UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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_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, 1996
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
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(Exact name of registrant as specified in its charter)
California 94-2985086
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(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
201 Mission Street,27th Floor,San Francisco, California 94105
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(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, 1996.
Documents incorporated by reference: None
This document consists of 59 pages.
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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, sell and remarket aircraft for their own accounts and
for existing aircraft and aircraft leasing programs managed by them. Further,
GECAS provides a significant range of 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, 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 Trans World Airlines, Inc. (TWA), Continental
Micronesia, Inc. (Continental Micronesia) and Continental Airlines, Inc.
(Continental) as of December 31, 1996.
Scheduled
Number of Lease
Lessee Aircraft Type Aircraft Expiration Renewal Options
- ------ ------------- -------- ---------- ---------------
TWA McDonnell Douglas DC-9-30 2 2/98 (1) none
McDonnell Douglas DC-9-40 1 11/98 (1) none
McDonnell Douglas DC-9-30 1 11/98 (1) none
McDonnell Douglas DC-9-30 11 11/04 (1) none
McDonnell Douglas DC-9-30 3 2/05 (1) none
Continental Boeing 727-200 Advanced 1 4/98 (2) none
Continental
Micronesia Boeing 727-200 Advanced 2 4/98 (3) none
(1) These leases to TWA 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. TWA may
specify a lease expiration date for each aircraft up to six months
before the date shown, provided the average date for two of the
aircraft is February 1998, the average expiration date for two aircraft
is November 1998, the average expiration date for eleven aircraft is
November 2004, and the average expiration date for the remaining three
aircraft is February 2005. The Partnership also agreed to share in the
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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.
As discussed in Item 7, in October 1994, TWA notified its creditors,
including the Partnership, of a proposed restructuring of its debt.
Subsequently, GECAS negotiated a standstill agreement with TWA which
was approved on behalf of the Partnership by PIMC. That agreement
provided 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. The deferred rents, which aggregated $3.6 million
plus interest, were repaid in monthly installments beginning in May
1995 through October 1995. In 1995, the Partnership received as
consideration for the agreement $218,071 and warrants for 227,133
shares of TWA Common Stock (Item 7).
GECAS, on behalf of the Partnership, negotiated with TWA for the
acquisition of noise-suppression devices, commonly known as "hushkits",
for 14 of the 18 Partnership aircraft currently on lease to TWA, as
well as other aircraft owned by affiliates of PIMC and leased to TWA.
The 14 aircraft that received hushkits were designated by TWA. The
hushkits recondition the aircraft so as to meet Stage 3 noise level
restrictions. Hushkits were installed on 11 of the Partnership's
aircraft during 1996 and the leases for these 11 aircraft were extended
for a period of eight years until November 2004. Hushkits were
installed on the remaining three aircraft during February 1997 and the
leases for these three aircraft were extended for a period of eight
years until February 2005.
The aggregate cost of the hushkit reconditioning for the 11 aircraft
was $17,516,722, or approximately $1.6 million per aircraft, which was
capitalized by the Partnership during 1996. The Partnership paid $3.3
million of the aggregate hushkit cost and the balance of $14,216,722
was financed by the engine/hushkit manufacturer over a 6-year period at
an interest rate of approximately 10% per annum. The balance of the
notes payable at December 31, 1996 was $14,193,178.
The aggregate cost of the hushkit reconditioning for the 3 aircraft was
$4,784,633, or approximately $1.6 million per aircraft, which was
capitalized by the Partnership during 1997. The Partnership paid
$900,000 of the aggregate hushkit cost and the balance of $3,884,633
was financed by the engine/hushkit manufacturer over a 6-year period at
an interest rate of approximately 10% per annum.
The rent payable by TWA under the leases was increased by an amount
sufficient to cover the monthly debt service payments on the hushkits
and fully repay, during the term of the TWA leases, the amount
borrowed. The loan from the engine/hushkit manufacturer is non-recourse
to the Partnership and secured by a security interest in the lease
receivables.
(2) 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 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 in 1994, 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.
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(3) 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 in 1994, 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
Note 5 to the financial statements (Item 8). 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.
The lease of one Boeing 737-200 Combi aircraft to Northwest Territorial Airways,
Ltd. (NWT) expired in October 1995. As specified in the lease, NWT was required
to perform certain maintenance work on the aircraft prior to its return. NWT
returned the aircraft without performing the required maintenance work, which
constituted a default under the lease. The Partnership and NWT subsequently
reached an agreement by which NWT paid to the Partnership in December 1995
approximately $457,000 and the Partnership was entitled to retain NWT's security
deposit of approximately $101,000 in lieu of NWT's performing the required
maintenance work on the aircraft. The airframe and one engine from this aircraft
were subsequently sold to Westjet Airlines, Ltd. (Westjet) in March 1996 and the
remaining engine was subsequently sold in January 1997 to American Aircarriers
Support, Inc. with one Boeing 737-200 as discussed in Items 7 and 8.
Industry-wide, approximately 280 commercial jet aircraft were available at
December 31, 1996 for sale or lease, approximately 195 less than a year ago, and
at under 2.5% of the total available jet aircraft fleet, this is the lowest
level of availability since 1988. From 1991 to 1994, depressed demand for travel
limited airline expansion plans, with new aircraft orders and scheduled
deliveries being canceled or substantially deferred. As profitability declined,
many airlines took action to downsize or liquidate assets and some airlines were
forced to file for bankruptcy protection. Following three years of good traffic
growth accompanied by rising yields, this trend is reversing with many airlines
reporting record profits. As a result of this improving trend, just over 1200
new jet aircraft were ordered in 1996, making this the second highest ever order
year in the history of the industry. To date, this strong recovery has mainly
benefited Stage 3 narrow-bodies and younger Stage 2 narrow-bodies, many of which
are now being upgraded with hushkits, which, when installed on the aircraft,
bring Stage 2 aircraft into compliance with Federal Aviation Administration
(FAA) Stage 3 noise restrictions as discussed in the Industry Update section of
Item 7. Older Stage 2 narrow-bodies have shown only marginal signs of recovery
since the depressed 1991 to 1994 period. In 1996, several airline accidents have
also impacted the market for older Stage 2 aircraft. The Partnership has been
forced to adjust its estimates of the residual values realizable from its
aircraft, which resulted in an increase in depreciation expense, as discussed in
Items 7 and 8. 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 as compared with the non-advanced model. Hushkits which bring the
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Boeing 727-200 Advanced into compliance with FAA Stage 3 noise restrictions, are
now available at an average cost of approximately $2.6 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.
Certain ADs applicable to all models of the Boeing 727 have been issued to
prevent fatigue cracks and control corrosion as discussed in Item 7.
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 which bring Boeing 737-200 aircraft
into compliance with FAA Stage 3 noise restrictions, are now available at a cost
of approximately $1.5 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. Certain ADs applicable to all models
of the Boeing 737 have been issued to prevent fatigue cracks and control
corrosion as discussed in Item 7.
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.
Certain ADs applicable to the McDonnell Douglas DC-9 have been issued to prevent
fatigue cracks and control corrosion as discussed in Item 7.
The general partner believes that, in addition to the factors cited above, the
deteriorated 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
At December 31, 1996, PAIF-II owned 17 McDonnell Douglas DC-9-30 and one
McDonnell Douglas DC-9-40 aircraft leased to TWA, one Boeing 727-200 Advanced
aircraft leased to Continental, two Boeing 727-200 Advanced aircraft leased to
Continental Micronesia and one Boeing 737-200 aircraft formerly leased to
Viscount, as discussed in Items 7 and 8. 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 in February
1995. The Partnership sold the airframe and one engine from the Boeing 737-200
Combi aircraft in March 1996. The Partnership sold the remaining engine along
with a Boeing 737-200 in January 1997.
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The following table describes the Partnership's aircraft portfolio at December
31, 1996 in greater detail:
Year of Cycles
Aircraft Type Serial Number Manufacture As of 10/31/96 (1)
- ------------- ------------- ----------- ------------------
Boeing 727-200 Advanced 21426 1977 32,574
Boeing 727-200 Advanced 21427 1977 31,121
Boeing 727-200 Advanced 21947 1979 27,593
Boeing 737-200 (2) 19609 1968 63,364
McDonnell Douglas DC-9-30 47082 1967 76,107
McDonnell Douglas DC-9-30 47096 1967 76,741
McDonnell Douglas DC-9-30 47135 1968 77,476
McDonnell Douglas DC-9-30 47137 1968 76,247
McDonnell Douglas DC-9-30 47249 1968 82,757
McDonnell Douglas DC-9-30 47251 1968 80,927
McDonnell Douglas DC-9-30 47343 1969 79,464
McDonnell Douglas DC-9-30 47345 1969 77,837
McDonnell Douglas DC-9-30 47411 1969 75,191
McDonnell Douglas DC-9-30 47412 1969 75,382
McDonnell Douglas DC-9-30 47027 1967 81,285
McDonnell Douglas DC-9-30 47107 1968 81,291
McDonnell Douglas DC-9-30 47108 1968 78,079
McDonnell Douglas DC-9-30 47174 1968 78,731
McDonnell Douglas DC-9-30 47324 1969 75,263
McDonnell Douglas DC-9-30 47357 1969 74,679
McDonnell Douglas DC-9-30 47734 1977 45,589
McDonnell Douglas DC-9-40 47617 1975 44,562
(1) Cycle information as of 12/31/96 was not available.
(2) Aircraft sold in January 1997.
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. 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.
Pan American World Airways, Inc. (Pan Am) - As discussed in the Partnership's
1990 and 1991 Forms 10-K, Pan Am commenced reorganization proceedings under
Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York on January 8, 1991, and, on November 8,
1991, the Partnership filed a proof a claim in Pan Am's bankruptcy proceeding to
recover damages for lost rent and for Pan Am's failure to meet return conditions
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with respect to the Partnership's aircraft on lease to Pan Am. Pan Am's
reorganization under Chapter 11 was ultimately unsuccessful, and Pan Am ceased
operations in December 1991. On July 10, 1995, Pan Am entered into a proposed
Stipulation and Order with the Partnership pursuant to which Pan Am agreed to
allow the Partnership $2.5 million as an administrative expense priority claim
and $56 million as a general unsecured claim. This Stipulation and Order was
approved by the Bankruptcy Court, at a hearing held on August 17, 1995. On or
about May 16, 1996, the Partnership received a payment of $567,500, representing
full satisfaction of the Partnership's $2.5 million administrative priority
claim.
Trans World Airlines, Inc. (TWA) - On June 30, 1995, TWA filed a reorganization
proceeding under Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Eastern District of Missouri. Immediately before the
filing, the Partnership and TWA entered into an Amended Deferral Agreement,
pursuant to which TWA agreed to bring lease rents current over a period of
several months and to confirm all of its leases with the Partnership. As agreed,
TWA proposed a plan of reorganization in which, among other things, it confirmed
all of its leases with the Partnership, and the plan was confirmed by the
Bankruptcy Court on August 4, 1995. TWA has emerged from its bankruptcy
proceeding and has repaid all outstanding rent deferrals in accordance with its
commitment to the Partnership and in accordance with its plan of reorganization.
TWA has since remained current on all of its payment obligations to the
Partnership. On May 2, 1996, the United States Bankruptcy Court for the Eastern
District of Missouri issued a notice of final decree declaring that the estate
of TWA had been fully administered and that TWA's proceedings under Chapter 11
of the United States Bankruptcy Code was closed.
Viscount Air Services, Inc. (Viscount) Bankruptcy - As discussed in the
Partnership's 1995 Form 10-K, on January 24, 1996, Viscount filed a petition for
protection under Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the District of Arizona. On April 12, 1996, GE Capital
Aviation Services, Inc. (GECAS), as agent for the Partnership, First Security
Bank, National Association (formerly known as First Security Bank of Utah,
National Association) (FSB), the owner/trustee under the Partnership's leases
with Viscount, certain guarantors of Viscount's indebtedness and others executed
that certain Compromise of Claims and Stipulation under Section 1110 of the
Bankruptcy Code.
On May 14, 1996, the Bankruptcy Court entered its Order Granting Debtor's
Motion: (1) To Approve And Authorize Compromise and Settlement; (2) To Approve
ss. 1110 Stipulation; (3) To Authorize Post-Petition Financing; and (4) To
Approve Rejection of an Aircraft Lease ("Compromise Order"). In the Compromise
Order, the Bankruptcy Court authorized and approved Viscount to reject its lease
of the Aircraft bearing registration no. N306VA (the "306 Aircraft").
At the time Viscount rejected its lease, the airframe was located at a
maintenance facility. The engines on the 306 Aircraft were either located
elsewhere for service or being used on other Viscount aircraft. On May 22, 1996,
FSB, as owner trustee, filed suit in the Superior Court of Arizona in Pima
County, Case NO. C313027, to recover the airframe from BAE Aviation, Inc., dba
Tucson Aerospace, STS Services, Inc., and Piping Design Services, Inc., dba PDS
Technical Services, which assert mechanics' liens, and to determine the validity
of their claimed liens. Pursuant to a stipulated order of the Superior Court
entered on July 9, 1996, FSB filed a bond by FSB, as owner trustee, and GECAS,
principals, and Federal Insurance Co., surety, and the claimants released the
aircraft on July 11, 1996. The claimants in the action have asserted a claim
against the Bond for $987,624 as of July 19, 1996, together with interest
thereon at the legal rate, plus accruing costs and attorneys' fees. The
litigation will continue in the Superior Court over the validity and amount of
the claimants' various liens alleged against the Bond.
On July 12, 1996, GECAS and FSB filed a motion in Viscount's bankruptcy case to
recover the engines and parts leased in connection with the Partnership's
aircraft. GECAS and FSB asserted that these engines and parts should have been
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delivered to FSB pursuant to the Compromise and Stipulation. Viscount paid to
the Partnership $10,000 for the use of the engine during the month of August
1996, and continued through August 1996 to pay maintenance reserves pursuant to
the lease terms.
On September 18, 1996, GECAS (on behalf of the Partnership and other entities)
and Viscount entered into a Stipulation and Agreement by which Viscount agreed
to voluntarily return aircraft owned by other Polaris entities, turn over
possession of the majority of its aircraft parts inventory, and cooperate with
GECAS in the transition of aircraft equipment and maintenance, in exchange for
which, upon Bankruptcy Court approval of the Stipulation and Agreement, the
Partnership would waive its right to pre- and post-petition claims against
Viscount for amounts due and unpaid.
The Stipulation and Agreement also provides that the Partnership, certain other
Polaris entities, GECAS and FSB shall release any and all claims against
Viscount, Viscount's bankruptcy estate, and the property of Viscount's
bankruptcy estate, effective upon entry of a final non-appealable court order
approving the Stipulation and Agreement. The Bankruptcy Court entered such an
order approving the Stipulation and Agreement on October 23, 1996.
As a result of the Stipulation and Agreement, all disputes between the
Partnership and Viscount have been resolved and there is no further pending
litigation with Viscount. Viscount has ceased operations and is currently
considered to be administratively insolvent, meaning that it does not have
sufficient funds to fully pay costs and expenses incurred after the commencement
of the bankruptcy case, which costs and expenses have priority over general
unsecured claims.
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 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. On January 9, 1997,
the trial court issued a scheduling order setting a July 21, 1997 trial 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
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Polaris Aircraft Income Funds," including the Partnership. The Partnership 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 the Partnership, 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.
Kidder, Peabody & Co. was added as an additional defendant by virtue of an
Intervenor's Amended Plea in Intervention filed on or about April 7, 1995.
Prudential Securities, Inc. reached a settlement with the plaintiffs. The trial
of the claims of one plaintiff, Robert W. Wilson, against Polaris Aircraft
Income Funds I-VI, Polaris Investment Management Corporation and various
affiliates of Polaris Investment Management Corporation, including General
Electric Capital Corporation, was commenced on July 10, 1995. On July 26, 1995,
the jury returned a verdict in favor of the defendants on all counts. Subsequent
to this verdict, all of the defendants (with the exception of Prudential
Securities, Inc., which had previously settled) entered into a settlement with
the plaintiffs. On February 26, 1997, the court issued an order notifying the
remaining plaintiffs, who did not accept the settlement with the non-Prudential
defendants, that the action would be dismissed on April 21, 1997 for want of
prosecution unless the plaintiffs showed cause why the action should not be
dismissed.
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.
Mary C. Scott v. Prudential Securities Inc. et al. - On or around August 15,
1995, a complaint entitled Mary C. Scott v. Prudential Securities Inc. et al.
was filed in the Court of Common Pleas, County of Summit, Ohio. The complaint
names as defendants Prudential Securities Inc., the Partnership, Polaris
Aircraft Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft
Income Fund VI, P-Bache/A.G. Spanos Genesis Income Partners LP 1,
Prudential-Bache Properties, Inc., A.G. Spanos Residential Partners - 86,
Polaris Securities Corporation and Robert Bryan Fitzpatrick. Plaintiff alleges
claims of fraud and violation of Ohio securities law arising out of the public
9
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offerings of the Partnership, Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund VI, and P-Bache/A.G. Spanos Genesis
Income Partners LP 1. Plaintiff seeks compensatory damages, general,
consequential and incidental damages, punitive damages, rescission, costs,
attorneys' fees and other and further relief as the Court deems just and proper.
On September 15, 1995, defendants removed this action to the United States
District Court, Eastern District of Ohio. On September 18, 1995, defendants
sought the transfer of this action to the Multi-District Litigation and sought a
stay of all proceedings by the district court, which stay was granted on
September 25, 1995. The Judicial Panel transferred this action to the
Multi-District Litigation on or about February 7, 1996.
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, (which has been dismissed, as discussed in
Item 10) where the Partnership was named as a defendant for procedural purposes,
the Partnership is not a party to these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<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, 1996
--------------------------- --------------------------------
Limited Partnership Interest: 15,888
General Partnership Interest: 1
c) Dividends:
The Partnership distributed cash to partners on a quarterly basis
beginning July 1986. Cash distributions to limited partners during 1996
and 1995 totaled $17,499,895 and $6,874,959 respectively. Cash
distributions per limited partnership unit were $35.00 and $13.75 in
1996 and 1995, respectively.
11
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<TABLE>
Item 6. Selected Financial Data
For the years ended December 31,
--------------------------------
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 16,304,608 $ 21,093,341 $ 14,443,902 $ 15,558,866 $ 17,990,196
Net Income (Loss) (14,708,486) 5,717,065 (3,217,172) 48,114 (1,709,007)
Net Income (Loss)
Allocated to Limited
Partners (16,311,216) 4,972,468 (4,434,868) (952,261) (2,941,785)
Net Income (Loss) per
Limited Partnership Unit (32.62) 9.94 (8.87) (1.91) (5.88)
Cash Distributions per
Limited Partnership
Unit 35.00 13.75 25.00 20.00 25.00
Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit* 35.00 13.75 25.00 20.00 25.00
Total Assets 87,622,742 107,820,317 110,568,377 129,706,547 141,436,928
Partners' Capital 72,215,709 106,368,523 108,290,301 125,396,279 136,459,209
</TABLE>
* The portion of such distributions which represents a return of capital on an
economic basis will depend in part on the residual sale value of the
Partnership's aircraft and thus will not be ultimately determinable until the
Partnership disposes of its aircraft. However, such portion may be significant
and may equal, exceed or be smaller than the amount shown in the above table.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
At December 31, 1996, Polaris Aircraft Income Fund II (the Partnership) owned a
portfolio of 22 used commercial jet aircraft, one spare engine and certain
inventoried aircraft parts out of its original portfolio of 30 aircraft. The
portfolio consists of 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, previously 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). The Partnership transferred six Boeing
727-200 aircraft, previously leased to Pan American World Airways, Inc., to
aircraft inventory in 1992. These aircraft have been disassembled for sale of
their component parts. The Partnership sold one Boeing 727-200 aircraft,
formerly leased to Delta Airlines, Inc. (Delta), in February 1995 as discussed
below. The Partnership sold the airframe and one engine from the Boeing 737-200
Combi aircraft, formerly leased to Northwest Territorial Airways, Ltd. (NWT), in
March 1996 as discussed below. The Partnership sold the remaining engine along
with a Boeing 737-200 in January 1997.
Remarketing Update
Sale of Boeing 737-200 Combi Airframe and Engine - In March 1996, the
Partnership sold the airframe and one engine from the Boeing 737-200 Combi
Aircraft, formerly on lease to NWT, to Westjet Airlines, Ltd. (Westjet). The
security deposit of approximately $88,000, received from Westjet in December
1995, was applied to the sales price of approximately $896,000. The Partnership
agreed to accept payment of the balance of the sales price in 22 monthly
installments, with interest at a rate of 10% per annum beginning in March 1996.
Sale of Boeing 737-200 Aircraft - On January 30, 1997, one Boeing 737-200
formerly on lease to Viscount, was sold to American Aircarriers Support, Inc. on
an "as-is, where-is" basis for $660,000 cash.
TWA Lease Extension - GECAS, on behalf of the Partnership, negotiated with TWA
for the acquisition of noise-suppression devices, commonly known as "hushkits",
for 14 of the 18 Partnership aircraft currently on lease to TWA. The 14 aircraft
to receive hushkits were designated by TWA. Installation of hushkits on 11 of
the aircraft was completed in November 1996. Installation of hushkits on the
remaining 3 aircraft was completed in February 1997.
The aggregate cost of the hushkit reconditioning for the 11 aircraft was
$17,516,722, or approximately $1.6 million per aircraft, which was capitalized
by the Partnership during 1996. The Partnership paid $3.3 million of the
aggregate hushkit cost and the balance of $14,216,722 was financed by the
engine/hushkit manufacturer over a 6-year period at an interest rate of
approximately 10% per annum. The balance of the note payable at December 31,
1996 was $14,193,178.
The aggregate cost of the hushkit reconditioning for the 3 aircraft was
$4,784,633 or approximately $1.6 million per aircraft, which was capitalized by
the Partnership during 1997. The Partnership paid $900,000 of the aggregate
hushkit cost and the balance of $3,884,633 was financed by the engine/hushkit
manufacturer over a 6-year period at an interest rate of approximately 10% per
annum. The rent payable by TWA under the leases was increased by an amount
sufficient to cover the monthly debt service payments on the hushkits and fully
repay, during the term of the TWA leases, the amount borrowed. The loan from the
engine/hushkit manufacturer is non-recourse to the Partnership and secured by a
security interest in the lease receivables. The leases for the 11 aircraft were
extended for a period of eight years until November 2004. The leases for the 3
aircraft were extended for a period of eight years until February 2005.
13
<PAGE>
Proposed Sale of Aircraft - The Partnership has received, and the General
Partner (upon recommendation of its servicer) has determined that it would be in
the best interests of the Partnership to accept an offer to purchase 7 of the
Partnership's remaining aircraft (the "Aircraft") and certain of its notes
receivables by a special purpose company (the "Purchaser"). The Purchaser is
managed by Triton Aviation Services, Ltd., a privately held aircraft leasing
company (the "Purchaser's Manager") which was formed in 1996. Each Aircraft is
to be sold subject to the existing leases, and as part of the transaction the
Purchaser assumes all obligations relating to maintenance reserves and security
deposits, if any, relating to such leases. At the same time cash balances
related to maintenance reserves and security deposits, if any, will be
transferred to the Purchaser.
The total proposed purchase price (the "Purchase Price") to be paid by the
Purchaser in the contemplated transaction would be $13,988,000 which would be
allocable to the Aircraft and to certain notes receivable by the Partnership.
The Purchaser proposes to pay $1,575,888 of the Purchase Price in cash at the
closing and the balance of $12,412,112 would be paid by delivery of a promissory
note ( the "Promissory Note") by the Purchaser. The Promissory Note would be
repaid in equal quarterly installments over a period of seven years bearing
interest at a rate of 12% per annum with a balloon principal payment at the end
of year seven. The Purchaser would have the right to voluntarily prepay the
Promissory Note in whole or in part at any time without penalty. In addition,
the Promissory Note would be subject to mandatory partial prepayment in certain
specified instances.
Under the terms of the contemplated transaction, the Aircraft, including any
income or proceeds therefrom and any reserves or deposits with respect thereto,
constitute the sole source of payments under the Promissory Note. No security
interest over the Aircraft or the leases would be granted in favor of the
Partnership, but the equity interests in the Purchaser would be pledged to the
Partnership. The Purchaser would have the right to sell the Aircraft, or any of
them, without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the proposed sale price is less than
the portion of the outstanding balance of the Promissory Note which is allocable
to the Aircraft in question and the Purchaser does not have sufficient funds to
make up the difference. The Purchaser would undertake to keep the Aircraft and
leases free of any lien, security interest or other encumbrance other than (i)
inchoate materialmen's liens and the like, and (ii) in the event that the
Purchaser elects to install hushkits on any Aircraft, secured debt to the extent
of the full cost of such hushkit. The Purchaser will be prohibited from
incurring indebtedness other than (i) the Promissory Note; (ii) deferred taxes
not yet due and payable; (iii) indebtedness incurred to hushkit Aircraft owned
by the Purchaser and, (iv) demand loans from another SPC (defined below) at a
market rate of interest.
It is also contemplated that each of Polaris Aircraft Income Fund II, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI would sell certain aircraft assets to separate special purpose
companies under common management with the Purchaser (collectively, together
with the Purchaser, the "SPC's") on terms similar to those set forth above.
Under the terms of the contemplated transaction, Purchaser's Manager would
undertake to make available a working capital line to the Purchaser of up to
approximately $1,222,000 to fund operating obligations of the Purchaser. This
working capital line is to be guaranteed by Triton Investments, Ltd., the parent
of the Purchaser's Manager and such guarantor will provide the Partnership with
a copy of its most recent balance sheet showing a consolidated net worth (net of
minority interests) of at least $150-million. Furthermore, each of the SPC's,
including the Purchaser, is to enter into a management agreement with
Purchaser's Manager pursuant to which Purchaser's Manager would provide all
normal and customary management services including remarketing, sales and
repossession, if necessary. Provided that the Purchaser is not in default in
making payments due under the Promissory Note to the Partnership, the Purchaser
would be permitted to dividend to its equity owners an amount not to exceed
approximately $33,000 per month. The Purchaser may distribute additional
dividends to the equity owners to the extent of the working capital advances
made by the Purchaser's Manager provided that the working capital line available
to the Purchaser will be deemed increased to the extent of such dividends.
14
<PAGE>
The Purchaser would be deemed to have purchased the Aircraft effective as of
April 1, 1997 notwithstanding the actual closing date. The Purchaser would have
the right to receive all income and proceeds, including rents and notes
receivables, from the Aircraft accruing from and after April 1, 1997, and the
Promissory Note would commence bearing interest as of April 1, 1997.
The Partnership has agreed to consult with Purchaser's Manager before taking any
significant action pertaining to the Aircraft after the effective date of the
purchase offer. The Purchaser also has the right to make all significant
decisions regarding the Aircraft from and after the date of completion of
definitive documentation legally binding the Purchaser and the Partnership to
the transaction, even if a delay occurs between the completion of such
documentation and the closing of the title transfer to the Purchaser.
In the event the Partnership receives and elects to accept an offer for all (but
not less than all) of the assets to be sold by it to the Purchaser on terms
which it deems more favorable, the Purchaser has the right to (I) match the
offer, or (ii) decline to match the offer and be entitled to compensation in an
amount equal to 1 1/2% of the Purchaser's proposed Purchase Price.
It should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
execution of definitive documentation and various other contingencies.
Partnership Operations
The Partnership recorded a net loss of $14,708,486, or $32.62 per limited
partnership unit for the year ended December 31, 1996, compared to net income of
$5,717,065, or $9.94 per limited partnership unit and a net loss of $3,217,172,
or an allocated net loss of $8.87 per limited partnership unit, for the years
ended December 31, 1995 and 1994, respectively. The net loss in 1994 resulted
primarily from a decrease in rental revenue recognized from the Partnership's
leases with TWA combined with maintenance expenses incurred from the TWA leases.
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 significant
improvement in operating results in 1995 was primarily the result of
substantially increased revenues combined with lower operating expenses in 1995
as compared to 1994. A substantial increase in depreciation expense, as
discussed later in the Industry Update section, contributed to the net loss
during 1996.
Rental revenues, net of related management fees, declined in 1996 as compared to
1995 primarily as a result of a decrease in rental revenue recognized in 1996 on
the Partnership's leases with TWA. TWA rental revenues were higher in 1995 due
to the receipt, during 1995, of certain deferred rental amounts from 1994 as
discussed below. Rental revenues, net of related management fees, increased
during 1995 as compared to 1994. In December 1994, GE Capital Aviation Services,
Inc. (GECAS) negotiated a standstill agreement with TWA. That agreement provided
for a deferral of the rent due the Partnership in November 1994 and 75% of the
rents due the Partnership from December 1994 through March 1995. The Partnership
did not recognize the rental amount deferred in 1994 of $1,575,000 as rental
revenue until it was received in 1995. The Partnership has received from TWA all
scheduled rent payments beginning in April 1995 and all scheduled deferred
rental payments beginning in May 1995 through October 1995, including interest
at a rate of 12% per annum. The increase in rental revenues in 1995, as compared
to 1994, was partially offset by a provision for credit losses of $241,964
recorded in 1995 for certain rent, deferred rent and accrued interest
receivables from Viscount as discussed below. Other factors contributing to the
decreased rental revenues in 1996 were decreases in rental revenue from NWT and
Viscount. The lease with NWT expired in October 1995 and the aircraft was then
sold, resulting in higher rental revenues from this aircraft during 1995 as
compared to 1996. Additionally, the default and bankruptcy by Viscount resulted
15
<PAGE>
in the return of the aircraft and engine to the Partnership during 1996,
resulting in higher rental revenues from this aircraft during 1995 as compared
to 1996.
In consideration for the rent deferral, TWA agreed to make a lump sum payment of
$1,000,000 to GECAS for the TWA lessors for whom GECAS provides management
services and who agreed to the Deferral Agreement. The Partnership received
$218,171 in January 1995 as its share of such payment by TWA. This amount was
recognized as other revenue in 1995. In addition, TWA agreed to issue warrants
to the Partnership for TWA Common Stock. The Partnership received warrants to
purchase 227,133 shares of TWA Common Stock from TWA in November 1995 and has
recognized the net warrant value as of the date of receipt of $1,772,206 as
revenue in 1995. The Partnership exercised the warrants on December 29, 1995 for
the strike price of $0.01 per share and has recognized a gain on the value of
the warrants of $582,028 in 1995. The Partnership sold its TWA Common Stock in
1996. In addition, the Partnership recognized as other revenue in 1995 payments
received from NWT aggregating approximately $647,000 in lieu of NWT performing
required maintenance work on the aircraft it was leasing prior to its return to
the Partnership. The Partnership also recognized as other revenue in 1995
maintenance reserves aggregating approximately $91,000 that were previously paid
to the Partnership by a former lessee for the aircraft that was sold to AIA in
February 1995.
On July 10, 1996, the Partnership entered into a proposed Stipulation and Order
in which Pan Am agreed to allow the Partnership $2.5 million as an
administrative expense priority claim and $56 million as a general unsecured
claim. In May 1996, the Partnership received from Pan Am a payment of $567,500
on the administrative expense priority claim. In November 1996, the Partnership
received an additional $9,000 payment on the administrative expense priority
claim. The Partnership has recorded these payments as other revenue in claims
related to lessee defaults in the 1996 statement of operations. It is unlikely
that the Partnership will receive additional payments on the administrative
expense priority claim. It cannot be estimated at this time when and if the
general unsecured claim will be paid.
The Partnership incurred interest expense during 1996 as the result of the
Partnership installing hushkits on 11 of its aircraft during 1996. The aggregate
cost of the hushkit reconditioning for the 11 aircraft was $17,516,722, or
approximately $1.6 million per aircraft, which was capitalized by the
Partnership during 1996. The Partnership paid $3.3 million of the aggregate
hushkit cost and the balance of $14,216,722 was financed by the engine/hushkit
manufacturer over a 6-year period at an interest rate of 10% per annum. The
balance of the note payable at December 31, 1996 was $14,193,178.
Operating expenses significantly decreased in 1996 and 1995 as compared to 1994.
As part of the TWA lease extension in 1991 as discussed in Note 6 to the
financial statements (Item 8), the Partnership agreed to share the cost of
meeting certain Airworthiness Directives (ADs) after TWA successfully
reorganized in 1993. The agreement stipulated 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 of these AD expenses during 1994. No operating expenses relating to
the TWA aircraft were recognized by the Partnership during 1995 and 1996.
As discussed later in the Industry Update section, if the projected net cash
flow for each aircraft (projected rental revenue, net of management fees, less
projected maintenance costs, if any, plus the adjusted estimated residual value)
is less than the carrying value of the aircraft, the Partnership recognizes the
deficiency currently as increased depreciation expense.
The Partnership recognized approximately $17.0 million, $2.4 million and $1.6
million of this deficiency as increased depreciation expense in 1996, 1995 and
1994, respectively. In 1996, the impairment loss was the result of several
significant factors. As a result of industry and market changes, a more
16
<PAGE>
extensive review of the Partnership's aircraft was completed in the fourth
quarter of 1996 which resulted in revised assumptions of future cash flows
including reassessment of projected re-lease terms and potential future
maintenance costs. As discussed in Note 13, the Partnership accepted an offer to
purchase 7 of the Partnership's remaining aircraft subject to each aircraft's
existing lease and certain notes receivable. This offer constitutes an event
that required the Partnership to review the aircraft carrying value pursuant to
SFAS 121. In determining this additional impairment loss, the Partnership
estimated the fair value of the aircraft based on the proposed purchase price
reflected in the offer, less the estimated costs and expenses of the proposed
sale. The Partnership is deemed to have an impairment loss to the extent that
the carrying value exceeded the fair value. Management believes the assumptions
related to fair value of impaired assets represents the best estimates based on
reasonable and supportable assumptions and projections. It should be noted that
there can be no assurance that the contemplated sale transaction will be
consummated. The contemplated transaction remains subject to execution of
definitive documentation and various other contingencies. The 1995 downward
adjustment was the result of the reduction of the net book value to the
estimated net realizable value of the Boeing 737- 200 Combi aircraft sold to
Westjet in 1996 as previously discussed. Approximately $1.03 million of the 1994
adjustment was the result of the reduction of the net book value to the
estimated net realizable value of the Boeing 727-200 aircraft sold to AIA in
February 1995 as previously discussed.
The increased depreciation expense reduces the aircraft's carrying value and
reduces the amount of future depreciation expense that the Partnership will
recognize over the projected remaining economic life of the aircraft. The
Partnership also made downward adjustments to the estimated residual value of
certain of its on-lease aircraft as of December 31, 1995 and 1994. For any
downward adjustment to the estimated residual values, future depreciation
expense over the projected remaining economic life of the aircraft is increased.
The Partnership's earnings are impacted by the net effect of the adjustments to
the aircraft carrying values recorded in 1996, 1995 and 1994 and the downward
adjustments to the estimated residual values recorded in 1995 and 1994 as
discussed later in the Industry Update section.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all lease payments due from
Continental, Continental Micronesia and TWA on a current basis. As discussed
above, TWA repaid its deferred rents in full with interest by October 1995. The
Partnership also received from TWA warrants to purchase 227,133 shares of TWA
Common Stock and a payment of $218,171 in consideration for the rent deferral.
The Partnership exercised the warrants in 1995 and sold the TWA Common Stock in
the first quarter of 1996, net of broker commissions, for $2,406,479.
As further discussed in Note 8 to the financial statements, the Partnership
recorded allowances for credit losses of $241,964 and $100,409 in 1995 and 1996,
respectively, for the aggregate unsecured receivables from Viscount. The line of
credit, which was advanced to Viscount in 1994, was, in accordance with the
Compromise and Stipulation, secured by certain of Viscount's trade receivables
and spare parts. The Stipulation and Agreement releases the Partnership's claim
against Viscount's trade receivables. As a result, the Partnership recorded an
additional allowance for credit losses of $92,508 during 1996, representing
Viscount's outstanding balance of the line of credit and accrued interest.
Payments received by the Partnership from the sale of the spare aircraft parts
(as discussed above), if any, will be recorded as revenue when received. The
Stipulation and Agreement provides that, upon entry of a final non-appealable
court order approving it, the Partnership would waive its pre- and post-petition
claims against Viscount for all amounts due and unpaid. As a result, the
Partnership considers all receivables from Viscount to be uncollectible and has
written-off, during 1996, all notes, rents and interest receivable balances from
Viscount.
17
<PAGE>
As discussed above, the Partnership agreed to share in the cost of meeting
certain ADs with TWA. In accordance with the cost-sharing agreement, TWA may
offset up to an additional $2.7 million against rental payments, subject to
annual limitations, over the remaining 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.
ALG, Inc. (ALG) was required to pay the Partnership a balloon payment of
$897,932 in January 1995 on their promissory note. ALG paid to the Partnership
$19,138 of the balloon payment in January 1995, originating an event of default
under the note. The Partnership and ALG subsequently restructured the terms of
the promissory note. The renegotiated terms specified 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. The
Partnership received all scheduled renegotiated payments due from ALG through
December 31, 1995. ALG did not pay the balloon payment due in January 1996. The
Partnership and ALG once again 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 1996 of $135,258
and eleven payments of $27,272 beginning in February 1996 through December 1996.
ALG paid the note in full in 1996.
The Partnership sold one Boeing 727-200 aircraft equipped with a hushkit to AIA
in February 1995 as previously discussed. The agreement with AIA specifies
payment of the sales price in 36 monthly installments of $55,000 beginning in
March 1995. The Partnership has received all scheduled payments due from AIA.
In March 1996, the Partnership sold its Boeing 737-200 Combi aircraft to Westjet
as previously discussed. The Partnership received a security deposit of
approximately $88,000 from Westjet in December 1995 which was applied to the
sales price of approximately $896,000. The Partnership agreed to accept payment
of the balance of the sales price in 22 monthly installments, with interest at a
rate of 10% per annum beginning in March 1996. The Partnership has received all
scheduled payments from Westjet.
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, if any,
remaining at the termination of the lease may be used by the Partnership to
offset future maintenance expenses or recognized as revenue. The net maintenance
reserves balances aggregate $223,528 as of December 31, 1996.
Payments of $260,234 have been received during 1996 from the sale of inventoried
parts from the six disassembled aircraft. The Partnership is retaining cash
reserves to meet obligations under the TWA, Continental and Continental
Micronesia lease agreements and to cover the costs that the Partnership incurred
relating to the Viscount default and bankruptcy filing, including potential
aircraft maintenance, remarketing and transition costs.
Cash Distributions - Cash distributions to limited partners were $17,499,895,
$6,874,959, and $12,499,925 in 1996, 1995 and 1994, respectively. Cash
18
<PAGE>
distributions per limited partnership unit were $35.00, $13.75 and $25.00 per
limited partnership unit in 1996, 1995 and 1994, respectively. The timing and
amount of future cash distributions are not yet known and will depend on the
Partnership's future cash requirements including; the receipt of rental payments
from TWA, Continental and Continental Micronesia; the receipt of modification
financing payments from Continental and Continental Micronesia; the receipt of
sales proceeds from AIA and Westjet; the receipt of payments generated from the
aircraft disassembly process; and the receipt of proceeds from the sale of the
aircraft and engine returned by Viscount.
TWA Restructuring
In October 1994, TWA notified its creditors, including the Partnership, of
another proposed restructuring of its debt. Subsequently, GECAS negotiated a
standstill arrangement, as set forth in a letter agreement dated December 16,
1994 (the Deferral Agreement), with TWA for the 46 aircraft that are managed by
GECAS, 18 of which are owned by the Partnership. As required by its terms, the
Deferral Agreement (which has since been amended as discussed below) was
approved by PIMC on behalf of the Partnership with respect to the Partnership's
aircraft.
The Deferral Agreement provided for (i) a moratorium on all the rent due to the
Partnership in November 1994 and on 75% of the rents due to the Partnership from
December 1994 through March 1995, and (ii) all of the deferred rents, together
with interest thereon, to be repaid in monthly installments beginning in May
1995 and ending in December 1995. The repayment schedule was subsequently
accelerated upon confirmation of TWA's bankruptcy plan. The Partnership recorded
a note receivable and corresponding allowance for credit losses equal to the
total of the 1994 deferred rents of $1.575 million, the net of which was
reflected in the Partnership's 1994 balance sheet (Item 8). The Partnership did
not recognize either the $1.575 million rental amount deferred in 1994 or the
$2.025 million rental amount deferred during the first quarter of 1995 as rental
revenue until the deferred rents were received. The note receivable and
corresponding allowance for credit losses were reduced by the principal portion
of the payments received. The Partnership received all scheduled rent payments
beginning in April 1995 and all scheduled deferred rental payments beginning in
May 1995, including interest at a rate of 12% per annum, from TWA and has
recognized the $3.6 million deferred rents as rental revenue during 1995. The
deferred rents were paid in full by October 1995.
In consideration for the partial rent moratorium described above, TWA agreed to
make a lump sum payment of $1,000,000 to GECAS for the TWA lessors for whom
GECAS provides management services and who agreed to the Deferral Agreement. The
Partnership received $218,171 in January 1995 as its share of such payment by
TWA. This amount was recognized as other revenue in the Partnership's 1995
statement of operations (Item 8). In addition, TWA agreed to issue warrants to
the Partnership for TWA Common Stock.
In order to resolve certain issues that arose after the execution of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995, pursuant to which they agreed to amend certain provisions of the Deferral
Agreement (as so amended, the Amended Deferral Agreement). The effect of the
Amended Deferral Agreement, which was approved by PIMC with respect to the
Partnership's aircraft, is that TWA, in addition to agreeing to repay the
deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable
in warrants, the number of which was determined by a formula) in consideration
for the aircraft owners' agreement to defer rent under the Deferral Agreement,
and, (ii) to the extent the market value of the warrants is less than the
payment amount, to supply maintenance services to the aircraft owners having a
value equal to such deficiency. The payment amount was determined by subtracting
certain maintenance reimbursements owed to TWA by certain aircraft owners,
including the Partnership, from the aggregate amount of deferred rents.
19
<PAGE>
On June 30, 1995, TWA filed its prepackaged Chapter 11 bankruptcy in the United
States Bankruptcy Court for the Eastern District of Missouri. On August 4, 1995,
the Bankruptcy Court confirmed TWA's plan of reorganization, which became
effective on August 23, 1995. Pursuant to the Amended Deferral Agreement, on the
confirmation date of the plan, August 4, 1995, the Partnership received a
payment of $1,217,989 from TWA which represented fifty percent (50%) of the
deferred rent outstanding plus interest as of such date. The remaining balance
of deferred rent plus interest was paid in full to the Partnership on October 2,
1995. TWA has been current with its obligation to the Partnership since August
1995. While TWA has committed to an uninterrupted flow of lease payments, there
can be no assurance that TWA will continue to honor its obligations in the
future.
The Partnership received warrants to purchase 227,133 shares of TWA Common Stock
from TWA in November 1995 and recognized the net warrant value as of the date of
receipt of $1,772,206 as revenue in the 1995 statement of operations. The
Partnership exercised the warrants on December 29, 1995 for the strike price of
$0.01 per share and has recognized a gain on the value of the warrants of
$582,028 in the 1995 statement of operations. The TWA Common Stock was
classified as trading securities in 1995 because the Partnership intended to
sell the stock in the near term. The fair market value of the TWA stock at
December 31, 1995 of $2,356,506 is reflected in the Partnership's December 31,
1995 balance sheet (Item 8). The Partnership sold the TWA Common Stock in the
first quarter of 1996, net of broker commissions, for $2,406,479.
Viscount Default and Bankruptcy Filing
On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First
Security Bank, National Association (formerly known as First Security Bank of
Utah, National Association) (FSB), the owner/trustee under the Partnership's
leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's
indebtedness and others executed in April 1996 a Compromise of Claims and
Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation), which was subsequently approved by the Bankruptcy Court. The
Compromise and Stipulation provided, among other things, that Viscount rejected
the lease of the Partnership's aircraft. The rejection of the lease gave rise to
a pre-petition unsecured claim in Viscount's bankruptcy for breach of contract
damages. Notwithstanding Viscount's rejection of the Partnership's aircraft
lease, Viscount continued to possess and use the Partnership's engine and
refused to return various aircraft parts removed from the Partnership's
aircraft.
During 1995, Viscount delivered the Partnership's Boeing 737-200 aircraft to a
repair facility operated by BAE Aviation, Inc., d/b/a Tucson Aerospace, located
in Arizona, to perform a heavy maintenance check on the aircraft. The
Partnership has paid to Tucson Aerospace approximately $565,000 from maintenance
reserves and cash reserves for this aircraft as progress payments on this
maintenance check. Work on the maintenance check was suspended prior to the
filing of the Chapter 11 petition by Viscount. Tucson Aerospace asserts that
Viscount owes it approximately $866,000 for work done on the aircraft, which is
in addition to the approximately $565,000 already paid by the Partnership from
maintenance reserves. In addition, a third party vendor, who claims it provided
personnel to work on the aircraft, is asserting a claim against Tucson Aerospace
and a lien against the aircraft in the amount of $720,000. Another third-party
vendor, who claims it provided inspectors, is claiming $185,000 from Tucson
Aerospace. On May 22, 1996, First Security Bank, National Association (formerly
known as First Security Bank of Utah, National Association) (FSB), as
owner/trustee, filed suit in the Superior Court of Arizona in Pima County, to
recover the airframe from BAE Aviation, Inc. and certain creditors alleging
mechanics liens and to determine the validity of the claimed liens.
20
<PAGE>
Pursuant to a stipulated order of the Superior Court entered on July 9, 1996,
FSB filed a bond in the penal sum of $1,371,000 for the benefit of the
lienholders, who subsequently released the aircraft to the Partnership on July
11, 1996. The aircraft was moved to a repair facility in Tucson, Arizona. The
litigation will continue in Superior Court over the validity and amount of the
various liens alleged against the bond.
On July 12, 1996, GECAS and FSB filed a motion in Viscount's bankruptcy case to
recover the engines and parts leased in connection with the Partnership's
aircraft. GECAS and FSB assert that these engines and parts should have been
delivered to FSB pursuant to the Compromise and Stipulation. Viscount paid to
the Partnership $10,000 for the use of the engine during the month of August
1996, and continued through August 1996 to pay maintenance reserves pursuant to
the lease terms.
On September 18, 1996, GECAS (on behalf of the Partnership, Polaris Holding
Company, Polaris Aircraft Income Fund I, Polaris Aircraft Income Fund IV and
Polaris Aircraft Investors XVIII) (collectively, the Polaris Entities) and
Viscount entered into a Stipulation and Agreement (the Stipulation and
Agreement) by which Viscount agreed to voluntarily return all of the Polaris
Entities' aircraft and engines, turn over possession of the majority of its
aircraft parts inventory, and cooperate with GECAS in the transition of aircraft
equipment and maintenance, in exchange for which, upon Bankruptcy Court approval
of the Stipulation and Agreement, the Polaris Entities would waive their pre-
and post-petition claims against Viscount for amounts due and unpaid.
In accordance with the Stipulation and Agreement, Viscount returned the
Partnership's engine on October 1, 1996. GECAS, on behalf of the Polaris
Entities, is evaluating the spare parts inventory to which Viscount relinquished
possession in order to determine its condition and value, the portion allocable
to the Partnership, and the Partnership's alternatives for the use and/or
disposition of such parts. A significant portion of the spare parts inventory is
currently in the possession of third party maintenance and repair facilities
with whom GECAS anticipates that it will need to negotiate for the repair and/or
return of these parts.
The Stipulation and Agreement also provides that the Polaris Entities, GECAS and
FSB would release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court entered such an order approving the Stipulation and
Agreement on October 23, 1996.
The Partnership recorded allowances for credit losses of $342,373 for the
aggregate unsecured receivables from Viscount. The line of credit, which was
advanced to Viscount in 1994, was, in accordance with the Compromise and
Stipulation, secured by certain of Viscount's trade receivables and spare parts.
The Stipulation and Agreement releases the Partnership's claim against
Viscount's trade receivables. As a result, the Partnership recorded an
additional allowance for credit losses of $92,508 during 1996, representing
Viscount's outstanding balance of the line of credit and accrued interest.
Payments received by the Partnership from the sale of the spare aircraft parts
(as discussed above), if any, will be recorded as revenue when received. The
Stipulation and Agreement provides that, upon entry of a final non-appealable
court order approving it, the Partnership would waive its pre- and post-petition
claims against Viscount for all amounts due and unpaid. As a result, the
Partnership considers all receivables from Viscount to be uncollectible and has
written-off, during 1996, all notes, rents and interest receivable balances from
Viscount.
The Partnership evaluated the airframe and engines previously leased to Viscount
for potential re-lease or sale and estimated that maintenance and refurbishment
costs aggregating approximately $1.6 million would be required to re-lease the
airframe and engines. Alternatively, a sale of the airframe and engines would
likely be made on an "as is, where is" basis, without the Partnership incurring
substantial maintenance costs.
21
<PAGE>
The aircraft was sold in January 1997 for $660,000. As discussed in Note 3, in
accordance with SFAS No. 121, the Partnership recognized an impairment loss of
$300,000 on this aircraft which was recorded as additional depreciation expense
during 1996.
Viscount's failure to perform its financial obligations to the Partnership has
had a material adverse effect on the Partnership's financial position. As a
result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership
has incurred legal costs of approximately $147,000, which are reflected in
operating expense in the Partnership's 1996 statement of operations.
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 result in 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. The extent of
modifications required to an aircraft varies according to the level of
incorporation of design improvements at manufacture.
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.
In 1996, the manufacturer proposed certain Boeing 737 rudder system product
improvements of which some will be mandated by the FAA. Airworthiness Directives
issued in the last quarter of 1996 and the first quarter of 1997 on this subject
have not been of significant maintenance cost impact. The cost of compliance
with future FAA maintenance requirements not yet issued is not determinable at
this time.
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. An
22
<PAGE>
aircraft returned to the Partnership as a result of a lease default would most
likely not be returned to the Partnership in compliance with all return
conditions required by the lease. 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 may 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 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 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 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).
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, with all Stage 2 aircraft phased-out by the
year 2002. The International Civil Aviation Organization has also endorsed the
phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.
Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3
requirements, are currently available for the Partnership's aircraft and have
been added to eleven of the Partnership's aircraft in 1996 and to three of their
aircraft in 1997. However, while technically feasible, hushkits may not be cost
effective due to the age of the aircraft and the time required to fully amortize
the additional investment. The general partner has evaluated, as appropriate,
the potential benefits of installing hushkits on some or all of the
Partnership's aircraft.
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.
23
<PAGE>
Demand for Aircraft - Industry-wide, approximately 280 commercial jet aircraft
were available at December 31, 1996 for sale or lease, approximately 195 less
than a year ago, and at under 2.5% of the total available jet aircraft fleet,
this is the lowest level of availability since 1988. From 1991 to 1994,
depressed demand for travel limited airline expansion plans, with new aircraft
orders and scheduled deliveries being canceled or substantially deferred. As
profitability declined, many airlines took action to downsize or liquidate
assets and some airlines were forced to file for bankruptcy protection.
Following three years of good traffic growth accompanied by rising yields, this
trend is reversing with many airlines reporting record profits. As a result of
this improving trend, just over 1200 new jet aircraft were ordered in 1996,
making this the second highest ever order year in the history of the industry.
To date, this strong recovery has mainly benefited Stage 3 narrow-bodies and
younger Stage 2 narrow-bodies, many of which are now being upgraded with
hushkits, whereas older Stage 2 narrow-bodies have shown only marginal signs of
recovery since the depressed 1991 to 1994 period.
The general partner believes that, in addition to the factors cited above, the
deteriorated 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 previously discussed.
Effects on the Partnership's Aircraft - The Partnership periodically reviews the
estimated realizability of the residual values at the projected end of each
aircraft's economic life based on estimated residual values obtained from
independent parties which provide current and future estimated aircraft values
by aircraft type. The Partnership made downward adjustments to the estimated
residual value of certain of its on-lease aircraft as of December 31, 1995 and
1994. For any downward adjustment in estimated residual value or decrease in the
projected remaining economic life, the depreciation expense over the projected
remaining economic life of the aircraft is increased.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, the Partnership
recognizes the deficiency currently as increased depreciation expense. The
Partnership recognized impairments on aircraft to be held and used by the
Partnership of approximately $17.0 million, $2.4 million and $1.6 million, or
$33.97, $4.75 and $3.18 per limited Partnership unit, in 1996, 1995 and 1994,
respectively. In 1996, the impairment loss was the result of several significant
factors. As a result of industry and market changes, a more extensive review of
the Partnership's aircraft was completed in the fourth quarter of 1996 which
resulted in revised assumptions of future cash flows including reassessment of
projected re-lease terms and potential future maintenance costs. As discussed in
Note 13, the Partnership accepted an offer to purchase seven of the
Partnership's remaining aircraft subject to each aircraft's existing lease and
certain notes receivable. This offer constitutes an event that required the
Partnership to review the aircraft carrying value pursuant to SFAS 121. In
determining this additional impairment loss, the Partnership estimated the fair
value of the aircraft based on the proposed purchase price reflected in the
offer, less the estimated costs and expenses of the proposed sale. The
Partnership recorded an impairment loss to the extent that the carrying value
exceeded the fair value. Management believes the assumptions related to fair
value of impaired assets represents the best estimates based on reasonable and
supportable assumptions and projections. It should be noted that there can be no
assurance that the contemplated sale transaction will be consummated. The
contemplated transaction remains subject to executing definitive documentation
and various other contingencies. The 1995 downward adjustment was the result of
the reduction of the net book value to the estimated net realizable value of the
Boeing 737- 200 Combi aircraft sold to Westjet in 1996. Approximately $1.03
million of the 1994 adjustment was the result of the reduction of the net book
value to the estimated net realizable value of the Boeing 727-200 aircraft sold
to AIA in February 1995. The increased depreciation expense reduces the
24
<PAGE>
aircraft's carrying value and reduces the amount of future depreciation expense
that the Partnership will recognize over the projected remaining economic life
of the aircraft.
The Partnership's future earnings are impacted by the net effect of the
adjustments to the carrying value of the aircraft recorded in 1996, 1995 and
1994 (which has the effect of decreasing future depreciation expense) and the
downward adjustments to the estimated residual values recorded in 1995 and 1994
(which has the effect of increasing future depreciation expense). The net effect
of the 1994 adjustments to the estimated residual values and the adjustments to
the carrying value of the aircraft recorded in 1994 is to cause the Partnership
to recognize increased depreciation expense of approximately $626,000 per year
beginning in 1995 through the end of the estimated economic lives of the
aircraft. The net effect of the 1995 adjustments to the estimated residual
values and the adjustments to the carrying value of the aircraft recorded in
1995 is to cause the Partnership to recognize increased depreciation expense of
approximately $866,000 per year beginning in 1996 through the end of the
estimated economic lives of the aircraft.
Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability,
the statement provides that the Partnership should estimate the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the projected net undiscounted cash flow for each
aircraft (projected rental revenue, net of management fees, less projected
maintenance costs, if any, plus the estimated residual value) is less than the
carrying value of the aircraft, an impairment loss is recognized. Pursuant to
the statement, measurement of an impairment loss for long-lived assets will be
based on the "fair value" of the asset as defined in the statement.
SFAS No. 121 states that the fair value of an asset is the amount at which the
asset could be bought or sold in a current transaction between willing parties,
i.e., other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and will be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value will be based on the best information available in the
circumstances. Pursuant to the statement, the estimate of fair value will
consider prices for similar assets and the results of valuation techniques to
the extent available in the circumstances. Examples of valuation techniques
include the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved, option-pricing models,
matrix pricing, option-adjusted spread models, and fundamental analysis.
The Partnership periodically reviews its aircraft for impairment in accordance
with SFAS No. 121. Using an estimate of the fair value of the Partnership's
aircraft to measure impairment may result in greater write-downs than would be
recognized under the accounting method previously applied by the Partnership.
The Partnership uses information obtained from third party valuation services in
arriving at its estimate of fair value for purposes of determining residual
values. The Partnership will use similar information, plus available information
and estimates related to the Partnership's aircraft, to determine an estimate of
fair value to measure impairment as required by the statement. The estimates of
fair value can vary dramatically depending on the condition of the specific
aircraft and the actual marketplace conditions at the time of the actual
disposition of the asset. If assets are deemed impaired, there could be
substantial write-downs in the future.
The Partnership's leases expire between February 1998 and February 2005. To the
extent that the Partnership's Boeing and McDonnell Douglas aircraft continue to
be significantly affected by industry events, the Partnership will evaluate each
aircraft as it comes off lease or is returned to the Partnership to determine
whether a re-lease or a sale at the then-current market rates would be most
beneficial for unit holders.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH
AUDITORS' REPORT
26
<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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
March 3, 1997
27
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS:
CASH AND CASH EQUIVALENTS $ 22,224,813 $ 25,884,742
MARKETABLE SECURITIES, trading -- 2,356,506
RENT AND OTHER RECEIVABLES, net of allowance
for credit losses of $0 in 1996 and $241,964
in 1995 6,648 8,965
NOTES RECEIVABLE 1,522,956 2,679,486
AIRCRAFT, net of accumulated depreciation of
$120,260,981 in 1996 and $97,407,528 in 1995 63,638,062 76,487,365
AIRCRAFT INVENTORY 113,248 373,483
OTHER ASSETS 117,015 29,770
------------ ------------
$ 87,622,742 $107,820,317
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 66,631 $ 92,511
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 209,781 87,356
SECURITY DEPOSITS 116,000 450,000
MAINTENANCE RESERVES 223,528 179,185
DEFERRED INCOME 597,915 642,742
NOTES PAYABLE 14,193,178 --
------------ ------------
Total Liabilities 15,407,033 1,451,794
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,480,858) (1,139,155)
Limited Partners, 499,997 units
issued and outstanding 73,696,567 107,507,678
------------ ------------
Total Partners' Capital 72,215,709 106,368,523
------------ ------------
$ 87,622,742 $107,820,317
============ ============
The accompanying notes are an integral part of these statements.
28
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
REVENUES:
Rent from operating leases $ 14,172,153 $ 16,114,000 $ 12,933,795
Receipt of lessee stock
warrants -- 1,772,206 --
Gain on trading securities 49,974 582,028 --
Interest 1,505,981 1,667,397 820,362
Claims related to lessee
defaults 576,500 -- --
Other -- 957,710 689,745
------------ ------------ ------------
Total Revenues 16,304,608 21,093,341 14,443,902
------------ ------------ ------------
EXPENSES:
Depreciation 29,470,353 13,895,184 13,045,238
Management fees to general
partner 667,678 752,384 615,940
Provision for credit losses 192,917 241,964 --
Operating 244,494 150,161 3,738,938
Interest 134,341 -- --
Administration and other 303,311 336,583 260,958
------------ ------------ ------------
Total Expenses 31,031,094 15,376,276 17,661,074
------------ ------------ ------------
NET INCOME (LOSS) $(14,708,486) $ 5,717,065 $ (3,217,172)
============ ============ ============
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 1,602,730 $ 744,597 $ 1,217,696
============ ============ ============
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $(16,311,216) $ 4,972,468 $ (4,434,868)
============ ============ ============
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (32.62) $ 9.94 $ (8.87)
============ ============ ============
The accompanying notes are an integral part of these statements.
29
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited
Partner Partners Total
------- -------- -----
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
Net income 744,597 4,972,468 5,717,065
Cash distributions to partners (763,884) (6,874,959) (7,638,843)
------------ ------------ ------------
Balance, December 31, 1995 (1,139,155) 107,507,678 106,368,523
Net income (loss) 1,602,730 (16,311,216) (14,708,486)
Cash distributions to partners (1,944,433) (17,499,895) (19,444,328)
------------ ------------ ------------
Balance, December 31, 1996 $ (1,480,858) $ 73,696,567 $ 72,215,709
============ ============ ============
The accompanying notes are an integral part of these statements.
30
<PAGE>
POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $(14,708,486) $ 5,717,065 $ (3,217,172)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 29,470,353 13,895,184 13,045,238
Provision for credit losses 192,917 241,964 --
Changes in operating assets
and liabilities:
Decrease (increase) in
marketable securities,
trading 2,356,506 (2,356,506) --
Decrease (increase) in rent
and other receivables (101,959) 41,132 (254,328)
Increase in other assets (87,245) -- --
Increase (decrease) in
payable to affiliates (25,880) (610,330) 650,567
Increase (decrease) in
accounts payable and accrued
liabilities 122,425 48,693 (2,517,662)
Increase (decrease) in
security deposits (334,000) 278,860 (18,424)
Increase (decrease) in
maintenance reserves 44,343 (543,505) (146,673)
Decrease in deferred income (44,827) -- --
------------ ------------ ------------
Net cash provided by
operating activities 16,884,147 16,712,557 7,541,546
------------ ------------ ------------
INVESTING ACTIVITIES:
Increase in notes receivable -- -- (2,304,533)
Increase in aircraft capitalized
costs (17,516,722) -- --
Principal payments on notes
receivable 1,963,561 1,873,751 545,409
Net proceeds from sale of
aircraft inventory 260,235 275,130 323,448
------------ ------------ ------------
Net cash provided by
(used in) investing
activities (15,292,926) 2,148,881 (1,435,676)
------------ ------------ ------------
FINANCING ACTIVITIES:
Increase in note payable 14,216,722 -- --
Principal payments on notes
payable (23,544) -- --
Cash distributions to partners (19,444,328) (7,638,843) (13,888,806)
------------ ------------ ------------
Net cash used in
financing activities (5,251,150) (7,638,843) (13,888,806)
------------ ------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (3,659,929) 11,222,595 (7,782,936)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 25,884,742 14,662,147 22,445,083
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 22,224,813 $ 25,884,742 $ 14,662,147
============ ============ ============
The accompanying notes are an integral part of these statements.
31
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POLARIS AIRCRAFT INCOME FUND II,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 its financial statements and files its tax returns on the accrual basis
of accounting. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates with regard to these financial statements are related to
the projected cash flows analysis in determining the fair value of assets.
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds. Cash and Cash Equivalents are stated at cost, which
approximates fair value.
Marketable Securities, trading - Marketable Securities, trading, were carried at
fair value, which was determined based on quoted market prices. These securities
were held for sale in the near term (Note 6).
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 was calculated based upon the number of
days that the aircraft were in service.
The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life based on estimated
residual values obtained from independent parties which provide current and
future estimated aircraft values by aircraft type. For any downward adjustment
in estimated residual value or decrease in the projected remaining economic
life, the depreciation expense over the projected remaining economic life of the
aircraft is increased.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, an impairment
loss is recognized. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 121, as discussed in Note 3, measurement of an impairment loss will
be based on the "fair value" of the asset as defined in the statement.
Capitalized Costs - Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement. These costs are also subject to periodic
evaluation as 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 the book value is fully recovered.
32
<PAGE>
Operating Leases - The aircraft leases are accounted for as operating leases.
Lease revenues are recognized in equal installments over the terms of the
leases.
Maintenance Reserves - 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 or lessee for maintenance work
performed on the Partnership's aircraft or engines, as specified in the leases.
Maintenance reserve payments are recognized when received and balances remaining
at the termination of the lease, if any, may be used by the Partnership to
offset future maintenance expenses or recognized as revenue.
Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft, including costs related to
lessee defaults and costs of disassembling aircraft inventory.
Net Income (Loss) Per Limited Partnership Unit - Net income (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, 1996, 1995
and 1994.
Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
Receivables - The Partnership recorded an allowance for credit losses for
certain impaired note and rents receivable as a result of uncertainties
regarding their collection as discussed in Note 8. The Partnership recognizes
revenue on impaired notes and receivables only as payments are received.
1996 1995
---- ----
Allowance for credit losses,
beginning of year $ (241,964) $(1,575,000)
Provision for credit losses (192,917) (241,964)
Write-downs 434,881 -
Collections - 1,575,000
----------- -----------
Allowance for credit losses,
end of year $ - $ (241,964)
=========== ===========
The fair value of the notes receivable is estimated by discounting future
estimated cash flows using current interest rates at which similar loans would
be made to borrowers with similar credit ratings and remaining maturities.
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).
33
<PAGE>
Polaris Holding Company (PHC) is the parent company of PALC. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company, owns
100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to related parties are described in Note 10.
3. Aircraft
At December 31, 1996, the Partnership owned 22 aircraft and certain inventoried
aircraft parts from its original portfolio of 30 used commercial jet aircraft,
which were acquired, leased or sold as discussed below. 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 operating
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, one lessee was 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
lessee is liable under the terms of the lease agreement. In the event of a
lessee default, these return conditions are not likely to be met. 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.
The following table describes the Partnership's aircraft portfolio at December
31, 1996 in greater detail:
Year of
Aircraft Type Serial Number Manufacture
- ------------- ------------- -----------
Boeing 727-200 Advanced 21426 1977
Boeing 727-200 Advanced 21427 1977
Boeing 727-200 Advanced 21947 1979
Boeing 737-200 (1) 19609 1968
McDonnell Douglas DC-9-30 47082 1967
McDonnell Douglas DC-9-30 47096 1967
McDonnell Douglas DC-9-30 47135 1968
McDonnell Douglas DC-9-30 47137 1968
McDonnell Douglas DC-9-30 47249 1968
McDonnell Douglas DC-9-30 47251 1968
McDonnell Douglas DC-9-30 47343 1969
McDonnell Douglas DC-9-30 47345 1969
McDonnell Douglas DC-9-30 47411 1969
McDonnell Douglas DC-9-30 47412 1969
McDonnell Douglas DC-9-30 47027 1967
McDonnell Douglas DC-9-30 47107 1968
McDonnell Douglas DC-9-30 47108 1968
McDonnell Douglas DC-9-30 47174 1968
McDonnell Douglas DC-9-30 47324 1969
McDonnell Douglas DC-9-30 47357 1969
McDonnell Douglas DC-9-30 47734 1977
McDonnell Douglas DC-9-40 47617 1975
(1) Aircraft sold in 1997 (Note 13).
34
<PAGE>
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 defaulted on the lease and returned the aircraft to
the Partnership as discussed in Note 8. An engine for the aircraft was leased
from an affiliate (Note 10) . The aircraft was sold in January 1997 as discussed
in Note 13.
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. 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.
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 adjusted the book value of this aircraft to
its estimated net realizable value by increasing depreciation expense
approximately $1.03 million in 1994. During 1995, the Partnership recognized as
other revenue maintenance reserves aggregating approximately $91,000 that were
previously paid to the Partnership by Delta. The aircraft was sold to American
International Airways Limited (AIA) in February 1995 for a sales price of
$1,771,805. The Partnership recorded no gain or loss on the sale, as the sales
price equaled the net book value of the aircraft and hushkit. 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. The
Partnership recorded a note receivable for the sales price and has received all
scheduled principal and interest payments due from AIA through December 31,
1996, including one additional principal payment of $410,229 received in May
1995. The note receivable balance as of December 31, 1996 and 1995 was $275,226
and $889,351, respectively.
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 was then leased to Air Zaire, Inc. until its
return to the Partnership in 1991. In August 1992, the Partnership leased the
aircraft to Northwest Territorial Airways, Ltd. (NWT) through March 1994. An
engine for the aircraft was leased from an affiliate through April 1994 (Note
10). The Partnership performed certain maintenance and modification work on the
aircraft then negotiated a new lease with NWT for 16 months commencing in June
1994. The new lease rate was approximately 108% of NWT's prior rental rate. The
new lease expired in October 1995. As specified in the lease, NWT was required
to perform certain maintenance work on the aircraft prior to its return. NWT
returned the aircraft without performing the required maintenance work, which
constituted a default under the lease. The Partnership and NWT subsequently
reached an agreement by which NWT paid to the Partnership in December 1995
approximately $457,000 and the Partnership was entitled to retain NWT's security
deposit of approximately $101,000 in lieu of NWT performing the required
maintenance work on the aircraft. The Partnership recorded these amounts as
other revenue in the accompanying 1995 statement of operations.
In March 1996, the Partnership sold the airframe and one engine from the Boeing
737-200 Combi aircraft to Westjet Airlines, Ltd. (Westjet). The security deposit
of approximately $88,000 received from WestJet in December 1995 was applied to
the sales price of approximately $896,000. The Partnership recorded no gain or
loss on the sale as the sales price equaled the net book value of the airframe
and engine. The Partnership agreed to accept payment of the balance of the sales
price in 22 monthly installments, with interest at a rate of 10% per annum,
beginning in March 1996. WestJet is current on its scheduled payments to the
Partnership. The note receivable balance as of December 31, 1996 was $477,990.
The remaining engine was sold with one Boeing 737-200 to American Aircarriers
Support, Inc. in January 1997.
35
<PAGE>
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 in 1991 prior to TWA's
bankruptcy filing as discussed in Note 6. Two of the aircraft have a lease
expiration date of February 1998 and two other aircraft have a lease expiration
date of November 1998. The leases for 11 of the aircraft that previously had
lease expiration dates in 1998 were extended for eight years until November
2004. The leases for three of the aircraft that previously had lease expiration
dates in 1998 were extended in February 1997 for eight years until February
2005.
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.
One of the aircraft was re-leased to 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 leases stipulate that the Partnership reimburse
Continental for the cost of cockpit modifications up to $600,000 per aircraft.
In accordance with the cost sharing agreement, in January 1994, the Partnership
reimbursed Continental $1.8 million for cockpit modifications, which was
capitalized by the Partnership. The three leases also stipulate that the
Partnership will provide financing of up to $815,000 per aircraft for new image
modifications. The Partnership financed $2,177,533 for new image modifications
during January 1994, 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, 1996. The aggregate note receivable balance as
of December 31, 1996 and 1995 was $769,740 and $1,289,328, respectively. 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
---- ------
1997 $ 17,789,726
1998 16,540,000
1999 14,280,000
2000 14,280,000
2001 and thereafter 43,955,000
------------
Total $106,844,726
============
Future minimum rental payments may be offset or reduced by future costs as
described above and in Note 6.
Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability,
the statement provides that the Partnership should estimate the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the projected undiscounted net cash flow for each
aircraft (projected rental revenue, net of management fees, less projected
maintenance costs, if any, plus the estimated residual value) is less than the
carrying value of the aircraft, an impairment loss is recognized. Pursuant to
the statement, measurement of an impairment loss for long-lived assets will be
based on the "fair value" of the asset as defined in the statement.
36
<PAGE>
SFAS No. 121 states that the fair value of an asset is the amount at which the
asset could be bought or sold in a current transaction between willing parties,
i.e., other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and will be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value will be based on the best information available in the
circumstances. Pursuant to the statement, the estimate of fair value will
consider prices for similar assets and the results of valuation techniques to
the extent available in the circumstances. Examples of valuation techniques
include the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved, option-pricing models,
matrix pricing, option-adjusted spread models, and fundamental analysis.
As discussed in Note 1, the Partnership periodically reviews the estimated
realizability of the residual values at the projected end of each aircraft's
economic life based on estimated residual values obtained from independent
parties which provide current and future estimated aircraft values by aircraft
type. The Partnership made downward adjustments to the estimated residual value
of certain of its on-lease aircraft as of December 31, 1995 and 1994.
The Partnership's future earnings are impacted by the net effect of the
adjustments to the carrying values of the aircraft (which has the effect of
decreasing future depreciation expense) and the downward adjustments to the
estimated residual values (which has the effect of increasing future
depreciation expense).
As discussed above, the Partnership uses information obtained from third party
valuation services in arriving at its estimate of fair value for purposes of
determining residual values. The Partnership will use similar information, plus
available information and estimates related to the Partnership's aircraft, to
determine an estimate of fair value to measure impairment as required by the
statement. The estimates of fair value can vary dramatically depending on the
condition of the specific aircraft and the actual marketplace conditions at the
time of the actual disposition of the asset. If assets are deemed impaired,
there could be substantial write-downs in the future.
The Partnership recognized impairment losses on aircraft to be held and used by
the Partnership aggregating approximately $17.0 million, $2.4 million and
approximately $1.6 million, or $33.97, $4.75 and $3.18 per limited Partnership
unit, as increased depreciation expense in 1996, 1995 and 1994, respectively. In
1996, the impairment loss was the result of several significant factors. As a
result of industry and market changes, a more extensive review of the
Partnership's aircraft was completed in the fourth quarter of 1996 which
resulted in revised assumptions of future cash flows including reassessment of
projected re-lease terms and potential future maintenance costs. As discussed in
Note 13, the Partnership accepted an offer to purchase seven of the
Partnership's remaining aircraft subject to each aircraft's existing lease. This
offer constitutes an event that required the Partnership to review the aircraft
carrying value pursuant to SFAS 121. In determining this additional impairment
loss, the Partnership estimated the fair value of the aircraft based on the
proposed purchase price reflected in the offer, less the estimated costs and
expenses of the proposed sale. The Partnership recorded an impairment loss to
the extent that the carrying value exceeded the fair value. Management believes
the assumptions related to fair value of impaired assets represents the best
estimates based on reasonable and supportable assumptions and projections. It
should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
executing definitive documentation and various other contingencies. The 1995 and
1994 downward adjustments were the result of reductions in the net book value of
certain aircraft to their estimated net realizable value. The increased
depreciation expense reduces the aircraft's carrying value and reduces the
amount of future depreciation expense that the Partnership will recognize over
the projected remaining economic life of the aircraft.
4. Sale of Equipment
One hushkit set from the aircraft formerly leased to Pan Am (Note 3) was sold in
January 1993 to ALG for $1,750,000. ALG paid cash for a portion of the sales
price and issued an 11% interest-bearing promissory note for the balance of
$1,132,363, which specified 23 equal monthly payments and a balloon payment of
$897,932 due in January 1995. ALG paid to the Partnership $19,138 of the balloon
37
<PAGE>
payment in January 1995, originating 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. In January 1996, the Partnership
and ALG once again 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 a lump sum payment in January 1996 of $135,258 and
eleven payments of $27,272 beginning in February 1996 through December 1996. The
note receivable balance as of December 31, 1995 was $412,166. ALG paid the note
in full during 1996.
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. The Partnership has incurred 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. The Partnership has received net proceeds
from the sale of aircraft inventory of $260,234, $275,130 and $323,448 during
1996, 1995 and 1994, respectively.
During 1995 and 1994, the Partnership recorded additional downward adjustments
to the inventory value of $200,000 and $72,000, 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.
6. TWA Reorganization
The Partnership renegotiated the TWA leases after TWA defaulted under its leases
with the Partnership during 1991. The renegotiated agreement stipulated that the
Partnership share in the cost of certain Airworthiness Directives after TWA
successfully reorganized. Pursuant to this cost-sharing agreement, since TWA
emerged from its reorganization proceedings in 1993, expenses totaling $6.3
million ($2.7 million in 1993 and $3.6 million in 1994) have been offset against
rental payments. Under the terms of this agreement, TWA may offset up to an
additional $2.7 million against rental payments, subject to annual limitations,
over the remaining lease terms.
In October 1994, TWA notified its creditors, including the Partnership, of
another proposed restructuring of its debt. Subsequently, GECAS negotiated a
standstill arrangement, as set forth in a letter agreement dated December 16,
1994 (the Deferral Agreement), with TWA for the 46 aircraft that are managed by
GECAS, 18 of which are owned by the Partnership. As required by its terms, the
Deferral Agreement (which has since been amended as discussed below) was
approved by PIMC on behalf of the Partnership with respect to the Partnership's
aircraft.
The Deferral Agreement provided for (i) a moratorium on the rents due to the
Partnership in November 1994 and on 75% of the rents due to the Partnership from
December 1994 through March 1995, and (ii) all of the deferred rents, together
with interest thereon, to be repaid in monthly installments beginning in May
1995 and ending in December 1995. The repayment schedule was subsequently
accelerated upon confirmation of TWA's bankruptcy plan. The Partnership did not
recognize either the $1.575 million rental amount deferred in 1994 or the $2.025
million rental amount deferred during the first quarter of 1995 as rental
revenue until the deferred rents were received. The deferred rents were paid in
full by October 1995. While TWA has committed to an uninterrupted flow of lease
payments, there can be no assurance that TWA will continue to honor its
obligations in the future.
38
<PAGE>
In consideration for the partial rent moratorium described above, TWA agreed to
make a lump sum payment of $1,000,000 to GECAS for the TWA lessors for whom
GECAS provides management services and who agreed to the Deferral Agreement. The
Partnership received $218,171 in January 1995 as its pro-rata share of such
payment by TWA. This amount was recognized as other revenue in the accompanying
1995 statement of operations.
In order to resolve certain issues that arose after the execution of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995, pursuant to which they agreed to amend certain provisions of the Deferral
Agreement (as so amended, the Amended Deferral Agreement). The effect of the
Amended Deferral Agreement, which was approved by PIMC with respect to the
Partnership's aircraft, is that TWA, in addition to agreeing to repay the
deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable
in warrants, the number of which was determined by formula) in consideration for
the aircraft owners' agreement to defer rent under the Deferral Agreement, and,
(ii) to the extent the market value of the warrants is less than the payment
amount, to supply maintenance services to the aircraft owners having a value
equal to such deficiency. The payment amount was determined by subtracting
certain maintenance reimbursements owed to TWA by certain aircraft owners,
including the Partnership, from the aggregate amount of deferred rents.
The Partnership received warrants to purchase 227,133 shares of TWA Common Stock
from TWA in November 1995. The Partnership exercised the warrants on December
29, 1995 for the strike price of $0.01 per share. The fair market value of the
TWA stock at December 31, 1995 of $2,356,506, which was determined based on
quoted market prices, is reflected in the accompanying December 31, 1995 balance
sheet. The Partnership sold the TWA Common Stock by February 1996, net of broker
commissions, for $2,406,479 and recognized a gain on trading securities of
$49,974 in 1996.
7. TWA Lease Extension
GECAS, on behalf of the Partnership, negotiated with TWA for the acquisition of
noise-suppression devices, commonly known as "hushkits", for 14 of the 18
Partnership aircraft currently on lease to TWA, as well as other aircraft owned
by affiliates of PIMC and leased to TWA. The 14 aircraft that received hushkits
were designated by TWA. The hushkits recondition the aircraft so as to meet
Stage 3 noise level restrictions. Hushkits were installed on 11 of the
Partnership's aircraft during 1996 and the leases for these 11 aircraft were
extended for a period of eight years until November 2004. Hushkits were
installed on the remaining three aircraft during February 1997 as discussed in
Note 13.
The aggregate cost of the hushkit reconditioning for the 11 aircraft was
$17,516,722, or approximately $1.6 million per aircraft, which was capitalized
by the Partnership during 1996. The Partnership paid $3.3 million of the
aggregate hushkit cost and the balance of $14,216,722 was financed by the
engine/hushkit manufacturer over a 6-year period at an interest rate of
approximately 10% per annum. The balance of the note payable at December 31,
1996 was $14,193,178.
The rent payable by TWA under the leases was increased by an amount sufficient
to cover the monthly debt service payments on the hushkits and fully repay,
during the term of the TWA leases, the amount borrowed. The loan from the
engine/hushkit manufacturer is non-recourse to the Partnership and secured by a
security interest in the lease receivables.
8. Viscount Restructuring Agreement and Default
On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
39
<PAGE>
Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First
Security Bank, National Association (formerly known as First Security Bank of
Utah, National Association) (FSB), the owner/trustee under the Partnership's
leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's
indebtedness and others executed in April 1996 a Compromise of Claims and
Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation), which was subsequently approved by the Bankruptcy Court. The
Compromise and Stipulation provided, among other things, that Viscount rejected
the lease of the Partnership's aircraft. The rejection of the lease gave rise to
a pre-petition unsecured claim in Viscount's bankruptcy for breach of contract
damages. Notwithstanding Viscount's rejection of the Partnership's aircraft
lease, Viscount continued to possess and use the Partnership's engine and
refused to return various aircraft parts removed from the Partnership's
aircraft.
During 1995, Viscount delivered the Partnership's Boeing 737-200 aircraft to a
repair facility operated by BAE Aviation, Inc., d/b/a Tucson Aerospace, located
in Arizona, to perform a heavy maintenance check on the aircraft. The
Partnership has paid to Tucson Aerospace approximately $565,000 from maintenance
reserves and cash reserves for this aircraft as progress payments on this
maintenance check. Work on the maintenance check was suspended prior to the
filing of the Chapter 11 petition by Viscount. Tucson Aerospace asserts that
Viscount owes it approximately $866,000 for work done on the aircraft, which is
in addition to the approximately $565,000 already paid by the Partnership from
maintenance reserves. In addition, a third party vendor, who claims it provided
personnel to work on the aircraft, is asserting a claim against Tucson Aerospace
and a lien against the aircraft in the amount of $720,000. Another third-party
vendor, who claims it provided inspectors, is claiming $185,000 from Tucson
Aerospace. On May 22, 1996, First Security Bank, National Association (formerly
known as First Security Bank of Utah, National Association) (FSB), as
owner/trustee, filed suit in the Superior Court of Arizona in Pima County, to
recover the airframe from BAE Aviation, Inc. and certain creditors alleging
mechanics liens and to determine the validity of the claimed liens.
Pursuant to a stipulated order of the Superior Court entered on July 9, 1996,
FSB filed a bond in the penal sum of $1,371,000 for the benefit of the
lienholders, who subsequently released the aircraft to the Partnership on July
11, 1996. The aircraft was moved to a repair facility in Tucson, Arizona. The
litigation will continue in Superior Court over the validity and amount of the
various liens alleged against the bond.
On July 12, 1996, GECAS and FSB filed a motion in Viscount's bankruptcy case to
recover the engines and parts leased in connection with the Partnership's
aircraft. GECAS and FSB asserted that these engines and parts should have been
delivered to FSB pursuant to the Compromise and Stipulation. Viscount paid to
the Partnership $10,000 for the use of the engine during the month of August
1996, and continued through August 1996 to pay maintenance reserves pursuant to
the lease terms.
On September 18, 1996, GECAS (on behalf of the Partnership, Polaris Holding
Company, Polaris Aircraft Income Fund I, Polaris Aircraft Income Fund IV and
Polaris Aircraft Investors XVIII) (collectively, the Polaris Entities) and
Viscount entered into a Stipulation and Agreement (the Stipulation and
Agreement) by which Viscount agreed to voluntarily return all of the Polaris
Entities' aircraft and engines, turn over possession of the majority of its
aircraft parts inventory, and cooperate with GECAS in the transition of aircraft
equipment and maintenance, in exchange for which, upon Bankruptcy Court approval
of the Stipulation and Agreement, the Polaris Entities would waive their pre-
and post-petition claims against Viscount for amounts due and unpaid.
In accordance with the Stipulation and Agreement, Viscount returned the
Partnership's engine on October 1, 1996. GECAS, on behalf of the Polaris
Entities, is evaluating the spare parts inventory to which Viscount relinquished
possession in order to determine its condition and value, the portion allocable
to the Partnership, and the Partnership's alternatives for the use and/or
disposition of such parts. A significant portion of the spare parts inventory is
40
<PAGE>
currently in the possession of third party maintenance and repair facilities
with whom GECAS anticipates that it will need to negotiate for the repair and/or
return of these parts.
The Stipulation and Agreement also provides that the Polaris Entities, GECAS and
FSB would release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court entered such an order approving the Stipulation and
Agreement on October 23, 1996.
The Partnership recorded allowances for credit losses of $241,964 and $100,409
in 1995 and 1996, respectively, for the aggregate unsecured receivables from
Viscount. The line of credit, which was advanced to Viscount in 1994, was, in
accordance with the Compromise and Stipulation, secured by certain of Viscount's
trade receivables and spare parts. The Stipulation and Agreement releases the
Partnership's claim against Viscount's trade receivables. As a result, the
Partnership recorded an additional allowance for credit losses of $92,508 during
1996, representing Viscount's outstanding balance of the line of credit and
accrued interest. Payments received by the Partnership from the sale of the
spare aircraft parts (as discussed above), if any, will be recorded as revenue
when received. The Stipulation and Agreement provides that, upon entry of a
final non-appealable court order approving it, the Partnership would waive its
pre- and post-petition claims against Viscount for all amounts due and unpaid.
As a result, the Partnership considers all receivables from Viscount to be
uncollectible and has written-off, during 1996, all notes, rents and interest
receivable balances from Viscount.
The Partnership has evaluated the airframe and engines previously leased to
Viscount for potential re-lease or sale and estimated that maintenance and
refurbishment costs aggregating approximately $1.6 million will be required to
re-lease the airframe and engines. Alternatively, a sale of the airframe and
engines would likely be made on an "as is, where is" basis, without the
Partnership incurring substantial maintenance costs. The aircraft was sold in
January 1997 for $660,000. As discussed in Note 3, in accordance with SFAS No.
121, the Partnership recognized an impairment loss of $300,000 on this aircraft
which was recorded as additional depreciation expense during 1996.
Viscount's failure to perform its financial obligations to the Partnership has
had a material adverse effect on the Partnership's financial position. As a
result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership
has incurred legal costs of approximately $147,000, which are reflected in
operating expense in the Partnership's 1996 statement of operations.
9. Claims Related to Lessee Defaults
Receipt of Braniff Bankruptcy Claim - In July 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. In 1992, the Partnership received full payment of the
claim subject 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 1992. 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.
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
41
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legal and maintenance expenses related to the default. The final expenses were
paid in 1993 and approximately $915,000 was reflected as other revenue in the
1993 statement of operations. The remaining amount of $400,000 was recognized as
other revenue in 1994.
Pan Am - The Partnership entered into a proposed Stipulation and Order in which
Pan Am agreed to allow the Partnership $2.5 million as an administrative expense
priority claim and $56 million as a general unsecured claim. In May 1996, the
Partnership received from Pan Am a payment of $567,500 on the administrative
expense priority claim. In November 1996, the Partnership received an additional
$9,000 payment on the administrative expense priority claim. The Partnership has
recorded these payments as other revenue in claims related to lessee defaults in
the 1996 statement of operations. It is unlikely that the Partnership will
receive additional payments on the administrative expense priority claim. It
cannot be estimated at this time when and if the general unsecured claim will be
paid.
10. 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 1996, 1995 and 1994, the Partnership paid management fees to
PIMC of $652,417, $763,774 and $604,551, respectively. Management fees
payable to PIMC at December 31, 1996 and 1995 were $0. .
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets.
In 1996, 1995 and 1994, $316,061, $299,588 and $228,357, respectively,
were reimbursed by the Partnership for administrative expenses.
Administrative reimbursements of $65,594 and $63,159 were payable at
December 31, 1996 and 1995, respectively. Reimbursements for
maintenance and remarketing costs of $153,699, $972,284 and $305,200
were paid by the Partnership in 1996, 1995 and 1994, respectively.
Maintenance and remarketing reimbursements of $1,037 and $29,352 were
payable at December 31, 1996 and 1995, respectively.
c. A 10% interest to PIMC in all cash distributions and sales proceeds,
gross income in an amount equal to 9.09% of distributed cash available
from operations and 1% of net income or loss and taxable income or
loss, as such terms are defined in the Partnership Agreement.
d. A subordinated sales commission to PIMC of 3% of the gross sales price
of each aircraft for services performed upon disposition and
reimbursement of out-of-pocket and other disposition expenses.
Subordinated sales commissions will be paid only after limited partners
have received distributions in an aggregate amount equal to their
capital contributions plus a cumulative non-compounded 8% per annum
return on their adjusted capital contributions, as defined in the
Partnership Agreement. The Partnership did not pay or accrue a sales
commission on any aircraft sales to date as the above subordination
threshold has not been met.
e. One engine owned by Polaris Aircraft Income Fund I (PAIF-I) was leased
to Viscount beginning in April 1993 through a joint venture with the
Partnership. The rental payments of $146,000 per year were offset
against rent from operating leases in the 1995 and 1994 statement of
operations, respectively.
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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
were offset against rent from operating leases in the 1994 statement of
operations.
11. Income Taxes
Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the financial statements.
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1996 and 1995 are as
follows:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
1996: Assets $ 87,622,742 $ 98,431,900 $(10,809,158)
Liabilities 15,407,033 14,654,469 752,564
1995: Assets $107,820,317 $103,582,640 $ 4,237,677
Liabilities 1,451,794 698,747 753,047
12. Reconciliation of Net Book Income (Loss) to Taxable Net Income (Loss)
<TABLE>
The following is a reconciliation between net income (loss) per limited
partnership unit reflected in the financial statements and the information
provided to limited partners for federal income tax purposes:
<CAPTION>
For the years ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Book net income (loss) per limited partnership unit $ (32.62) $ 9.94 $ (8.87)
Adjustments for tax purposes represent differences
between book and tax revenue and expenses:
Rental and maintenance reserve revenue recognition 0.03 (2.60) 5.18
Management fee expense 0.03 0.14 (0.27)
Depreciation 30.16 (0.78) (2.76)
Gain or loss on sale of aircraft (0.19) (1.60) -
Capitalized costs - 0.93 7.13
Basis in inventory (0.08) (1.08) (0.39)
Other revenue and expense items (0.16) (0.36) (1.18)
-------- ------- -------
Taxable net income (loss) per limited partnership unit $ (2.83) $ 4.59 $ (1.16)
======== ======= =======
</TABLE>
The differences between net income and loss for book purposes and net income and
loss for tax purposes result from the temporary differences of certain revenue
and deductions.
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For book purposes, rental revenue is generally recorded as it is earned. For tax
purposes, certain temporary differences exist in the recognition of revenue. For
tax purposes, management fee expense is accrued in the same year as the tax
basis rental revenue. Increases in the Partnership's book maintenance reserve
liability were recognized as rental revenue for tax purposes. Disbursements from
the Partnership's book maintenance reserves are capitalized or expensed for tax
purposes, as appropriate.
The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
purposes. The Partnership also periodically evaluates the ultimate
recoverability of the carrying values and the economic lives of its aircraft for
book purposes and, accordingly, recognized adjustments which increased book
depreciation expense. As a result, the current year book depreciation expense is
greater than the tax depreciation expense. These differences in depreciation
methods result in book to tax differences on the sale of aircraft. In addition,
certain costs were capitalized for tax purposes and expensed for book purposes.
For book purposes, aircraft held in inventory are reflected at the lower of
depreciable cost or estimated net realizable value. Differences in book and tax
revenue and loss from inventory result from the differences in the book and tax
carrying value of the inventory.
13. Subsequent Events
Sale of Boeing 737-200 Aircraft - On January 30, 1997, one Boeing 737-200
formerly on lease to Viscount, was sold to American Aircarriers Support, Inc. on
an "as-is, where-is" basis for $660,000 cash.
TWA Lease Extension - GECAS, on behalf of the Partnership, negotiated with TWA
for the acquisition of noise-suppression devices, commonly known as "hushkits",
for 14 of the 18 Partnership aircraft currently on lease to TWA, as well as 18
other aircraft owned by affiliates of PIMC and leased to TWA, as previously
discussed in Note 7. Hushkits were installed on 11 aircraft in November 1996.
The remaining three aircraft were fitted with hushkits during February 1997.
The aggregate cost of the hushkit reconditioning for the 3 aircraft was
$4,784,633 or approximately $1.6 million per aircraft, which was capitalized by
the Partnership during 1997. The Partnership paid $900,000 of the aggregate
hushkit cost and the balance of $3,884,633 was financed by the engine/hushkit
manufacturer over a 6-year period at an interest rate of approximately 10% per
annum.
The rent payable by TWA under the leases has been increased by an amount
sufficient to cover the monthly debt service payments on the hushkits and fully
repay, during the term of the TWA leases, the amount borrowed. The loan from the
engine/hushkit manufacturer is non-recourse to the Partnership and secured by a
security interest in the lease receivables. The leases for these 3 aircraft were
extended for a period of eight years until February 2005.
Proposed Sale of Aircraft - The Partnership has received, and the General
Partner (upon recommendation of its servicer) has determined that it would be in
the best interests of the Partnership to accept an offer to purchase 7 of the
Partnership's remaining aircraft (the "Aircraft") and certain of its notes
receivables by a special purpose company (the "Purchaser"). The Purchaser is
managed by Triton Aviation Services, Ltd., a privately held aircraft leasing
company (the "Purchaser's Manager") which was formed in 1996. Each Aircraft is
to be sold subject to the existing leases, and as part of the transaction the
Purchaser assumes all obligations relating to maintenance reserves and security
deposits, if any, relating to such leases. At the same time cash balances
related to maintenance reserves and security deposits, if any, will be
transferred to the Purchaser.
The total proposed purchase price (the "Purchase Price") to be paid by the
Purchaser in the contemplated transaction would be $13,988,000 which would be
allocable to the Aircraft and to certain notes receivable by the Partnership.
The Purchaser proposes to pay $1,575,888 of the Purchase Price in cash at the
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<PAGE>
closing and the balance of $12,412,112 would be paid by delivery of a promissory
note ( the "Promissory Note") by the Purchaser. The Promissory Note would be
repaid in equal quarterly installments over a period of seven years bearing
interest at a rate of 12% per annum with a balloon principal payment at the end
of year seven. The Purchaser would have the right to voluntarily prepay the
Promissory Note in whole or in part at any time without penalty. In addition,
the Promissory Note would be subject to mandatory partial prepayment in certain
specified instances.
Under the terms of the contemplated transaction, the Aircraft, including any
income or proceeds therefrom and any reserves or deposits with respect thereto,
constitute the sole source of payments under the Promissory Note. No security
interest over the Aircraft or the leases would be granted in favor of the
Partnership, but the equity interests in the Purchaser would be pledged to the
Partnership. The Purchaser would have the right to sell the Aircraft, or any of
them, without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the proposed sale price is less than
the portion of the outstanding balance of the Promissory Note which is allocable
to the Aircraft in question and the Purchaser does not have sufficient funds to
make up the difference. The Purchaser would undertake to keep the Aircraft and
leases free of any lien, security interest or other encumbrance other than (i)
inchoate materialmen's liens and the like, and (ii) in the event that the
Purchaser elects to install hushkits on any Aircraft, secured debt to the extent
of the full cost of such hushkit. The Purchaser will be prohibited from
incurring indebtedness other than (i) the Promissory Note; (ii) deferred taxes
not yet due and payable; (iii) indebtedness incurred to hushkit Aircraft owned
by the Purchaser and, (iv) demand loans from another SPC (defined below) at a
market rate of interest.
It is also contemplated that each of Polaris Aircraft Income Fund II, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI would sell certain aircraft assets to separate special purpose
companies under common management with the Purchaser (collectively, together
with the Purchaser, the "SPC's") on terms similar to those set forth above.
Under the terms of the contemplated transaction, Purchaser's Manager would
undertake to make available a working capital line to the Purchaser of up to
approximately $1,222,000 to fund operating obligations of the Purchaser. This
working capital line is to be guaranteed by Triton Investments, Ltd., the parent
of the Purchaser's Manager and such guarantor will provide the Partnership with
a copy of its most recent balance sheet showing a consolidated net worth (net of
minority interests) of at least $150-million. Furthermore, each of the SPC's,
including the Purchaser, is to enter into a Management Agreement with
Purchaser's Manager pursuant to which Purchaser's Manager would provide all
normal and customary management services including remarketing, sales and
repossession, if necessary. Provided that the Purchaser is not in default in
making payments due under the Promissory Note to the Partnership, the Purchaser
would be permitted to dividend to its equity owners an amount not to exceed
approximately $33,000 per month. The Purchaser may distribute additional
dividends to the equity owners to the extent of the working capital advances
made by the Purchaser's Manager provided that the working capital line available
to the Purchaser will be deemed increased to the extent of such dividends.
The Purchaser would be deemed to have purchased the Aircraft effective as of
April 1, 1997 notwithstanding the actual closing date. The Purchaser would have
the right to receive all income and proceeds, including rents and notes
receivables, from the Aircraft accruing from and after April 1, 1997, and the
Promissory Note would commence bearing interest as of April 1, 1997.
The Partnership has agreed to consult with Purchaser's Manager before taking any
significant action pertaining to the Aircraft after the effective date of the
purchase offer. The Purchaser also has the right to make all significant
decisions regarding the Aircraft from and after the date of completion of
definitive documentation legally binding the Purchaser and the Partnership to
the transaction,, even if a delay occurs between the completion of such
documentation and the closing of the title transfer to the Purchaser.
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In the event the Partnership receives and elects to accept an offer for all (but
not less than all) of the assets to be sold by it to the Purchaser on terms
which it deems more favorable, the Purchaser has the right to (i) match the
offer, or (ii) decline to match the offer and be entitled to compensation in an
amount equal to 1 1/2% of the Purchaser's proposed Purchase Price.
The Partnership adopted, effective January 1, 1996, SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." That statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The purchase offer constitutes a change in
circumstances which, pursuant to SFAS No. 121, requires the Partnership to
review the Aircraft for impairment. As previously discussed in Note 3, the
Partnership has determined that an impairment loss must be recognized. In
determining the amount of the impairment loss, the Partnership estimated the
"fair value" of the Aircraft based on the proposed Purchase Price reflected in
the contemplated transaction , less the estimated costs and expenses of the
proposed sale. The Partnership is deemed to have an impairment loss to the
extent that the carrying value exceeded the fair value. Management believes the
assumptions related to the fair value of impaired assets represent the best
estimates based on reasonable and supportable assumptions and projections.
It should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
execution of definitive documentation and various other contingencies.
46
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
47
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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), restructured their operations and businesses
(the Polaris Restructuring) in 1994. In connection therewith, PIMC entered into
a services agreement dated as of July 1, 1994 (the Services Agreement) with GE
Capital Aviation Services, Inc. (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 officers and directors of PIMC are:
Name PIMC Title
------------------ --------------------------------
Eric M. Dull President; Director
Marc A. Meiches Vice President; Chief Financial Officer
Richard J. Adams Vice President; Director
Norman C. T. Liu Vice President; Director
Edward Sun Vice President
Richard L. Blume Vice President; Secretary
Robert W. Dillon Vice President; Assistant Secretary
Substantially all of these management personnel will devote only such portion of
their time to the business and affairs of PIMC as deemed necessary or
appropriate.
Mr. Dull, 36, assumed the position of President and Director of PIMC effective
January 1, 1997. Mr. Dull previously was a Director of PIMC from March 31, 1995
to July 31, 1995. Mr. Dull holds the position of Executive Vice President -
Portfolio Management of GECAS, having previously held the position of Senior
Vice President - Underwriting Risk Management of GECAS. Prior to joining GECAS,
Mr. Dull held various positions with Transportation and Industrial Funding
Corporation (TIFC).
Mr. Meiches, 44, assumed the position of Vice President and Chief Financial
Officer of PIMC effective October 9, 1995. Mr. Meiches presently holds the
positions of Executive Vice President and Chief Financial Officer of GECAS.
Prior to joining GECAS, Mr. Meiches has been with General Electric Company (GE)
and its subsidiaries since 1978. Since 1992, Mr. Meiches held the position of
Vice President of the General Electric Capital Corporation Audit Staff. Between
1987 and 1992, Mr. Meiches held Manager of Finance positions for GE Re-entry
Systems, GE Government Communications Systems and the GE Astro-Space Division.
Mr. Adams, 63, assumed the position of 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. Mr.
Adams presently holds the position of Senior Vice President - Aircraft
Marketing, North America, of GECAS. Effective July 1, 1994, Mr. Adams held the
positions of Vice President and Director of PIMC.
Mr. Liu, 39, assumed the position of Vice President of PIMC effective May 1,
1995 and has assumed the position of Director of PIMC effective July 31, 1995.
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<PAGE>
Mr. Liu presently holds the position of Executive Vice President - Marketing and
Structured Finance of GECAS, having previously held the position of Executive
Vice President - Capital Funding and Portfolio Management of GECAS. Prior to
joining GECAS, Mr. Liu was with General Electric Capital Corporation for nine
years. He has held management positions in corporate Business Development and in
Syndications and Leasing for TIFC. Mr. Liu previously held the position of
managing director of Kidder, Peabody & Co., Incorporated.
Mr. Sun, 47, assumed the position of Vice President of PIMC effective May 1,
1995. Mr. Sun presently holds the position of Senior Vice President - Structured
Finance of GECAS. Prior to joining GECAS, Mr. Sun held various positions with
TIFC since 1990.
Mr. Blume, 55, assumed the position of Secretary of PIMC effective May 1, 1995
and Vice President of PIMC effective October 9, 1995. Mr. Blume presently holds
the position of Executive Vice President and General Counsel of GECAS. Prior to
joining GECAS, Mr. Blume was counsel at GE Aircraft Engines since 1987.
Mr. Dillon, 55, assumed the position of 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.
Dillon presently holds the position of Senior Vice President and Managing
Counsel of GECAS.
Certain Legal Proceedings:
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. On April 25, 1996, the Appellate Division for the First Department
affirmed the trial court's order which had dismissed most of plaintiffs' claims.
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
49
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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 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. On April 18, 1995, this action was transferred
to the Multi-District Litigation described below. 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 July 7, 1995, defendants filed briefs in support of their
appeal from that portion of the trial court's order denying the motion to
dismiss. On March 14, 1996, the appellate court reversed the trial court's order
denying the motion to dismiss, and dismissed the complaint.
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
50
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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. Prudential Securities, Inc., on behalf of
itself and its affiliates has made an Offer of Settlement. A class has been
certified for purposes of the Prudential Settlement and notice to the class has
been sent. Any questions concerning Prudential's Offer of Settlement should be
directed to 1-800-327-3664, or write to the Claims Administrator at:
Prudential Securities Limited Partnerships
Litigation Claims Administrator
P.O. Box 9388
Garden City, New York 11530-9388
On June 5, 1996, the Court certified a class with respect to claims against
Polaris Holding Company, one of its former officers, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, and Polaris Securities
Corporation. The class is comprised of all investors who purchased securities in
any of Polaris Aircraft Income Funds I through VI during the period from January
1985 until January 29, 1991, regardless of which brokerage firm the investor
purchased from. Excepted from the class are those investors who settled in the
SEC/Prudential settlement or otherwise opted for arbitration pursuant to the
settlement and any investor who has previously released the Polaris defendants
through any other settlement. On June 10, 1996, the Court issued an opinion
denying summary judgment to Polaris on plaintiffs' Section 1964(c) and (d) RICO
claims and state causes of action, and granting summary judgment to Polaris on
plaintiffs' 1964(a) RICO claims and the New Jersey State RICO claims. On August
5, 1996, the Court signed an order providing for notice to be given to the class
members. The trial, which was scheduled for November 11, 1996, has not
proceeded, and no new trial date has been set.
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, which was being
coordinated with In re Prudential, has been settled and the action dismissed
pursuant to a court order dated December 18, 1996.
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
51
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fiduciary duty and civil conspiracy by misrepresenting and failing to disclose
material facts in connection with the sale of limited partnership units in
Polaris Aircraft Income Fund I, Polaris Aircraft Income Fund IV, and Polaris
Aircraft Income Fund V. Plaintiffs seek, among other things, rescission of their
investments in the 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, this action was removed to
the United States District Court for the Northern District of Ohio, Eastern
Division. Subsequently, the Judicial Panel transferred this action to the
Multi-District Litigation filed in the United States District Court for the
Southern District of New York, discussed above. 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, and on March
31, 1995 the case was removed to the United States District Court for the
Southern District of Florida. An amended class action complaint (the "amended
complaint"), which renamed this action Bashein, et al. v. Kidder, Peabody &
Company Inc., et al., was filed on June 13, 1995. The amended 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 amended complaint sets forth various causes of action
purportedly arising in connection with the public offerings of Polaris Aircraft
Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund
V, and Polaris Aircraft Income Fund VI. Specifically, plaintiffs assert claims
for violation of Sections 12(2) and 15 of the Securities Act of 1933, fraud,
negligent misrepresentation, breach of fiduciary duty, breach of third party
beneficiary contract, violation of NASD Rules of Fair Practice, breach of
implied covenant, and breach of contract. Plaintiffs seek compensatory damages,
interest, punitive damages, costs and attorneys' fees, as well as any other
relief the court deems just and proper. Defendants moved to dismiss the amended
complaint on June 26, 1995. On October 2, 1995, the court denied the defendants'
motion to dismiss. While the motion to dismiss was pending, plaintiffs filed a
motion for leave to file a second amended complaint, which was granted on
October 3, 1995. Defendants thereafter filed a motion to dismiss the second
amended complaint, and defendants' motion was denied by Court Order dated
December 26, 1995. On February 12, 1996, defendants answered. This case was
reassigned (from Hurley, J. To Lenard, J.) on February 18, 1996, and on March
18, 1996, plaintiffs moved for class certification. On the eve of class
discovery, April 26, 1996, plaintiffs moved for a voluntary dismissal of Counts
I and II (claims brought pursuant to the Securities Act of 1933) of the Second
Amended Complaint and simultaneously filed a motion to remand this action to
state court for lack of federal jurisdiction. Plaintiff's motion for voluntary
dismissal of the federal securities law claims and motion for remand were
granted on July 10, 1996. The Partnership is not named as a defendant in this
action.
On or around April 13, 1995, a class action complaint entitled B & L Industries,
Inc., et al. v. Polaris Holding Company, et al. was filed in the Supreme Court
of the State of New York. The complaint names as defendants Polaris Holding
Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management
Corporation, Polaris Securities Corporation, Peter G. Pfendler, Marc P.
Desautels, General Electric Capital Corporation, General Electric Financial
Services, Inc., General Electric Company, Prudential Securities Inc., and Kidder
Peabody & Company Incorporated. The complaint sets forth various causes of
action purportedly arising out of the public offerings of Polaris Aircraft
Income Fund III and Polaris Aircraft Income Fund IV. Plaintiffs allege claims of
fraud, negligent misrepresentation, breach of fiduciary duty, knowingly inducing
or participating in breach of fiduciary duty, breach of third party beneficiary
contract, violation of NASD Rules of Fair Practice, breach of implied covenant,
and unjust enrichment. Plaintiffs seek compensatory damages, interest, general,
consequential and incidental damages, exemplary and punitive damages,
disgorgement, rescission, costs, attorneys' fees, accountants' and experts'
fees, and other legal and equitable relief as the court deems just and proper.
On October 2, 1995, defendants moved to dismiss the complaint. On August 16,
52
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1996, defendants filed a motion to dismiss plaintiffs' amended complaint. The
motion is returnable on July 17, 1997. The Partnership is not named as a
defendant in this action.
On or around September 27, 1995, a complaint entitled Martha J. Harrison v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and Prudential Securities Incorporated. Plaintiff alleges
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code concerning the inducement and solicitation of purchases
arising out of the public offering of Polaris Aircraft Income Fund IV. Plaintiff
seeks compensatory damages, attorney's fees, interest, costs and general relief.
The Partnership is not named as a defendant in this action.
On or around December 8, 1995, a complaint entitled Overby, et al. v. General
Electric Company, et al. was filed in the Civil District Court for the Parish of
Orleans, State of Louisiana. The complaint names as defendants General Electric
Company and General Electric Capital Corporation. Plaintiffs allege claim of
tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation
of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil
Code in connection with the public offering of Polaris Aircraft Income Funds III
and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs
and general relief. The Partnership is not named as a defendant in this action.
In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. Plaintiffs allege claims of tort,
breach of fiduciary duty, in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
in connection with the public offering of Polaris Aircraft Income Funds III and
IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief. The Partnership is not named as a defendant in this action.
In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v.
Prudential Securities, Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities Incorporated and Stephen Derby Gisclair. On or about
January 18, 1996, plaintiff filed a First Supplemental and Amending Petition
adding defendants General Electric Company and General Electric Capital
Corporation. Plaintiff alleges claims of tort, breach of fiduciary duty in tort,
contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law
and violation of the Louisiana Civil Code in connection with the public offering
of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory
damages, attorneys' fees, interest, costs and general relief. The Partnership is
not named as a defendant in this action.
On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v.
General Electric Co., et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and General Electric Capital Corporation. Plaintiffs allege
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code in connection with the public offering of Polaris Aircraft
Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief. The Partnership is not named as a defendant in this
action.
In or around December 1994, a complaint entitled John J. Jones, Jr. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition
53
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adding as additional defendants General Electric Company and General Electric
Capital Corporation. Plaintiff alleges claims of tort, breach of fiduciary duty
in tort, contract and quasi-contract, violation of sections of the Louisiana
Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement
and solicitation of purchases arising out of the public offering of Polaris
Aircraft Income Fund III. Plaintiff seeks compensatory damages, attorneys' fees,
interest, costs and general relief. The Partnership is not named as a defendant
in this action.
On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint named as defendants General
Electric Company and General Electric Capital Corporation. Plaintiffs allege
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code concerning the inducement and solicitation of purchases
arising out of the public offering of Polaris Aircraft Income Funds III and IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief. The Partnership is not named as a defendant in this action.
On or about April 9, 1996, a summons and First Amended Complaint entitled Sara
J. Bishop, et al. v. Kidder Peabody & Co., et al. was filed in the Superior
Court of the State of California, County of Sacramento, by over one hundred
individual plaintiffs who purchased limited partnership units in Polaris
Aircraft Income Funds III, IV, V and VI and other limited partnerships sold by
Kidder Peabody. The complaint names Kidder, Peabody & Co. Incorporated, KP
Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Financial Services, Inc., General
Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100
as defendants. The complaint alleges violations of state common law, including
fraud, negligent misrepresentation, breach of fiduciary duty, and violations of
the rules of the National Association of Securities Dealers. The complaint seeks
to recover compensatory damages and punitive damages in an unspecified amount,
interest, and rescission with respect to the Polaris Aircraft Income Funds
III-VI and all other limited partnerships alleged to have been sold by Kidder
Peabody to the plaintiffs. On June 18, 1996, defendants filed a motion to
transfer venue from Sacramento to San Francisco County. The Court subsequently
denied the motion. The Partnership is not named as a defendant in this action.
Defendants filed an answer in the action on August 30, 1996.
On October 1, 1996, a complaint entitled Wilson et al. v. Polaris Holding
Company et al. was filed in the Superior Court of the State of California for
the County of Sacramento by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I through VI.
The complaint names Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Capital Services, Inc., General
Electric Capital Corporation, GE Capital Aviation Services, Inc. and DOES 1-100
as defendants. The Partnership has not been named as a defendant. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, negligence, breach of contract, and breach of fiduciary duty.
The complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest and rescission with respect to the Polaris Aircraft
Income Funds sold to plaintiffs. Defendants have filed an answer.
On or about May 7, 1996, a petition entitled Charles Rich, et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. Plaintiffs allege claims of tort concerning the inducement and
solicitation of purchases arising out of the public offering of Polaris Aircraft
Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees,
interest, costs and general relief. The Partnership is not named as a defendant
in this action.
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On or about March 4, 1996, a petition entitled Richard J. McGiven v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. Plaintiff alleges claims of tort concerning the inducement and
solicitation of purchases arising out of the public offering of Polaris Aircraft
Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest,
costs and general relief. The Partnership is not named as a defendant in this
action.
On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric
Company and General Electric Capital Corporation was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint names as
defendants General Electric Company and General Electric Capital Corporation.
Plaintiff alleges claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund V.
Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief. The Partnership is not named as a defendant in this action.
On or about October 15, 1996, a complaint entitled Joyce H. McDevitt, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about October 16, 1996, a complaint entitled Mary Grant Tarrer, et al.
v.Kidder Peabody & Co.,et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI and other limited
partnerships allegedly sold by Kidder Peabody. The complaint names Kidder,
Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, General Electric Credit Corporation
and DOES 1-100 as defendants. The complaint alleges violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest, and recission with respect to Polaris Aircraft
Income Funds I-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The Partnership is not named as a defendant
in this action.
On or about November 6, 1996, a complaint entitled Janet K. Johnson, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income FundsI-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
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On or about November 13, 1996, a complaint entitled Wayne W. Kuntz, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about November 26, 1996, a complaint entitled Thelma Abrams, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about January 16, 1997, a complaint entitled Enita Elphick, et al. v.
Kidder Peabody & Co.,et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI and other limited
partnerships allegedly sold by Kidder Peabody. The complaint names Kidder,
Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, General Electric Credit Corporation
and DOES 1-100 as defendants. The complaint alleges violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest, and recission with respect to Polaris Aircraft
Income Funds I-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The Partnership is not named as a defendant
in this action.
On or about February 14, 1997, a complaint entitled George Zicos, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. 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.
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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 1995 all
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were met.
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 $652,417 were paid to PIMC in 1996 in addition to a 10%
interest in all cash distributions as described in Note 10 to the financial
statements (Item 8).
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) No person owns of record, or is known by 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:
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 distributions, gross income
Interest Corporation 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 27
Balance Sheets 28
Statements of Operations 29
Statements of Changes in Partners' Capital (Deficit) 30
Statements of Cash Flows 31
Notes to Financial Statements 32
2. Reports on Form 8-K.
None.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
27. Financial Data Schedule.
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 28, 1997 By: /S/ Eric M. Dull
- ------------------- ---------------------------
Date Eric M. Dull, 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/Eric M. Dull President and Director of Polaris Investment March 28, 1997
- --------------- Management Corporation, General Partner --------------
(Eric M. Dull) of the Registrant
/S/Marc A. Meiches Chief Financial Officer of Polaris Investment March 28, 1997
- ------------------ Management Corporation, General Partner --------------
(Marc A. Meiches) of the Registrant
/S/Richard J. Adams
- ------------------- Chief Financial Officer of Polaris Investment March 28, 1997
(Richard J. Adams) Management Corporation, General Partner --------------
of the Registrant
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