UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
---------------------------
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___to___
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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 17 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended September 30, 1997
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - September 30, 1997 and
December 31, 1996..........................................3
b) Statements of Operations - Three and Nine Months
Ended September 30, 1997 and 1996..........................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1996
and Nine Months Ended September 30, 1997...................5
d) Statements of Cash Flows - Nine Months
Ended September 30, 1997 and 1996..........................6
e) Notes to Financial Statements..............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........11
Part II. Other Information
Item 1. Legal Proceedings.........................................16
Item 6. Exhibits and Reports on Form 8-K..........................16
Signature ......................................................17
2
<PAGE>
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1997 1996
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 18,065,499 $ 23,989,285
RENT AND OTHER RECEIVABLES -- 943,708
NOTE RECEIVABLE 18,545,096 --
AIRCRAFT, net of accumulated depreciation of
$88,490,049 in 1996 -- 30,187,395
OTHER ASSETS -- 22,099
------------ ------------
$ 36,610,595 $ 55,142,487
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 161,649 $ 216,319
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 415,096 322,513
LESSEE SECURITY DEPOSITS -- 1,124,529
MAINTENANCE RESERVES 1,006 5,409,620
------------ ------------
Total Liabilities 577,751 7,072,981
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (4,095,869) (3,975,366)
Limited Partners, 499,964 units
issued and outstanding 40,128,713 52,044,872
------------ ------------
Total Partners' Capital 36,032,844 48,069,506
------------ ------------
$ 36,610,595 $ 55,142,487
============ ============
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rent from operating leases $ 94,889 $2,361,349 $3,813,721 $8,664,507
Interest 193,370 324,128 756,218 1,077,051
Gain on sale of aircraft 951,579 -- 951,579 --
Other 779,893 15,386 807,388 15,386
---------- ---------- ---------- ----------
Total Revenues 2,019,731 2,700,863 6,328,906 9,756,944
---------- ---------- ---------- ----------
EXPENSES:
Depreciation and amortization 3,013 1,986,210 2,685,475 6,030,874
Management fees to general partner -- 118,067 106,632 418,225
Provision for credit losses -- 281,902 -- 589,029
Operating 56,807 71,674 113,659 252,222
Administration and other 84,269 74,150 277,562 221,981
---------- ---------- ---------- ----------
Total Expenses 144,089 2,532,003 3,183,328 7,512,331
---------- ---------- ---------- ----------
NET INCOME $1,875,642 $ 168,860 $3,145,578 $2,244,613
========== ========== ========== ==========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 885,108 $ 314,136 $1,397,721 $ 959,786
========== ========== ========== ==========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 990,534 $ (145,276) $1,747,857 $1,284,827
========== ========== ========== ==========
NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT $ 1.98 $ (0.29) $ 3.50 $ 2.57
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<CAPTION>
Year Ended December 31, 1996 and
Nine Months Ended September 30, 1997
------------------------------------
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Balance, December 31, 1995 $(3,651,904) $ 84,055,091 $ 80,403,187
Net income (loss) 1,065,327 (19,511,119) (18,445,792)
Cash distributions to partners (1,388,789) (12,499,100) (13,887,889)
----------- ------------ ------------
Balance, December 31, 1996 (3,975,366) 52,044,872 48,069,506
Net income 1,397,721 1,747,857 3,145,578
Cash distributions to partners (1,518,224) (13,664,016) (15,182,240)
----------- ------------ ------------
Balance, September 30, 1997 $(4,095,869) $ 40,128,713 $ 36,032,844
=========== ============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND IV,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,145,578 $ 2,244,613
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,685,475 6,030,874
Gain on sale of aircraft (951,579) --
Net provision for credit losses -- (440,689)
Changes in operating assets and liabilities,
net of effect of sale of aircraft:
Decrease in rent and other receivables 3,219 1,010,747
Increase (decrease) in payable to affiliates (2,949) 10,193
Increase (decrease) in accounts payable
and accrued liabilities (88,016) 181,852
Decrease in lessee security deposits (1,124,529) (12,768)
Increase (decrease) in maintenance reserves (5,408,614) 574,061
Decrease in deferred income -- (382,500)
------------ ------------
Net cash provided by (used in) operating activities (1,741,415) 9,216,383
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft 4,940,755 --
Payments to Purchaser related to sale of aircraft (1,792,380) --
Principal payments on notes receivable 7,851,494 2,740,104
------------ ------------
Net cash provided by investing activities 10,999,869 2,740,104
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (15,182,240) (10,415,917)
------------ ------------
Net cash used in financing activities (15,182,240) (10,415,917)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (5,923,786) 1,540,570
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 23,989,285 23,456,031
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 18,065,499 $ 24,996,601
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
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, 1996, 1995, and
1994 included in the Partnership's 1996 Annual Report to the SEC on Form 10-K
(Form 10-K).
2. Sale of Aircraft to Triton
On May 28, 1997, Polaris Investment Management Corporation (the "General
Partner" or "PIMC"), on behalf of the Partnership, executed definitive
documentation for the purchase of the Partnership's 13 remaining aircraft (the
"Aircraft") and certain of its notes receivables by Triton Aviation Services IV
LLC, a special purpose company (the "Purchaser" or "Triton"). The closings for
the purchase of 11 of the 13 Aircraft occurred from May 28, 1997 to June 30,
1997. The closings for 2 of the Aircraft occurred on July 21, 1997. The
Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the
"Manager"), a privately held aircraft leasing company which was formed in 1996
by Triton Investments, Ltd., a company which has been in the marine cargo
container leasing business for 17 years and is diversifying its portfolio by
leasing commercial aircraft. Each Aircraft was sold subject to the existing
leases, if any. Although the aforementioned transaction was structured as a
sale, under Generally Accepted Accounting Principles (GAAP), the transaction had
been recorded using the deposit method of accounting as discussed in Note 2
under The Accounting Treatment of the Transaction.
The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser is $29,748,000 which is allocable to the Aircraft and
to certain notes receivable by the Partnership. The Purchaser paid into an
escrow account $3,351,410 of the Purchase Price in cash upon the closing of the
first aircraft and delivered a promissory note (the "Promissory Note") for the
balance of $26,396,590. The Partnership received $2,633,833 from the escrow
account on July 10, 1997 for the pro rata cash portion of the Purchase Price
allocated to the 11 aircraft that closed from May 28, 1997 to June 30, 1997. The
Partnership received the balance of the escrow funds of $717,577 from Triton on
July 31, 1997 for the pro rata cash portion of the Purchase Price allocated to
the 2 aircraft that closed on July 21, 1997. The Partnership is entitled to
interest on the cash portion of the purchase price at 5.3% per annum from April
1, 1997 to the date the Partnership received the funds.
The Promissory Note was initially due in 28 quarterly installments of principal
and interest commencing June 30, 1997 in the amount of $1,294,663 over a period
of seven years bearing interest at a rate of 12% per annum with a balloon
principal payment in the amount of $4,812,392 due on March 31, 2004. As
discussed in the next paragraph, these payment amounts have been adjusted due to
the Purchaser's right to voluntarily prepay the Promissory Note in whole or in
part at any time without penalty. In addition, the Promissory Note is subject to
mandatory partial prepayment in certain specified instances. Due to the
possibility that 4 of the Aircraft (United Kingdom registered aircraft) would
not close by June 30, 1997, the Partnership agreed with the Purchaser to accept
a pro rata note payment on June 30, 1997 of $714,786. The unpaid portion of the
note payment continued to accrue interest at 12% per annum until paid. In fact,
two of the four Aircraft closed on June 30, 1997 and the Partnership received
7
<PAGE>
$298,906 on July 10, 1997. The remaining two aircraft closed on July 21, 1997
and the Partnership received the balance of the June 30th note payment on July
29, 1997. The Promissory Note was not reflected in the June 30, 1997 balance
sheet due to the Partnership using the deposit method of accounting as discussed
in The Accounting Treatment of the Transaction.
In August 1997 and September 1997, the Purchaser made prepayments of principal
on the Promissory Note of $1,891,402 and $5,000,000, respectively. The
$1,891,402 prepayment was the result of the Purchaser selling two aircraft and
the $5,000,000 was a voluntary prepayment by the Purchaser. As a result, the
remaining quarterly installments of principal and interest have been adjusted to
$946,157 and the balloon payment due March 31, 2004 has been adjusted to
$3,831,026.
Under the terms of the transaction, the Purchaser's assets, which are limited to
the Aircraft, including any income or proceeds therefrom, and any funds made
available to Purchaser under the working capital line described below constitute
the sole source of payments under the Promissory Note. Although no security
interest over the Aircraft or the leases is granted in favor of the Partnership,
the equity interests in the Purchaser have been pledged to the Partnership. In
connection with that pledge, the Purchaser is prohibited from incurring
indebtedness other than (i) the Promissory Note; (ii) deferred taxes not yet due
and payable; (iii) indebtedness incurred to hushkit Aircraft owned by the
Purchaser; (iv) demand loans to another SPC (defined below) at a market rate of
interest; and (v) debt to trade creditors incurred in the ordinary course of
business. In addition, the Purchaser undertakes to keep the Aircraft and leases
free of any lien, security interest or other encumbrance other than (i) inchoate
taxes and materialmen's liens and the like; (ii) in the event that the Purchaser
elects to install hushkits on any Aircraft, secured debt to the extent of the
full cost of such hushkit and other hushkits acquired with proceeds from the
same loan facility; and (iii) liens lessees are customarily permitted to incur
that are required to be removed. The Purchaser has the right to sell any of the
Aircraft without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the sale price is less than the
portion of the outstanding balance of the Promissory Note which is allocable to
the Aircraft in question and the Purchaser does not have sufficient funds to
make up the difference. In the event that any of the Aircraft are sold by the
Purchaser, the Promissory Note is subject to a mandatory prepayment of the
portion of the Promissory Note which is allocable to the Aircraft sold.
Under the terms of the transaction, the Purchaser's Manager has undertaken to
make available a working capital line to the Purchaser of up to approximately
$2,598,000 to fund operating obligations of the Purchaser. This working capital
line is guaranteed by Triton Investments, Ltd., the parent of the Purchaser's
Manager and such guarantor provided the Partnership with a copy of its most
recent balance sheet showing a consolidated net worth (net of minority
interests) of at least $150-million at December 31, 1996. Provided that the
Purchaser is not in default in making payments due under the Promissory Note to
the Partnership, the Purchaser is permitted to dividend to its equity owners an
amount not to exceed approximately $70,000 per month. The Purchaser may
distribute additional dividends to the equity owners to the extent of the
working capital advances made by the Purchaser's Manager provided that the
working capital line available to the Purchaser will be deemed increased to the
extent of such dividends.
Under the purchase agreement, the Purchaser purchased the Aircraft effective as
of April 1, 1997 notwithstanding the actual closing dates. The utilization of an
effective date facilitated the determination of rent and other allocations
between the parties. The Purchaser has the right to receive all income and
proceeds, including rents and receivables, from the Aircraft accruing from and
after April 1, 1997, and the Promissory Note commenced bearing interest as of
April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold
subject to the existing leases, if any, and as part of the transaction the
Purchaser assumes all obligations relating to maintenance reserves and security
deposits relating to such leases. Cash balances of $5,461,043 related to
maintenance reserves and security deposits were transferred to the Purchaser
after the Aircraft closing dates.
8
<PAGE>
Neither PIMC nor GE Capital Aviation Services, Inc. (GECAS) will receive a sales
commission in connection with the transaction. In addition, PIMC will not be
paid a management fee with respect to the collection of the Promissory Note or
on any rents accruing from or after April 1, 1997. Neither PIMC nor GECAS or any
of its affiliates holds any interest in Triton Aviation or any of Triton
Aviation's affiliates. John Flynn, the current President of Triton Aviation, was
a Polaris executive until May 1996 and has over 15 years experience in the
commercial aviation industry. At the time Mr. Flynn was employed at PIMC, he had
no affiliation with Triton Aviation or its affiliates.
Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris
Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold
certain aircraft assets to separate special purpose companies under common
management with the Purchaser (collectively, together with the Purchaser, the
"SPC's") on terms similar to those set forth above, with the exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.
The Accounting Treatment of the Transaction - As noted above and in accordance
with GAAP, this transaction was not accounted for as a sale at the closing date.
This transaction was recorded using the deposit method of accounting which
required the Partnership to continue to report on its financial statements the
Aircraft, other assets, liabilities and any related debt even if they were
assumed by Triton. Cash received from Triton, including the initial down payment
and subsequent collection of principal and interest, was reported as a deposit
on the contract. In August and September 1997, the Partnership received
prepayments of principal from Triton of $1,891,402 and $5,000,000, respectively.
As a result, sale treatment was recorded on September 30, 1997.
In accordance with GAAP, the Partnership recognized rental income through the
closing date for the Aircraft which occurred from May 28, 1997 to July 21, 1997.
The Partnership recorded rental income from operating leases, interest and other
income totaling $94,889 and $1,603,571 during the three months ended September
30, 1997 and June 30, 1997, respectively, related to the Aircraft. However,
under the terms of the transaction, Triton was entitled to receive payment of
the rents, receivables and other income accruing from April 1, 1997 to the
closing dates for each of the Aircraft, which have been reflected as adjustments
to the sales proceeds received by the Partnership. Interest collected on the
Promissory Note prior to sale accounting treatment was recorded as part of
Triton's initial investment and has been subsequently recognized as additional
sales proceeds upon sale accounting treatment in accordance with GAAP.
The Aircraft transferred pursuant to the definitive documentation executed on
May 28, 1997 had been classified as aircraft held for sale from that date. Under
GAAP, aircraft held for sale are carried at their fair market value less
estimated costs to sell. The adjustment to the sales proceeds described above
and revisions to estimated costs to sell the Aircraft required the Partnership
to record an adjustment to the net carrying value of the aircraft held for sale
of $1,328,482 during the three months ended June 30, 1997. This adjustment to
the net carrying value of the aircraft held for sale was included in
depreciation and amortization expense on the statement of operations.
9
<PAGE>
3. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for the
Three Months Ended Payable at
September 30, 1997 September 30, 1997
------------------ ------------------
Out-of-Pocket Administrative Expense
Reimbursement $ 98,724 $ 54,198
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 56,081 107,451
-------- --------
$154,805 $161,649
======== ========
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In May 1997, Polaris Aircraft Income Fund IV (the Partnership) executed
definitive documentation for the purchase by Triton Aviation Services IV LLC of
the Partnership's remaining 13 used commercial jet aircraft out of its original
portfolio of 33 aircraft. The closings for 11 of the 13 used commercial jet
aircraft were completed during May 1997 and June 1997. In July 1997, the
closings for the remaining 2 aircraft were completed. The 13 aircraft sold
consisted of: five DC-9-30 aircraft leased to Continental Airlines, Inc.
(Continental); two Boeing 727-200 Advanced aircraft leased to American Trans
Air, Inc. (ATA); two Boeing 737-200 Advanced aircraft leased to Independent
Aviation Group Limited (IAG); two Boeing 737-200 Advanced aircraft leased to TBG
Airways Limited (TBG Airways); and two Boeing 737-200 aircraft formerly leased
to Viscount Air Services, Inc. (Viscount) which filed for Chapter 11 bankruptcy
protection in January 1996 as discussed below. Out of an original portfolio of
33 aircraft, one Boeing 727-100 was declared a casualty loss due to an accident
in 1991, fourteen Boeing 727-100 Freighters were sold in 1993, and five Boeing
727-200 aircraft were sold in May 1994. In 1993, ATA transferred to the
Partnership two Boeing 727-100 aircraft as part of the ATA lease transaction.
One of these Boeing 727-100 aircraft was sold in February 1994 and the second
Boeing 727-100 aircraft was sold in August 1994.
Remarketing Update
Sale of Aircraft to Triton
On May 28, 1997, Polaris Investment Management Corporation (the "General
Partner" or "PIMC"), on behalf of the Partnership, executed definitive
documentation for the purchase of the Partnership's 13 remaining aircraft (the
"Aircraft") and certain of its notes receivables by Triton Aviation Services IV
LLC, a special purpose company (the "Purchaser" or "Triton"). The closings for
the purchase of 11 of the 13 Aircraft occurred from May 28, 1997 to June 30,
1997. The closings for 2 of the Aircraft occurred on July 21, 1997. The
Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the
"Manager"), a privately held aircraft leasing company which was formed in 1996
by Triton Investments, Ltd., a company which has been in the marine cargo
container leasing business for 17 years and is diversifying its portfolio by
leasing commercial aircraft. Each Aircraft was sold subject to the existing
leases if any. Although the aforementioned transaction was structured as a sale,
under Generally Accepted Accounting Principles (GAAP), the transaction had been
recorded using the deposit method of accounting as discussed in Note 2 under The
Accounting Treatment of the Transaction.
The General Partner's Decision to Approve the Transaction - In determining
whether the transaction was in the best interests of the Partnership and its
unit holders, the General Partner evaluated, among other things, the risks and
significant expenses associated with continuing to own and remarket the Aircraft
(many of which were subject to leases that were nearing expiration). The General
Partner determined that such a strategy could require the Partnership to expend
a significant portion of its cash reserves for remarketing and that there was a
substantial risk that this strategy could result in the Partnership having to
reduce or even suspend future cash distributions to limited partners. The
General Partner concluded that the opportunity to sell the Aircraft at an
attractive price would be beneficial in the present market where demand for
Stage II aircraft is relatively strong rather than attempting to sell the
aircraft "one-by-one" over the coming years when the demand for such Aircraft
might be weaker. GE Capital Aviation Services, Inc. ("GECAS"), which provides
aircraft marketing and management services to the General Partner, sought to
obtain the best price and terms available for these Stage II aircraft given the
aircraft market and the conditions and types of planes owned by the Partnership.
Both the General Partner and GECAS approved the sale terms of the Aircraft (as
described below) as being in the best interest of the Partnership and its unit
holders because both believe that this transaction will optimize the potential
cash distributions to be paid to limited partners. To ensure that no better
offer could be obtained, the terms of the transaction negotiated by GECAS
11
<PAGE>
included a "market-out" provision that permitted the Partnership to elect to
accept an offer for all (but not less than all) of the assets to be sold by it
to the Purchaser on terms which it deemed more favorable, with the ability of
the Purchaser to match the offer or decline to match the offer and be entitled
to be compensated in an amount equal to 1 1/2% of the Purchaser's proposed
purchase price. The Partnership did not receive any other offers and,
accordingly, the General Partner believes that a valid market check has occurred
confirming that the terms of this transaction were the most beneficial that
could have been obtained.
The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser is $29,748,000 which is allocable to the Aircraft and
to certain notes receivable by the Partnership. The Purchaser paid into an
escrow account $3,351,410 of the Purchase Price in cash upon the closing of the
first aircraft and delivered a promissory note (the "Promissory Note") for the
balance of $26,396,590. The Partnership received $2,633,833 from the escrow
account on July 10, 1997 for the pro rata cash portion of the Purchase Price
allocated to the 11 aircraft that closed from May 28, 1997 to June 30, 1997. The
Partnership received the balance of the escrow funds of $717,577 from Triton on
July 31, 1997 for the pro rata cash portion of the Purchase Price allocated to
the 2 aircraft that closed on July 21, 1997. The Partnership is entitled to
interest on the cash portion of the purchase price at 5.3% per annum from April
1, 1997 to the date the Partnership received the funds.
The Promissory Note was initially due in 28 quarterly installments of principal
and interest commencing June 30, 1997 in the amount of $1,294,663 over a period
of seven years bearing interest at a rate of 12% per annum with a balloon
principal payment in the amount of $4,812,392 due on March 31, 2004. The
Purchaser has the right to voluntarily prepay the Promissory Note in whole or in
part at any time without penalty. In addition, the Promissory Note is subject to
mandatory partial prepayment in certain specified instances. Due to the
possibility that 4 of the Aircraft (United Kingdom registered aircraft) would
not close by June 30, 1997, the Partnership agreed with the Purchaser to accept
a pro rata note payment on June 30, 1997 of $714,786. The unpaid principal
balance continued to accrue interest at 12% per annum until paid. In fact, two
of the four Aircraft closed on June 30, 1997 and the Partnership received
$298,906 on July 10, 1997. The remaining two aircraft closed on July 21, 1997
and the Partnership received the balance of the note payment on July 29, 1997.
The Promissory Note was not reflected in the June 30, 1997 balance sheet due to
the Partnership using the deposit method of accounting as discussed in The
Accounting Treatment of the Transaction.
In August 1997 and September 1997, the Purchaser made prepayments of principal
on the Promissory Note of $1,891,402 and $5,000,000, respectively. The
$1,891,402 prepayment was the result of the Purchaser selling two aircraft and
the $5,000,000 was a voluntary prepayment by the Purchaser. As a result, the
remaining quarterly installments of principal and interest have been adjusted to
$946,157 and the balloon payment due March 31, 2004 has been adjusted to
$3,831,026.
Under the terms of the transaction, the Purchaser's assets, which are limited to
the Aircraft, including any income or proceeds therefrom, and any funds made
available to Purchaser under the working capital line described below constitute
the sole source of payments under the Promissory Note. Although no security
interest over the Aircraft or the leases is granted in favor of the Partnership,
the equity interests in the Purchaser have been pledged to the Partnership. In
connection with that pledge, the Purchaser is prohibited from incurring
indebtedness other than (i) the Promissory Note; (ii) deferred taxes not yet due
and payable; (iii) indebtedness incurred to hushkit Aircraft owned by the
Purchaser; (iv) demand loans to another SPC (defined below) at a market rate of
interest; and (v) debt to trade creditors incurred in the ordinary course of
business. In addition, the Purchaser undertakes to keep the Aircraft and leases
free of any lien, security interest or other encumbrance other than (i) inchoate
taxes and materialmen's liens and the like; (ii) in the event that the Purchaser
elects to install hushkits on any Aircraft, secured debt to the extent of the
full cost of such hushkit and other hushkits acquired with proceeds from the
same loan facility; and (iii) liens lessees are customarily permitted to incur
that are required to be removed. The Purchaser has the right to sell any of the
Aircraft without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the sale price is less than the
portion of the outstanding balance of the Promissory Note which is allocable to
12
<PAGE>
the Aircraft in question and the Purchaser does not have sufficient funds to
make up the difference. In the event that any of the Aircraft are sold by the
Purchaser, the Promissory Note is subject to a mandatory prepayment of the
portion of the Promissory Note which is allocable to the Aircraft sold.
Under the terms of the transaction, the Purchaser's Manager has undertaken to
make available a working capital line to the Purchaser of up to approximately
$2,598,000 to fund operating obligations of the Purchaser. This working capital
line is guaranteed by Triton Investments, Ltd., the parent of the Purchaser's
Manager and such guarantor provided the Partnership with a copy of its most
recent balance sheet showing a consolidated net worth (net of minority
interests) of at least $150-million at December 31, 1996. Provided that the
Purchaser is not in default in making payments due under the Promissory Note to
the Partnership, the Purchaser is permitted to dividend to its equity owners an
amount not to exceed approximately $70,000 per month. The Purchaser may
distribute additional dividends to the equity owners to the extent of the
working capital advances made by the Purchaser's Manager provided that the
working capital line available to the Purchaser will be deemed increased to the
extent of such dividends.
Under the purchase agreement, the Purchaser purchased the Aircraft effective as
of April 1, 1997 notwithstanding the actual closing dates. The utilization of an
effective date facilitated the determination of rent and other allocations
between the parties. The Purchaser has the right to receive all income and
proceeds, including rents and receivables, from the Aircraft accruing from and
after April 1, 1997, and the Promissory Note commenced bearing interest as of
April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold
subject to the existing leases, if any, and as part of the transaction the
Purchaser assumes all obligations relating to maintenance reserves and security
deposits relating to such leases. Cash balances of $5,461,043 related to
maintenance reserves and security deposits were transferred to the Purchaser
after the Aircraft closing dates.
Neither PIMC nor GECAS will receive a sales commission in connection with the
transaction. In addition, PIMC will not be paid a management fee with respect to
the collection of the Promissory Note or on any rents accruing from or after
April 1, 1997. Neither PIMC nor GECAS or any of its affiliates holds any
interest in Triton Aviation or any of Triton Aviation's affiliates. John Flynn,
the current President of Triton Aviation, was a Polaris executive until May 1996
and has over 15 years experience in the commercial aviation industry. At the
time Mr. Flynn was employed at PIMC, he had no affiliation with Triton Aviation
or its affiliates.
Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris
Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold
certain aircraft assets to separate special purpose companies under common
management with the Purchaser (collectively, together with the Purchaser, the
"SPC's") on terms similar to those set forth above, with the exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.
The Accounting Treatment of the Transaction - As noted above and in accordance
with GAAP, this transaction was not accounted for as a sale at the closing date.
This transaction was recorded using the deposit method of accounting which
required the Partnership to continue to report on its financial statements the
Aircraft, other assets, liabilities and any related debt even if they were
assumed by Triton. Cash received from Triton, including the initial down payment
and subsequent collection of principal and interest, was reported as a deposit
on the contract. In August and September 1997, the Partnership received
prepayments of principal from Triton of $1,891,402 and $5,000,000, respectively.
As a result, sale treatment was recorded on September 30, 1997.
In accordance with GAAP, the Partnership recognized rental income through the
closing date for the Aircraft which occurred from May 28, 1997 to July 21, 1997.
The Partnership recorded rental income from operating leases, interest and other
income totaling $94,889 and $1,603,571 during the three months ended September
30, 1997 and June 30, 1997, respectively, related to the Aircraft. However,
under the terms of the transaction, Triton was entitled to receive payment of
13
<PAGE>
the rents, receivables and other income accruing from April 1, 1997 to the
closing dates for each of the Aircraft, which have been reflected as adjustments
to the sales proceeds received by the Partnership. Interest collected on the
Promissory Note prior to sale accounting treatment was recorded as part of
Triton's initial investment and has been subsequently recognized as additional
sales proceeds upon sale accounting treatment in accordance with GAAP.
The Aircraft transferred pursuant to the definitive documentation executed on
May 28, 1997 had been classified as aircraft held for sale from that date. Under
GAAP, aircraft held for sale are carried at their fair market value less
estimated costs to sell. The adjustment to the sales proceeds described above
and revisions to estimated costs to sell the Aircraft required the Partnership
to record an adjustment to the net carrying value of the aircraft held for sale
of $1,328,482 during the three months ended June 30, 1997. This adjustment to
the net carrying value of the aircraft held for sale was included in
depreciation and amortization expense on the statement of operations.
Partnership Operations
The Partnership recorded net income of $1,875,642, or $1.98 per limited
partnership unit for the three months ended September 30, 1997, compared to net
income of $168,860, or an allocated net loss of $0.29 per limited partnership
unit, for the same period in 1996. The Partnership recorded net income of
$3,145,578, or $3.50 per limited partnership unit for the nine months ended
September 30, 1997, compared to net income of $2,244,613, or $2.57 per limited
partnership unit, for the same period in 1996.
The Partnership reported decreases in rent from operating leases, management
fees and depreciation expense during the three and nine months ended September
30, 1997, as compared to the same period in 1996, due to the sale of the
remaining Aircraft to Triton. As discussed in Note 2 to the financial
statements, the Partnership did not recognize this transaction as a sale until
September 30, 1997, at which time it recognized a gain on sale of $951,579.
During 1996, the Partnership recorded provisions for credit losses aggregating
$589,029 for certain rent and interest receivables from Viscount and recognized
legal expenses aggregating $250,000 incurred during the first three quarters of
1996 related to the Viscount default and Chapter 11 bankruptcy filing.
Interest income decreased during the three and nine months ended September 30,
1997 as compared to the same periods in 1996 due to the payoff of the ATA note
in March 1996 and the Continental note in September 1996, and a decrease in
interest income on the deferred rent payments due from Continental that ended in
the first quarter of 1997.
The Partnership recognized as other revenue in the third quarter of 1997,
maintenance reserves aggregating $779,893 that were previously paid to the
Partnership by a former lessee for the aircraft that was sold to Triton in 1997.
Administration and other expenses increased during the three and nine months
ended September 30, 1997 as compared to the same periods in 1996, due to
increases in printing and postage costs combined with an increase in outside
services.
Liquidity and Cash Distributions
Liquidity -The Partnership received all payments due on the Promissory Note from
Triton during the nine months ended September 30, 1997. PIMC has determined that
the Partnership maintain cash reserves as a prudent measure to insure that the
Partnership has available funds in the event Triton defaults under the
Promissory Note and for other contingencies including expenses of the
Partnership.
14
<PAGE>
The Partnership's cash reserves will be monitored and may be revised from time
to time as further information becomes available in the future.
Cash Distributions - Cash distributions to limited partners during the three
months ended September 30, 1997 were $8,664,376, or $17.33 per limited
partnership unit, compared to $3,124,775, or $6.25 per limited partnership unit
for the three months ended September 30, 1996. Cash distributions to limited
partners during the nine months ended September 30, 1997 were $13,664,016, or
$27.33 per limited partnership unit, compared to $9,374,325, or $18.75 per
limited partnership unit for the nine months ended September 30, 1996. The
timing and amount of future cash distributions are not yet known and will depend
on the Partnership's future cash requirements (including expenses of the
Partnership) and need to retain cash reserves, as previously discussed in the
Liquidity section, and the receipt of note payments from Triton.
15
<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) 1996 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the periods ended March 31, 1997
and June 30, 1997, there are a number of pending legal actions or proceedings
involving the Partnership. Except as discussed below, there have been no
material developments with respect to any such actions or proceedings during the
period covered by this report.
Equity Resources, Inc., et al. v. Polaris Investment Management Corporation, et
al. - As previously disclosed, on May 23, 1997, the defendants filed a motion to
dismiss this action. Subsequently, plaintiffs voluntarily sought dismissal of
their suit without prejudice. On September 16, 1997, the court dismissed
plaintiffs' complaint without prejudice.
Ron Wallace v. Polaris Investment Management Corporation, et al. - On September
2, 1997, an amended complaint was filed adding additional plaintiffs. On
September 16, 1997, the Polaris defendants filed a demurrer seeking to dismiss
the amended complaint. Simultaneously with the filing of the demurrer, the
Polaris defendants sought a stay of discovery. The hearing on the demurrer
occurred on November 4, 1997. On November 5, 1997, the court granted the Polaris
defendants' demurrer and ordered that plaintiffs be given 10 days leave to amend
their complaint to plead demand futility.
On or about October 14, 1997, the plaintiffs in this action filed a separate
Petition for Writ of Mandate in the San Francisco Superior Court entitled Ron
Wallace, et al. v. Polaris Investment Management Corp., et al., seeking to
obtain access to all the Partnership's books, records and documents.
Subsequently, pursuant to an agreement between the parties, plaintiffs agreed to
dismiss their Petition for Writ of Mandate with prejudice and the Polaris
defendants agreed to withdraw its motion seeking a stay of discovery.
Other Proceedings - Item 10 in Part III of the Partnership's 1996 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the periods ended March 31,
1997 and June 30, 1997 discuss certain actions which have been filed against
Polaris Investment Management Corporation and others in connection with the sale
of interests in the Partnership and the management of the Partnership. With the
exception of Novak, et al v. Polaris Holding Company, et al, (which has been
dismissed, as discussed in the 1996 Form 10-K) where the Partnership was named
as a defendant for procedural purposes, the Partnership is not a party to these
actions. There have been no material developments with respect to any of the
actions described therein during the period covered by this report.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedules.
b) Reports on Form 8-K
A Current Report on Form 8-K/A, dated May 28, 1997, amending certain
exhibits listed in Item 7, was filed on August 18, 1997.
16
<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
November 12, 1997 By: /S/Marc A. Meiches
- ---------------------------------- --------------------------------
Marc A. Meiches
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
17
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