UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
---------------------------
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
--------------------------
Commission File No. 33-15551
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POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
State of Organization: California
IRS Employer Identification No. 94-3039169
201 Mission Street, 27th Floor, San Francisco, California 94105
Telephone - (415) 284-7400
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
This document consists of 17 pages.
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POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1996
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1996 and
December 31, 1995..................................... 3
b) Statements of Income - Three and Six Months
Ended June 30, 1996 and 1995.......................... 4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1995
and Six Months Ended June 30, 1996.................... 5
d) Statements of Cash Flows - Six Months
Ended June 30, 1996 and 1995.......................... 6
e) Notes to Financial Statements......................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 12
Part II. Other Information
Item 1. Legal Proceedings................................ 15
Item 6. Exhibits and Reports on Form 8-K................. 16
Signature ................................................. 17
2
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Part I. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 24,451,114 $ 23,456,031
RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of
$1,017,936 in 1996 and $710,809 in 1995 1,422,093 1,513,176
NOTES RECEIVABLE, net of allowance for
credit losses of $492,844 in 1996 and
$1,466,456 in 1995 838,447 3,010,224
AIRCRAFT, net of accumulated depreciation of
$63,565,386 in 1996 and $59,542,596 in 1995 55,112,058 59,134,848
OTHER ASSETS, net of accumulated amortization
of $2,171,559 in 1996 and $2,149,685 in 1995 38,691 60,565
------------ ------------
$ 81,862,403 $ 87,174,844
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 172,810 $ 145,908
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 231,104 107,574
LESSEE SECURITY DEPOSITS 1,149,099 1,124,458
MAINTENANCE RESERVES 4,774,394 5,011,217
DEFERRED RENTAL INCOME - 382,500
------------ ------------
Total Liabilities 6,327,407 6,771,657
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,700,648) (3,651,904)
Limited Partners, 499,964 units
issued and outstanding 79,235,644 84,055,091
------------ ------------
Total Partners' Capital 75,534,996 80,403,187
------------ ------------
$ 81,862,403 $ 87,174,844
============ ============
The accompanying notes are an integral part of these statements.
3
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POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
Rent from operating leases $ 3,161,395 $ 3,227,039 $ 6,303,158 $ 6,296,412
Interest 341,884 537,632 752,923 1,043,067
----------- ----------- ----------- -----------
Total Revenues 3,503,279 3,764,671 7,056,081 7,339,479
----------- ----------- ----------- -----------
EXPENSES:
Depreciation and amortization 2,022,332 2,370,119 4,044,664 4,740,237
Management fees to general
partner 158,070 161,352 300,158 314,821
Provision for credit losses - - 307,127 -
Operating 82,873 2,767 180,548 46,934
Administration and other 84,870 76,440 147,831 136,520
----------- ----------- ----------- -----------
Total Expenses 2,348,145 2,610,678 4,980,328 5,238,512
----------- ----------- ----------- -----------
NET INCOME $ 1,155,134 $ 1,153,993 $ 2,075,753 $ 2,100,967
=========== =========== =========== ===========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 323,998 $ 323,986 $ 645,650 $ 645,902
=========== =========== =========== ===========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 831,136 $ 830,007 $ 1,430,103 $ 1,455,065
=========== =========== =========== ===========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 1.66 $ 1.66 $ 2.86 $ 2.91
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
4
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POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1995 and
Six Months Ended June 30, 1996
------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1994 $(3,543,265) $ 94,797,766 $ 91,254,501
Net income 1,280,150 1,756,425 3,036,575
Cash distributions to partners (1,388,789) (12,499,100) (13,887,889)
----------- ------------ ------------
Balance, December 31, 1995 (3,651,904) 84,055,091 80,403,187
Net income 645,650 1,430,103 2,075,753
Cash distributions to partners (694,394) (6,249,550) (6,943,944)
----------- ------------ ------------
Balance, June 30, 1996 $(3,700,648) $ 79,235,644 $ 75,534,996
=========== ============ ============
The accompanying notes are an integral part of these statements.
5
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POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net income $ 2,075,753 $ 2,100,967
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,044,664 4,740,237
Provision for credit losses 307,127 -
Changes in operating assets and liabilities:
Increase in rent and other receivables (216,044) (313,018)
Increase in payable to affiliates 26,902 10,624
Increase in accounts payable and
accrued liabilities 123,530 23,933
Increase in lessee security deposits 24,641 25,854
Increase (decrease) in maintenance reserves (236,823) 1,517,131
Increase (decrease) in deferred income (382,500) 272,500
----------- -----------
Net cash provided by operating activities 5,767,250 8,378,228
----------- -----------
INVESTING ACTIVITIES:
Principal payments on notes receivable 2,171,777 1,581,772
----------- -----------
Net cash provided by investing activities 2,171,777 1,581,772
----------- -----------
FINANCING ACTIVITIES:
Cash distributions to partners (6,943,944) (6,943,945)
----------- -----------
Net cash used in financing activities (6,943,944) (6,943,945)
----------- -----------
CHANGES IN CASH AND CASH
EQUIVALENTS 995,083 3,016,055
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 23,456,031 18,152,875
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $24,451,114 $21,168,930
=========== ===========
The accompanying notes are an integral part of these statements.
6
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POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Principles and Policies
In the opinion of management, the financial statements presented herein include
all adjustments, consisting only of normal recurring items, necessary to
summarize fairly Polaris Aircraft Income Fund IV's (the Partnership's) financial
position and results of operations. The financial statements have been prepared
in accordance with the instructions of the Quarterly Report to the Securities
and Exchange Commission (SEC) Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto for the years ended December 31, 1995, 1994, and
1993 included in the Partnership's 1995 Annual Report to the SEC on Form 10-K
(Form 10-K).
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 below, 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.
Financial Accounting Pronouncements - SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," requires the Partnership to disclose the fair
value of financial instruments. Cash and cash equivalents is stated at cost,
which approximates fair value. The fair value of the Partnership's 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. As discussed in Note 3, the carrying
value of the notes receivable from Continental Airlines, Inc. (Continental) for
deferred rents is zero due to a recorded allowance for credit losses equal to
the balance of the notes. As of June 30, 1996, the aggregate fair value of the
Continental deferred rent notes receivable was estimated to be approximately
$0.4 million. The carrying value of the Partnership's remaining note receivable
from Continental discussed in Note 4 approximates its estimated fair value. As
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discussed in Note 5, the carrying value of the rents receivable from Viscount
Air Services, Inc. (Viscount) is zero due to a recorded allowance for credit
losses equal to the balance of the outstanding rents. As of June 30, 1996, the
estimated fair value of the rents receivable was also zero. The carrying value
of the line of credit note receivable from Viscount, which is secured by certain
of Viscount's trade receivables and spare parts as discussed in Note 5,
approximates its estimated fair value.
The Partnership adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of January 1,
1996. This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Partnership estimates that this pronouncement will
not have a material impact on the Partnership's financial position or results of
operations unless events or circumstances change that would cause projected net
cash flows to be adjusted. No impairment loss was recognized by the Partnership
during the first two quarters of 1996.
2. Lease to American Trans Air, Inc. (ATA)
As discussed in the Form 10-K, under the ATA lease, the Partnership may be
required to finance up to two aircraft hushkits for use on the aircraft at an
estimated aggregate cost of approximately $5.2 million, which would be partially
recovered with interest through payments from ATA over an extended lease term.
The Partnership loaned $1,164,800 to ATA in 1993 to finance the purchase by ATA
of two spare engines. The balance of the note at December 31, 1995 was $799,712.
ATA paid the Partnership the remaining note balance in full in March 1996.
3. Lease to Continental
As discussed in the Form 10-K, the leases with Continental were modified after
Continental filed for Chapter 11 bankruptcy protection in December 1990. The
modified agreement with Continental included an extended deferral of the dates
when Continental will remit its rental payments for the period from December 3,
1990 through September 30, 1991 and for a period of three months, beginning in
November 1992, aggregating $8,385,000 (the Deferred Amount). The Partnership
recorded a note receivable and an allowance for credit losses equal to the total
of the deferred rents and prior accrued interest, the net of which is reflected
in the accompanying balance sheets. The note receivable and corresponding
allowance for credit losses are reduced by the principal portion of payments
received. In addition, the Partnership recognizes rental revenue and interest
revenue in the period the deferred rental payments are received.
The allowances for credit losses on the principal and interest portions due were
$492,844 and $1,466,456 as of June 30, 1996 and December 31, 1995, respectively.
The unrecognized Deferred Amounts as of June 30, 1996 and December 31, 1995 were
$485,246 and $1,434,402, respectively. In accordance with the aforementioned
agreement, Continental began making supplemental payments for the Deferred
Amount plus interest on July 1, 1992. During the six months ended June 30, 1996
and 1995, the Partnership received supplemental payments of $1,025,283 and
$1,196,163, of which $949,156 and $942,410 was recognized as rental revenue in
the six months ended June 30, 1996 and 1995, respectively.
The leases of five McDonnell Douglas DC-9-30 aircraft with Continental were
originally scheduled to expire in June 1996. Continental extended the leases for
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the five aircraft for a one-year term commencing in July 1996 at the current
monthly market lease rate of $50,000 per aircraft, which is approximately 65% of
the prior lease rate.
Continental continues to pay all other amounts due under the prior agreement. As
of June 30, 1996, Continental is current on all payments due the Partnership.
The Partnership has not recorded an allowance for credit losses on the
additional Continental aircraft finance sale note receivable described in Note
4, as it is currently deemed to be collectible. The Partnership's right to
receive payments under the agreements fall into various categories of priority
under the Bankruptcy Code. In general, the Partnership's claims are
administrative claims. If Continental's reorganization is not successful, it is
likely that a portion of the Partnership's claims will not be paid in full.
4. Sale of Aircraft to Continental
In May 1994, the Partnership sold five Boeing 727-200 aircraft to Continental
for an aggregate sales price of $5,032,865. The Partnership agreed to accept
payment of the sales price in 29 monthly installments of $192,500, with interest
at a rate of 9.5% per annum. The Partnership recorded a note receivable for the
sales price. The Partnership has received all scheduled payments due under the
note. The note receivable balance at June 30, 1996 and December 31, 1995 was
$568,327 and $1,664,763, respectively.
5. Viscount Default and Bankruptcy Filing
As discussed in the Form 10-K, in July 1994, the Partnership entered into a
Restructuring and Loan Agreement (Loan Agreement) with Viscount. During 1995,
the Partnership had been in discussions with Viscount to restructure additional
existing financial obligations of Viscount to the Partnership. Viscount
subsequently defaulted on its financial obligations to the Partnership and on
December 13, 1995, the Partnership issued a notice of default to Viscount. On
January 9, 1996, Viscount was notified that the Partnership had elected to
terminate the leases and the Partnership demanded return of the aircraft.
Viscount disputed these lease terminations. 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.
On or about April 15, 1996, GECAS, on behalf of the Partnership, Polaris Holding
Company, Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund IV, and
Polaris Aircraft Investors XVIII (collectively, Polaris Entities), First
Security Bank of Utah, National Association, the owner/trustee under a number of
the leases, Viscount, and other parties executed a Compromise of Claims and
Stipulation under Section 1110 of the United States Bankruptcy Code (the
Compromise and Stipulation), which was approved by the Bankruptcy Court on May
14, 1996. The Compromise and Stipulation, provides, among other things, for: (i)
Viscount's continued use of the Partnership's two aircraft, subject to complying
with the terms of the leases and the Compromise and Stipulation; (ii) Viscount's
acknowledgment that the leases are valid leases, and that the Partnership
possesses in respect of the leases the rights of a secured party or lessor under
Section 1110 of the United States Bankruptcy Code; (iii) Viscount's
acknowledgment and stipulation as to the amount of certain monetary defaults
under the leases through March 31, 1996; (iv) Viscount's agreement to resume
monthly rent and maintenance reserve payments effective April 1, 1996, subject
to rent increases commencing as of the month following the completion of the
next significant maintenance event; (v) Viscount's agreement to an increase in
the per hour maintenance reserve amounts and return rates amounts under the
leases, effective April 1, 1996; (vi) Viscount's agreement to pay additional
monthly amounts into a Supplemental Maintenance Reserve to fund shortfalls in
maintenance reserves to cover significant maintenance events; (vii) an
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assignment from certain of Viscount's guarantors under the Loan Agreement of
security interests in Viscount assets that will provide further security for
Viscount's indebtedness to the Partnership and the Polaris Entities; (viii) a
release by Viscount of claims against GECAS, the Partnership, and the Polaris
Entities; and (ix) a release by GECAS, the Partnership, and the Polaris Entities
of Viscount's guarantors with respect to the Loan Agreement (the guarantor's
collateral for the obligations on the line of credit are being substituted by
the assignments referenced in (vii) above). In addition, upon Bankruptcy Court
approval of the Compromise and Stipulation, Viscount shall be entitled to borrow
funds from the Partnership not to exceed the amount of basic rent, to complete
certain scheduled maintenance, including for C Check or D Check or other
significant maintenance events, and such loans shall be secured and entitled to
a super-priority claim status, meaning that such loans would be repayable before
all of Viscount's other administrative expenses.
On April 15, 1996, pursuant to the Compromise and Stipulation, Viscount resumed
payments under the leases effective April 1, 1996. The Compromise and
Stipulation further provides that the Partnership may exercise its rights to
take back the aircraft, if, after its approval, Viscount defaults on its
obligations under the Compromise and Stipulation or the leases, subject to any
right Viscount may have to cure.
The Partnership's claims for past due amounts under the leases, as well as its
other claims (including the Loan Agreement line of credit, deferred rents and
all other amounts due the Partnership prior to April 1, 1996), are addressed
under Viscount's proposed plan of reorganization, which was filed with the
Bankruptcy Court on July 1, 1996 as discussed in Part II, Item 1, and must be
confirmed by September 30, 1996, pursuant to the Compromise and Stipulation.
As of June 30, 1996, the Partnership's aggregate rent, loan and interest
receivables from Viscount was approximately $1.3 million. In addition,
delinquent maintenance reserves due from Viscount aggregate approximately $0.3
million as of June 30, 1996 for a total of approximately $1.6 million in
outstanding obligations. All amounts due from Viscount may be affected by
Viscount's filing for protection under Chapter 11.
The balance of the Loan Agreement line of credit advanced to Viscount in 1994 of
$270,120 at June 30, 1996 and December 31, 1995 plus accrued interest, is
secured by certain of Viscount's trade receivables and spare parts. An allowance
for credit losses has not been provided for this note. The Partnership has
recorded an allowance for credit losses for the remaining unsecured receivable
balances from Viscount for the aggregate of the unpaid rents, outstanding
deferred rent balance and accrued interest of $1,017,936 and $710,809 as of June
30, 1996 and December 31, 1995, respectively.
Viscount's failure to perform on its financial obligations with the Partnership
has an 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 $179,000, which are reflected in operating
expense in the Partnerships statement of income for the six months ended June
30, 1996. The Partnership may incur maintenance, remarketing, transition and
additional legal costs related to the Partnership's aircraft, which cannot be
estimated at this time. The outcome of Viscount's Chapter 11 proceeding cannot
be predicted.
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6. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
June 30, 199 June 30, 1996
------------- -------------
Aircraft Management Fees $ 151,345 $ 81,425
Out-of-Pocket Administrative Expense
Reimbursement 90,846 91,188
Out-of-Pocket Operating and
Remarketing Expense Reimbursement - 197
--------- ---------
$ 242,191 $ 172,810
========= =========
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Polaris Aircraft Income Fund IV (the Partnership) owns a portfolio of 13 used
commercial jet aircraft out of its original portfolio of 33 aircraft. The
portfolio includes five DC-9-30 aircraft leased to Continental Airlines, Inc.
(Continental); two Boeing 727-200 Advanced aircraft leased to American Trans
Air, Inc. (ATA); two Boeing 737-200 Advanced aircraft leased to Independent
Aviation Group Limited (IAG); two Boeing 737-200 Advanced aircraft leased to TBG
Airways Limited (TBG Airways); and two Boeing 737-200 aircraft currently leased
to Viscount Air Services, Inc. (Viscount) which filed for Chapter 11 bankruptcy
protection in January 1996 as discussed below. Out of an original portfolio of
33 aircraft, one Boeing 727-100 was declared a casualty loss due to an accident
in 1991, fourteen Boeing 727-100 Freighters were sold in 1993, and five Boeing
727-200 aircraft were sold in May 1994. In 1993, ATA transferred to the
Partnership two Boeing 727-100 aircraft as part of the ATA lease transaction.
One of these Boeing 727-100 aircraft was sold in February 1994 and the second
Boeing 727-100 aircraft was sold in August 1994.
Remarketing Update
Continental Lease Extension - The leases of five McDonnell Douglas DC-9-30
aircraft with Continental were originally scheduled to expire in June 1996.
Continental exercised their right to extend the leases for the five aircraft for
a one-year term commencing in July 1996 at the current monthly market lease rate
of $50,000 per aircraft, which is approximately 65% of the prior lease rate.
Partnership Operations
The Partnership recorded net income of $1,155,134, or $1.66 per limited
partnership unit, for the three months ended June 30, 1996, compared to net
income of $1,153,993, or $1.66 per unit, for the same period in 1995. The
Partnership recorded net income of $2,075,753, or $2.86 per limited partnership
unit, for the six months ended June 30, 1996, compared to net income of
$2,100,967, or $2.91 per unit, for the same period in 1995.
Operating results during the three and six months ended June 30, 1996, were
comparable to those of the same periods in 1995. Year to date 1996 operating
results reflect a provision for credit losses recorded for certain rent and
interest receivables from Viscount combined with legal expenses incurred during
the first two quarters of 1996 related to the Viscount default and Chapter 11
bankruptcy filing, which were offset by decreased depreciation expense in 1996.
The Partnership has recorded an allowance for credit losses during the first
quarter of 1996 for certain unpaid rent and accrued interest receivables from
Viscount during the first quarter of 1996 as a result of Viscount's default on
certain obligations due the Partnership and Viscount's subsequent bankruptcy
filing. The aggregate allowance for credit losses of $307,127 for these
obligations is reflected in the provision for credit losses in the Partnership's
statement of income for the six months ended June 30, 1996. In addition, the
Partnership recognized legal costs of approximately $179,000 related to the
Viscount default and its Chapter 11 bankruptcy filing. These legal costs are
reflected as operating expense in the Partnership's statement of income for the
six months ended June 30, 1996.
As discussed in the Partnership's 1995 Annual Report to the Securities and
Exchange Commission on Form 10-K (Form 10-K), the Partnership recorded
depreciation and residual value adjustments to certain of the Partnership's
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aircraft in 1995. 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. For any downward adjustment to the estimated aircraft residual values,
future depreciation expense over the projected remaining life of the aircraft is
increased. The Partnership's operating results during the three and six months
ended June 30, 1996 were impacted by the net effect of the adjustments to the
aircraft carrying values recorded in 1995 and the downward adjustments to the
estimated residual values recorded in 1995, as discussed in the Form 10-K.
Liquidity and Cash Distributions
Liquidity - As discussed above, in January 1996, Viscount filed a petition for
protection under Chapter 11 of the United States Bankruptcy Code. As of June 30,
1996, Viscount's defaults with the Partnership aggregated approximately $1.6
million. Viscount's failure to perform on its financial obligations with the
Partnership has an adverse effect on the Partnership's financial position. As a
result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership
may incur maintenance, remarketing, transition and additional legal costs
related to the Partnership's aircraft. A further discussion of the Viscount
situation is included in the Legal Proceedings section (Part II, Item 1).
The Viscount leases stipulate that the Partnership may be required to finance
aircraft hushkits at an estimated aggregate cost of approximately $2.2 million,
which would be recovered with interest through payments from Viscount over an
extended lease term.
As described in Note 3 to the financial statements, the Continental leases
provide for payment by the Partnership of the costs of certain maintenance work,
Airworthiness Directive (AD) compliance, aircraft modification and refurbishment
costs, which are not to exceed approximately $4.9 million, a portion of which
will be recovered with interest through payments from Continental over the lease
terms. The balance of the costs that the Partnership is currently obligated to
pay or finance is approximately $2.3 million.
The ATA lease specifies that the Partnership may finance up to two aircraft
hushkits at an aggregate cost of approximately $5.2 million, a portion of which
would be partially recovered with interest through payments from ATA over an
extended lease term.
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, recognized as revenue, or reimbursed to the
lessee. The net maintenance reserve balances aggregate $4,774,394 as of June 30,
1996.
The Partnership is retaining cash reserves to finance a portion of the costs
that may be incurred under the leases with Continental and ATA, to cover the
additional costs that the Partnership will incur relating to the Viscount
default and bankruptcy, and to cover other cash requirements, including the
potential costs of remarketing the Partnership aircraft.
Cash Distributions - Cash distributions to limited partners during the three
months ended June 30, 1996 and 1995 were $3,124,775, or $6.25 per limited
partnership unit for both periods. Cash distributions to limited partners during
the six months ended June 30, 1996 and 1995 were $6,249,550, or $12.50 per
limited partnership unit for both periods. The timing and amount of future cash
distributions to partners are not yet known and will depend on the Partnership's
future cash requirements, including the costs that may be incurred relating to
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the Viscount default and bankruptcy; the receipt from Continental of payments
for the sale of the five Boeing 727-200 aircraft and modification financing
payments; the receipt of rental payments from Continental, ATA, GB Airways and
TBG Airways; and the receipt of current and delinquent rental and loan payments
from Viscount.
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Part II. Other Information
--------------------------
Item 1. Legal Proceedings
As discussed in Item 3 of Part I of Polaris Aircraft Income Fund IV's (the
Partnership) 1995 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the period ended March 31, 1996,
there are a number of pending legal actions or proceedings involving the
Partnership. Except as described below, there have been no material developments
with respect to any such actions or proceedings during the period covered by
this report.
Viscount Air Services, Inc. (Viscount) Bankruptcy - On April 15, 1996, GE
Capital Aviation Services, Inc., as agent for the Partnership, First Security
Bank, National Association (formerly known as First Security Bank of Utah,
National Association), 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 (the Compromise and Stipulation), the key terms of which as they
affect the Partnership were disclosed in the Partnership's Form 10-Q for the
period ended March 31, 1996. 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 Section 1110 Stipulation; (3) To Authorize
Post-Petition Financing; and (4) To Approve Rejection of an Aircraft Lease
(Compromise Order), approving the Compromise and Stipulation. The Compromise and
Stipulation obligates Viscount to make payments for rents and maintenance
reserves under each of the Partnership's aircraft leases with Viscount. Since
the approval of the Compromise and Stipulation, Viscount on a number of
occasions has defaulted in the timely performance of its weekly monetary
obligations, but has always cured such defaults within the specified grace
period.
On July 1, 1996, Viscount filed its bankruptcy disclosure statement and proposed
plan of reorganization, which sets forth Viscount's proposed treatment for
restructuring and satisfying the claims of all of its creditors. The plan of
reorganization contemplates a capital investment of between $2.5 million and $9
million from an outside source. A hearing date of August 29, 1996 has been set
to consider the sufficiency of disclosure contained in the disclosure statement;
however, counsel for Viscount has indicated that Viscount likely will amend the
disclosure statement and plan prior to any such hearing. The Partnership is
presently evaluating the disclosure statement and plan and has had preliminary
discussions with Viscount concerning the Partnership's claims, including a
possible return of aircraft.
Other Proceedings - Item 10 in Part III of the Partnership's 1995 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the period ended March 31,
1996 discuss certain actions which have been filed against Polaris Investment
Management Corporation and others in connection with the sale of interests in
the Partnership and the management of the Partnership. With the exception of
Novak, et al v. Polaris Holding Company, et al, (which has been dismissed, as
discussed in Item 10 of the Partnership's 1995 Form 10-K) where the Partnership
was named as a defendant for procedural purposes, the Partnership is not a party
to these actions. Except as discussed below, there have been no material
developments with respect to any of the actions described therein during the
period covered by this report.
Bishop v. Kidder Peabody & Co., Incorporated et al. - On June 18, 1996,
defendants filed a motion to transfer venue from Sacramento to San Francisco
County. The Court subsequently denied the motion.
15
<PAGE>
Weisl et al. v. Polaris Holding Company et al. - On April 25, 1996, the
Appellate Division for the First Department affirmed the trial court's order
which had dismissed most of plaintiffs' claims.
In re Prudential Securities Inc. Limited Partnerships Litigation - 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 case has been set for trial on November 11, 1996.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedules (Filed electronically only)
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter for
which this report is filed.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
August 8, 1996 By: /S/Marc A. Meiches
- -------------------------------- --------------------------------
Marc A. Meiches
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
17
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