UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____to___
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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 18 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 1996
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1996 and
December 31, 1995................................................3
b) Statements of Income - Three Months Ended
March 31, 1996 and 1995..........................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1995
and Three Months Ended March 31, 1996............................5
d) Statements of Cash Flows - Three Months
Ended March 31, 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.............................17
Signature.............................................................18
2
<PAGE>
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 23,474,053 $ 23,456,031
RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $1,017,936 in 1996
and $710,809 in 1995 1,515,180 1,513,176
NOTES RECEIVABLE, net of allowance for credit
losses of $986,216 in 1996 and $1,466,456 in 1995 1,533,019 3,010,224
AIRCRAFT, net of accumulated depreciation of
$61,553,991 in 1996 and $59,542,596 in 1995 57,123,453 59,134,848
OTHER ASSETS, net of accumulated amortization
of $2,160,622 in 1996 and $2,149,685 in 1995 49,628 60,565
------------ ------------
$ 83,695,333 $ 87,174,844
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 151,963 $ 145,908
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 168,478 107,574
LESSEE SECURITY DEPOSITS 1,136,893 1,124,458
MAINTENANCE RESERVES 4,386,165 5,011,217
DEFERRED RENTAL INCOME -- 382,500
------------ ------------
Total Liabilities 5,843,499 6,771,657
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,677,449) (3,651,904)
Limited Partners, 499,964 units
issued and outstanding 81,529,283 84,055,091
------------ ------------
Total Partners' Capital 77,851,834 80,403,187
------------ ------------
$ 83,695,333 $ 87,174,844
============ ============
The accompanying notes are an integral part of these statements.
3
<PAGE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
REVENUES:
Rent from operating leases $3,141,763 $3,069,373
Interest 411,039 505,435
---------- ----------
Total Revenues 3,552,802 3,574,808
---------- ----------
EXPENSES:
Depreciation and amortization 2,022,332 2,370,118
Management fees to general partner 142,088 153,469
Provision for credit losses 307,127 --
Operating 97,675 44,167
Administration and other 62,961 60,080
---------- ----------
Total Expenses 2,632,183 2,627,834
---------- ----------
NET INCOME $ 920,619 $ 946,974
========== ==========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 321,652 $ 321,916
========== ==========
NET INCOME ALLOCATED TO
LIMITED PARTNERS $ 598,967 $ 625,058
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 1.20 $ 1.25
========== ==========
The accompanying notes are an integral part of these statements.
4
<PAGE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1995 and
Three Months Ended March 31, 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 321,652 598,967 920,619
Cash distributions to partners (347,197) (3,124,775) (3,471,972)
------------ ------------ ------------
Balance, March 31, 1996 $ (3,677,449) $ 81,529,283 $ 77,851,834
============ ============ ============
The accompanying notes are an integral part of these statements.
5
<PAGE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net income $ 920,619 $ 946,974
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,022,332 2,370,118
Provision for credit losses 307,127 --
Changes in operating assets and liabilities:
Increase in rent and other receivables (309,131) (149,619)
Increase (decrease) in payable to affiliates 6,055 (30,273)
Increase in accounts payable and accrued
liabilities 60,904 25,632
Increase in lessee security deposits 12,435 12,445
Increase (decrease) in maintenance reserves (625,052) 493,908
Decrease in deferred income (382,500) (110,000)
------------ ------------
Net cash provided by operating activities 2,012,789 3,559,185
------------ ------------
INVESTING ACTIVITIES:
Principal payments on notes receivable 1,477,205 711,876
------------ ------------
Net cash provided by investing activities 1,477,205 711,876
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (3,471,972) (3,471,972)
------------ ------------
Net cash used in financing activities (3,471,972) (3,471,972)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS 18,022 799,089
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 23,456,031 18,152,875
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 23,474,053 $ 18,951,964
============ ============
The accompanying notes are an integral part of these statements.
6
<PAGE>
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 March 31, 1996, the aggregate fair value of the
Continental deferred rent notes receivable was estimated to be approximately
$1.47 million. The carrying value of the Partnership's remaining notes
receivable from Continental discussed in Notes 3 and 4 approximate their
estimated fair value.
7
<PAGE>
As 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 March 31, 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 guaranteed by
certain affiliates of Viscount 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 quarter of 1996.
2. Lease to American Trans Air, Inc. (ATA)
As discussed in the Form 10-K, the Partnership negotiated a seven-year lease
with ATA for two Boeing 727-200 Advanced aircraft formerly on lease to USAir,
Inc. The leases began in February and March 1993. ATA was not required to begin
making cash rental payments until January and February 1994, although rental
revenue is to be recognized over the entire lease term. The leases are renewable
for up to three one-year periods. ATA transferred to the Partnership two
unencumbered Boeing 727-100 aircraft as part of the lease transaction. The
Partnership sold both of these aircraft as discussed in the Form 10-K.
Under the ATA lease, the Partnership may be required to finance 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 Partnership has
received all scheduled payments due under the note. The balance of the note at
December 31, 1995 was $799,712. ATA paid the Partnership the remaining note
balance in full during March 1996.
3. Continental Lease Modification
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 for the Partnership's five McDonnell Douglas DC-9-30 aircraft
and five Boeing 727-200 aircraft specifies (i) extension of the leases for the
five Boeing 727-200s (which were subsequently sold to Continental as discussed
in Note 4) to April 1994 and for the five McDonnell Douglas DC-9-30 aircraft to
June 1996; (ii) renegotiated rental rates averaging approximately 67% of the
original lease rates; (iii) payment of ongoing rentals at the reduced rates
beginning in October 1991; (iv) payment of deferred rentals with interest
beginning in July 1992; and (v) payment by the Partnership of certain aircraft
modification and refurbishment costs, not to exceed approximately $4.9 million,
a portion of which will be recovered with interest through payments from
Continental over the extended lease term. The Partnership's share of such costs
may be capitalized and depreciated over the remaining lease terms, subject to
the capitalization policy as described in Note 1. The Partnership's balance
sheets reflect the net reimbursable costs incurred of $139,871 and $275,629 as
of March 31, 1996 and December 31, 1995, respectively, as notes receivable.
8
<PAGE>
The 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
$986,216 and $1,466,456 as of March 31, 1996 and December 31, 1995,
respectively. The unrecognized Deferred Amounts as of March 31, 1996 and
December 31, 1995 were $969,640 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 three months ended
March 31, 1996 and 1995, the Partnership received supplemental payments of
$512,641 each period, of which $464,762 and $392,372 was recognized as rental
revenue in the three months ended March 31, 1996 and 1995, respectively.
Continental continues to pay all other amounts due under the prior agreement. As
of March 31, 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
or the Continental modification financing note receivable described above, as
they are 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
The leases of five Boeing 727-200 aircraft to Continental expired on April 30,
1994 as discussed in Note 3. In May 1994, the Partnership sold these 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 and recognized a loss on sale of $6,707,562 in
the second quarter of 1994. The Partnership has received all scheduled payments
due under the note. The note receivable balance at March 31, 1996 and December
31, 1995 was $1,123,028 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 agreement with Viscount to defer certain rents due the Partnership
which aggregated $600,000; to extend a line of credit to Viscount for a total of
$387,000 to be used primarily for maintenance expenses relating to the
Partnership's aircraft; and to give the Partnership the option to acquire
approximately 1.86% of the issued and outstanding shares of Viscount stock as of
July 26, 1994 for an option price of approximately $279,000. It was not
practicable to estimate the fair value of the stock options as of March 31,
1996, as they are not publicly traded, although Viscount's recent bankruptcy
filing (as discussed below) would have an adverse impact on the value of the
stock options, if any.
9
<PAGE>
During 1995, the Partnership had been in discussions with Viscount to
restructure additional financial obligations of Viscount to the Partnership.
While such discussions were underway, Viscount had undertaken to pay in full, by
the end of each month, beginning in June 1995, the current month's obligations
by making partial periodic payments during that month. Viscount is presently in
default on its financial obligations to the Partnership. On December 13, 1995,
the Partnership issued a notice of default to Viscount demanding, within 10
days, full payment of all delinquent amounts due the Partnership. 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.
Viscount presently has possession of the Partnership's aircraft and engines.
Legal counsel has been retained and the general partner is evaluating the
rights, remedies and courses of action available to the Partnership with respect
to Viscount's default and bankruptcy filing. The Partnership has received no
payments from Viscount during the first quarter of 1996. The Partnership has
received certain payments from Viscount subsequent to March 31, 1996 as
discussed in Note 7.
Two of the Partnership's Boeing 737-200 commercial jet aircraft were on lease to
Viscount prior to the lease termination notifications. As of March 31, 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 March 31, 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 deferred rents, which were being repaid by Viscount with interest at a rate
of 6% per annum over the remaining terms of the leases, were recognized as
revenue in the period earned. The unpaid balance of the deferred rents, before
the allowance for credit losses as discussed below, was $505,802. The line of
credit, which was advanced to Viscount during 1994, was being repaid by Viscount
over a 30-month period, beginning in January 1995, with interest at a rate of
11.53% per annum.
The balance of the line of credit advanced to Viscount in 1994 of $270,120 at
March 31, 1996 and December 31, 1995 plus accrued interest, is guaranteed by
certain affiliates of the principal shareholder of Viscount and 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 March 31, 1996 and
December 31, 1995, respectively. Viscount's failure to perform on its financial
obligations with the Partnership will have 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
$97,000, which are reflected in operating expense in the Partnerships statement
of operations for the three months ended March 31, 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. A further discussion of
the Viscount situation subsequent to March 31, 1996 is discussed in Note 7.
10
<PAGE>
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
March 31, 1996 March 31, 1996
-------------- --------------
Aircraft Management Fees $142,113 $ 74,699
Out-of-Pocket Administrative Expense
Reimbursement 91,109 77,264
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 2,452 --
-------- --------
$235,674 $151,963
======== ========
7. Subsequent Event
Viscount Chapter 11 Bankruptcy - On or about April 15, 1996, GE Capital Aviation
Services, Inc., on behalf of the Partnership and Polaris Holding Company,
Polaris Aircraft Income Fund I, Polaris Aircraft Income Fund II, and Polaris
Aircraft Investors XVIII, First Security Bank of Utah, National Association, the
owner/trustee in relation to the Partnership's aircraft, Viscount, and others
executed a Compromise of Claims and Stipulation under Section 1110 of the United
States Bankruptcy Code (the Compromise and Stipulation). The Compromise and
Stipulation, which remains subject to court approval, is described in the Legal
Proceedings section (Part II, Item 1). A hearing to consider approval of the
Compromise and Stipulation has been scheduled for May 14, 1996. The
Partnership's claims for past due amounts under the aircraft leases, as well as
its other claims, will be addressed under Viscount's plan of reorganization,
which must be filed by June 30, 1996, and confirmed by September 30, 1996, or in
accordance with bankruptcy distribution rules.
11
<PAGE>
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 GB Airways
Limited (GB Airways); two Boeing 737-200 Advanced aircraft leased to TBG Airways
Limited (TBG Airways); and two Boeing 737-200 aircraft currently in the
possession of 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
The leases of five McDonnell Douglas DC-9-30 aircraft with Continental expire in
June 1996. Continental notified the Partnership of its intention to renew the
leases for the five aircraft for a one-year term commencing in July 1996.
Partnership Operations
The Partnership recorded net income of $920,619, or $1.20 per limited
partnership unit, for the three months ended March 31, 1996, compared to net
income of $946,974, or $1.25 per unit, for the same period in 1995.
Operating results during the first three months of 1996 as compared to the same
period in 1995 reflect a provision for credit losses recorded in 1996 for
certain rent and interest receivables from Viscount combined with legal expenses
incurred during the first quarter of 1996 related to the Viscount default and
Chapter 11 bankruptcy filing, partially offset by decreased depreciation
expense.
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 operations for the three months ended March 31, 1996. In addition,
the Partnership recognized legal costs of approximately $97,000 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 operations for
the three months ended March 31, 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
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 of 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 months ended
March 31, 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.
12
<PAGE>
Liquidity and Cash Distributions
Liquidity - 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. Legal counsel has been retained and the general
partner is evaluating the rights, remedies and courses of action available to
the Partnership with respect to Viscount's default and bankruptcy filing. All
amounts due from Viscount may be affected by Viscount's filing for protection
under Chapter 11.
As of March 31, 1996, the Partnership's aggregate rent, loan and interest
receivable from Viscount was approximately $1.3 million. In addition, delinquent
maintenance reserves due from Viscount aggregated approximately $0.3 million as
of March 31, 1996 for a total of approximately $1.6 million in outstanding
obligations. Viscount's failure to perform on its financial obligations with the
Partnership will have 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 $97,000 and may incur
maintenance, remarketing, transition and additional legal costs related to the
Partnership's aircraft. A further discussion of the Viscount situation in
included in the Legal Proceedings section (Part II, Item 1).
The Viscount leases, which the Partnership elected to terminate in January 1996
(which is disputed by Viscount), had stipulated 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 $4,386,165 as of March
31, 1996.
The Partnership's 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.
13
<PAGE>
Cash Distributions - Cash distributions to limited partners during the three
months ended March 31, 1996 and 1995 were $3,124,775, or $6.25 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
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.
14
<PAGE>
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), 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's Air Services, Inc. (Viscount) Bankruptcy - 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 for the District of
Arizona. The Partnership leases two aircraft to Viscount. Polaris Holding
Company, Polaris Aircraft Income Fund I, Polaris Aircraft Income Fund II, and
Polaris Aircraft Investors XVIII (collectively, Polaris Entities) lease a total
of eight other aircraft and a spare engine to Viscount. GE Capital Aviation
Services, Inc. (GECAS), on behalf of the Partnership and the Polaris Entities,
delivered a letter of termination to Viscount prepetition, notifying Viscount of
the termination of the aircraft and engine leases. Viscount disputes the
effectiveness of the termination and currently has possession of the aircraft
and engines. Pursuant to various agreements between Viscount and the Polaris
Entities, the aggregate outstanding obligations between Viscount and the Polaris
Entities is estimated to be approximately $11.5 million, of which approximately
$1.6 million represents indebtedness to the Partnership.
As of March 31, 1996, Viscount was in default under the aircraft leases in the
approximate aggregate amount of $850,000. Pursuant to that certain Restructuring
and Loan Agreement (Loan Agreement), dated July 20, 1994, between the
Partnership, Viscount and other parties, the Partnership advanced a line of
credit to Viscount and agreed to defer rent obligations under the leases. As of
March 31, 1996, Viscount was indebted to the Partnership under the Loan
Agreement in the approximate amount of $270,000 on the line of credit and
$505,000 on deferred rent obligations. Viscount's total outstanding obligations
to the Partnership as of March 31, 1996, were approximately $1.6 million.
On or about April 15, 1996, GECAS, on behalf of the Partnership and the 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). The Compromise and Stipulation, which
remains subject to court approval, 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
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
15
<PAGE>
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 superiority 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 in its
obligations under the Compromise and Stipulation or the leases, subject to any
right Viscount may have to cure. A hearing to consider approval of the
Compromise and Stipulation has been scheduled for May 14, 1996. The
Partnership's claims for past due amounts under the leases, as well as its other
claims (including the line of credit, deferred rents and all other amounts due
the Partnership prior to April 1, 1996), will be addressed under Viscount's plan
of reorganization, which must be filed by June 30, 1996, and confirmed by
September 30, 1996, or in accordance with bankruptcy distribution rules.
Other Proceedings - Item 10 in Part III of the Partnership's 1995 Form 10-K
discusses 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. The Partnership is not a
party to these actions. There have been no material developments with respect to
any of the actions described therein during the period covered by this report,
but the following new proceedings have been commenced.
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
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
16
<PAGE>
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. The Partnership is not named as a defendant in this
action.
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.
17
<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
May 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)
18
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<PERIOD-END> MAR-31-1996
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