and (b) for leave to file petition for writ of
mandamus, together with relators' petition and writ of mandamus, supporting
brief and record. On November 15, 1994, the Supreme Court granted the
emergency motion to stay trial court proceedings pending determination of
relators' motion for leave to file petition for writ of mandamus, which
concerns trial court rulings regarding venue, discovery, and trial settings.
On November 16, 1994, plaintiffs filed an emergency motion to lift the stay.
On February 16, 1995, the Texas Supreme Court denied leave to file the petition
and writ of mandamus and the stay of trial court proceedings was lifted. On
February 21, 1995, defendants filed a motion for a continuance of the case.
Howland, et al. v. Polaris Holding Company, et al. - On or about February 4,
1994, a purported class action entitled Howland, et al. v. Polaris Holding
Company, et al. was filed in the United States District Court for the District
of Arizona on behalf of investors in Polaris Aircraft Income Funds I-VI. The
complaint names each of Polaris Investment Management Corporation, Polaris
Securities Corporation, Polaris Holding Company, Polaris Aircraft Leasing
Corporation, the Partnership, Polaris Aircraft Income Fund I, Polaris Aircraft
Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund
V, Polaris Aircraft Income Fund VI, General Electric Capital Corporation,
Prudential Securities, Inc., Prudential Securities Group, Inc., Prudential
Insurance Company of America, George W. Ball, Robert J. Sherman, James J. Darr,
Paul J. Proscia, Frank W. Giordano, William A. Pittman, Joseph H. Quinn, Joe W.
Defur, James M. Kelso and Brian J. Martin, as defendants. The complaint
alleges that defendants violated federal RICO statutes, committed negligent
misrepresentations, and breached their fiduciary duties by misrepresenting and
failing to disclose material facts in connection with the sale of limited
partnership units in the Partnership and the other Polaris Aircraft Income
Funds. Plaintiffs seek, among other things, an accounting of all monies
invested by plaintiffs and the class and the uses made thereof by defendants,
an award of compensatory, punitive and treble damages in unspecified amounts
plus interest thereon, rescission, attorneys' fees and costs. On August 3,
1994, the action was transferred to the multi-district litigation in the
Southern District of New York entitled In re Prudential Securities Limited
Partnerships Litigation, discussed in Part III, Item 10 below.
Other Proceedings - Part III, Item 10 discusses certain other actions which
have been filed against the general partner in connection with certain public
offerings, including that of the Partnership. With the exception of Novak, et
al v. Polaris Holding Company, et al, where the Partnership is named as a
nominal defendant, the Partnership is not a party to these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
9<PAGE>
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
a) Polaris Aircraft Income Fund II's (PAIF-II or the Partnership) limited
partnership interests (Units) are not publicly traded. Currently there is
no market for PAIF-II's Units and it is unlikely that any market will
develop.
b) Number of Security Holders:
Number of Record Holders
Title of Class as of December 31, 1994
---------------------------- -------------------------
Limited Partnership Interest: 16,920
General Partnership Interest: 1
c) Dividends:
The Partnership distributed cash to partners on a quarterly basis
beginning in July 1986. Cash distributions to limited partners during 1994
and 1993 totaled $12,499,925 and $9,999,940, respectively. Cash
distributions per limited partnership unit were $25.00 and $20.00 in 1994
and 1993, respectively.
<TABLE>
Item 6. Selected Financial Data
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 14,443,902 $ 15,558,866 $ 17,990,196 $ 29,673,077 $ 38,427,157
Net Income (Loss) (3,217,172) 48,114 (1,709,007) (1,596,956) 21,801,650
Net Income (Loss)
Allocated to
Limited Partners (4,434,868) (952,261) (2,941,785) (3,330,801) 18,364,475
Net Income (Loss) per
Limited Partnership
Unit (8.87) (1.91) (5.88) (6.66) 36.73
Cash Distributions per
Limited Partnership
Unit 25.00 20.00 25.00 35.00 64.39
Total Assets 110,568,377 129,706,547 141,436,928 155,052,097 175,603,651
Partners' Capital 108,290,301 125,396,279 136,459,209 152,057,022 173,098,306
</TABLE>
10<PAGE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership owns a portfolio of 23 used commercial jet aircraft and certain
inventoried aircraft parts out of its original portfolio of 30 aircraft. The
portfolio consists of one Boeing 737-200 Combi aircraft leased to Northwest
Territorial Airways, Ltd. (NWT), 17 McDonnell Douglas DC-9-30 aircraft and one
McDonnell Douglas DC-9-40 aircraft leased to Trans World Airlines, Inc. (TWA),
one Boeing 737-200 aircraft leased to Viscount Air Services, Inc. (Viscount),
two Boeing 727-200 Advanced aircraft leased to Continental Micronesia, Inc.
(Continental Micronesia) and one Boeing 727-200 Advanced aircraft leased to
Continental Airlines, Inc. (Continental). One engine owned by Polaris Aircraft
Income Fund I is leased to Viscount through a joint venture with the
Partnership. The Partnership transferred six Boeing 727-200 aircraft,
previously leased to Pan American World Airways, Inc. (Pan Am), to aircraft
inventory in 1992. These aircraft have been disassembled for sale of their
component parts as discussed below. The Partnership sold one Boeing 727-200
aircraft, formerly leased to Delta Airlines, Inc. (Delta), in February 1995 as
discussed below.
Partnership Operations
The Partnership recorded a net loss of $3,217,172, or $8.87 per limited
partnership unit, for the year ended December 31, 1994, compared to net income
of $48,114, or an allocated net loss of $1.91 per limited partnership unit, for
the year ended December 31, 1993 and a net loss of $1,709,007, or $5.88 per
limited partnership unit, for the year ended December 31, 1992. The net loss
in 1994 resulted primarily from a decrease in rental revenue recognized from
the leases with TWA combined with maintenance expenses incurred from the
Partnership's leases to TWA. Further impacting the decline in operating results
in 1994 as compared to 1993, depreciation expense was substantially increased
in 1994 for declines in the estimated realizable values of the Partnership's
aircraft and aircraft inventory, as discussed later in the Industry Update
section. The Partnership recognized depreciation adjustments of approximately
$1.68 million in 1994, compared to adjustments of $300,000 and $5.8 million in
1993 and 1992, respectively.
Rental revenues, net of related management fees, continued to decline in 1994
as compared to 1993 and 1992, primarily as a result of a decrease in rental
revenue recognized in 1994 on the Partnership's leases with TWA. In October
1994, TWA proposed to its creditors, including the Partnership, a restructuring
of its debt. As discussed later in Item 7, in December 1994, GE Capital
Aviation Services, Inc. (or "GECAS" which, as discussed in Part III, Item 10
now provides certain management services to Polaris Investment Management
Corporation (PIMC) and Polaris Aircraft Leasing Corporation) negotiated a
proposed standstill agreement with TWA which was approved on behalf of the
Partnership by PIMC. That agreement provides for a moratorium of the rent due
the Partnership in November 1994 and 75% of the rents due the Partnership from
December 1994 through March 1995, with the deferred rents, which aggregate $3.6
million plus interest, being repaid by TWA in monthly installments between May
1995 through December 1995. The Partnership will not recognize the rental
amount deferred in 1994 of $1.575 million as rental revenue until it is
received. The Partnership received as consideration for the agreement $218,071
and warrants for such amount of TWA Common Stock as would have a value (as
described later) on December 31, 1997, on a fully diluted basis, equal to the
total amount of rent deferred.
As part of the TWA lease extension as discussed in Note 6 to the financial
statements (Item 8), the Partnership agreed to share the cost of meeting
11<PAGE>
<PAGE>
certain Airworthiness Directives (ADs) after TWA successfully reorganized in
1993. The agreement stipulates that such costs incurred by TWA may be credited
against monthly rentals, subject to annual limitations and a maximum of
$500,000 per aircraft through the end of the leases. In accordance with the
cost sharing agreement, the Partnership recognized as operating expense $3.6
million and $2.7 million of these AD expenses during 1994 and 1993,
respectively.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all lease payments due from NWT,
Continental, Continental Micronesia and Viscount, with the exception of certain
maintenance reserve payments due from Viscount. However, to assist Viscount
with the funding of costs associated with Federal Aviation Regulation
compliance relating to the Partnership's aircraft, the Partnership has entered
into an agreement with Viscount under which it agreed to defer certain rents
due the Partnership on one aircraft. These deferred rents are being repaid by
Viscount with interest over the remaining term of the lease. The agreement
with Viscount also stipulates that the Partnership will advance Viscount
$127,000, primarily for maintenance expenses incurred by Viscount relating to
the Partnership's aircraft. In accordance with the agreement, the Partnership
advanced Viscount $127,000 in 1994 which is being repaid by Viscount with
interest over a 30-month period beginning in January 1995 as discussed later.
The Partnership receives maintenance reserve payments from certain of its
lessees that may be reimbursed to the lessee or applied against certain costs
incurred by the Partnership for maintenance work performed on the Partnership's
aircraft, as specified in the leases. Maintenance reserve balances remaining
at the termination of the lease may be used by the Partnership to offset future
maintenance expenses. The net maintenance reserves payments aggregate $722,690
as of December 31, 1994.
As previously discussed, the Partnership and TWA agreed to defer certain rents
due the Partnership totaling $3.6 million, to be repaid by TWA, with interest
beginning in May 1995 through December 1995. Until the deferred rents are
repaid by TWA in full, the negative impact on the Partnership's cash reserves
will be significant.
As discussed above, during 1994 TWA offset $3.6 million against rental payments
due the Partnership for expenses TWA incurred for certain ADs on the
Partnership's aircraft. TWA may offset rental payments due the Partnership for
the ADs up to an additional $2.7 million, subject to annual limitations, over
the lease terms.
As specified in the Partnership's leases with Continental Micronesia and
Continental, in January 1994, the Partnership reimbursed Continental (partially
on behalf of its affiliate Continental Micronesia) an aggregate of $1.8 million
for cockpit modifications and $742,325 for C-check labor and parts for the
three aircraft. In addition, in January 1994, the Partnership financed an
aggregate of $2,177,533 for new image modifications, which is being repaid with
interest over the terms of the aircraft leases. The leases with Continental
and Continental Micronesia also stipulate that the Partnership share in the
cost of meeting certain ADs, which cannot be estimated at this time.
The Partnership sold one Boeing 727-200 aircraft equipped with a hushkit to
American International Airways, Inc. (AIA) in February 1995 as discussed below.
The agreement specifies payment of the sales price in 36 monthly installments
of $55,000 beginning in March 1995.
12<PAGE>
<PAGE>
Payments of $323,448 have been received during 1994 from the sale of
inventoried parts from the six disassembled aircraft. The Partnership's cash
reserves are being retained to meet obligations under the TWA and Continental
and Continental Micronesia lease agreements.
Cash Distributions - Cash distributions to limited partners were $12,499,925,
$9,999,940 and $12,499,925 in 1994, 1993 and 1992, respectively. Cash
distributions per limited partnership unit were $25.00, $20.00 and $25.00 per
limited partnership unit in 1994, 1993 and 1992, respectively. The timing and
amount of future cash distributions will depend upon the Partnership's future
cash requirements; the receipt of rental payments from NWT, TWA, Viscount,
Continental and Continental Micronesia; the receipt of the deferred rental
payments from TWA; the receipt of the deferred rental payments and financing
payments from Viscount; the receipt of modification financing payments from
Continental and Continental Micronesia; the receipt of sales proceeds from AIA;
and, the receipt of payments generated from the aircraft disassembly process.
Remarketing Update
Sale of Aircraft to AIA - The Partnership sold one Boeing 727-200 aircraft
equipped with a hushkit, formerly leased to Delta, to AIA in February 1995 for
a sales price of approximately $1.77 million. The Partnership agreed to accept
payment of the sales price in 36 monthly installments of $55,000, with interest
at a rate of 7.5% per annum, beginning in March 1995.
Disassembly of Aircraft
In an attempt to maximize the economic return from the remaining six aircraft
formerly leased to Pan Am, the Partnership entered into an agreement with
Soundair, Inc. (Soundair) in October 1992 for the disassembly and sale of
certain of the Partnership's aircraft. It is anticipated that the disassembly
and sales process will take at least three years. The Partnership has borne
the cost of disassembly and will receive the proceeds from the sale of such
parts, net of overhaul expenses if necessary, and commissions paid to Soundair.
Disassembly of the six aircraft has been completed. During 1993 and 1992, the
Partnership paid $327,750 and $135,750, respectively, for aircraft disassembly
costs. The Partnership has received net proceeds from the sale of aircraft
inventory of $323,448, $1,169,483 and $32,460 during 1994, 1993 and 1992,
respectively.
The six aircraft were recorded as aircraft inventory in the amount of $3.0
million in 1992. During 1994 and 1993, the Partnership recorded downward
adjustments to the inventory value of $72,000 and $300,000, respectively, to
reflect the then-current estimate of net realizable aircraft inventory value.
These adjustments are reflected as increased depreciation expense in the
corresponding years' statements of operations (Item 8).
TWA Restructuring
In October 1994, TWA notified its creditors, including the Partnership, of a
proposed restructuring of its debt. Such restructuring was to include a six-
month moratorium on its lease payments to TWA's lessors commencing November
1994. TWA initially proposed that lease payments for a portion of that period
be forgiven in exchange for shares of TWA common stock to be issued in
conjunction with the restructuring and the remainder repaid over the remaining
lease term. TWA stated that if it were unable to obtain approvals from its
13<PAGE>
<PAGE>
creditors (including the Partnership) for the proposed restructuring, it would
have to file for protection under Chapter 11 of the Federal Bankruptcy Code.
Subsequently, GECAS negotiated a proposed standstill agreement with TWA for the
46 aircraft that are managed by GECAS. That agreement, which was subject to
the approval of the owners of these aircraft, was subsequently approved by
PIMC. The agreement provides for a moratorium of the rent due the Partnership
in November 1994 and 75% of the rents due the Partnership from December 1994
through March 1995, with the deferred rents, which aggregate $3.6 million plus
interest, being repaid in monthly installments beginning in May 1995 through
December 1995. The Partnership will not recognize the rental amount deferred
in 1994 of $1.575 million as rental revenue until it is received. In
consideration for that partial moratorium, TWA agreed to make an initial
payment to the TWA lessors for whom GECAS provides management services and who
agreed to the proposed standstill agreement, including the Partnership. The
Partnership received as consideration for the agreement $218,071 in January
1995. In addition, TWA issued warrants to the Partnership for such amount of
TWA Common Stock as would have a value (based on the projected balance sheet
provided by TWA in connection with the restructuring) on December 31, 1997, on
a fully diluted basis, equal to the total amount of rent deferred. TWA has not
concluded agreements with all of its creditors regarding its proposed debt
restructuring. Thus, it remains uncertain whether TWA will file for protection
under Chapter 11 of the Federal Bankruptcy Code.
Viscount Restructuring Agreement
Rent Deferral - To assist Viscount with the funding of costs associated with
Federal Aviation Regulation compliance relating to the Partnership's aircraft,
the Partnership has entered into an agreement with Viscount to defer certain
rents due the Partnership on one aircraft for a period of six months. The
deferred rents, which aggregate $196,800, are being repaid by Viscount with
interest at a rate of 6% per annum, beginning in October 1994, over the
remaining lease term.
Maintenance Advance - The Partnership has also agreed to extend a line of
credit to Viscount for $127,000 to be used primarily for maintenance expenses
relating to the Partnership's aircraft. In accordance with the agreement, the
Partnership advanced Viscount $127,000 during 1994. Payments of interest at
variable rates ranging from 8.75% to 9.18% per annum were paid by Viscount
beginning in September 1994. Beginning in January 1995, level payments to
amortize the advance over a 30-month period, with interest at a rate of 11.53%
per annum, are being paid in arrears.
Option - The Partnership has the option to acquire approximately 0.6% of the
issued and outstanding shares of Viscount stock as of July 26, 1994 for an
option price of approximately $91,000. The option may be exercised at any time
during the option period, which expires on July 20, 1999. This option is
carried at zero value in the balance sheet as of December 31, 1994 (Item 8) due
to the uncertainty of its realizability.
Claims Related to Lessee Defaults
Braniff, Inc. (Braniff) Bankruptcy Claim - As discussed in Item 3, in 1992, the
Partnership received full payment of the Braniff administrative claim, subject,
however, to the requirement that 25% of total proceeds be held by PIMC in a
separate, interest-bearing account pending notification by Braniff that all of
the allowed administrative claims have been satisfied. During 1994, the
Partnership was advised that the 25% portion of the administrative claim
proceeds with interest could be released by PIMC to the Partnership. As a
result, the Partnership recognized $67,958 as other revenue in the 1994
statement of operations (Item 8).
14<PAGE>
<PAGE>
Continental Restructuring
On January 26, 1995, Continental announced a number of actual and proposed
changes in its operations and financial situation. In connection with those
changes, Continental indicated that it was discussing with certain of its major
lenders modifications to existing debt amortization schedules to enhance the
airline's capital structure. Continental stated that during those discussions
it would not be making payments to such lenders and lessors otherwise required
under the current contracts. The Partnership is not engaged in any such
discussions with Continental at the present time, and Continental has made all
payments due to the Partnership on a current basis to date.
Reconciliation of Book Loss to Taxable Loss
The following is a reconciliation between net loss per limited partnership unit
reflected in the accompanying financial statements (Item 8) and the information
provided to limited partners for federal income tax purposes:
1994 book net loss per limited partnership unit $(8.87)
Adjustments for tax purposes:
TWA rental revenue recognized for tax purposes and deferred for
book purposes 5.76
Management fee recognized for tax purposes and deferred for
book purposes (0.27)
Recognition of revenue from increase in maintenance reserves 2.67
Additional expense from disbursement of maintenance reserves (3.25)
Reversal of book other revenue previously recognized for tax (1.18)
Tax depreciation in excess of book depreciation (2.76)
Net tax loss on sale of inventory and writedown of inventory (0.39)
Items capitalized for tax and expensed for book 7.13
------
1994 taxable loss per limited partnership unit $(1.16)
======
The difference between net loss for book purposes and net loss for tax purposes
result from timing differences of certain revenue and deductions. As
previously discussed, the Partnership has deferred certain 1994 TWA rents until
1995, when they are to be paid with interest. For book purposes, the
Partnership will not recognize the rental amount deferred in 1994 as revenue
until it is received. This deferral has been reversed for tax purposes and the
rental revenue and associated management fee expense has been recognized.
During 1994, TWA incurred maintenance costs related to the Partnership's
aircraft. Under the lease agreement, these costs will offset future rental
payments owed by TWA. For tax purposes, the payment of these costs by TWA is
treated as prepaid rent and recognized as rental revenue in 1994.
Certain increases in the Partnership's book maintenance reserve liability were
recognized as revenue for tax purposes. Certain disbursements from the
Partnership book maintenance reserves are capitalized or expensed for tax
purposes, as appropriate. During 1994, certain maintenance reserve liability
balances remaining at the end of the lease term were recognized as revenue for
book purposes. Since this revenue had been previously recognized for tax
purposes, it was reversed for tax purposes.
The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
purposes. As a result, the current year tax depreciation expense is greater
than the book depreciation expense. Certain aircraft have been disassembled
and held in inventory until their component parts can be sold. A net tax loss
15<PAGE>
<PAGE>
resulted from the sale of these component parts along with a writedown to tax
basis inventory value. For book purposes, such assets are reflected at
estimated net realizable value. Finally, certain costs were capitalized for
tax purposes and expensed for book purposes.
Industry Update
Maintenance of Aging Aircraft - The process of aircraft maintenance begins at
the aircraft design stage. For aircraft operating under Federal Aviation
Administration (FAA) regulations, a review board consisting of representatives
of the manufacturer, FAA representatives and operating airline representatives
is responsible for specifying the aircraft's initial maintenance program. The
general partner understands that this program is constantly reviewed and
modified throughout the aircraft's operational life.
Since 1988, the FAA, working with the aircraft manufacturers and operators, has
issued a series of ADs which mandate that operators conduct more intensive
inspections, primarily of the aircraft fuselages. The results of these
mandatory inspections may uncover the need for repairs or structural
modifications that may not have been required under pre-existing maintenance
programs.
In addition, an AD adopted in 1990 requires replacement or modification of
certain structural items on a specific timetable. These structural items were
formerly subject to periodic inspection, with replacement when necessary. The
FAA estimates the cost of compliance with this AD to be approximately $1.0
million and $900,000 per Boeing 727 and Boeing 737 aircraft, respectively, if
none of the required work had been done previously. The FAA also issued
several ADs in 1993 updating inspection and modification requirements for
Boeing 737 aircraft. The FAA estimates the cost of these requirements to be
approximately $90,000 per aircraft. In general, the new maintenance
requirements must be completed by the later of March 1994, or 75,000 and 60,000
cycles for each Boeing 737 and 727, respectively. A similar AD was adopted on
September 24, 1990, applicable to McDonnell Douglas aircraft. The AD requires
specific work to be performed at various cycle thresholds between 50,000 and
100,000 cycles, and on specific date or age thresholds. The estimated cost of
compliance with all of the components of this AD is approximately $850,000 per
aircraft.
In December 1990, the FAA adopted another AD intended to mitigate corrosion of
structural components, which would require repeated inspections from 5 years of
age throughout the life of an aircraft, with replacement of corroded components
as needed. Integration of the new inspections into each aircraft operator's
maintenance program was required by December 31, 1991 on Boeing aircraft.
The Partnership's existing leases require the lessees to maintain the
Partnership's aircraft in accordance with an FAA-approved maintenance program
during the lease term. At the end of the leases, each lessee is generally
required to return the aircraft in airworthy condition including compliance
with all ADs for which action is mandated by the FAA during the lease term.
The Partnership has agreed to bear a portion of the costs of compliance with
certain ADs with respect to the aircraft leased to TWA, Continental and
Continental Micronesia, as described in Item 1. In negotiating subsequent
leases, market conditions currently generally require that the Partnership bear
some or all of the costs of compliance with future ADs or ADs that have been
issued, but which did not require action during the previous lease term. The
ultimate effect on the Partnership of compliance with the FAA maintenance
standards is not determinable at this time and will depend on a variety of
factors, including the state of the commercial aircraft industry, the timing of
16<PAGE>
<PAGE>
the issuance of ADs, and the status of compliance therewith at the expiration
of the current leases.
Aircraft Noise - Another issue which has affected the airline industry is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are, with
few exceptions, no longer allowed to operate from civil airports in the United
States. Stage 2 aircraft meet current FAA requirements, subject to the phase-
out rules discussed below. Stage 3 aircraft are the most quiet and Stage 3 is
the standard for all new aircraft.
On September 24, 1991, the FAA issued final rules on the phase-out of Stage 2
aircraft by the end of this decade. The current U.S. fleet is comprised of
approximately 57% Stage 3 aircraft and 43% Stage 2 aircraft. The key features
of the rule include:
- Compliance can be accomplished through a gradual process of phase-in
or phase-out (see below) on each of three interim compliance dates:
December 31, 1994, 1996, and 1998. All Stage 2 aircraft must be
phased out of operations in the contiguous United States by December
31, 1999, with waivers available in certain specific cases to
December 31, 2003.
- All operators have the option of achieving compliance through a
gradual phase-out of Stage 2 aircraft (i.e., eliminate 25% of its
Stage 2 fleet on each of the compliance dates noted above), or a
gradual phase-in of Stage 3 aircraft (i.e., 55%, 65% and 75% of an
operator's fleet must consist of Stage 3 aircraft by the respective
interim compliance dates noted above).
- Carryforward credits will be awarded to operators for early additions
of Stage 3 aircraft to their fleets. These credits may be used to
reduce either the number of Stage 2 aircraft it must phase-out or the
number of Stage 3 aircraft it must phase-in by the next interim
compliance date. The credits must be used by that operator, however,
and cannot be transferred or sold to another operator.
The federal rule does not prohibit local airports from issuing more stringent
phase-out rules. In fact, several local airports have adopted more stringent
noise requirements which restrict the operation of Stage 2 and certain Stage 3
aircraft.
Other countries have also adopted noise policies. The European Union (EU)
adopted a non-addition rule in 1989, which directed each member country to pass
the necessary legislation to prohibit airlines from adding Stage 2 aircraft to
their fleets after November 1, 1990. The rule has specific exceptions for
leased aircraft and does allow the continued use of Stage 2 aircraft which were
in operation before November 1, 1990, although adoption of rules requiring the
eventual phase-out of Stage 2 aircraft is anticipated. The International Civil
Aviation Organization has also endorsed the phase-out of Stage 2 aircraft on a
world-wide basis by the year 2002.
Except for one Boeing 727-200 aircraft with a hushkit, which was sold in
February 1995 as previously discussed, the Partnership's entire fleet consists
of Stage 2 aircraft. Hushkit modifications, which allow Stage 2 aircraft to
meet Stage 3 requirements, are currently available for the Partnership's
aircraft. However, while technically feasible, hushkits may not be cost
effective on all models due to the age of some of the aircraft and the time
required to fully amortize the additional investment. The general partner will
evaluate, as appropriate, the potential benefits of hushkitting some or all of
17<PAGE>
<PAGE>
the Partnership's aircraft. It is unlikely, however, that the Partnership will
incur such costs unless they can be substantially recovered through a lease.
Implementation of the Stage 3 standards has adversely affected the value of
Stage 2 aircraft, as these aircraft will require eventual modification to be
operated in the U.S. or other countries with Stage 3 standards after the
applicable dates.
Demand for Aircraft - Approximately 600 commercial aircraft are currently
available for sale or lease, approximately 100 less than a year ago. The
current surplus has negatively affected market lease rates and fair market
values of both new and used aircraft. Current depressed demand for air travel
has limited airline expansion plans, with new aircraft orders and scheduled
delivery being cancelled or substantially deferred. As profitability has
declined, many airlines have taken action to downsize or liquidate assets and
many airlines have filed for bankruptcy protection.
Effects on the Partnership's Aircraft - To ensure that the carrying value of
each asset equals its estimated residual value at the end of its expected
holding period, where appropriate the Partnership made downward adjustments to
the residual value during 1994, 1993 and 1992 for certain of its on-lease
aircraft. In addition, during 1994, 1993 and 1992, the Partnership recognized
downward adjustments totaling approximately $1.68 million, $300,000 and $5.8
million, respectively, to the book value for certain of its off-lease and on-
lease aircraft, and with respect to 1994 and 1993, the adjustments also
included adjustments to aircraft inventory as previously discussed. These
adjustments are included in depreciation expense in the statements of
operations (Item 8).
The Partnership's leases expire between October 1995 and November 1998. To the
extent that the Partnership's Boeing and McDonnell Douglas aircraft continue to
be adversely affected by industry events, the Partnership will evaluate each
aircraft as it comes off lease to determine whether a re-lease or a sale at the
then-current market rates would be most beneficial for unit holders.
18<PAGE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994 AND 1993
TOGETHER WITH
AUDITORS' REPORT
19<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Polaris Aircraft Income Fund II,
A California Limited Partnership:
We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
II, A California Limited Partnership as of December 31, 1994 and 1993, and the
related statements of operations, changes in partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the general partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the general partner, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Polaris Aircraft Income Fund
II, A California Limited Partnership as of December 31, 1994 and 1993, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
January 24, 1995 (except with respect
to the matter discussed in Note 11, as
to which the date is February 9, 1995)
20<PAGE>
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
1994 1993
ASSETS: ---- ----
CASH AND CASH EQUIVALENTS $ 14,662,147 $ 97,473
SHORT-TERM INVESTMENTS, at cost which
approximates market value - 22,347,610
------------ -----------
Total Cash and Cash Equivalents and
Short-Term Investments 14,662,147 22,445,083
RENT AND OTHER RECEIVABLES 292,061 37,733
NOTES RECEIVABLE 2,781,432 1,022,308
AIRCRAFT at cost, net of accumulated depreciation
of $90,004,933 in 1994 and $77,031,695 in 1993 91,954,354 104,927,592
AIRCRAFT INVENTORY 848,613 1,244,061
OTHER ASSETS, net of accumulated amortization of
$459,928 in 1994 and 1993 29,770 29,770
------------ ------------
$110,568,377 $129,706,547
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 702,841 $ 52,274
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 38,663 2,556,325
LESSEE SECURITY DEPOSITS 171,140 189,564
MAINTENANCE RESERVES 722,690 869,363
DEFERRED INCOME 642,742 642,742
------------ ------------
Total Liabilities 2,278,076 4,310,268
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,119,868) (948,683)
Limited Partners, 499,997 units issued and
outstanding 109,410,169 126,344,962
------------ ------------
Total Partners' Capital 108,290,301 125,396,279
------------ ------------
$110,568,377 $129,706,547
============ ============
The accompanying notes are an integral part of these statements.
21<PAGE>
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1994 1993 1992
---- ---- ----
REVENUES:
Rent from operating leases $12,933,795 $ 14,397,683 $ 17,170,434
Net loss on sale of equipment - (513,395) -
Interest and other 1,510,107 1,674,578 819,762
----------- ------------ ------------
Total Revenues 14,443,902 15,558,866 17,990,196
----------- ------------ ------------
EXPENSES:
Depreciation and amortization 13,045,238 11,114,846 16,556,938
Management and advisory fees 615,940 685,950 805,411
Operating 3,738,938 3,445,325 2,001,445
Interest - - 63,057
Administration and other 260,958 264,631 272,352
----------- ----------- ------------
Total Expenses 17,661,074 15,510,752 19,699,203
----------- ------------ ------------
NET INCOME (LOSS) $(3,217,172) $ 48,114 $ (1,709,007)
=========== ============ ============
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 1,217,696 $ 1,000,375 $ 1,232,778
=========== ============ ============
NET LOSS ALLOCATED TO
LIMITED PARTNERS $(4,434,868) $ (952,261) $ (2,941,785)
=========== ============ ============
NET LOSS PER LIMITED
PARTNERSHIP UNIT $ (8.87) $ (1.91) $ (5.88)
=========== ============ ============
The accompanying notes are an integral part of these statements.
22<PAGE>
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1991 $ (681,851) $ 152,738,873 $ 152,057,022
Net income (loss) 1,232,778 (2,941,785) (1,709,007)
Cash distributions to partners (1,388,881) (12,499,925) (13,888,806)
------------ ------------- -------------
Balance, December 31, 1992 (837,954) 137,297,163 136,459,209
Net income (loss) 1,000,375 (952,261) 48,114
Cash distributions to partners (1,111,104) (9,999,940) (11,111,044)
------------ ------------- ------------
Balance, December 31, 1993 (948,683) 126,344,962 125,396,279
Net income (loss) 1,217,696 (4,434,868) (3,217,172)
Cash distributions to partners (1,388,881) (12,499,925) (13,888,806)
------------ ------------- -------------
Balance, December 31, 1994 $ (1,119,868) $ 109,410,169 $ 108,290,301
============ ============= =============
The accompanying notes are an integral part of these statements.
23<PAGE>
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<TABLE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (3,217,172) $ 48,114 $ (1,709,007)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 13,045,238 11,114,846 16,556,938
Net loss on sale of equipment - 513,395 -
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables (254,328) 339,579 482,421
Decrease in aircraft inventory - - 463,500
Decrease in other assets - 6,420 3,824
Increase (decrease) in payable to affiliates 650,567 (1,141,850) 900,698
Increase (decrease) in accounts payable
and accrued liabilities (2,517,662) 694,921 (253,132)
Increase (decrease) in lessee security deposits (18,424) 3,244 102,481
Increase (decrease) in maintenance reserves (146,673) (215,383) 533,715
Increase (decrease) in deferred income - (1,808,383) 699,955
-------------- --------------- ---------------
Net cash provided by operating activities 7,541,546 9,554,903 17,781,393
-------------- --------------- ---------------
INVESTING ACTIVITIES:
Increase in notes receivable (2,304,533) - -
Net proceeds from sale of aircraft equipment - 2,585,000 -
Principal payments on note receivable 545,409 727,692 -
Net proceeds from sale of aircraft inventory 323,448 1,169,483 32,460
Inventory disassembly costs - (327,750) (135,750)
Hushkit deposits - - 270,000
Lease acquisition fees - - (1,073)
-------------- --------------- ---------------
Net cash provided by (used in)
investing activities (1,435,676) 4,154,425 165,637
-------------- --------------- ---------------
FINANCING ACTIVITIES:
Cash distributions to partners (13,888,806) (11,111,044) (13,888,806)
-------------- --------------- ---------------
Net cash used in financing activities (13,888,806) (11,111,044) (13,888,806)
-------------- --------------- ---------------
CHANGES IN CASH AND CASH
EQUIVALENTS AND SHORT-TERM
INVESTMENTS (7,782,936) 2,598,284 4,058,224
CASH AND CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS AT
BEGINNING OF YEAR 22,445,083 19,846,799 15,788,575
-------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS AT END
OF YEAR $ 14,662,147 $ 22,445,083 $ 19,846,799
============== =============== ===============
The accompanying notes are an integral part of these statements.
</TABLE>
24<PAGE>
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. Accounting Principles and Policies
Accounting Method - Polaris Aircraft Income Fund II, A California Limited
Partnership (PAIF-II or the Partnership), maintains its accounting records,
prepares financial statements and files its tax returns on the accrual basis of
accounting.
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds.
Short-Term Investments - The Partnership classifies all liquid investments with
original maturities of three months or less as short-term investments.
Aircraft and Depreciation - The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual value is computed
using the straight-line method over the estimated economic life of the aircraft
which was originally estimated to be 30 years from the date of manufacture.
Depreciation in the year of acquisition is calculated based upon the number of
days that the aircraft are in service.
The Partnership periodically reviews the estimated realizability of the
residual values at the end of each aircraft's economic life. For any downward
adjustment in estimated residual, or decrease in the estimated remaining
economic life, the depreciation expense over the remaining life of the aircraft
is increased. If the expected net income generated from the lease (rental
revenue, net of management fees, less adjusted depreciation and an allocation
of estimated administrative expense) results in a net loss, that loss will be
recognized currently. Off-lease aircraft are carried at the lower of
depreciated cost or estimated net realizable value. A further adjustment is
made for those aircraft, if any, that require substantial maintenance work.
Capitalized Costs - Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft are
capitalized and amortized using the straight-line method over the appropriate
period. These costs are also subject to the periodic evaluation discussed
above.
Aircraft Inventory - Aircraft held in inventory for sale are reflected at the
lower of depreciated cost or estimated net realizable value. Proceeds from
sales are applied against inventory until book value is fully recovered.
Other Assets - Lease acquisition costs are capitalized as other assets and
amortized using the straight-line method over the term of the lease.
Operating Leases - The aircraft leases are accounted for as operating leases.
Lease revenues are recognized in equal installments over the terms of the
leases.
Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft, including costs related to
lessee defaults and costs of disassembling aircraft inventory.
25<PAGE>
<PAGE>
Net Income (Loss) Per Limited Partnership Unit - Net income (loss) per limited
partnership unit is based on the limited partners' share of net income or loss
and the number of units outstanding for the years ended December 31, 1994, 1993
and 1992.
Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
Reclassification - Certain 1993 and 1992 balances have been reclassified to
conform to the 1994 presentation.
Financial Accounting Pronouncements - SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," and the related SFAS No. 118, which together require
that certain impaired loans be measured based on the present value of expected
cash flows discounted at the loan's effective interest rate; or, alternatively,
at the loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. This statement has been adopted as of
January 1, 1995. The Partnership does not expect the adoption of this
statement to have a significant impact on its financial position or results of
operations.
2. Organization and the Partnership
The Partnership was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. The Partnership will terminate no later than December 2010.
Upon organization, both the general partner and the initial limited partner
contributed $500. The Partnership recognized no profits or losses during the
periods ended December 31, 1985 and 1984. The offering of limited partnership
units terminated on December 31, 1986, at which time the Partnership had sold
499,997 units of $500, representing $249,998,500. All partners were admitted
to the Partnership on or before December 1, 1986.
Polaris Investment Management Corporation (PIMC), the sole general partner of
the Partnership, supervises the day-to-day operations of the Partnership. PIMC
is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC).
Polaris Holding Company (PHC) is the parent company of PALC. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company,
owns 100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to affiliates are described in Note 9.
3. Aircraft
The Partnership owns 24 aircraft and certain inventoried aircraft parts from
its original portfolio of 30 used commercial jet aircraft, which were acquired
and leased as discussed below, including one aircraft which was sold in
February 1995 (Note 11). All aircraft acquired from an affiliate were
purchased within one year of the affiliate's acquisition at the affiliate's
original price paid. The aircraft leases are net leases, requiring the lessees
to pay all operating expenses associated with the aircraft during the lease
term. While the leases require the lessees to comply with Airworthiness
Directives (ADs) which have been or may be issued by the Federal Aviation
Administration (FAA) and require compliance during the lease term, in certain
of the leases the Partnership has agreed to share in the cost of compliance
with ADs. In addition to basic rent, certain lessees are required to pay
supplemental amounts based on flight hours or cycles into a maintenance reserve
account, to be used for heavy maintenance of the engines or airframe. The
leases generally state a minimum acceptable return condition for which the
26<PAGE>
<PAGE>
lessee is liable under the terms of the lease agreement. Certain leases also
provide that, if the aircraft are returned at a level above the minimum
acceptable level, the Partnership must reimburse the lessee for the related
excess, subject to certain limitations. The related liability to these
lessees, if any, cannot currently be estimated and therefore is not reflected
in the financial statements.
One Boeing 737-200 - This aircraft was acquired for $6,766,166 in 1986 and
leased to various lessees until 1989, when Braniff, Inc. (Braniff) defaulted on
its lease. The aircraft remained off lease until March 1991. The aircraft was
then leased to SABA Airlines, S.A. (SABA) at approximately 70% of the prior
rate until February 1992, when the aircraft was repossessed by the Partnership
after SABA defaulted under its lease. In November 1992, the aircraft was
re-leased for five years to Viscount Air Services, Inc. (Viscount) at
approximately 56% of the prior lease rate. Viscount, a charter carrier based
in Arizona, has the option to purchase the aircraft for the then-current fair
market value at the end of the lease term. An engine for the aircraft has been
leased from an affiliate (Note 9) following the return of an inoperable engine
from SABA as discussed in Note 4. The Partnership has negotiated an agreement
with Viscount to defer certain rents due the Partnership and to provide
financing to Viscount for maintenance expenses relating to the Partnership's
aircraft (Note 7).
Seven Boeing 727-200 - These aircraft were acquired for $38,986,145 during 1986
and leased to Pan American World Airways, Inc. (Pan Am) until 1991, when the
lease was terminated due to Pan Am's bankruptcy filing, as discussed in the
Partnership's 1993 Annual Report to the Securities and Exchange Commission on
Form 10-K. The Partnership has transferred six of these aircraft to aircraft
inventory and has disassembled them for sale of the component parts (Note 5).
One hushkit set from the aircraft was sold in January 1993 and two additional
hushkit sets from the aircraft were sold in September 1993 (Note 4).
The remaining aircraft was leased to Delta Airlines, Inc. (Delta) in September
1991. Delta returned the aircraft at the end of September 1993, following
several month-by-month lease extensions since the original lease termination
date in April 1993. The Partnership has adjusted the book value of this
aircraft to the estimated net realizable value as discussed in Note 1 by
increasing depreciation expense approximately $1.03 million in 1994. The
aircraft was sold in February 1995 as discussed in Note 11.
One Boeing 737-200 Combi - This aircraft was acquired for $7,582,572 in 1986
and leased to Presidential Airways, Inc. (Presidential), until Presidential's
default in 1989. The aircraft remained off lease until June 1990, when it was
leased to Air Zaire, Inc. (Air Zaire). The lease required that Air Zaire
maintain the aircraft in accordance with FAA requirements. However, Air Zaire
was unable to obtain FAA approval for its proposed maintenance program, thus
prompting the early termination of the lease in 1991. Air Zaire provided a
$610,000 letter of credit, the proceeds of which the Partnership applied to
outstanding rent, reserves and interest due in 1991. Air Zaire paid additional
amounts in 1993 and 1992 as a result of legal action commenced by the
Partnership (Note 8).
In August 1992, the Partnership leased the aircraft to Northwest Territorial
Airways, Ltd. (NWT) through March 1993 at approximately 45% of the prior rental
rate then extended the lease through March 1994 at approximately 80% of the
previous rental rate. An engine for the aircraft was leased from an affiliate
through April 1994 (Note 9). The aircraft was returned to the Partnership in
April 1994 and NWT subsequently paid to the Partnership approximately $860,000
in lieu of meeting return conditions as specified in the lease. The
Partnership negotiated a new lease with NWT for 16 months commencing in June
27<PAGE>
<PAGE>
1994. The new lease rate is approximately 108% of NWT's prior rental rate.
During the off-lease period, the Partnership performed certain maintenance and
modification work on the aircraft, which was offset by the approximately
$860,000 paid to the Partnership by NWT.
17 McDonnell Douglas DC-9-30 and One McDonnell Douglas DC-9-40 - These aircraft
were acquired for $122,222,040 during 1986 and leased to Ozark Air Lines, Inc.
(Ozark). In 1987, Trans World Airlines, Inc. (TWA) merged with Ozark and
assumed the leases. The leases were modified and extended prior to TWA's
bankruptcy filing as discussed in Note 6.
Three Boeing 727-200 Advanced - These aircraft were acquired for $36,364,929
during 1987 and leased to Alaska Airlines, Inc. (Alaska) until September 1992.
Upon return of the aircraft, an additional amount of $509,000 was received from
Alaska for deferred maintenance and applied in 1993 as an offset to maintenance
expenses incurred on the aircraft. One of the aircraft was re-leased to
Continental Airlines, Inc. (Continental) from April 1993 until April 1998. The
remaining two aircraft were re-leased to Continental Micronesia, Inc.
(Continental Micronesia), an affiliate of Continental, from May and June 1993
until April 1998. All three of the aircraft are leased at approximately 55% of
the prior lease rates. The three leases stipulate that the Partnership will
reimburse costs for cockpit modifications up to $600,000 per aircraft, C-check
labor costs up to $300,000 per aircraft for two of the aircraft and the actual
cost of C-check parts for these two aircraft. In addition, the Partnership
will provide financing of up to $815,000 for new image modifications, to be
repaid with interest over the lease term for each aircraft. In accordance with
the cost sharing agreement, in January 1994, the Partnership reimbursed
Continental (partially on behalf of its affiliate Continental Micronesia) $1.8
million for cockpit modifications, which is included in aircraft cost in the
December 31, 1993 balance sheet, and $742,325 for C-check labor and parts,
which was included in operating expense in the statement of operations for the
year ended December 31, 1993. In addition, the Partnership financed $2,177,533
for new image modifications, which is being repaid with interest over the lease
terms of the aircraft, beginning in February 1994. The Partnership has
received all scheduled principal and interest payments due from Continental and
Continental Micronesia through December 31, 1994. The aggregate note
receivable balance as of December 31, 1994 was $1,764,167. The leases with
Continental and Continental Micronesia also stipulate that the Partnership
share in the cost of meeting certain ADs, which cannot be estimated at this
time.
The following is a schedule by year of future minimum rental revenue under the
existing leases:
Year Amount
1995 $14,596,500
1996 14,074,000
1997 14,041,000
1998 3,410,000
1999 and thereafter -
-----------
Total $46,121,500
===========
Future minimum rental payments may be offset or reduced by future costs as
described above and in Note 6.
To ensure that the carrying value of each asset equals its estimated residual
value at the end of its expected holding period, where appropriate the
28<PAGE>
<PAGE>
Partnership made downward adjustments to the residual value during 1994, 1993
and 1992 for certain of its on-lease aircraft (Note 1). In addition, during
1994, 1993 and 1992, the Partnership recognized downward adjustments totaling
approximately $1.68 million, $300,000 and $5.8 million, respectively, to the
book value for certain of its off-lease and on-lease aircraft, and with respect
to 1994 and 1993, the adjustments also included adjustments to aircraft
inventory as described in Note 5. These adjustments are included in
depreciation expense in the accompanying statements of operations.
4. Sale of Equipment
One hushkit set from the aircraft formerly leased to Pan Am (Note 3) was sold
in January 1993 to ALG, Inc. (ALG) for $1,750,000, which resulted in a $259,809
gain in 1993. ALG paid cash for a portion of the sale price and issued an 11%
interest-bearing promissory note for the balance of $1,132,363, which specifies
23 equal monthly payments and a balloon payment due in January 1995. The
Partnership has received all payments due under the note through December 31,
1994. The note receivable balances as of December 31, 1994 and 1993 were
$890,265 and $1,022,308, respectively. ALG paid to the Partnership only a
portion of the balloon payment due in January 1995, originating an event of
default under the note. The Partnership and ALG have subsequently restructured
the terms of the promissory note as discussed in Note 11.
In September 1993, two additional hushkit sets from the disassembled Pan Am
aircraft were sold to Emery Worldwide Airlines for $1,250,000 each, which
resulted in a $398,192 loss. The decline in sales price from the previous
hushkit sale in January 1993 reflected a softening market for this equipment.
The Partnership sold one used engine to International Aircraft Support, L.P. in
July 1993 for $85,000, which resulted in a $375,012 loss. The engine, along
with its airframe, was repossessed from the former lessee, SABA in February
1992. At the time of its default, SABA had not maintained the aircraft as
required under the lease agreement, rendering the engine inoperable. The
Partnership determined the costs to repair the engine were excessive in
comparison to amounts recoverable from sale or lease. As a result, the engine
was sold for its component parts.
5. Disassembly of aircraft
In an attempt to maximize the economic return from the remaining six aircraft
formerly leased to Pan Am, the Partnership entered into an agreement with
Soundair, Inc. (Soundair) in October 1992, for the disassembly and sale of
certain of the Partnership's aircraft. It is anticipated that the disassembly
and sales process will take at least three years. The Partnership has borne
the cost of disassembly and will receive the proceeds from the sale of such
parts, net of overhaul expenses if necessary, and commissions paid to Soundair.
Disassembly of the six aircraft has been completed. During 1993 and 1992, the
Partnership paid $327,750 and $135,750, respectively, for aircraft disassembly
costs. The Partnership has received net proceeds from the sale of aircraft
inventory of $323,448, $1,169,483 and $32,460 during 1994, 1993 and 1992,
respectively.
The six aircraft were recorded as aircraft inventory in the amount of $3.0
million in 1992 as discussed in Note 3. During 1994 and 1993, the Partnership
recorded downward adjustments to the inventory value of $72,000 and $300,000,
respectively, to reflect the then current estimate of net realizable aircraft
inventory value. These adjustments are reflected as increased depreciation
expense in the accompanying statements of operations.
29<PAGE>
<PAGE>
6. TWA Reorganization
During 1991, TWA defaulted under its leases with the Partnership when it failed
to pay its March lease payments. On March 28, 1991, TWA and the Partnership
entered into lease amendments which specified (i) renegotiated lease rates
equal to approximately 70% of the original rates; (ii) payment of the March and
April lease payments at the renegotiated rates on March 27, 1991; and (iii) an
advance lump-sum security deposit payment on March 29, 1991 representing the
present value of the remaining lease payments due through the end of the leases
at the renegotiated rate. The Partnership recorded the lump sum payment from
TWA as deferred income, and recognized the rental revenue as it was earned over
the lease term. The Partnership also recognized interest expense equal to the
difference between the cash received and the rental revenue earned over the
lease term. The 16 leases that expired in November 1991 were extended for
three months at 57% of the original rates.
In December 1991, the leases for all 18 aircraft were amended further, with
extensions into various dates in 1998. The renegotiated lease rates represent
approximately 46% of the initial lease rates. In addition, the Partnership
agreed to share in the costs of certain ADs after TWA successfully reorganized.
The agreement with TWA stipulates that such costs incurred by TWA may be
credited against monthly rentals due to the Partnership, subject to annual
limitations and a maximum of $500,000 per aircraft over the term of the leases.
In January 1992, TWA commenced reorganization proceedings under Chapter 11 of
the Federal Bankruptcy Code. TWA received court approval to emerge from
bankruptcy protection effective November 3, 1993. TWA notified the Partnership
of its intention to affirm its leases for all 18 DC-9 aircraft. In addition,
while the court had originally granted TWA an additional 90-day period
subsequent to its emergence from bankruptcy during which it could exercise its
right to reject the Partnerships's leases, TWA elected to waive that right with
respect to the Partnership's aircraft. As previously agreed with TWA, August
and September 1993 rentals were drawn from the security deposit held by the
Partnership, which had been posted for this purpose by TWA prior to its
bankruptcy filing.
In accordance with the cost sharing arrangement described above, TWA submitted
to the Partnership invoices for expenses paid by TWA to meet the ADs. Expenses
totaling $2.7 million were offset against rental payments during 1993 and are
included in operating expense in the 1993 statement of operations. Additional
expenses totaling $3.6 million, which are included in operating expense in the
1994 statement of operations, were offset against rental payments that were due
to the Partnership in the first four months of 1994. TWA may offset an
additional $2.7 million against rental payments, subject to annual limitations,
over the lease terms.
In October 1994, TWA notified its creditors, including the Partnership, of a
proposed restructuring of its debt. Such restructuring was to include a six-
month moratorium on its lease payments to TWA's lessors commencing November
1994. TWA initially proposed that lease payments for a portion of that period
would be forgiven in exchange for shares of TWA common stock to be issued in
conjunction with the restructuring and the remainder repaid over the remaining
lease term. TWA stated that if it were unable to obtain approvals from its
creditors (including the Partnership) for the proposed restructuring, it would
have to file for protection under Chapter 11 of the Federal Bankruptcy Code.
Subsequently, GECAS (which now provides certain management services to PIMC and
PALC) negotiated a proposed standstill agreement with TWA for the 46 aircraft
that are managed by GECAS. That agreement, which was subject to the approval
of the owners of these aircraft, was subsequently approved by PIMC. The
30<PAGE>
<PAGE>
agreement provides for a moratorium of the rent due the Partnership in November
1994 and 75% of the rents due the Partnership from December 1994 through March
1995, with the deferred rents, which aggregate $3.6 million plus interest,
being repaid in monthly installments beginning in May 1995 through December
1995. The Partnership will not recognize the rental amount deferred in 1994 of
$1.575 million as rental revenue until it is received. In consideration for
that partial moratorium, TWA agreed to make an initial payment to the TWA
lessors for whom GECAS provides management services and who agreed to the
proposed standstill agreement, including the Partnership. The Partnership
received as consideration for the agreement $218,071 in January 1995. In
addition, TWA issued warrants to the Partnership for such amount of TWA Common
Stock as would have a value (based on the projected balance sheet provided by
TWA in connection with the restructuring) on December 31, 1997, on a fully
diluted basis, equal to the total amount of rent deferred. TWA has not
concluded agreements with all of its creditors regarding its proposed debt
restructuring. Thus, it remains uncertain whether TWA will file for protection
under Chapter 11 of the Federal Bankruptcy Code.
7. Viscount Restructuring Agreement
Rent Deferral - To assist Viscount with the funding of costs associated with
Federal Aviation Regulation compliance relating to the Partnership's aircraft,
the Partnership has entered into an agreement with Viscount to defer certain
rents due the Partnership on one aircraft for a period of six months. The
deferred rents, which aggregate $196,800, are being repaid by Viscount with
interest at a rate of 6% per annum, beginning in October 1994, over the
remaining lease term.
Maintenance Advance - The Partnership has also agreed to extend a line of
credit to Viscount for $127,000 to be used primarily for maintenance expenses
relating to the Partnership's aircraft. In accordance with the agreement, the
Partnership advanced Viscount $127,000 during 1994. Payments of interest at
variable rates ranging from 8.75% to 9.18% per annum were paid by Viscount
beginning in September 1994. Beginning in January 1995, level payments to
amortize the advance over a 30-month period, with interest at a rate of 11.53%
per annum, will be due in arrears.
Option - The Partnership has the option to acquire approximately 0.6% of the
issued and outstanding shares of Viscount stock as of July 26, 1994 for an
option price of approximately $91,000. The option may be exercised at any time
during the option period, which expires on July 20, 1999. This option is
carried at zero value in the accompanying balance sheet as of December 31, 1994
due to the uncertainty of its realizability.
8. Claims Related to Lessee Defaults
Braniff Bankruptcy Claim - In July 1992, the Bankruptcy Court approved a
stipulation embodying a settlement among PIMC, on behalf of the Partnership,
the Braniff Creditor committees and Braniff in which it was agreed that First
Security Bank of Utah, National Association, acting as trustee for the
Partnership, would be allowed an administrative claim in the bankruptcy
proceeding of approximately $230,769. In 1992, the Partnership received full
payment of the claim, subject, however, to the requirement that 25% of total
proceeds be held by PIMC in a separate, interest-bearing account pending
notification by Braniff that all of the allowed administrative claims have been
satisfied. The Partnership recognized 75% of the total claim as other revenue
in the accompanying 1992 statement of operations. During 1994, the Partnership
was advised that the 25% portion of the administrative claim proceeds with
31<PAGE>
<PAGE>
interest could be released by PIMC to the Partnership. As a result, the
Partnership recognized $67,958 as other revenue in the 1994 statement of
operations.
Air Zaire - As a result of legal action commenced by the general partner, a
final settlement was reached with Air Zaire. Air Zaire paid to the Partnership
approximately $2,885,000, of which approximately $1,570,000 has been applied to
legal and maintenance expenses related to the default. The final expenses were
paid in 1993 and approximately $915,000 was reflected as other income in the
1993 statement of operations. The remaining amount of $400,000, which was
included in maintenance reserves in the December 31, 1993 balance sheet, was
recognized as other revenue in 1994.
9. Related Parties
Under the Limited Partnership Agreement (Partnership Agreement), the
Partnership paid or agreed to pay the following amounts to PIMC and/or its
affiliates in connection with services rendered:
a. An aircraft management fee equal to 5% of gross rental revenues with
respect to operating leases or 2% of gross rental revenues with respect to
full payout leases of the Partnership, payable upon receipt of the rent.
In 1994, 1993 and 1992, the Partnership paid management fees to PIMC of
$604,551, $681,241 and $896,143, respectively. Management fees payable to
PIMC at December 31, 1994 were $11,389. No payable was outstanding as of
December 31, 1993.
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets. In
1994, 1993 and 1992, $228,357, $407,582 and $275,312, respectively, were
reimbursed by the Partnership for administrative expenses. Administrative
reimbursements of $101,277 and $46,910 were payable at December 31, 1994
and 1993, respectively. Reimbursements for maintenance and remarketing
costs of $305,200, $2,608,523 and $2,040,505 were paid by the Partnership
in 1994, 1993 and 1992, respectively. Maintenance and remarketing
reimbursements of $590,175 and $5,364 were payable at December 31, 1994
and 1993, respectively.
c. A 10% interest in all cash distributions and sales proceeds, gross income
in an amount equal to 9.09% of distributed cash available from operations
and 1% of net income or loss and taxable income or loss, as such terms are
defined in the Partnership Agreement.
d. A subordinated sales commission of 3% of the gross sales price of each
aircraft for services performed upon disposition and reimbursement of
out-of-pocket and other disposition expenses. Subordinated sales
commissions shall be paid only after limited partners have received
distributions in an aggregate amount equal to their capital contributions
plus a cumulative non-compounded 8% per annum return on their adjusted
capital contributions, as defined in the Partnership Agreement. The
Partnership did not pay or accrue a sales commission on any aircraft sales
to date as the above subordination threshold has not been met.
e. One engine owned by Polaris Aircraft Income Fund I (PAIF-I) is leased to
Viscount beginning in April 1993 through a joint venture with the
Partnership. The rental payments of $146,000 and $98,000 were offset
against rent from operating leases in the 1994 and 1993 statement of
operations, respectively.
32<PAGE>
<PAGE>
f. One engine was leased from PHC from September 1993 through April 1994 for
use on the aircraft leased to NWT. The rental payments of $38,400 and
$42,000 were offset against rent from operating leases in the 1994 and
1993 statement of operations, respectively.
10. Income Taxes
Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the accompanying financial statements.
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1994 and 1993 are as
follows:
Reported Amounts Tax Basis Net Difference
1994: Assets $ 110,568,377 $ 108,560,932 $ 2,007,445
Liabilities 2,278,076 1,049,849 1,228,227
1993: Assets $ 129,706,547 $ 120,984,013 $ 8,722,534
Liabilities 4,310,268 255,838 4,054,430
11. Subsequent Events
Promissory Note from ALG - As discussed in Note 4, the promissory note from ALG
required a balloon payment of $897,932 due in January 1995. ALG paid $19,138
of this balloon payment in January 1995 which originated an event of default
under the note. The Partnership and ALG subsequently restructured the terms of
the promissory note. The renegotiated terms specify payment by ALG of the note
balance with interest at a rate of 13% per annum with one lump sum payment in
January 1995 of $254,733, eleven monthly payments of $25,600 beginning in
February 1995, and a balloon payment in January 1996 of $416,631. ALG is
current on the renegotiated payments.
Sale of Aircraft to American International Airways, Inc. (AIA) - The
Partnership sold one Boeing 727-200 aircraft and hushkit, formerly leased to
Delta, to AIA in February 1995 for a sales price of approximately $1.77
million. The Partnership agreed to accept payment of the sales price in 36
monthly installments of $55,000, with interest at a rate of 7.5% per annum,
beginning in March 1995.
Continental Restructuring - On January 26, 1995, Continental announced a number
of actual and proposed changes in its operations and financial situation. In
connection with those changes, Continental indicated that it was discussing
with certain of its major lenders modifications to existing debt amortization
schedules to enhance the airline's capital structure. Continental stated that
during those discussions it would not be making payments to such lenders and
lessors otherwise required under the current contracts. The Partnership is not
engaged in any such discussions with Continental at the present time, and
Continental has made all payments due to the Partnership on a current basis to
date.
33<PAGE>
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
34<PAGE>
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PART III
Item 10. Directors and Executive Officers of the Registrant
Polaris Aircraft Income Fund II, A California Limited Partnership (PAIF-II or
the Partnership) has no directors or officers. Polaris Holding Company (PHC)
and its subsidiaries, including Polaris Aircraft Leasing Corporation (PALC) and
Polaris Investment Management Corporation (PIMC), the general partner of the
Partnership (collectively Polaris), have recently restructured their operations
and businesses (the Polaris Restructuring). In connection therewith, PIMC has
entered into a services agreement dated as of July 1, 1994 (the Services
Agreement) with GE Capital Aviation Services, Inc. (the Servicer or GECAS), a
Delaware corporation which is a wholly owned subsidiary of General Electric
Capital Corporation, a New York corporation (GE Capital). GE Capital has been
PHC's parent company since 1986. As subsidiaries of GE Capital, the Servicer
and PIMC are affiliates.
The GE Capital Restructuring - GE Capital has recently completed a
restructuring (the GE Capital Restructuring) of its commercial aviation
operations, and as a result the owned and managed aircraft portfolios of
certain of its affiliates, including its Polaris affiliates, are now managed by
GECAS, subject in the case of Polaris investment programs to overall management
and supervision by PIMC. The business of GECAS has combined commercial
aviation activities formerly conducted by GE Capital's Polaris affiliates and
its Transportation and Industrial Funding Corporation division (the T&I
Division). In addition, GECAS will provide a significant range of aircraft
management services to GPA Group plc, a public limited company organized in
Ireland, together with its consolidated subsidiaries.
The Polaris Restructuring - In connection with the GE Capital Restructuring,
the Servicer hired many of the employees who had performed the functions for
Polaris and its investment programs (including the Partnership) that are now
performed by the Servicer for PHC owned aircraft and for Polaris investment
programs under the Services Agreement and under similar services agreements
entered into by PIMC and/or PALC with the Servicer relating to other Polaris
investment programs.
In order to allow it to continue to be able to discharge its responsibilities
as general partner of the Partnership, PIMC has retained certain of its
employees. As of December 31, 1994, PIMC had seven full-time employees. In
addition, certain employees of GECAS will serve as officers and directors of
PIMC. The following management personnel will serve in the capacities shown
opposite their names:
Name PIMC Title
Howard L. Feinsand President; Director
Richard J. Adams Vice President; Director
Rodney Sirmons Director
James W. Linnan Vice President
John E. Flynn Vice President
Robert W. Dillon Vice President; Assistant Secretary
James F. Walsh Chief Financial Officer
William C. Bowers Secretary
Substantially all of these management personnel will devote only such portion
of their time to the business and affairs of PIMC as deemed necessary or
appropriate.
35<PAGE>
<PAGE>
Mr. Feinsand, 47, Senior Vice President and Manager, Capital Markets, Pricing
and Investor Programs of GECAS, joined PIMC and PALC as Vice President, General
Counsel and Assistant Secretary in April 1989. Effective July 1989,
Mr. Feinsand assumed the position of Senior Vice President, and served as
General Counsel and Secretary from July 1989 to August 1992. Mr. Feinsand, an
attorney, was a partner in the New York law firm of Golenbock and Barell from
1987 through 1989. In his previous capacities, Mr. Feinsand served as counsel
to PIMC and PALC. Mr. Feinsand also serves as a director on the board of Duke
Realty Investments, Inc. Effective July 1, 1994, Mr. Feinsand held the
positions of President and Director of PIMC.
Mr. Adams, 61, Senior Vice President, Aircraft Marketing - North America,
served as Senior Vice President - Aircraft Sales and Leasing of PIMC and PALC
effective August 1992, having previously served as Vice President - Aircraft
Sales & Leasing, Vice President - North America, and Vice President - Corporate
Aircraft since he joined PALC in August 1986. Effective July 1, 1994, Mr.
Adams held the positions of Vice President and Director of PIMC.
Mr. Sirmons, 48, is Vice President, Portfolio and Risk Management for GECAS.
During the last twenty-one years, he has held a variety of credit, underwriting
and financial positions with several businesses within GE Capital and its
predecessor. Effective July 1, 1994, Mr. Sirmons held the position of Director
of PIMC.
Mr. Linnan, 53, became Vice President - Financial Management of PIMC and PALC
effective April 1991, having previously served as Vice President - Investor
Marketing of PIMC and PALC since July 1986. Effective July 1, 1994, Mr. Linnan
held the position of Vice President of PIMC.
Mr. Flynn, 54, Senior Vice President and Manager, Task Force Marketing and
General Manager, Cargo, of GECAS, served as Senior Vice President, Aircraft
Marketing for PIMC and PALC effective April 1991, having previously served as
Vice President, North America of PIMC and PALC effective July 1989. Mr. Flynn
joined PALC in March 1989 as Vice President, Cargo. For the two years prior to
joining PALC, Mr. Flynn was a transportation consultant. Effective July 1,
1994, Mr. Flynn held the position of Vice President of PIMC.
Mr. Dillon, 53, became Vice President - Aviation Legal and Insurance Affairs
effective April 1989. Previously, he served as General Counsel of PIMC and
PALC effective January 1986. Effective July 1, 1994, Mr. Dillon held the
positions of Vice President and Assistant Secretary of PIMC.
Mr. Walsh, 45, Senior Vice President and Chief Financial Officer of GECAS,
joined PIMC and PALC in March 1987. He served as Senior Vice President and
Chief Financial Officer, having previously served as Vice President and Chief
Financial Officer. Effective October, 1993, Mr. Walsh resigned as Senior Vice
President and Chief Financial Officer of PIMC to assume new responsibilities at
GE Capital. Effective July 1, 1994, Mr. Walsh held the position of Chief
Financial Officer of PIMC.
Mr. Bowers, 48, Senior Vice President and Associate General Counsel of GECAS,
joined that company in November, 1993. Prior to joining GECAS, Mr. Bowers, an
attorney, was General Counsel of GPA Capital, the capital markets division of
GPA Group plc, from June, 1990 to October, 1993. Prior to joining GECAS, Mr.
Bowers was a partner in the New York office of Paul, Hastings, Janofsky &
Walker from January, 1988 until June, 1990, having joined that firm as an Of
Counsel in October, 1985. Effective November 18, 1994, Mr. Bowers held the
position of Secretary of PIMC.
Through the personnel it has retained, PIMC will oversee the services to be
performed by the Servicer under the Services Agreement, make decisions as to
36<PAGE>
<PAGE>
matters that are effectively reserved to PIMC for decision by the Services
Agreement, receive and analyze reports received from the Servicer, and
otherwise discharge its responsibilities as general partner of the Partnership
(See "The Services Agreement"). In addition, PIMC will continue to perform
investor relations services for the Partnership and will continue to supervise
ReSource/Phoenix, a division of Phoenix Leasing Incorporated which, since
August 1993, has been performing substantially all of the accounting and
financial reporting services previously performed by PIMC, pursuant to a
Program Accounting and Financial Reporting Administration Agreement. Since
July 1994, ReSource/Phoenix has also provided database time-share services,
data processing services and investor transfer services pursuant to a Time-
Share and Transfer Services Agreement.
GECAS - GECAS is a global commercial aviation financial services company that
(i) offers a broad range of financial products to airlines and aircraft
operators, aircraft owners, lenders and investors, including financing leases,
operating leases, tax-advantaged and other incentive-based financing and debt
and equity financing, and (ii) provides management, marketing and technical
support services to aircraft owners, lenders and investors, including GE
Capital, its affiliates, and certain third parties.
GECAS is the world's largest manager of commercial aircraft. From time to
time, GE Capital and its affiliates are likely to acquire additional new and
used aircraft which are expected to be included in the portfolio to be managed
by GECAS. GECAS's managed portfolio includes other aircraft of the same type
as those owned by the Partnership. Accordingly, the Servicer may have certain
conflicts of interest in performing its duties under the Services Agreement.
(See "The Services Agreement", herein.)
The Servicer has represented to PIMC that during the term of the Services
Agreement the Servicer's net worth will be greater than $25,000,000, and has
agreed during such term not to pay or make any dividends or distributions to
its shareholder(s) which would have the effect of reducing the Servicer's net
worth below that amount.
The Services Agreement - Under the Services Agreement, PIMC has engaged the
Servicer to perform, or arrange for the performance of, aircraft management
services, aircraft leasing and sales services, and certain portfolio management
services. These services will include, inter alia, managing the Partnership's
portfolio of aircraft, arranging for the re-leasing and sale of aircraft,
preparing certain reports for the Partnership, employing persons to perform
services for the Partnership, and otherwise performing various portfolio and
partnership management functions. PIMC will continue to serve as general
partner of the Partnership and will retain all of its rights, powers and
interests as general partner. In its capacity as general partner, PIMC will
exercise supervisory control over the Servicer's rendering of services in
connection with the Partnership and will continue to have control and overall
management of all matters relating to the Partnership's ongoing business and
operations. The Servicer is not becoming a general partner of the Partnership
and is not assuming any fiduciary duty that PIMC, as general partner, has had
or will have.
As compensation for services provided by the Servicer, PIMC will pay to the
Servicer (i) a portion of the aircraft management fees, cash available from
operations and cash available from sales proceeds received by PIMC under the
Partnership Agreement, and (ii) all sales commissions received by PIMC under
the Partnership Agreement with respect to sales of Partnership aircraft
arranged by the Servicer. The Servicer will also receive an amount equal to
the reimbursement for Partnership expenses which PIMC receives from the
Partnership on account of expenses incurred by the Servicer in performing
37<PAGE>
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services pursuant to the Services Agreement. The expense reimbursement
limitations in the Partnership Agreement will not be affected by the Services
Agreement.
The Services Agreement recognizes that the Servicer will be providing services
with respect to the separate aircraft of GE Capital and its affiliates as well
as with respect to the aircraft of third parties, and that conflicts of
interest may arise as a result. The Servicer is required to perform services
under the Services Agreement in good faith and, to the extent that a particular
Partnership aircraft and other aircraft then in the Servicer's managed
portfolio are substantially similar in terms of relevant objectively
identifiable characteristics, the Servicer must not discriminate between such
aircraft on the basis of ownership, fees payable to the Servicer, or on an
unreasonable basis. The Services Agreement also requires the Servicer to
perform services in accordance with all applicable laws, in a manner consistent
with all applicable provisions of the Partnership Agreement, and with such care
and in accordance with such standards of performance as would have been applied
to PIMC had PIMC performed the services directly.
The Services Agreement requires the Servicer to take any actions relating to
the Services Agreement that PIMC may direct so long as such actions are
reasonably deemed by PIMC to be necessary or appropriate in order to permit
PIMC to fulfill its fiduciary duties as general partner of the Partnership or
otherwise to be in the best interest of the Partnership or its limited
partners. Furthermore, certain actions with respect to the Partnership may not
be taken by the Servicer without the prior approval of PIMC. Such actions
include, among others: (i) selling or otherwise disposing of one or more
aircraft by the Partnership (including the sale or other disposition of an
aircraft as parts or scrap); (ii) entering into any new lease (or any renewal
or extension of an existing lease) with respect to any aircraft; (iii)
terminating or modifying any lease with respect to any aircraft; (iv) financing
or refinancing one or more aircraft by the Partnership; (v) making material
capital, maintenance or inspection expenditures for the Partnership;
(vi) hiring any broker to sell or lease any aircraft; (vii) entering into any
contract (including any contract of sale), agreement or instrument other than a
contract, agreement or instrument entered into in the ordinary course of
business that has a term of less than one year and that does not contemplate
payments which will exceed, over the term of the contract, agreement or
instrument, $100,000 in the aggregate; (viii) changing in any material respect
the type or amount of insurance coverage in place for the Partnership; and (ix)
incurring any Partnership expenses for which the Servicer will seek
reimbursement pursuant to the Services Agreement which exceed in the aggregate,
for any calendar month, the sum of $10,000. Absent PIMC authorization, it is
contemplated that the Servicer will not enter into contracts, agreements or
instruments on behalf of the Partnership.
Absent earlier termination based on certain events (including the withdrawal,
removal or replacement of PIMC as general partner of the Partnership), the
Services Agreement will terminate upon the completion of the winding up and
liquidation of the Partnership and the distribution of all of its assets.
38<PAGE>
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Certain Legal Proceedings:
As reported in the Partnership's 1990 Form 10-K, on June 8, 1990, a purported
class action entitled Harner, et al., v. Prudential Bache Securities, Inc. et
al., (to which the Partnership was not a party) was filed by certain purchasers
of units in a 1983 and 1984 public offering in several corporate aircraft
public partnerships. Polaris Aircraft Leasing Corporation and Polaris
Investment Management Corporation were named as two of the defendants in this
action. On September 24, 1991, the court entered an order in favor of Polaris
Aircraft Leasing Corporation and Polaris Investment Management Corporation
granting their motion for summary judgment and dismissing the plaintiffs'
complaint with prejudice. On March 13, 1992, plaintiff filed a notice of
appeal to the United States Court of Appeals for the Sixth Circuit. On
August 21, 1992, the Sixth Circuit ordered consolidation of the appellants'
causes for the purposes of briefing and submission. On September 9, 1994, the
Sixth Circuit affirmed the lower court's decision dismissing the action.
On October 27, 1992, a class action complaint entitled Weisl, Jr. et
al., v. Polaris Holding Company, et al. was filed in the Supreme Court of the
State of New York for the County of New York. The complaint sets forth various
causes of action which include allegations against certain or all of the
defendants (i) for alleged fraud in connection with certain public offerings,
including that of the Partnership, on the basis of alleged misrepresentation
and alleged omissions contained in the written offering materials and all
presentations allegedly made to investors; (ii) for alleged negligent
misrepresentation in connection with such offerings; (iii) for alleged breach
of fiduciary duties; (iv) for alleged breach of third party beneficiary
contracts; (v) for alleged violations of the NASD Rules of Fair Practice by
certain registered broker dealers; and (vi) for alleged breach of implied
covenants in the customer agreements by certain registered brokers. The
complaint seeks an award of compensatory and other damages and remedies. On
January 19, 1993, plaintiffs filed a motion for class certification. On March
1, 1993, defendants filed motions to dismiss the complaint on numerous grounds,
including failure to state a cause of action and statute of limitations. On
July 20, 1994, the court entered an order dismissing almost all of the claims
in the complaint and amended complaint. Certain claims, however, remain
pending. Plaintiffs filed a notice of appeal on September 2, 1994. The
Partnership is not named as a defendant in this action.
On or around February 17, 1993, a civil action entitled Einhorn, et al. v.
Polaris Public Income Funds, et al., was filed in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida against, among others, Polaris
Investment Management Corporation and Polaris Depositary Company. Plaintiffs
seek class action certification on behalf of a class of investors in Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI who purchased their interests while residing in Florida.
Plaintiffs allege the violation of Section 517.301, Florida Statutes, in
connection with the offering and sale of units in such Polaris Aircraft Income
Funds. Among other things, plaintiffs assert that the defendants sold
interests in such Polaris Aircraft Income Funds while "omitting and failing to
disclose the material facts questioning the economic efficacy of" such Polaris
Aircraft Income Funds. Plaintiffs seek rescission or damages, in addition to
interest, costs, and attorneys' fees. On April 5, 1993, defendants filed a
motion to stay this action pending the final determination of a prior filed
action in the Supreme Court for the State of New York entitled Weisl v. Polaris
Holding Company. On that date, defendants also filed a motion to dismiss the
complaint on the grounds of failure to attach necessary documents, failure to
plead fraud with particularity and failure to plead reasonable reliance. On
April 13, 1993, the court denied the defendants' motion to stay. On May 7,
1993, the court stayed the action pending an appeal of the denial of the motion
39<PAGE>
<PAGE>
to stay. Defendants subsequently filed with the Third District Court of Appeal
a petition for writ of certiorari to review the lower court's order denying the
motion to stay. On October 19, 1993, the Court of Appeal granted the writ of
certiorari, quashed the order, and remanded the action with instruction to
grant the stay. The Partnership is not named as a defendant in this action.
On or around May 14, 1993, a purported class action entitled Moross, et al., v.
Polaris Holding Company, et al., was filed in the United States District Court
for the District of Arizona. This purported class action was filed on behalf
of investors in Polaris Aircraft Income Funds I - VI by nine investors in such
Polaris Aircraft Income Funds. The complaint alleges that defendants violated
Arizona state securities statues and committed negligent misrepresentation and
breach of fiduciary duty by misrepresenting and failing to disclose material
facts in connection with the sale of limited partnership units in the above-
named funds. An amended complaint was filed on September 17, 1993, but has not
been served upon defendants. On or around October 4, 1993, defendants filed a
notice of removal to the United States District Court for the District of
Arizona. Defendants also filed a motion to stay the action pending the final
determination of a prior filed action in the Supreme Court for the State of New
York entitled Weisl v. Polaris Holding Company ("Weisl") and to defendants'
time to respond to the complaint until 20 days after disposition of the motion
to action pending resolution of the motions for class certification and motions
to dismiss pending in Weisl. On January 20, 1994, the court stayed the action
and required defendants to file status reports every sixty days setting forth
the status of the motions in Weisl. The Partnership is not named as a
defendant in this action.
On September 21, 1993, a purported derivative action entitled Novak, et al., v.
Polaris Holding Company, et al., was filed in the Supreme Court of the State of
New York, County of New York. This action was brought on behalf of the
Partnership, Polaris Aircraft Income Fund I and Polaris Aircraft Income Fund
III. The complaint names as defendants Polaris Holding Company, its affiliates
and others. Each of the Partnership, Polaris Aircraft Income Fund I and
Polaris Aircraft Income Fund III is named as a nominal defendant. The
complaint alleges, among other things, that defendants mismanaged the
Partnership and the other Polaris Aircraft Income Funds, engaged in self-
dealing transactions that were detrimental to the Partnership and the other
Polaris Aircraft Income Funds and failed to make required disclosure in
connection with the sale of the units in the Partnership and the other Polaris
Aircraft Income Funds. The complaint alleges claims of breach of fiduciary
duty and constructive fraud and seeks, among other things an award of
compensatory and punitive damages in an unspecified amount, re-judgment
interest, and attorneys' fees and costs. On January 13, 1994, certain of the
defendants, including Polaris Holding Company, filed motions to dismiss the
complaint on the grounds of, among others, failure to state a cause of action
and failure to plead the alleged wrong in detail. On August 11, 1994, the
court denied in part and granted in part defendants' motions to dismiss.
Specifically, the court denied the motions as to the claims for breach of
fiduciary duty, but dismissed plaintiffs' claim for constructive fraud with
leave to replead. On October 7, 1994, defendants filed a notice of appeal.
On November 15, 1994, defendants submitted an answer to the remaining causes of
action.
On or around March 13, 1993, a purported class action entitled Kahn v. Polaris
Holding Company, et al., was filed in the Supreme Court of the State of New
York, County of New York. This purported class action on behalf of investors
in Polaris Aircraft Income Fund V ("PAIF V") was filed by one investor in PAIF
V. The complaint names as defendants Polaris Investment Management
Corporation, Polaris Holding Company, its affiliates and others. The complaint
charges defendants with common law fraud, negligent misrepresentation and
40<PAGE>
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breach of fiduciary duty in connection with certain misrepresentations and
omissions allegedly made in connection with the sale of interest in PAIF V.
Plaintiffs seek compensatory and consequential damages in an unspecified
amount, plus interest, disgorgement and restitution of all earnings, profits
and other benefits received by defendants as a result of their alleged
practices, and attorneys' fees and costs. Defendants' time to move, answer or
otherwise plead with respect to the complaint was extended by stipulation up to
and including April 24, 1995. The Partnership is not named as a defendant in
this action.
On June 8, 1994, a consolidated complaint captioned In re Prudential Securities
Inc. Limited Partnerships Litigation was filed in the United States District
Court for the Southern District of New York, purportedly consolidating cases
that had been transferred from other federal courts by the Judicial Panel on
Multi-District Litigation. The consolidated complaint names as defendants
Prudential entities and various other sponsors of limited partnerships sold by
Prudential, including Polaris Holding Company, one of its former officers,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation
and Polaris Securities Corporation. The complaint alleges that the Prudential
defendants created a scheme for the sale of approximately $8-billion of limited
partnership interests in 700 assertedly high-risk limited partnerships,
including the Partnership, to approximately 350,000 investors by means of false
and misleading offering materials; that the sponsoring organizations (including
the Polaris entities) participated with the Prudential defendants with respect
to, among other things, the partnerships that each sponsored; and that all of
the defendants conspired to engage in a nationwide pattern of fraudulent
conduct in the marketing of all limited partnerships sold by Prudential. The
complaint alleges violations of the federal Racketeer Influenced and Corrupt
Organizations Act and the New Jersey counterpart thereof, fraud, negligent
misrepresentation, breach of fiduciary duty and breach of contract. The
complaint seeks rescission, unspecified compensatory damages, treble damages,
disgorgement of profits derived from the alleged acts, costs and attorneys
fees. On October 31, 1994, Polaris Investment Management Corporation and other
Polaris entities filed a motion to dismiss the consolidated complaint on the
grounds of, inter alia, statute of limitations and failure to state a claim.
The Partnership is not named as a defendant in this action.
A further litigation captioned Romano v. Ball et. al, an action by Prudential
Insurance Company policyholders against many of the same defendants (including
Polaris Investment Management Corporation and Polaris Aircraft Leasing
Corporation), has also been commenced by policy holders of the Prudential
Insurance Company as a purported derivative action on behalf of the Prudential
Insurance Company. The complaint alleges claims under the federal Racketeer
Influenced and Corrupt Organizations Act, as well as claims for waste,
mismanagement and intentional and negligent misrepresentation, and seeks
unspecified compensatory, treble and punitive damages. The case is being
coordinated with In re Prudential.
On or about February 6, 1995, a class action complaint entitled Cohen, et al.
v. J.B. Hanauer & Company, et al. was filed in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida. The
complaint names J.B. Hanauer & Company, General Electric Capital Corporation,
General Electric Financial Services, Inc., and General Electric Company as
defendants. The action purports to be on behalf of "approximately 5,000
persons throughout the United States" who purchased units in Polaris Aircraft
Income Funds I through VI. The complaint sets forth various causes of action
which include allegations against certain or all of the defendants (i) for
violation of Section 12(2) of the Securities Act of 1933, as amended, by a
registered broker dealer and for violation of Section 15 of such act by all
defendants in connection with certain public offerings, including that of the
41<PAGE>
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Partnership, on the basis of alleged misrepresentation and alleged omissions
contained in the written offering materials and all presentations allegedly
made to investors; (ii) for alleged fraud in connection with such offerings;
(iii) for alleged negligent misrepresentation in connection with such
offerings; (iv) for alleged breach of fiduciary duties; (v) for alleged breach
of third party beneficiary contracts; (vi) for alleged violations of the NASD
Rules of Fair Practice by a registered broker dealer; and (vii) for alleged
breach of implied covenants in the customer agreements by a registered broker
dealer. The complaint seeks an award of compensatory and punitive damages and
other remedies. The Partnership is not named as a defendant in this action.
On or about January 12, 1995, a class action complaint entitled Cohen, et al.
v. Kidder Peabody & Company, Inc., et al. was filed in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida. The
complaint names Kidder Peabody & Company, Inc., General Electric Capital
Corporation, General Electric Financial Services, Inc., and General Electric
Company as defendants. The action purports to be on behalf of "approximately
20,000 persons throughout the United States" who purchased units in Polaris
Aircraft Income Funds III through VI. The complaint sets forth various causes
of action which include allegations against certain or all of the defendants
(i) for violation of Section 12(2) of the Securities Act of 1933, as amended,
by a registered broker dealer and for violation of Section 15 of such act by
all defendants in connection with certain public offerings on the basis of
alleged misrepresentation and alleged omissions contained in the written
offering materials and all presentations allegedly made to investors; (ii) for
alleged fraud in connection with such offerings; (iii) for alleged negligent
misrepresentation in connection with such offerings; (iv) for alleged breach of
fiduciary duties; (v) for alleged breach of third party beneficiary contracts;
(vi) for alleged violations of the NASD Rules of Fair Practice by a registered
broker dealer; and (vii) for alleged breach of implied covenants in the
customer agreements by a registered broker dealer. The complaint seeks an
award of compensatory and punitive damages and other remedies. The Partnership
is not named as a defendant in this action.
On or about February 13, 1995, an action entitled Adams, et al. v. Prudential
Securities, Inc. et al. was filed in the Court of Common Pleas, Stark County,
Ohio. The action names Prudential Securities, Inc., Prudential Insurance
Company of America, Polaris Investment Management Corporation, Polaris
Securities Corporation, Polaris Aircraft Leasing Corporation, Polaris Holding
Company, General Electric Capital Corporation, Polaris Aircraft Income Fund I,
Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V and James Darr
as defendants. The complaint alleges that defendants committed common law
fraud, fraud in the inducement, negligent misrepresentation, negligence, breach
of fiduciary duty and civil conspiracy by misrepresenting and failing to
disclose material facts in connection with the sale of limited partnership
units in the Partnership and the other Polaris Aircraft Income Funds.
Plaintiffs seek, among other things, rescission of their investments in the
Partnership and the other Polaris Aircraft Income Funds, an award of
compensatory damages in an unspecified amount plus interest thereon, and
punitive damages in an unspecified amount. On or about March 15, 1995,
defendants filed a Notice of Removal to the United States District Court for
the Northern District of Ohio, Eastern Division. The Partnership is not named
as a defendant in this action.
Other Proceedings - Part I, Item 3 discusses certain other actions arising out
of certain public offerings, including that of the Partnership, to which both
the Partnership and its general partner are parties.
Disclosure pursuant to Section 16, Item 405 of Regulation S-K:
Based solely on its review of the copies of such forms received or written
representations from certain reporting persons that no Forms 3, 4, or 5 were
required for those persons, the Partnership believes that, during 1994 all
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were met.
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Item 11. Executive Compensation
PAIF-II has no directors or officers. PAIF-II is managed by PIMC, the General
Partner. In connection with management services provided, management and
advisory fees of $604,551 were paid to PIMC in 1994.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) No person owns of record, or is known by PAIF-II to own beneficially,
more than five percent of any class of voting securities of PAIF-II.
b) The General Partner of PAIF-II owns the equity securities of PAIF-II as
set forth in the following table:
(1) (2) (3) (4)
Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
General Polaris Investment Represents a 10.0% interest 100%
Partner Management of all cash distributions,
Interest Corporation gross income in an amount
equal to 9.09% of distributed
cash available from operations,
and a 1% interest in net income
or loss
c) There are no arrangements known to PAIF-II, including any pledge by any
person of securities of PAIF-II, the operation of which may at a
subsequent date result in a change in control of PAIF-II.
Item 13. Certain Relationships and Related Transactions
None.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements.
The following are included in Part II of this report:
Page No.
Report of Independent Public Accountants 20
Balance Sheets 21
Statements of Operations 22
Statements of Changes in Partners' Capital
(Deficit) 23
Statements of Cash Flows 24
Notes to Financial Statements 25
2. Reports on Form 8-K.
None.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
10. Material Contracts.
a. Services Agreement.
27. Financial Data Schedules (Filed electronically only).
4. Financial Statement Schedules.
All financial statement schedules are omitted because they are not
applicable, not required or because the required information is included
in the financial statements or notes thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner
March 23, 1995 By: /S/ Howard L. Feinsand
--------------------- --------------------------------
Date Howard L. Feinsand, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/Howard L. Feinsand Chairman of the Board and March 23, 1995
--------------------- President of Polaris --------------
(Howard L. Feinsand) Investment Management
Corporation, General Partner
of the Registrant
/S/Richard J. Adams Vice President and Director of March 23, 1995
------------------- Polaris Investment Management --------------
(Richard J. Adams) Corporation, General Partner
of the Registrant
/S/James F. Walsh Chief Financial Officer of March 23, 1995
----------------- Polaris Investment Management --------------
(James F. Walsh) Corporation, General Partner
of the Registrant
45<PAGE>
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Exhibit 10. Material Contracts
POLARIS AIRCRAFT INCOME FUND II
SERVICES AGREEMENT
By and Between
POLARIS INVESTMENT MANAGEMENT CORPORATION,
a California corporation, and
GE CAPITAL AVIATION SERVICES, INC.,
a Delaware corporation
Dated as of July 1, 1994
<PAGE>
<PAGE>
SERVICES AGREEMENT
TABLE OF CONTENTS
PAGE
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1
2. PROVISION OF SERVICES AND COMPENSATION THEREFOR . . . . . . . 3
2.1 Performance of Services; Staff and Resources . . . . 3
2.2 Compensation for Services . . . . . . . . . . . . . 4
2.3 Expense Reimbursement . . . . . . . . . . . . . . . 4
2.4 Subordination . . . . . . . . . . . . . . . . . . . 5
2.5 Standard of Performance . . . . . . . . . . . . . . 5
2.6 Cooperation . . . . . . . . . . . . . . . . . . . . 5
2.7 Servicer Not a General Partner . . . . . . . . . . . 5
2.8 PIMC Responsibility . . . . . . . . . . . . . . . . 5
3. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 6
3.1 Representations by PIMC . . . . . . . . . . . . . . 6
3.2 Representations by Servicer . . . . . . . . . . . . 6
3.3 Survival . . . . . . . . . . . . . . . . . . . . . . 7
4. CONTROL AND DECISION-MAKING . . . . . . . . . . . . . . . . . 7
4.1 General Partner's Role; Actions Requiring
Approval . . . . . . . . . . . . . . . . . . . . . . 7
4.2 Servicer Committee . . . . . . . . . . . . . . . . . 8
4.3 Reports and Other Documents . . . . . . . . . . . . 8
4.4 Access . . . . . . . . . . . . . . . . . . . . . . . 9
4.5 Maintenance of Books and Records . . . . . . . . . . 9
5. EXCULPATION AND INDEMNIFICATION . . . . . . . . . . . . . . . 9
5.1 Exculpation and Indemnification of Servicer . . . . 9
5.2 Exculpation and Indemnification of PIMC . . . . . . 10
6. TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . 10
6.1 Term . . . . . . . . . . . . . . . . . . . . . . . 10
6.2 Termination by PIMC . . . . . . . . . . . . . . . . 10
6.3 Termination by Servicer . . . . . . . . . . . . . . 10
6.4 Effect of Termination . . . . . . . . . . . . . . . 11
6.5 Post-Termination Matters . . . . . . . . . . . . . . 11
7. ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . 12
8. CONFLICTS OF INTEREST . . . . . . . . . . . . . . . . . . . . 12
9. NO THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . . . . 13
i<PAGE>
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PAGE
10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 13
10.1 No Commingling . . . . . . . . . . . . . . . . . . . 13
10.2 Successors and Assigns . . . . . . . . . . . . . . . 13
10.3 Governing Law . . . . . . . . . . . . . . . . . . . 13
10.4 Entire Agreement . . . . . . . . . . . . . . . . . . 13
10.5 Waivers . . . . . . . . . . . . . . . . . . . . . . 13
10.6 Counterparts . . . . . . . . . . . . . . . . . . . . 13
10.7 Independent Contractor Relationship . . . . . . . . 14
10.8 Further Assurances . . . . . . . . . . . . . . . . . 14
10.9 Severability . . . . . . . . . . . . . . . . . . . . 14
10.10 Notices . . . . . . . . . . . . . . . . . . . . . . 14
10.11 Titles and Captions . . . . . . . . . . . . . . . . 15
10.12 Amendments to Partnership Agreement . . . . . . . . 15
10.13 Attorneys' Fees . . . . . . . . . . . . . . . . . . 15
10.14 Additional Insured . . . . . . . . . . . . . . . . . 15
10.15 Net Worth of Servicer . . . . . . . . . . . . . . . 15
ii<PAGE>
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SERVICES AGREEMENT
THIS SERVICES AGREEMENT ("Services Agreement") is entered into to be
effective as of July 1, 1994, by and between: GE CAPITAL AVIATION SERVICES,
INC., a Delaware corporation ("Servicer"), and POLARIS INVESTMENT MANAGEMENT
CORPORATION, a California corporation ("PIMC").
RECITALS
A. PIMC currently serves as general partner of Polaris Aircraft
Income Fund II, a California Limited Partnership formed under the laws of the
State of California (the "Partnership").
B. PIMC desires to enter into this Services Agreement with Servicer
in order to engage Servicer to perform or cause to be performed for the
Partnership certain services which are more specifically described in
Section 2.
C. Servicer, having personnel with substantial expertise in the
areas of managing, leasing, selling and otherwise dealing with aircraft of the
type owned by the Partnership and providing administrative services in
connection therewith, and having the capability, technology and other
supporting resources to perform the services as they are required to be
performed by Servicer pursuant to this Services Agreement, desires to be
engaged to perform such services.
D. PIMC will continue to maintain such executive personnel and
other staff as PIMC shall determine in order to enable PIMC to discharge all of
its responsibilities, including those referred to in this Services Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual provisions contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS.
For purposes of this Services Agreement, the following terms shall
have the respective meanings ascribed to them below. Capitalized terms used
herein, but not otherwise defined below or elsewhere in this Services
Agreement, shall have the respective meanings assigned to them in the
Partnership Agreement (as such term is hereinafter defined):
Affiliate of any person shall mean: (i) any other person directly or
indirectly controlling, controlled by or under common control with such
person; (ii) any other person owning or controlling ten percent or more of
the outstanding voting securities of such person; (iii) any officer,
director or partner of such person; and (iv) if such other person is an
officer, director or partner, any company for which such person acts in
such capacity.
Aircraft shall mean the aircraft owned directly or indirectly by the
Partnership and any related equipment, including spare parts and engines,
and shall include any beneficial interest in an Aircraft.
Aircraft Management Fee shall have the meaning set forth in the
Partnership Agreement.
Aircraft Management Services shall mean the Aircraft management
services which are provided to the Partnership by PIMC pursuant to the
terms of the Partnership Agreement in managing the Partnership's portfolio
of Aircraft, and shall include the services described in Section 9.3 of
the Partnership Agreement with respect to the Aircraft.
Aircraft Sales Services shall mean the services which are provided to
the Partnership by PIMC pursuant to the terms of the Partnership Agreement
in connection with the sale or other disposition of one or more of the
Aircraft by the Partnership.
Assignment shall have the meaning set forth in Section 7 of this<PAGE>
<PAGE>
Services Agreement.
Cash Available from Operations shall have the meaning set forth in
Section 2.1 of the Partnership Agreement.
Cash Available from Sale Proceeds shall have the meaning set forth in
Section 2.1 of the Partnership Agreement.
Conflicts Standard shall have the meaning set forth in Section 8 of
this Services Agreement.
Effective Date shall mean July 1, 1994.
GE Capital shall mean General Electric Capital Corporation, a New
York corporation.
Legal Proceeding shall mean any action, suit, litigation,
arbitration, proceeding (including, without limitation, any civil,
criminal, administrative or appellate proceeding), prosecution, audit,
examination, inquiry, inquest, hearing or investigation.
Other Assets shall have the meaning set forth in Section 8 of this
Services Agreement.
Partnership shall have the meaning set forth in Recital A.
Partnership Agreement shall mean the Amended and Restated Limited
Partnership Agreement governing the affairs of the Partnership in effect
as of the Effective Date, as the same may be amended thereafter from time
to time.
Partnership Expenses shall mean any expenses that the Partnership may
permissibly pay or reimburse to PIMC or an Affiliate of PIMC pursuant to
the terms of the Partnership Agreement, including but not limited to all
such expenses which are described in Section 10.1 of the Partnership
Agreement.
PIMC Managed Asset shall have the meaning set forth in Section 8 of
this Services Agreement.
Portfolio Management Services shall mean the portfolio and
partnership management services which are provided to the Partnership
pursuant to the terms of the Partnership Agreement, including but not
limited to:
2<PAGE>
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(i) preparing or causing to be prepared certain reports,
statements and other relevant information relating to the Partnership
as PIMC may from time to time request;
(ii) employing employees, agents, independent contractors,
brokers, attorneys, accountants and other persons to perform services
for the Partnership, and dismissing such persons;
(iii) preparing, filing and publishing any and all instruments
or documents necessary to enable the Partnership to transact business
or otherwise to exist, operate and be recognized as a limited
partnership in jurisdictions outside California;
(iv) preparing financial projections of future results of
operations;
(v) causing to be performed any substantive accounting or tax
related research on new issues;
(vi) pursuant to the appropriate instruction by PIMC, causing
checks to be signed and approving wire transfers from bank accounts;
(vii) preparing and coordinating any communication regarding
delinquent payments with aircraft lessees; and
(viii) performing financial analyses with respect to
capitalization of aircraft expenditures.
; provided, however, that Portfolio Management Services shall not include
(i) Aircraft Management Services, (ii) Aircraft Sales Services,
(iii) investor relations services, and (iv) those accounting and financial
reporting services defined as the "Services" in that certain Program
Accounting and Financial Reporting Administration Agreement between PIMC
and ReSource/Phoenix, a division of Phoenix Leasing Incorporated.
Sales Commission shall have the meaning assigned to such term in
Section 2.1 of the Partnership Agreement.
Servicer Committee shall have the meaning set forth in Section 4.2 of
this Services Agreement.
Services shall mean the Aircraft Sales Services, the Aircraft
Management Services, and the Portfolio Management Services.
Standard of Performance shall have the meaning set forth in
Section 2.5 of this Services Agreement.
Termination Date shall mean the date on which this Services Agreement
terminates pursuant to the provisions of Section 6 of this Services
Agreement.
Unit Holders shall mean the investors in the Partnership, whether
denominated as limited partners or unit holders, and their respective
assignees or transferees.
2. PROVISION OF SERVICES AND COMPENSATION THEREFOR.
2.1 Performance of Services; Staff and Resources. From and after the
Effective Date, Servicer shall provide or arrange for the provision of the
3<PAGE>
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Aircraft Management Services, Aircraft Sales Services and Portfolio Management
Services. Servicer shall employ or otherwise engage such staff and maintain
such supporting resources as Servicer shall reasonably deem necessary, both in
number and in quality, to enable Servicer to perform the Services in accordance
with the terms of this Services Agreement.
2.2 Compensation For Services. As full compensation for the performance
of the Services by Servicer, PIMC shall pay to Servicer the following amounts:
(i) an amount equal to fifty percent (50%) of the Aircraft
Management Fees received by PIMC at any time pursuant to Section 9.3 of
the Partnership Agreement with respect to the period from the Effective
Date until the Termination Date, which amount shall be paid to Servicer
within five days after the date on which PIMC receives the corresponding
Aircraft Management Fees;
(ii) an amount equal to all Sales Commissions received by PIMC at
any time pursuant to Section 9.4 of the Partnership Agreement with respect
to sales of Aircraft arranged or effected by Servicer pursuant to this
Services Agreement during the period from the Effective Date until the
Termination Date, which amount shall be paid to Servicer by PIMC within
five days after the date on which PIMC receives the corresponding Sales
Commissions with respect to such Aircraft;
(iii) within five days after the end of each calendar year, with
respect to the immediately preceding year, an amount equal to the
difference between (A) the Cash Available From Operations and Cash
Available From Sale Proceeds which PIMC receives from the Partnership
during such preceding year, and (B) any amounts paid with respect to such
preceding year by PIMC to parties other than Servicer for services related
to the Partnership (not including any such amounts for which PIMC is
entitled to reimbursement from the Partnership); and
(iv) an amount equal to the reimbursement (the "Expense
Reimbursement") for Partnership Expenses which PIMC receives from the
Partnership pursuant to Section 2.3 herein on account of expenses incurred
by Servicer in performing the Services pursuant to this Services
Agreement.
2.3 Expense Reimbursement. The Expense Reimbursement to be made to
Servicer pursuant to clause (iv) of Section 2.2 shall be based upon Services
actually performed by Servicer during the period from the Effective Date until
the Termination Date, and shall be subject to all of the expense reimbursement
limitations set forth in the Partnership Agreement, including but not limited
to those set forth in Sections 10.1 and 10.2 of the Partnership Agreement.
Servicer shall on a monthly basis submit to PIMC an itemized statement of
expenses incurred by Servicer in performing the Services pursuant to this
Services Agreement for the immediately preceding month as to which Servicer
believes it is entitled to reimbursement pursuant to the Partnership Agreement.
Such statement shall be accompanied by such supporting detail and documentation
(including without limitation employee time records, receipts, expense
allocation information and the like) as PIMC shall reasonably request. After
receiving such itemized statement and such detail and documentation for a
particular month, PIMC shall review the same and promptly make a determination
of the amount of such expenses which are "Partnership Expenses" and as to which
Servicer is entitled to be reimbursed pursuant to the Partnership Agreement.
The determination of PIMC in this regard shall be final and binding upon
Servicer, absent manifest error on the part of PIMC. Promptly after making
such determination, PIMC shall submit to the Partnership for reimbursement the
amount of Partnership Expenses PIMC so determines are reimbursable, and will
4<PAGE>
<PAGE>
pay to Servicer an amount equal to the amount of such expenses actually
reimbursed by the Partnership to PIMC on account of Services performed by
Servicer, within five days after the date PIMC receives such reimbursement from
the Partnership.
2.4 Subordination. Servicer hereby acknowledges that payments by the
Partnership to PIMC of Sales Commissions are subordinated to certain returns to
the Unit Holders as provided in Section 9.4 of the Partnership Agreement and
that no amounts will be paid to Servicer unless and until such time, if any, as
PIMC shall actually receive from the Partnership the Sales Commissions.
2.5 Standard of Performance. In performing the Services required to be
performed by it pursuant to this Services Agreement, Servicer shall perform
such Services (i) in accordance with all applicable laws, rules and
regulations, (ii) in a manner that is consistent with all applicable provisions
of the Partnership Agreement (and Servicer shall take no action with respect to
the Partnership which PIMC as general partner of the Partnership is not
permitted to take), and (iii) with such care and in accordance with such
standards of performance as would be applied to the general partner of the
Partnership pursuant to the terms of the Partnership Agreement if the general
partner had performed such Services directly (including, without limitation, in
accordance with any fiduciary duty owed by the general partner of the
Partnership as a result of its status as general partner of the Partnership).
Without limiting the generality of the foregoing, Servicer shall not directly
or indirectly take any of the actions prohibited by Section 15.3 of the
Partnership Agreement. (The standards set forth in this Section 2.5 shall be
referred to collectively as the "Standard of Performance").
2.6 Cooperation. PIMC shall at all times cooperate with Servicer to
enable Servicer to provide the Services, including providing Servicer with all
powers of attorney as may be reasonably necessary or appropriate for Servicer
to perform the Services.
2.7 Servicer Not a General Partner. PIMC shall continue to serve as
general partner of the Partnership and shall continue to have all of the
rights, powers, and interests as general partner, whether granted to it by the
Partnership Agreement, by applicable law, rule or regulation, or otherwise.
Nothing in this Services Agreement is intended to imply that Servicer is acting
as or substituting for PIMC as the general partner of the Partnership, and PIMC
acknowledges that the responsibility for the Partnership and the protection of
the assets of the Partnership which PIMC had immediately prior to the Effective
Date by virtue of its role as general partner of the Partnership shall remain
with PIMC, and PIMC shall take such actions as PIMC deems necessary or
appropriate in order to discharge such responsibility. Without limiting the
foregoing, no provision of this Services Agreement (including without
limitation the provisions of this Section 2 requiring Servicer to perform
Portfolio Management Services for the Partnership) shall be construed as
stating or implying that Servicer is acting as or substituting for PIMC as
general partner of the Partnership, or that Servicer has assumed any fiduciary
duty that PIMC, as general partner of the Partnership, has had or hereafter
has.
2.8 PIMC Responsibility. Notwithstanding the appointment of Servicer to
perform the Services, PIMC shall continue to have and exercise through the PIMC
board of directors control and management of all matters related to its ongoing
business, operations, assets and liabilities.
5<PAGE>
<PAGE>
3. REPRESENTATIONS AND WARRANTIES
3.1 Representations by PIMC. PIMC hereby represents and warrants to
Servicer as follows:
(i) PIMC (a) is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, and (b) has
full corporate power and authority to enter into this Services Agreement
and to perform all of the terms, conditions and provisions set forth
herein to be performed by PIMC, and the execution, delivery and
performance of this Services Agreement by PIMC have been duly authorized
by all necessary action on the part of PIMC and its officers, directors
and stockholder, and this Services Agreement has been duly executed and
delivered by PIMC;
(ii) this Services Agreement is binding upon and enforceable against
PIMC in accordance with its terms subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity);
(iii) none of the transactions hereby contemplated to be performed
by PIMC, nor the fulfillment of the terms, provisions and conditions
hereof, will materially conflict with, or result in a material breach of
any of the material terms, conditions, or provisions of, or constitute a
default under (a) any of the provisions of PIMC's articles of
incorporation or bylaws, (b) any resolution adopted by the stockholder or
board of directors of PIMC, or (c) any material agreement or instrument to
which PIMC is a party or by which it is bound;
(iv) the Partnership Agreement permits PIMC to engage Servicer to
perform the Services described in this Services Agreement on the terms set
forth herein;
(v) the copy of the Partnership Agreement heretofore provided to
Servicer is a true, correct and complete copy; and
(vi) PIMC is the sole general partner of the Partnership.
3.2 Representations by Servicer. Servicer hereby represents and warrants
to PIMC as follows:
(i) Servicer (a) is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and (b) has
full corporate power and authority to enter into this Services Agreement
and to perform all of the terms, conditions and provisions set forth
herein to be performed by Servicer, and the execution, delivery and
performance of this Services Agreement by Servicer have been duly
authorized by all necessary action on the part of Servicer and its
officers, directors and stockholder, and this Services Agreement has been
duly executed and delivered by Servicer;
(ii) this Services Agreement is binding upon and enforceable against
Servicer in accordance with its terms subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity); and
6<PAGE>
<PAGE>
(iii) none of the transactions hereby contemplated to be performed
by Servicer, nor the fulfillment of the terms, provisions and conditions
hereof, will materially conflict with, or result in a material breach of
any of the material terms, conditions, or provisions of, or constitute a
default under (a) any of the provisions of Servicer's certificate of
incorporation or bylaws, (b) any resolution adopted by the stockholder or
board of directors of Servicer, or (c) any material agreement or
instrument to which Servicer is a party or by which it is bound.
3.3 Survival. All representations and warranties contained in this
Services Agreement or made pursuant hereto or in connection herewith shall
remain in effect for a period of 12 months after the Termination Date, after
which they shall expire and cease to be of any force and effect, provided that
any representation or warranty which is not true when made and which is made
fraudulently and with intent to defraud or mislead shall survive such 12-month
period.
4. CONTROL AND DECISION-MAKING.
4.1 General Partner's Role; Actions Requiring Approval.
(a) PIMC, as general partner of the Partnership, shall have the
right to review and supervise all actions taken by Servicer hereunder.
Servicer shall take any actions relating to this Services Agreement that PIMC
may direct so long as such actions are reasonably deemed by PIMC to be
necessary or appropriate in order to permit PIMC to fulfill its fiduciary
duties as general partner of the Partnership or otherwise to be in the best
interests of the Partnership or its Unit Holders.
(b) Except as provided in this subsection (b) or subsection (c)
below, Servicer shall have the power and authority to provide or arrange for
the provision of the Services, without prior approval from PIMC.
Notwithstanding anything herein to the contrary, the following actions with
respect to the Partnership shall require the prior approval of PIMC, and if
Servicer shall propose that PIMC approve any of the following actions with
respect to the Partnership, it shall prepare and submit to PIMC, at a time
sufficiently far in advance of the date such action is proposed to be taken as
is reasonably necessary for PIMC to consider whether or not to approve such
proposed action (and in no event less than five days prior to the date of such
proposed action), a written description of the proposed action stating the
basis therefor and Servicer's recommendation with respect thereto (together
with such supporting materials as PIMC may reasonably request):
(i) selling or otherwise disposing of one or more Aircraft by the
Partnership (including, without limitation, the sale or other disposition
of an Aircraft as parts or scrap);
(ii) entering into any new lease (or any renewal or extension of an
existing lease) with respect to any Aircraft;
(iii) terminating or modifying any lease with respect to any
Aircraft;
(iv) financing or refinancing one or more Aircraft by the
Partnership;
(v) borrowing money by the Partnership;
(vi) surrendering an Aircraft to a lender;
7<PAGE>
<PAGE>
(vii) filing for protection under the bankruptcy laws by the
Partnership;
(viii) deferring or waiving any Partnership obligations to PIMC;
(ix) hiring counsel for the Unit Holders;
(x) making material capital, maintenance or inspection expenditures
for the Partnership;
(xi) hiring any broker to sell or lease any Aircraft;
(xii) causing an Aircraft to be placed in storage for a period in
excess of thirty days;
(xiii) transferring Partnership assets to a master limited
partnership or any other form of so-called partnership roll-up;
(xiv) entering into any contract (including, without limitation, any
contract of sale), agreement or instrument other than a contract,
agreement or instrument entered into in the ordinary course of business
that has a term of less than one year and that does not contemplate
payments which will exceed, over the term of the contract, agreement or
instrument, $100,000 in the aggregate;
(xv) issuing any guaranty on behalf of, or otherwise pledging the
credit of, the Partnership;
(xvi) incurring on behalf of the Partnership any liability (actual
or contingent) or causing any such liability to be incurred;
(xvii) amending the Partnership Agreement in any respect;
(xviii) changing in any material respect the type or amount of
insurance coverage in place for the Partnership as of the Effective Date;
(xix) making any distributions to Unit Holders;
(xx) commencing any Legal Proceeding with respect to the Partnership
or the Aircraft; and
(xxi) incurring any Partnership Expenses for which Servicer will
seek reimbursement pursuant to this Services Agreement which exceed in the
aggregate, for any calendar month, the sum of $10,000.
(c) In addition to the matters listed in subsection (b) above, PIMC
shall have the right, upon at least ten (10) days' prior written notice to
Servicer, to designate any additional action as an action that shall require
PIMC's prior approval if, in PIMC's reasonable judgment, such designation is
reasonably necessary in order to permit PIMC to carry out its fiduciary duties
as general partner of the Partnership.
4.2 Servicer Committee. Servicer has established or shall hereafter
establish a committee (the "Servicer Committee) which shall have, and shall
regularly exercise, the authority to approve matters relating to this Services
Agreement. Servicer shall submit to PIMC for PIMC's approval only those
proposed actions which have previously been approved by the Servicer Committee.
4.3 Reports and Other Documents. Servicer shall supply to PIMC the
following documents and reports:
8<PAGE>
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(i) copies of all correspondence and reports prepared by, or at the
direction of, Servicer and sent to or filed on behalf of the Partnership
with any federal regulatory agency (including, without limitation, the
Securities and Exchange Commission) or with any state or local regulatory
agency;
(ii) copies of all complaints, arbitration notices, mediation
notices, cease and desist orders and other similar orders from federal,
state or local regulatory authorities or other third parties, notices
threatening any Proceeding, and any other similar notices, in each case
which are received by Servicer and which relate to the Partnership or its
assets or operations;
(iii) copies of the annual report (including audited financial
statements) and related management letters normally prepared with respect
to the Partnership by the independent certified public accountants for the
Partnership;
(iv) any return (including any informational return), report,
statement, schedule, notice, form or other document or information
prepared by, or at the direction of, Servicer and filed with or submitted
to, or required to be filed with or submitted to, any federal, state or
local governmental agency in connection with the determination,
assessment, collection, or payment of any tax, assessment, deficiency or
other fee relating in any way to the Partnership or its assets or
operations; and
(v) copies of such other documents and reports relating to this
Services Agreement as PIMC may reasonably request.
Copies of the materials described in clauses (i), (iii) and (iv) above shall be
submitted to PIMC for its review and approval prior to the time the same are
sent to Unit Holders, filed with the Securities and Exchange Commission or any
state or local regulatory agency, or filed with any taxing authority, as
applicable.
4.4 Access. PIMC shall have the right, at all reasonable times during
customary business hours and at its own expense, upon reasonable advance notice
to Servicer, to inspect and make copies of the books of account and records of
Servicer relating to this Services Agreement and the matters set forth herein,
to enable PIMC to monitor the performance by Servicer under this Services
Agreement and otherwise to enable PIMC to discharge its obligations under this
Services Agreement and its obligations and responsibilities as general partner
of the Partnership. Such right may be exercised on behalf of PIMC by any
designated agent or employee of PIMC or by an independent certified public
accountant designated by PIMC.
4.5 Maintenance of Books and Records. Without the prior written consent
of PIMC, Servicer shall not destroy or otherwise dispose of the books of
account and records of Servicer relating to this Services Agreement or the
matters set forth herein.
5. EXCULPATION AND INDEMNIFICATION.
5.1 Exculpation and Indemnification of Servicer. Nothing contained in
this Services Agreement shall in any way limit or constitute a waiver of any of
the exculpation and indemnification rights to which Servicer may be entitled
pursuant to (i) the Partnership Agreement (including without limitation the
provisions of Section 22 thereof), (ii) applicable laws, rules and regulations,
9<PAGE>
<PAGE>
and (iii) the provisions of any insurance policy now or hereafter maintained
which provides coverage to Servicer.
5.2 Exculpation and Indemnification of PIMC. Nothing contained in this
Services Agreement shall in any way limit or constitute a waiver of any of the
exculpation and indemnification rights to which PIMC may be entitled pursuant
to (i) the Partnership Agreement (including without limitation the provisions
of Section 22 thereof), (ii) applicable laws, rules, and regulations, and
(iii) the provisions of any insurance policy now or hereafter maintained which
provides coverage to PIMC.
6. TERM AND TERMINATION.
6.1 Term. This Services Agreement shall commence on the Effective Date
and shall continue until the completion of the winding up and liquidation of
the Partnership and the distribution of all of its assets; provided, however,
that this Services Agreement may be sooner terminated by PIMC in the manner
provided in Section 6.2 below, and may be sooner terminated by Servicer in the
manner provided in Section 6.3 below.
6.2 Termination by PIMC. If, during the term of this Services Agreement,
any of the events listed below shall occur, PIMC, in addition to all of its
other rights and remedies, may terminate this Services Agreement upon written
notice to Servicer:
(i) any breach by Servicer of any of the representations, warranties
or covenants made by Servicer in this Services Agreement or in any
certificate or document executed pursuant hereto or in connection
herewith, which breach shall not be cured within thirty (30) days after
receipt of written notice thereof from PIMC or within such longer period
(but in any event not to exceed one hundred and twenty (120) days), if
any, as may be reasonably required to effect such cure by Servicer so long
as Servicer is diligently proceeding to effect such cure;
(ii) the discontinuance or cessation of business by Servicer,
including by reason of the bankruptcy of Servicer;
(iii) a decision made in the good faith judgment of PIMC that
termination is required to permit PIMC to satisfy its fiduciary
obligations to the Partnership or the Unit Holders;
(iv) at any time after the Effective Date, the adoption or enactment
of any applicable law or governmental rule, requirement, guideline, order
or regulation, or any change therein or change in the interpretation or
administration thereof, by any judicial or governmental authority which
shall make it illegal, impossible or inappropriate for PIMC to engage
Servicer to provide the Services;
(v) a decision made in the good faith judgment of PIMC that Servicer
is not acting in the best interests of the Partnership; or
(vi) the withdrawal, removal or replacement of PIMC as general
partner of the Partnership.
6.3 Termination by Servicer. If, during the term of this Services
Agreement, any of the events listed below shall occur, Servicer, in addition to
all of its other rights and remedies, may terminate this Services Agreement
upon written notice to PIMC:
10<PAGE>
<PAGE>
(i) a continuing default in the payment of any amounts owing to
Servicer under this Services Agreement, which default shall not be cured
within ten (10) days after receipt of written notice thereof from
Servicer;
(ii) the breach by PIMC of any of PIMC's representations, warranties
or covenants set forth in this Services Agreement or in any certificate or
document executed pursuant hereto or in connection herewith (other than
those covenants described in clause (i) above dealing with the payment of
amounts owing to Servicer under this Services Agreement), which breach
shall not be cured within thirty (30) days after receipt of written notice
thereof from Servicer or within such longer period (but in any event not
to exceed one hundred and twenty (120) days), if any, as may be reasonably
required to effect such cure by PIMC so long as PIMC is diligently
proceeding to effect such cure;
(iii) the withdrawal, removal or replacement of PIMC as general
partner of the Partnership;
(iv) at any time after the Effective Date, the adoption or enactment
of any applicable law or governmental rule, requirement, guideline, order
or regulation, or any change therein or change in the interpretation or
administration thereof, by any judicial or governmental authority which
shall make it illegal, impossible or inappropriate for Servicer to provide
the Services described herein; or
(v) the amendment of the Partnership Agreement of the Partnership
which has a material adverse effect on Servicer's rights, compensation or
obligations under this Services Agreement.
6.4 Effect of Termination. In the event of the termination of this
Services Agreement, then the entitlement of Servicer with respect to any
compensation provided for in this Services Agreement shall terminate
concurrently therewith. Notwithstanding the foregoing, no termination of this
Services Agreement shall impair the rights of Servicer to ultimately receive
all amounts earned by Servicer under this Services Agreement prior to the
effective date of any such termination.
6.5 Post-Termination Matters.
Upon the expiration of the term of this Services Agreement or in the
event of the earlier termination of this Services Agreement, Servicer shall:
(i) turn over to PIMC, without charge, all books, records, contracts
and documents relating to the Partnership, whether in writing or stored in
electro-magnetic or any other form, all bank accounts maintained with
respect to the Partnership and/or PIMC, all management summaries relating
to the administration of Partnership business, and all management systems
utilized to provide the Services, and all other materials generally
relating to the Partnership;
(ii) assign to PIMC all executory contracts to which Servicer is a
party which (x) relate primarily to the performance of the Services and
(y) have been approved by PIMC or otherwise have been entered into in
accordance with the provisions of this Services Agreement, whereupon PIMC
or an Affiliate of PIMC shall assume the obligations of Servicer to be
performed after, and that relate to the period after, the date of such
assignment, but only to the extent that such obligations relate to the
performance of the Services for the Partnership;
11<PAGE>
<PAGE>
(iii) offer to sell to PIMC, at the lower of book or market value,
such equipment, furnishings and other personal property that Servicer
shall then own and shall have utilized in connection with its performance
of this Services Agreement that Servicer shall not require (in Servicer's
sole discretion) in order to continue its other business activities
following termination of this Services Agreement;
(iv) consent, without the payment of any consideration, to the
employment by PIMC, or any other person that PIMC may retain to provide
Services to the Partnership following termination of this Services
Agreement of any of Servicer's employees whom Servicer shall not require
(in Servicer's sole discretion) in order to continue its other business
activities; and
(v) for such period as is reasonably required therefor, generally
cooperate in good faith with PIMC in order to facilitate the discharge by
PIMC of its obligations under the Partnership Agreement and its
obligations under applicable laws, rules, requirements, guidelines, orders
and regulations.
7. ASSIGNMENT.
Servicer shall have no right to assign, give, delegate, convey
(including by way of a transfer of control of Servicer), mortgage, license or
otherwise transfer or encumber all or any part of its rights, duties, or other
interests in this Services Agreement (collectively, an "Assignment"), without
the consent of PIMC; provided, however, that such consent shall not be
unreasonably withheld with respect to a transfer by Servicer to an Affiliate of
Servicer so long as Servicer has given to PIMC at least 60 days prior written
notice of a proposed transfer and so long as (i) the proposed transferee is a
reputable company in good standing in the jurisdictions in which it operates,
(ii) the proposed transferee undertakes in a manner reasonably satisfactory to
PIMC to commit personnel to the provision of Services which are of comparable
quality, number and experience to Servicer personnel providing such Services at
the time of the proposed assignment, and (iii) the proposed transferee has a
net worth of $25,000,000 or more. Any attempted Assignment in violation of
this Section 7 shall be a material default under this Services Agreement and,
at the option of PIMC, shall be null and void.
8. CONFLICTS OF INTEREST.
PIMC acknowledges and agrees that (i) in addition to providing the
Services to PIMC under this Services Agreement, Servicer and its Affiliates may
provide services to, and shall be entitled to provide such services from time
to time with respect to the separate assets ("Other Assets") and businesses of,
GE Capital, its Affiliates and third parties; (ii) in the course of conducting
such activities, Servicer may from time to time have conflicts of interest in
performing its duties on behalf of the various entities to which it provides
services and with respect to the various assets in respect of which it provides
services; and (iii) the PIMC board of directors has approved the transactions
contemplated by this Services Agreement and desires that such transactions be
consummated and in giving such approval the PIMC board of directors has
expressly recognized that such conflicts of interest may arise and that when
such conflicts of interest arise Servicer shall perform the Services in
accordance with the Standard of Performance and the Conflicts Standard.
If conflicts of interest arise regarding the provision of Services
with respect to (i) a particular asset subject to the terms of this Services
12<PAGE>
<PAGE>
Agreement (a "PIMC Managed Asset"), on the one hand, and another asset owned by
an investment vehicle sponsored by PIMC as to which Servicer provides
management services, on the other hand, or (ii) any PIMC Managed Asset, on the
one hand, and Other Assets, on the other hand, Servicer shall perform the
Services in good faith and, without limiting the generality of the foregoing,
to the extent (x) such PIMC Managed Asset and assets of such investment vehicle
or (y) such PIMC Managed Asset and such Other Assets are substantially similar
in terms of objectively identifiable characteristics relevant for purposes of
the particular Services to be performed, including without limitation
characteristics deemed relevant by a potential lessee or purchaser, Servicer
shall not discriminate between such PIMC Managed Asset and assets of such
investment vehicle or between such PIMC Managed Asset and such Other Assets,
respectively, on the basis of ownership, fees payable to Servicer in respect of
a particular transaction, or on an unreasonable basis. (The standards set
forth in this Section 8 shall be referred to collectively as the "Conflicts
Standard").
9. NO THIRD PARTY BENEFICIARIES.
Under no circumstances shall any provision of this Services Agreement
be deemed to be for the benefit of or enforceable by any person or entity other
than PIMC and Servicer (and their respective permitted successors and assigns)
and, to the extent expressly provided herein, their respective Affiliates.
10. MISCELLANEOUS.
10.1 No Commingling. The funds of PIMC shall not be commingled by
Servicer with the funds of any other person or entity. The funds of the
Partnership shall not be commingled by Servicer with the funds of any other
person or entity, except as expressly permitted by the Partnership Agreement.
10.2 Successors and Assigns. Without limiting the restrictions on
Assignment set forth in Section 7, this Services Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
permitted successors and assigns.
10.3 Governing Law. This Services Agreement shall be construed in
accordance with the laws of the State of California, and venue for any legal
action arising out of this Services Agreement shall be in San Francisco County,
California.
10.4 Entire Agreement. This Services Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof, and
supersedes any prior oral or written agreement between the parties respecting
the subject matter hereof.
10.5 Waivers. Neither this Services Agreement nor any of the terms
hereof may be terminated, amended or waived orally by the parties, but only by
an instrument in writing signed by the party against which enforcement of the
termination, amendment or waiver is sought. Notwithstanding the foregoing
provisions of this Section 10.5, the rights and obligations of the parties
hereunder shall be automatically modified from time to time hereunder to the
extent and in the manner necessary to make this Services Agreement and the
rights and obligations of the parties hereunder comply with any and all
applicable federal, state and local laws, rules and regulations.
10.6 Counterparts. This Services Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and it shall not
13<PAGE>
<PAGE>
be necessary in making proof of this Services Agreement to produce or account
for more than one such counterpart.
10.7 Independent Contractor Relationship. This Services Agreement is not
intended to and shall not create any relationship of principal and agent,
partnership, joint venture, employer and employee or any other relationship,
association or affiliation whatsoever between the parties, except for that of
independent contractor.
10.8 Further Assurances. Each party covenants on behalf of itself, its
successors and assigns, to execute, with acknowledgment or affidavit if
required, any and all documents and writings which may be necessary or
desirable to carry out the purposes of this Services Agreement.
10.9 Severability. In the event that any provision of this Services
Agreement, or the application of such provision to any person, entity or set of
circumstances, shall be deemed invalid, unlawful or unenforceable to any
extent, the remainder of this Services Agreement, and the application of all
such provisions to persons, entities or circumstances other than those
determined invalid, unlawful or unenforceable shall not be affected and shall
continue to be enforceable to the fullest extent permitted by law.
10.10 Notices.
(a) All notices, demands or requests provided for or permitted to be
given pursuant to this Services Agreement must be in writing. All notices,
demands and requests to be sent to PIMC or the Partnership pursuant hereto
shall be deemed to have been properly given if served by personal delivery, by
depositing the same in the United States mail, postpaid, by depositing the same
with any reputable overnight mail courier, or by transmission of same by
telecopy or similar service, at the following address:
Until September 1, 1994:
Polaris Investment Management Corporation
Four Embarcadero Center, 40th Floor
San Francisco, CA 94111
Attention: James Linnan
After September 1, 1994:
Polaris Investment Management Corporation
201 Mission Street
San Francisco, CA 94105
Attention: James Linnan
with a copy at any time to:
Polaris Investment Management Corporation
1600 Summer Street
Stamford, CT 06927-1559
Attention: Howard Feinsand
(b) All notices, demands or requests to be sent to Servicer
pursuant hereto shall be deemed to have been properly given if served by
personal delivery, by depositing the same in the United States mail, postpaid,
by depositing the same with any reputable overnight mail courier, or by
transmission of same by telecopy or similar service, at the following address:
14<PAGE>
<PAGE>
GE Capital Aviation Services, Inc.
1600 Summer Street
Stamford, CT 06927-1559
Attention: President
with a copy to:
GE Capital Aviation Services, Inc.
1600 Summer Street
Stamford, CT 06927-1559
Attention: General Counsel
(c) Unless another requirement is specifically set forth in any
Section hereof, each notice, demand and request shall be effective upon
personal delivery, upon confirmation of receipt of the applicable telecopy, or
three (3) business days after the date on which the same is deposited in the
United States mail or with any reputable overnight mail courier in accordance
with the foregoing requirements. Rejection or other refusal to accept or the
inability to deliver because of changed address of which no notice was given
shall not adversely impact the effectiveness of any such notice, demand or
request.
(d) By giving to the other parties at least ten (10) days'
written notice thereof, the parties hereto, and their respective permitted
successors and assigns, shall have the right from time to time and at any time
during the term of this Services Agreement to change their respective addresses
and each shall have the right to specify as its address any other address
within the United States of America.
10.11 Titles and Captions. Paragraph titles or captions contained in
this Services Agreement are inserted only as a matter of convenience and for
reference. Such titles and captions in no way define, limit, extend or
describe the scope of this Services Agreement nor the intent of any provisions
hereof.
10.12 Amendments to Partnership Agreement. PIMC hereby covenants and
agrees that it shall give to Servicer prompt written notice of any amendment to
the Partnership Agreement proposed by PIMC or, to PIMC's knowledge, proposed by
Unit Holders of the Partnership.
10.13 Attorneys' Fees. If any party hereto brings an action to
enforce the terms hereof or to obtain a declaration of the rights of such party
hereunder, the prevailing party in any such action, upon its final resolution,
shall be entitled to such party's reasonable attorneys' fees to be paid by the
losing party.
10.14 Additional Insured. PIMC agrees that Servicer may add itself
and its Affiliates as additional insured parties (at the expense of the
Partnership to the extent permitted by the Partnership Agreement) under any
blanket insurance program applicable to the Partnership that is in effect from
time to time with respect to the Services provided hereunder.
10.15 Net Worth of Servicer.
(a) Servicer represents and warrants that no later than 30 days
after the date this Services Agreement has been fully executed, its net worth
(calculated in accordance with generally accepted accounting principles) will
be greater than $25,000,000. Servicer covenants and agrees that from and after
the date Servicer's net worth is greater than $25,000,000 as provided in the
immediately preceding sentence, Servicer will not pay or permit to be paid any
15<PAGE>
<PAGE>
dividends or make any other distributions to its shareholder or shareholders
which would have the result of reducing Servicer's net worth to the extent
that Servicer's net worth following any such reduction would be less than
$25,000,000.
(b) Within one hundred twenty (120) days after the end of each
calendar year during the term of this Services Agreement, Servicer shall cause
to be delivered to PIMC a balance sheet setting forth Servicer's net worth as
of the last day of such calendar year (calculated in accordance with generally
accepted accounting principles).
16<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Services
Agreement as of the Effective Date.
SERVICER:
GE CAPITAL AVIATION SERVICES, INC.
a Delaware corporation
By: /S/ Howard L. Feinsand
----------------------
Name: Howard L. Feinsand
----------------------
Its: Senior Vice President
----------------------
PIMC:
POLARIS INVESTMENT MANAGEMENT CORPORATION,
a California corporation
By: /S/ Howard L. Feinsand
----------------------
Name: Howard L. Feinsand
----------------------
Its: Senior Vice President
----------------------
17<PAGE>
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<PERIOD-END> DEC-31-1994
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