Item 1. Business
The principal objectives of Polaris Aircraft Income Fund I (PAIF-I or the Partnership), are to purchase and lease used commercial jet aircraft in order to provide distributions of cash from operations, to maximize the residual values of aircraft upon sale and to protect Partnership capital through experienced management and diversification. PAIF-I was organized as a California limited partnership on June 27, 1984 and will terminate no later than December 2010.
PAIF-I has many competitors in the aircraft leasing market, including airlines, aircraft leasing companies, other limited partnerships, banks and several other types of financial institutions. This market is highly competitive and there is no single competitor who has a significant influence on the industry. In addition to other competitors, the general partner, Polaris Investment Management Corporation (PIMC), and its affiliates, including GE Capital Aviation Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris Holding Company (PHC) and General Electric Capital Corporation (GE Capital), acquire, lease, finance, sell and remarket aircraft for their own accounts and for existing aircraft and aircraft leasing programs managed by them. Further, GECAS provides a significant range of management services to GPA Group plc, a public limited company organized in Ireland, together with its consolidated subsidiaries (GPA), which acquires, leases and sells aircraft. Accordingly, in seeking to re-lease and sell its aircraft, the Partnership may be in competition with the general partner, its affiliates, and GPA.
A brief description of the aircraft owned by the Partnership is set forth in Item 2.
Item 2.
American Air Lease, Inc. (American Air Lease) defaulted under its lease of one Boeing 737-200 aircraft in June 1991, and three Boeing 737-200s were off-lease as a result of the Braniff bankruptcy. As a result of market conditions, all four of these aircraft were transferred to aircraft inventory during 1993 and 1992 and disassembled for sale of their component parts.
In 1995, the Partnership sold the airframe from one Boeing 737-200 aircraft that was previously leased to Cambodia International Airlines Company, Ltd. (Cambodia International) until Cambodia International returned the aircraft to the Partnership in September 1993. The Partnership has leased two engines from this aircraft and one engine, previously leased to Viscount, to CanAir Cargo Ltd. (CanAir) for three years beginning in May 1994. CanAir has an option to renew the lease for one three-year period at the same rental rate. The following table describes certain material terms of the Partnership's engine leases as of December 31, 1996.
Number Lease Lessee Engine Type of Engines Expiration Renewal Options - ------ ----------- ---------- ---------- ---------------
CanAir JT8D-9A 3 5/97 One three-year period
Industry-wide, approximately 280 commercial jet aircraft are currently available for sale or lease, as of December 31, 1996, approximately 195 less than a year ago, and at under 2.5% of the total available jet aircraft fleet, this is the lowest level of availability since 1988. From 1991 to 1994, depressed demand for travel limited airline expansion plans, with new aircraft orders and scheduled deliveries being canceled or substantially deferred. As profitability declined, many airlines took action to downsize or liquidate assets and some airlines were forced to file for bankruptcy protection. Following three years of good traffic growth accompanied by rising yields, this trend is reversing with many airlines reporting record profits. As a result of this improving trend, just over 1200 new jet aircraft were ordered in 1996, making this the second highest ever order
year in the history of the industry. To date, this strong recovery has mainly benefited Stage 3 narrow-bodies and younger Stage 2 narrow-bodies, many of which are now being upgraded with hushkits, which, when installed on the aircraft, bring Stage 2 aircraft into compliance with Federal Aviation Administration (FAA) Stage 3 noise restrictions as discussed in the Industry Update section of Item 7. Older Stage 2 narrow-bodies have shown only marginal signs of recovery since the depressed 1991 to 1994 period. In 1996, several airline accidents have occurred which have also impacted the older Stage 2 market. The Partnership has been forced to adjust its estimates of the residual values realizable from its aircraft, which resulted in an increase in depreciation expense, as discussed in Items 7 and 8. A discussion of the current market condition for the type of aircraft owned by the Partnership follows:
Boeing 737-200 - The Boeing 737-200 aircraft was introduced in 1967 and 150 were delivered from 1967 through 1971. This two-engine, two-pilot aircraft provides operators with 107 to 130 seats, meeting their requirements for economical lift in the 1,100 nautical mile range. Hushkits which bring the Boeing 737-200 aircraft into compliance with FAA Stage 3 noise restrictions, are now available at a cost of approximately $1.5 million per aircraft. Hushkits may not be cost effective on all aircraft due to the age of some of the aircraft and the time required to fully amortize the additional investment. Certain Airworthiness Directives (ADs) applicable to all models of this aircraft have been issued by the FAA to prevent fatigue cracks and control corrosion as discussed in Item 7.
The general partner believes that, in addition to the factors cited above, the deteriorated market for the Partnership's aircraft reflects the airline industry's reaction to the significant expenditures potentially necessary to bring these aircraft into compliance with certain ADs issued by the FAA relating to aging aircraft, corrosion prevention and control and structural inspection and modification as discussed in the Industry Update section of Item 7.
Item 2. Properties
At December 31 1996, PAIF-I owned three commercial jet aircraft, five spare engines and certain inventoried aircraft parts. The Partnership's entire fleet consists of Stage 2 aircraft. Two of the Partnerships Boeing 737-200 aircraft formerly on lease to Viscount were returned to the Partnership in September 1996 and sold in March 1997. One of the Partnership's Boeing 737-200 aircraft formerly on lease to Viscount and subleased to Nations Air Express, Inc.(Nations Air), was returned to the Partnership in February 1997. During 1992, the Partnership transferred three Boeing 737-200 aircraft, formerly on lease to Braniff, to aircraft inventory. In 1993, one additional Boeing 737-200 aircraft, formerly on lease to American Air Lease, was transferred to aircraft inventory. The inventoried aircraft, which are not included in the following table, have been disassembled for sale of their component parts. Two engines from the former Cambodia International aircraft and one engine formerly leased to Viscount are currently leased to CanAir. Two engines formerly on lease to Viscount were returned to the Partnership in May and October 1996. The Partnership has determined that a sale of the remaining aircraft and spare engines on an "as is, where is" basis would maximize the economic return on this equipment to the Partnership.
The following table describes the Partnership's current aircraft portfolio:
Year of Cycles Aircraft Type Serial Number Manufacture As of 10/31/96 (1) ------------- ------------- ----------- ------------------ Boeing 737-200 19606 1968 61,775 Boeing 737-200 (2) 19617 1969 60,330 Boeing 737-200 (2) 20125 1969 62,688
(1) Cycle information as of 12/31/96 was not available.
(2) Aircraft sold in March 1997.
Item 3.
Item 3. Legal Proceedings
Viscount Air Services, Inc. (Viscount) Bankruptcy - As previously reported in the Partnership's 1995 Form 10-K, on January 24, 1996, Viscount filed a petition for protection under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the District of Arizona. On April 12, 1996, GE Capital Aviation Services, Inc. (GECAS), as agent for the Partnership, First Security Bank, National Association (formerly known as First Security Bank of Utah, National Association) (FSB), the owner/trustee under the Partnership's leases with Viscount, certain guarantors of Viscount's indebtedness and others executed that certain Compromise of Claims and Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and Stipulation). Among other things, the Compromise and Stipulation, which was subsequently approved by the Bankruptcy Court, provided that if Viscount failed to meet its monetary obligations, the Partnership would be entitled to immediate possession of the aircraft for which Viscount failed to perform, and Viscount would deliver to GECAS all records related thereto, without further order of the Bankruptcy Court. Pursuant to the Compromise and Stipulation, Viscount, Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc., assumed Viscount's obligations under the finance sale note for the spare engine, and payments began October 31, 1996.
Viscount defaulted on and was unable to cure its September rent obligations. However, Viscount took the position that it was entitled to certain offsets and asserted defenses to the September rent obligations. On September 18, 1996, GECAS (on behalf of the Partnership and other entities) and Viscount entered into a Stipulation and Agreement by which Viscount agreed to voluntarily return all of the Partnership's aircraft and engines, turn over possession of the majority of its aircraft parts inventory, and cooperate with GECAS in the transition of aircraft equipment and maintenance, in exchange for which, upon Bankruptcy Court approval of the Stipulation and Agreement, the Partnership would waive its right to pre- and post-petition claims against Viscount for amounts due and unpaid.
As of September 13 and 18, 1996, Viscount surrendered possession of two of the Partnership's aircraft and two spare engines, and on October 1, 1996, the third aircraft was returned to the Partnership. One of the three aircraft which was in the possession of, and operated by, Nations Air, was returned to the Partnership in February 1997. Shortly after the return of the Partnership's aircraft, Viscount ceased business operations and is now in liquidation under the supervision of a bankruptcy trustee.
The Stipulation and Agreement also provides that the Partnership, certain other Polaris entities, GECAS and FSB shall release any and all claims against Viscount, Viscount's bankruptcy estate, and the property of Viscount's bankruptcy estate, effective upon entry of a final non-appealable court order approving the Stipulation and Agreement. The Bankruptcy Court entered such an order approving the Stipulation and Agreement on October 23, 1996.
As a result of the Stipulation and Agreement, all disputes between the Partnership and Viscount have been resolved and there is no further pending litigation with Viscount. Viscount has ceased operations and is currently considered to be administratively insolvent, meaning that it does not have sufficient funds to fully pay costs and expenses incurred after the commencement of the bankruptcy case, which costs and expenses have priority over general unsecured claims.
One of the Partnership's engines was located on an airframe (the "306 Aircraft") owned by Polaris Aircraft Income Fund II ("Fund II"). The 306 Aircraft was delivered to a maintenance facility in Tucson, Arizona called BAE Aviation, Inc. dba Tucson Aerospace ("TA"). The maintenance and repairs on the 306 Aircraft were partially or inadequately done and Fund II has challenged the amounts charged by TA and its subcontractors, STS Services, Inc. ("STS") and Piping
Design Services, Inc., dba PDS Technical Services ("PDS"). TA, STS and PDS have asserted mechanics liens against the 306 Aircraft. First Security Bank, National Association, the owner trustee of the 306 Aircraft and of the Partnership's engine placed thereon, commenced a lawsuit in the Superior Court of Arizona in Pima County, Case No. C313027, to recover the airframe from TA, STS and PDS and to determine the validity of the alleged liens, which are disputed. Because the Partnership's engine was not physically located on the 306 Aircraft at the time, the Partnership asserts that the alleged mechanic's liens are invalid as to the Partnership's engine. FSB, on behalf of the Partnership, however, may need to file a summary judgement motion requesting the Superior Court to determine that the alleged liens do not extend to the Partnership's engine, if the parties to the lawsuit are unable to reach agreement on this question.
Mercury Air Group v. Aero Costa Rica (ACORI), S.A., et al. - On or about October 9, 1996, an action entitled Mercury Air Group v. Aero Costa Rica (ACORI), S.A., et al. was filed in the Circuit Court, 11th Judicial District for Dade County, Florida. The complaint names Aero Costa Rica (ACORI), S.A., Polaris Holding Company, and First Security Bank, National Association (FSB), as trustee for the Partnership, as defendants. The plaintiff is seeking leave to amend the complaint to add additional defendants. The action was brought by a Florida fuel supplier to enforce a foreclosure lien against an aircraft owned by FSB, as trustee for the Partnership. The lien allegedly arises under a Florida statute on account of unpaid fuel bills incurred at Florida airports when the aircraft, while under lease to Viscount, was operated in subservice to Aero Costa Rica.
Nations Air Express, Inc. v. First Security Bank, National Association, et al. - On or about December 12, 1996, an action entitled Nations Air Express, Inc. v. First Security Bank, National Association, et al. was filed in the Georgia Superior Court for Cobb County, Georgia. The complaint named First Security Bank, National Association (FSB), as trustee for the Partnership, the Partnership, GE Capital Aviation Services, Inc., and Polaris Holding Company as defendants. The action alleged that the defendants fraudulently misled Nations Air Express, Inc. (Nations Air) in connection with a direct lease to Nations Air, and, as a consequence, the defendants were unjustly enriched as a result of certain maintenance payments made to the defendants. Nations Air sought injunctive relief to prevent the defendants from repossessing the aircraft in question, $400,000 in damages, additional damages to be proven at trial and punitive and exemplary damages also to be proven at trial. The action was dismissed with prejudice on February 10, 1997 pursuant to a stipulation, but Nations Air has now moved to set aside the dismissal with prejudice.
First Security Bank, National Association, as Owner Trustee v. Nations Air Express, Inc. - On or about December 20, 1996, First Security Bank, National Association (FSB), as trustee for the Partnership and for Polaris Holding Company (PHC), filed an action against Nations Air Express, Inc. (Nations Air) in the United States District Court for the Northern District of California. This action involves two aircraft owned by FSB, as trustee for the Partnership and PHC, respectively, which were leased to Viscount Air Services, Inc. (Viscount), and subleased by Viscount to Nations Air. The claims arise out of the possession and use of the aircraft by Nations Air following the commencement of Viscount's bankruptcy proceedings. As discussed in connection with Viscount's bankruptcy above, the Partnership's aircraft was returned in February, 1997, but the other aircraft remains in the possession of Nations Air. In this action, FSB is seeking (i) to have Nations Air turn over possession of the aircraft and related records, and (ii) to recover damages for unpaid rent. Nations Air has filed a counterclaim for damages for breach of contract, for unjust enrichment, for tortious interference with prospective economic advantage, and for negligent misrepresentation, all in amounts to be proved at trial.
Markair, Inc. (Markair) Bankruptcy - On June 6, 1992, the Partnership repossessed two Boeing 737-200 aircraft leased to Markair, and formerly leased to Braniff, for Markair's failure to make rental payments when due. Markair commenced reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska, and on June 11, 1992, the Partnership filed a proof of claim in the case to recover damages for past due rent and for Markair's failure to meet return
conditions with respect to the Partnership's aircraft. In August 1993, the Bankruptcy Court approved a plan of reorganization for Markair and a stipulation relating to the Partnership's claims against Markair. The stipulation approved by the Bankruptcy Court allowed the Partnership to retain the security deposits and maintenance reserves previously posted by Markair and also allowed the Partnership an unsecured claim against Markair for $445,000, which was converted to subordinated debentures during 1994. Markair has defaulted on its payment obligations on such debentures. On April 14, 1995, Markair commenced new reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On October 25, 1995, Markair converted its Chapter 11 reorganization proceeding into a proceeding under Chapter 7 of the United States Bankruptcy Code in the same court. The trustee, Key Bank of Washington, is taking steps to protect the interests of the debenture holders, including the Partnership.
Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. On September 26, 1990 the Partnership filed a proof of claim to recover unpaid rent and other damages, and on November 27, 1990, the Partnership filed a proof of administrative claim to recover damages for detention of aircraft, non-compliance with court orders and post-petition use of engines as well as liquidated damages. On July 27, 1992, the Bankruptcy Court approved a stipulation embodying a settlement among the Partnership, the Braniff creditor committees and Braniff in which it was agreed that the Partnership would be allowed an administrative claim in the bankruptcy proceeding of approximately $2,076,923. As the final disposition of the Partnership's claim in the Bankruptcy proceedings, the Partnership was permitted by the Bankruptcy Court to exchange a portion of its unsecured claim for Braniff's right (commonly referred to as a "Stage 2 Base Level right") under the FAA noise regulations to operate nine Stage 2 aircraft and has been allowed a net remaining unsecured claim of $6,923,077 in the proceedings.
Jet Fleet Bankruptcy - In September 1992, Jet Fleet, lessee of one of the Partnership's aircraft, defaulted on its obligations under the lease for the Partnership's aircraft by failing to pay reserve payments and to maintain required insurance. The Partnership repossessed its Aircraft on September 28, 1992 at Sanford Regional Airport, Florida. Thereafter, Jet Fleet filed for bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division. On April 13, 1993, the Partnership filed a proof of claim in the Jet Fleet bankruptcy to recover its damages. The bankrupt estate was subsequently determined to be insolvent. Therefore, no payment of the Partnership's claim can be expected. However, no action on the Partnership's proof of claim has been taken by the Bankruptcy Court.
Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, an action entitled Kepford, et al. v. Prudential Securities, Inc. was filed in the District Court of Harris County, Texas. The complaint names Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Holding Company, Polaris Aircraft Leasing Corporation, the Partnership, Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, General Electric Capital Corporation, Prudential Securities, Inc., Prudential Insurance Company of America and James J. Darr, as defendants. Certain defendants were served with a summons and original petition on or about May 2, 1994. Plaintiffs' original petition alleges that defendants violated the Texas Securities Act, the Texas Deceptive Trade Practices Act, sections 11 and 12 of the Securities Act of 1933 and committed common law fraud, fraud in the inducement, negligent misrepresentation, negligence, breach of fiduciary duty and civil conspiracy by misrepresenting and failing to disclose material facts in connection with the sale of limited partnership units in the Partnership and the other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an award of compensatory damages in an unspecified amount plus interest thereon, and double and treble damages under the Texas Deceptive Trade Practices Act.
Certain defendants, including Polaris Investment Management Corporation and the Partnership, filed a general denial on June 29, 1994 and a motion for summary judgment on June 17, 1994 on the basis that the statute of limitations had expired. On June 29, 1994 and July 14, 1994, respectively, plaintiffs filed
their first amended original petition and second amended original petition, both of which added plaintiffs. On July 18, 1994, plaintiffs filed their response and opposition to defendants' motion for partial summary judgment and also moved for a continuance on the motion for partial summary judgment. On August 11, 1994, after plaintiffs again amended their petition to add numerous plaintiffs, the defendants withdrew their summary judgment motion and motion to stay discovery, without prejudice to refiling these motions at a later date. On January 9, 1997, the trial court issued a scheduling order setting a July 21, 1997 trial date.
Riskind, et al. v. Prudential Securities, Inc., et al. - An action entitled Riskind, et al. v. Prudential Securities, Inc., et al. has been filed in the District Court of the 165 Judicial District, Maverick County, Texas. This action is on behalf of over 3,000 individual investors who purchased units in "various Polaris Aircraft Income Funds," including the Partnership. The Partnership and Polaris Investment Management Corporation received service of plaintiffs' second amended original petition and, on June 13, 1994, filed an original answer containing a general denial.
The second amended original petition names the Partnership, Polaris Investment Management Corporation, Prudential Securities, Inc. and others as defendants and alleges that these defendants violated the Texas Securities Act and the Texas Deceptive Trade Practices Act and committed common law fraud, fraud in the inducement, negligent misrepresentation, negligent breach of fiduciary duty and civil conspiracy by misrepresenting and failing to disclose material facts in connection with the sale of limited partnership units in the Partnership and the other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an award of compensatory damages in an unspecified amount plus interest thereon, and double and treble damages under the Texas Deceptive Trade Practices Act. Kidder, Peabody & Co. was added as an additional defendant by virtue of an Intervenor's Amended Plea in Intervention filed on or about April 7, 1995.
Prudential Securities, Inc. reached a settlement with the plaintiffs. The trial of the claims of one plaintiff, Robert W. Wilson, against Polaris Aircraft Income Funds I-VI, Polaris Investment Management Corporation and various affiliates of Polaris Investment Management Corporation, including General Electric Capital Corporation, was commenced on July 10, 1995. On July 26, 1995, the jury returned a verdict in favor of the defendants on all counts. Subsequent to this verdict, all of the defendants (with the exception of Prudential Securities, Inc., which had previously settled) entered into a settlement with the plaintiffs. On February 26, 1997, the court issued an order notifying the remaining plaintiffs, who did not accept the settlement with the non Prudential defendants, that the action would be dismissed on April 21, 1997 for want of prosecution unless the plaintiffs showed cause why the action should not be dismissed.
Howland, et al. v. Polaris Holding Company, et al. - On or about February 4, 1994, a purported class action entitled Howland, et al. v. Polaris Holding Company, et al. was filed in the United States District Court for the District of Arizona on behalf of investors in Polaris Aircraft Income Funds I-VI. The complaint names each of Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Holding Company, Polaris Aircraft Leasing Corporation, the Partnership, Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, General Electric Capital Corporation, Prudential Securities, Inc., Prudential Securities Group, Inc., Prudential Insurance Company of America, George W. Ball, Robert J. Sherman, James J. Darr, Paul J. Proscia, Frank W. Giordano, William A. Pittman, Joseph H. Quinn, Joe W. Defur, James M. Kelso and Brian J. Martin, as defendants. The complaint alleges that defendants violated federal RICO statutes, committed negligent misrepresentations, and breached their fiduciary duties by misrepresenting and failing to disclose material facts in connection with the sale of limited partnership units in the Partnership and the other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an accounting of all monies invested by plaintiffs and the class and the uses made thereof by defendants, an award of compensatory, punitive and treble damages in unspecified amounts plus interest thereon, rescission, attorneys' fees and costs. On August 3, 1994, the action
was transferred to the multi-district litigation in the Southern District of New York entitled In re Prudential Securities Limited Partnerships Litigation, discussed in Part III, Item 10 below.
Adams, et al. v. Prudential Securities, Inc., et al. On or about February 13, 1995, an action entitled Adams, et al. v. Prudential Securities, Inc. et al. was filed in the Court of Common Pleas, Stark County, Ohio. The action names Prudential Securities, Inc., Prudential Insurance Company of America, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Aircraft Leasing Corporation, Polaris Holding Company, General Electric Capital Corporation, the Partnership, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, and James Darr as defendants. The complaint alleges that defendants committed common law fraud, fraud in the inducement, negligent misrepresentation, negligence, breach of fiduciary duty and civil conspiracy by misrepresenting and failing to disclose material facts in connection with the sale of limited partnership units in the Partnership and the other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, rescission of their investments in the Partnership and the other Polaris Aircraft Income Funds, an award of compensatory damages in an unspecified amount plus interest thereon, and punitive damages in an unspecified amount. On or about March 15, 1995, this action was removed to the United States District Court for the Northern District of Ohio, Eastern Division. Subsequently, the Judicial Panel transferred this action to the Multi-District Litigation filed in the united States District Court for the Southern District of New York, which is described in Item 10 of Part III below.
Other Proceedings - Part III, Item 10 discusses certain other actions which have been filed against the general partner in connection with certain public offerings, including that of the Partnership. With the exception of Novak, et al v. Polaris Holding Company, et al, (which has been dismissed, as discussed in Item 10) where the Partnership was named as a defendant for procedural purposes, the Partnership is not a party to these actions.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
a) Polaris Aircraft Income Fund I's (PAIF-I or the Partnership) limited partnership interests (Units) are not publicly traded. Currently there is no formal market for PAIF-I's Units and it is unlikely that any market will develop.
b ) Number of Security Holders:
Number of Record Holders Title of Class as of December 31, 1996 ------------------ --------------------------------
Limited Partnership Interest: 6,532
General Partnership Interest: 1
c) Dividends:
Distributions of cash from operations commenced in 1987. The Partnership made cash distributions to limited partners of $2,530,935 and $1,434,196, or $15.00 and $8.50 per limited partnership unit during 1996 and 1995, respectively.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
At December 31, 1996, Polaris Aircraft Income Fund I (the Partnership) owned a portfolio of three used Boeing 737-200 commercial jet aircraft, five spare engines and certain inventoried aircraft parts out of its original portfolio of eleven aircraft. The three aircraft were returned to the Partnership by Viscount Air Services, Inc. (Viscount), as discussed below. One of these aircraft which was in the possession of, and operated by Nations Air Express, Inc. (Nations Air), its former sub-lessee, was returned to the Partnership in February 1997. Two aircraft returned by Viscount were sold in March 1997 and the aircraft returned by Nations Air is currently being remarketed for sale. The Partnership leased three spare engines to CanAir Cargo Ltd. (CanAir). In addition, the Partnership transferred four aircraft to aircraft inventory during 1992 and 1993. These aircraft have been disassembled for sale of their component parts. Two engines formerly leased to Viscount, were returned to the Partnership in May and October 1996 and are currently being remarketed for sale. One additional engine from these aircraft was sold to Viscount during 1995. Viscounts affiliates, Rock-It Cargo USA, Inc. (Rock-It Cargo) and Riverhorse Investments, Inc. (Riverhorse Investments) assumed the note for this engine sale in October 1996. The Partnership has sold three aircraft and one airframe from its original aircraft portfolio: a Boeing 737-200 Convertible Freighter in 1990, a McDonnell Douglas DC-9-10 in 1992, a Boeing 737-200 in 1993 and the airframe from a Boeing 737-200 aircraft in April 1995.
Remarketing Update
Sub-lease of Boeing 737-200 - Viscount entered into a sub-lease agreement for one of the Partnership's Boeing 737-200 aircraft with Nations Air for a term of one year through February 1996. The sublease had been extended through February 1998. Rent and maintenance reserve payments due to Viscount from Nations Air were paid directly to the Partnership and were applied against payments due the Partnership from Viscount. Nations Air was past due on certain note and lease payments due the Partnership at December 31, 1996. This aircraft was returned by Nations Air in February 1997 and is currently being marketed for sale on an "as is, where is" basis.
Viscount - As discussed in Note 7 to the financial statements, in September and October 1996, Viscount returned or surrendered possession of the Partnership's three aircraft and two spare engines pursuant to the Stipulation and Agreement. The Partnership estimates that a sale of the remaining aircraft and spare engines on an "as is, where is" basis would maximize the economic return on this equipment to the Partnership. As a result, the Partnership is currently marketing this equipment for sale.
Sale of two Boeing 737-200s - In January 1997, the Partnership received a deposit of $162,000 toward the sales price of $1,620,000 for the sale of two Boeing 737-200s formerly leased to Viscount. These aircraft were returned to the Partnership in September and October 1996 pursuant to the Stipulation and Agreement as further discussed in Note 7. The Partnership received the remaining $1,458,000 in March 1997.
Partnership Operations
The Partnership recorded a net loss of $591,415, or $4.97 per limited partnership unit for the year ended December 31, 1996, compared to net income of $446,293, or $1.77 per limited partnership unit for the year ended December 31, 1995 and net income of $829,960, or $4.07 per limited partnership unit for the year ended December 31, 1994. The decline in operating results in 1995, as compared to 1994, was the result of a provision for credit losses of $956,015 recorded for certain rent and loan receivables from Viscount combined with higher operating expenses and partially offset by lower depreciation expense in 1995. The decline in operating results in 1996, as compared to 1995, is the
result of increased depreciation expense for declines in the estimated realizable values of the Partnership's aircraft, as discussed in the Industry Update section, as well as lower rental and other revenues.
During 1996 and 1995, the Partnership recorded allowances for credit losses of $1,055,050 and $956,015, respectively for outstanding receivables from Viscount and Nations Air. The Stipulation and Agreement provides that, upon entry of a final non-appealable court order approving it, the Partnership would waive its pre- and post-petition claims against Viscount for all amounts due and unpaid. As a result, the Partnership considers all receivables from Viscount to be uncollectible and has written-off, during the third quarter of 1996, all notes, rents and interest receivable balances from Viscount. Payments received by the Partnership from the sale of the spare aircraft parts (as discussed above), if any, will be recorded as revenue when received.
Depreciation adjustments in 1996, 1995 and 1994 were approximately $400,000, $115,000 and $260,000, respectively, for declines in the estimated realizable values of the Partnership's aircraft and aircraft inventory, as discussed later in the Industry Update section. In 1996, the Partnership concluded that a sale of the returned aircraft and spare engines on an "as is, where is" basis would maximize the economic return on this equipment to the Partnership. In determining the 1996 impairment loss, the Partnership estimated the fair value of the aircraft and equipment based on the estimated sale price less cost to sell, and then deducted this amount from the carrying value of the aircraft. Two Boeing 737-200s were depreciated to their estimated residual value in June 1994 and November 1994, respectively.
In 1994, all lessees performed as required by their leases or restructuring agreements, and operating expenses were reduced. In 1995, the Partnership agreed to share in the cost of certain heavy maintenance work performed on the Boeing 737-200 aircraft sub-leased to Nations Air by Viscount. The Partnership recognized approximately $574,000 of this heavy maintenance work as operating expense in 1995. The Partnership recorded legal expenses of approximately $414,000 related to the Viscount defaults and Chapter 11 bankruptcy filing. These legal costs are included in operating expense in the Partnership's 1996 statement of operations.
Liquidity and Cash Distributions
Liquidity - As discussed in Note 7 to the financial statements, the Viscount Stipulation and Agreement specifies, among other things, that the Partnership waive its pre- and post-petition claims against Viscount for amounts due and unpaid. As a result, the Partnership recorded an additional allowance for credit losses of $643,600 in 1996, representing Viscount's outstanding balance of rents, the line of credit and accrued interest. In addition, the Partnership considers all receivables from Viscount to be uncollectible and has written-off, during the third quarter of 1996, all notes, rents and interest receivable balances from Viscount. Viscounts affiliates, Rock-It Cargo and Riverhorse Investments, assumed the engine finance sale note from Viscount and agreed to pay the note balance, including past due interest, in 45 installments beginning on October 31, 1996.
As discussed in Notes 7 and 8 to the financial statements, Nations Air was delinquent on its maintenance cost-sharing payments to the Partnership. In addition, under the prior Nations Air sublease with Viscount, Nations Air paid rent and maintenance reserve payments directly to the Partnership. These payments continued through September 1996 and Nations Air has not paid the rent and maintenance reserve payments since October 1996. Nations Air returned the aircraft to the Partnership in February 1997. The Partnership is currently in litigation with Nations Air regarding these payment defaults. As a result, the Partnership has recorded an allowance for credit losses of $411,450, representing the outstanding amounts due from Nations Air at December 31, 1996.
The Partnership receives maintenance reserve payments from certain 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 or engines, as specified in the leases. Maintenance reserve balances remaining at the termination of the lease, if any, may be used by the Partnership to offset future maintenance expenses or recognized as revenue. The net maintenance reserves balances aggregate $3,217,368 as of December 31, 1996.
The Partnership received payments of approximately $478,000 in 1996 from the sale of parts from the four disassembled aircraft. The remaining net book value of the aircraft inventory was fully recovered during 1995. Payments of approximately $604,000 and $912,000 had been received during 1995 and 1994, respectively, from the sales of parts from the four disassembled aircraft.
The Partnership's cash reserve balance is being retained to cover the costs that the Partnership has incurred as a result of the Viscount default and bankruptcy, including potential aircraft maintenance, remarketing and transition costs.
Cash Distributions - Cash distributions to limited partners during 1996, 1995 and 1994 were $2,530,935, $1,434,196 and $1,349,832, respectively. Cash distributions per limited partnership unit were $15.00, $8.50 and $8.00 during 1996, 1995 and 1994, respectively. The timing and amount of future cash distributions to partners are not yet known and will depend upon the Partnership's future cash requirements, including the costs that may be incurred to remarket the former Viscount aircraft and spare engines and the receipt of rental payments from CanAir.
Viscount Restructuring Agreement and Default
On January 24, 1996, Viscount filed a petition for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First Security Bank, National Association (formerly known as First Security Bank of Utah, National Association) (FSB), the owner/trustee under the Partnership's leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's indebtedness and others executed in April 1996 a Compromise of Claims and Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and Stipulation), which was subsequently approved by the Bankruptcy Court. Among other things, the Compromise and Stipulation provided that in the event that Viscount failed to promptly and timely perform its monetary obligations under the Leases and the Compromise and Stipulation, without further order of the Bankruptcy Court, GECAS would be entitled to immediate possession of the aircraft for which Viscount failed to perform and Viscount would deliver such aircraft and all records related thereto to GECAS.
Viscount defaulted on and was unable to cure its September rent obligations. However, Viscount took the position that it was entitled to certain offsets and asserted defenses to the September rent obligations. On September 18, 1996, GECAS (on behalf of the Partnership and other entities) and Viscount entered into a Stipulation and Agreement by which Viscount agreed to voluntarily return all of the Partnership's aircraft and engines, turn over possession of the majority of its aircraft parts inventory, and cooperate with GECAS in the transition of aircraft equipment and maintenance, in exchange for which, upon Bankruptcy Court approval of the Stipulation and Agreement, the Partnership would waive its right to pre- and post-petition claims against Viscount for amounts due and unpaid.
The Stipulation and Agreement provided that upon the return and surrender of possession of the Partnership's three airframes and eight engines (two of which were spare engines), Viscount's rights and interests therein would terminate. As of September 18, 1996, Viscount had returned (or surrendered possession of) two of the Partnership's airframes and seven of the Partnership's engines. One of
the returned airframes (together with one installed engine) was in the possession of and being operated by Nations Air. Six of the seven returned engines are in the possession of certain maintenance facilities and will require maintenance work in order to be made operable. Viscount returned the Partnership's remaining airframe and one installed engine on October 1, 1996. Nations Air returned this airframe and one installed engine to the Partnership in February 1997.
GECAS, on behalf of the Polaris Entities, is evaluating the spare parts inventory to which Viscount relinquished possession in order to determine its condition and value, the portion allocable to the Partnership, and the Partnership's alternatives for the use and/or disposition of such parts. A significant portion of the spare parts inventory is currently in the possession of third party maintenance and repair facilities with whom GECAS anticipates that it will need to negotiate for the repair and/or return of these parts.
The Stipulation and Agreement also provided that the Polaris Entities, GECAS and FSB would release any and all claims against Viscount, Viscount's bankruptcy estate, and the property of Viscount's bankruptcy estate, effective upon entry of a final non-appealable court order approving the Stipulation and Agreement. The Bankruptcy Court entered such an order approving the Stipulation and Agreement on October 23, 1996.
As discussed in Note 4, Viscount's affiliates, Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc., assumed Viscount's engine finance sale note to the Partnership as provided under the Compromise and Stipulation.
During 1996 and 1995, the Partnership recorded allowances for credit losses of $1,055,050 and $956,015, respectively for outstanding receivables from Viscount and Nations Air. The Stipulation and Agreement provides that, upon entry of a final non-appealable court order approving it, the Partnership would waive its pre- and post-petition claims against Viscount for all amounts due and unpaid. As a result, the Partnership considers all receivables from Viscount to be uncollectible and has written-off, during the third quarter of 1996, all notes, rents and interest receivable balances from Viscount. Payments received by the Partnership from the sale of the spare aircraft parts (as discussed above), if any, will be recorded as revenue when received.
The Partnership evaluated the condition of the returned equipment and estimated that very substantial maintenance and refurbishment costs aggregating approximately $3.2 million would be required if the Partnership decided to re-lease the returned aircraft and spare engines. Alternatively, if the Partnership decided to sell the returned aircraft and spare engines, such sale could be made on an "as is, where is" basis, without the Partnership incurring substantial maintenance costs. Based on its evaluation, the Partnership concluded that a sale of the remaining aircraft and spare engines on an "as is, where is" basis would maximize the economic return on this equipment to the Partnership.
Viscount's failure to perform its financial obligations to the Partnership has had a material adverse effect on the Partnership's financial position. As a result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership has incurred legal costs of approximately $414,000, which are reflected in operating expense in the Partnership's 1996 statement of operations.
Nations Air Default and Litigation
On or about December 20, 1996, First Security Bank, National Association (FSB), as trustee for the Partnership, filed an action against Nations Air Express, Inc. (Nations Air) in the United States District Court for the Northern District of California. This action involves aircraft owned by FSB, as trustee for the Partnership which were leased to Viscount Air Services, Inc. (Viscount), and
subleased by Viscount to Nations Air. The claims arise out of the possession and use of the aircraft by Nations Air following the commencement of Viscount's bankruptcy proceedings. As discussed in connection with Viscount's bankruptcy in Note 7, the Partnership's aircraft was returned in February 1997. In this action FSB is seeking to recover damages for unpaid rent and maintenance, and interest on such unpaid amounts, in the amount of approximately $1,248,000.
Claims Related to Lessee Defaults
Receipt of American Air Lease, Inc. (American Air Lease) Claim - As discussed in Item 3, the Partnership filed suit in 1991 seeking damages for unpaid rent and other defaults against lessee American Air Lease and guarantor Americom Leasing Group, Inc. (Americom). In November 1994, the Partnership received $91,452 representing settlement of Americom's and American Air Lease's obligation to pay the original settlement judgement. The Partnership was also entitled to retain security deposits in the amount of $74,075. Both amounts were recognized as revenue in claims related to lessee defaults in the 1994 statement of operations (Item 8). The Partnership settled its claim against the insurers of American Air Lease for payment of insurance proceeds of $400,000. The Partnership received the $400,000 in July 1995 and recognized the full amount as revenue in claims related to lessee defaults in the 1995 statement of operations.
Markair, Inc. (Markair) Claim - As discussed in Item 3, the Partnership terminated the leases and repossessed the two aircraft in June 1992 and Markair filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The Partnership filed a proof of claim in the case to recover damages for past-due rent and for Markair's failure to meet return conditions with respect to the Partnership's aircraft. In August 1993, the Bankruptcy Court approved a plan of reorganization for Markair and a stipulation allows the Partnership to retain the security deposits and maintenance reserves and an unsecured claim against Markair for $445,000 which was converted to 10% subordinated debentures during 1994. The security deposits and maintenance reserves, which were held by the Partnership under the leases with Markair, totaled $748,951, of which $47,877 was applied during 1993 to rent owed the Partnership by Markair. The balance of $701,074 was recognized as revenue in claims related to lessee defaults in the 1993 statement of operations. During 1994, the Partnership earned interest on the debentures of $33,284 and received a nominal principal payment of $5,459. The Partnership recognized the interest and principal payment as revenue in claims related to lessee defaults in the 1994 statement of operations (Item 8). During 1995, the Partnership received an additional principal payment and a partial interest payment aggregating $9,698, which was recorded as revenue in claims related to lessee defaults in the 1995 statement of operations. Markair has defaulted on its payment obligations on the debentures, and the trustee, Key Bank of Washington, is taking steps to protect the interests of the debenture holders, including the Partnership.
Industry Update
Maintenance of Aging Aircraft - The process of aircraft maintenance begins at the aircraft design stage. For aircraft operating under Federal Aviation Administration (FAA) regulations, a review board consisting of representatives of the manufacturer, FAA representatives and operating airline representatives is responsible for specifying the aircraft's initial maintenance program. The general partner understands that this program is constantly reviewed and modified throughout the aircraft's operational life.
Since 1988, the FAA, working with the aircraft manufacturers and operators, has issued a series of Airworthiness Directives (ADs) which mandate that operators conduct more intensive inspections, primarily of the aircraft fuselages. The results of these mandatory inspections may result in the need for repairs or structural modifications that may not have been required under pre-existing maintenance programs.
In addition, an AD adopted in 1990 requires replacement or modification of certain structural items on a specific timetable. These structural items were formerly subject to periodic inspection, with replacement when necessary. The FAA estimates the cost of compliance with this AD to be approximately $900,000 per Boeing 737 aircraft, if none of the required work had been done previously. The FAA also issued several ADs in 1993 updating inspection and modification requirements for Boeing 737 aircraft. The FAA estimates the cost of these requirements to be approximately $90,000 per aircraft. In general, the new maintenance requirements must be completed by the later of March 1994, or 75,000 cycles for each Boeing 737. The extent of modifications required to an aircraft varies according to the level of incorporation of design improvements at manufacture.
In December 1990, the FAA adopted another AD intended to mitigate corrosion of structural components, which would require repeated inspections from 5 years of age throughout the life of an aircraft, with replacement of corroded components as needed. Integration of the new inspections into each aircraft operator's maintenance program was required by December 31, 1991 on Boeing aircraft.
In 1996, the manufacturer proposed certain Boeing 737 rudder system product improvements of which some will be mandated by the FAA. Airworthiness Directives issued in the last quarter of 1996 and the first quarter of 1997 on this subject have not been of significant maintenance cost impact. The cost of compliance with future FAA maintenance requirements not yet issued is not determinable at this time.
Although the Partnership's existing leases require the lessees to maintain the Partnership's aircraft in accordance with an FAA-approved maintenance program during the lease term, all three of the aircraft which remained in the Partnership's portfolio at December 31, 1996 were returned to the Partnership as a result of a lease default and were not in compliance with all return conditions required by the lease. As discussed in "Viscount Restructuring Agreement and Default", the Partnership determined that a sale of such aircraft on an "as is, where is" basis would maximize the economic return on this aircraft to the Partnership.
Aircraft Noise - Another issue which has affected the airline industry is that of aircraft noise levels. The FAA has categorized aircraft according to their noise levels. Stage 1 aircraft, which have the highest noise level, are no longer allowed to operate from civil airports in the United States. Stage 2 aircraft meet current FAA requirements, subject to the phase-out rules discussed below. Stage 3 aircraft are the most quiet and is the standard for all new aircraft.
On September 24, 1991, the FAA issued final rules on the phase-out of Stage 2 aircraft by the end of this decade. The key features of the rule include:
- Compliance can be accomplished through a gradual process of phase-in or phase-out (see below) on each of three interim compliance dates: December 31, 1994, 1996 and 1998. All Stage 2 aircraft must be phased out of operations in the contiguous United States by December 31, 1999, with waivers available in certain specific cases to December 31, 2003.
- All operators have the option of achieving compliance through a gradual phase-out of Stage 2 aircraft (i.e., eliminate 25% of its Stage 2 fleet on each of the compliance dates noted above), or a gradual phase-in of Stage 3 aircraft (i.e., 55%, 65% and 75% of an operator's fleet must consist of Stage 3 aircraft by the respective interim compliance dates noted above).
The federal rule does not prohibit local airports from issuing more stringent phase-out rules. In fact, several local airports have adopted more stringent noise requirements which restrict the operation of Stage 2 and certain Stage 3 aircraft.
Other countries have also adopted noise policies. The European Union (EU) adopted a non-addition rule in 1989, which directed each member country to pass the necessary legislation to prohibit airlines from adding Stage 2 aircraft to their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the year 2002. The International Civil Aviation Organization has also endorsed the phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.
At December 31, 1996, the Partnership's entire fleet consisted of three Stage 2 aircraft. Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3 requirements, were available for the Partnership's aircraft. However, while technically feasible, hushkits were not judged by the Partnership to be cost effective due to the age and maintenance condition of the aircraft and the time required to fully amortize the additional investment.
Implementation of the Stage 3 standards has adversely affected the value of Stage 2 aircraft, as these aircraft will require eventual modification to be operated in the U.S. or other countries with Stage 3 standards after the applicable dates.
Demand for Aircraft - Industry-wide, approximately 280 commercial jet aircraft were available for sale or lease at December 31, 1996, approximately 195 less than a year ago, and at under 2.5% of the total available jet aircraft fleet, this is the lowest level of availability since 1988. From 1991 to 1994, depressed demand for travel limited airline expansion plans, with new aircraft orders and scheduled deliveries being canceled or substantially deferred. As profitability declined, many airlines took action to downsize or liquidate assets and some airlines were forced to file for bankruptcy protection. Following three years of good traffic growth accompanied by rising yields, this trend is reversing with many airlines reporting record profits. As a result of this improving trend, just over 1200 new jet aircraft were ordered in 1996, making this the second highest ever order year in the history of the industry. To date, this strong recovery has mainly benefited Stage 3 narrow-bodies and younger Stage 2 narrow-bodies, many of which are now being upgraded with hushkits, whereas older Stage 2 narrow-bodies have shown only marginal signs of recovery since the 1991 to 1994 period.
The general partner believes that, in addition to the factors cited above, the deteriorated market for the Partnership's aircraft reflects the airline industry's reaction to the significant expenditures potentially necessary to bring these aircraft into compliance with certain ADs issued by the FAA relating to aging aircraft, corrosion prevention and control and structural inspection and modification as previously discussed.
Effects on the Partnership's Aircraft - The Partnership periodically reviews the estimated realizability of the residual values at the projected end of each aircraft's economic life based on estimated residual values obtained from independent parties which provide current and future estimated aircraft values by aircraft type. 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.
In 1996, the Partnership concluded that a sale of the returned aircraft and spare engines on an "as is, where is" basis would maximize the economic return on this equipment to the Partnership. Previously, the aircraft were considered to be held and used by the Partnership, pursuant to SFAS 121. In determining the impairment loss, the Partnership estimated the fair value of the aircraft and equipment based on the estimated sale price less cost to sell, and then deducted this amount from the carrying value of the aircraft.
If the projected net cash flow for each aircraft (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) is less than the carrying value of the aircraft, the Partnership recognizes the deficiency currently as increased depreciation expense. The Partnership recognized downward adjustments of $400,000, $115,000 and $260,000,
or $2.35, $0.67 and $1.53 per limited Partnership unit, in 1996, 1995 and 1994, respectively, to the book value for certain of its aircraft and aircraft inventory, as a result of declining estimates in their residual values.
Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the statement provides that the Partnership should estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the projected net undiscounted cash flow for each aircraft (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) is less than the carrying value of the aircraft, an impairment loss is recognized. Pursuant to the statement, measurement of an impairment loss for long-lived assets will be based on the "fair value" of the asset as defined in the statement.
SFAS No. 121 states that the fair value of an asset is the amount at which the asset could be bought or sold in a current transaction between willing parties, i.e., other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and will be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value will be based on the best information available in the circumstances. Pursuant to the statement, the estimate of fair value will consider prices for similar assets and the results of valuation techniques to the extent available in the circumstances. Examples of valuation techniques include the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis.
The Partnership periodically reviews its aircraft for impairment in accordance with SFAS No. 121. Using an estimate of the fair value of the Partnership's aircraft to measure impairment may result in greater write-downs than would be recognized under the accounting method previously applied by the Partnership. The Partnership uses information obtained from third party valuation services in arriving at its estimate of fair value for purposes of determining residual values. The Partnership will use similar information, plus available information and estimates related to the Partnership's aircraft, to determine an estimate of fair value to measure impairment as required by the statement. The estimates of fair value can vary dramatically depending on the condition of the specific aircraft and the actual marketplace conditions at the time of the actual disposition of the asset. If assets are deemed impaired, there could be substantial write-downs in the future.
Item 8.
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND I
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH
AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Polaris Aircraft Income Fund I:
We have audited the accompanying balance sheets of Polaris Aircraft Income Fund I (a California limited partnership) as of December 31, 1996 and 1995, and the related statements of operations, changes in partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the general partner. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the general partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Polaris Aircraft Income Fund I as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California, January 31, 1997
POLARIS AIRCRAFT INCOME FUND I
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- ASSETS:
CASH AND CASH EQUIVALENTS $ 10,065,652 $ 9,807,315
RENT AND OTHER RECEIVABLES, net of allowance for credit losses of $233,913 in 1996 and $811,131 in 1995 18,816 32,863
NOTES RECEIVABLE, net of allowance for credit losses of $177,537 in 1996 and $144,884 in 1995 418,145 1,040,505
AIRCRAFT, net of accumulated depreciation of $20,823,462 in 1996 and $19,166,733 in 1995 3,751,387 5,408,116 ------------ ------------
$ 14,254,000 $ 16,288,799 ============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 77,676 $ 51,757
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 464,603 98,410
SECURITY DEPOSITS 70,925 145,925
MAINTENANCE RESERVES 3,217,368 2,165,714 ------------ ------------
Total Liabilities 3,830,572 2,461,806 ------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (624,341) (590,280) Limited Partners, 168,729 units issued and outstanding 11,047,769 14,417,273 ------------ ------------
Total Partners' Capital 10,423,428 13,826,993 ------------ ------------
$ 14,254,000 $ 16,288,799 ============ ============
The accompanying notes are an integral part of these statements.
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- REVENUES: Rent from operating leases $ 1,763,400 $ 2,073,250 $ 1,765,947 Gain on sale of aircraft inventory 477,832 558 -- Claims related to lessee defaults -- 409,698 815,888 Gain on sale of equipment -- 17,849 -- Interest and other 539,980 694,680 499,380 ----------- ----------- -----------
Total Revenues 2,781,212 3,196,035 3,081,215 ----------- ----------- -----------
EXPENSES: Depreciation 1,656,729 896,176 1,837,584 Management fees to general partner 63,337 63,294 84,066 Provision for credit losses 1,055,050 956,015 -- Operating 425,146 650,685 164,557 Administration and other 172,365 183,572 165,048 ----------- ----------- -----------
Total Expenses 3,372,627 2,749,742 2,251,255 ----------- ----------- -----------
NET INCOME (LOSS) $ (591,415) $ 446,293 $ 829,960 =========== =========== ===========
NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 247,154 $ 147,868 $ 143,269 =========== =========== ===========
NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS $ (838,569) $ 298,425 $ 686,691 =========== =========== ===========
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ (4.97) $ 1.77 $ 4.07 =========== =========== ===========
The accompanying notes are an integral part of these statements.
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited Partner Partners Total ------- -------- -----
Balance, December 31, 1993 $ (572,081) $ 16,216,185 $ 15,644,104
Net income 143,269 686,691 829,960
Cash distributions to partners (149,981) (1,349,832) (1,499,813) ------------ ------------ ------------
Balance, December 31, 1994 (578,793) 15,553,044 14,974,251
Net income 147,868 298,425 446,293
Cash distributions to partners (159,355) (1,434,196) (1,593,551) ------------ ------------ ------------
Balance, December 31, 1995 (590,280) 14,417,273 13,826,993
Net income (loss) 247,154 (838,569) (591,415)
Cash distributions to partners (281,215) (2,530,935) (2,812,150) ------------ ------------ ------------
Balance, December 31, 1996 $ (624,341) $ 11,047,769 $ 10,423,428 ============ ============ ============
The accompanying notes are an integral part of these statements.
POLARIS AIRCRAFT INCOME FUND I
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
1. Accounting Principles and Policies
Accounting Method - Polaris Aircraft Income Fund I (PAIF-I or the Partnership), a California limited partnership, maintains its accounting records, prepares its financial statements and files its tax returns on the accrual basis of accounting. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates with regard to these financial statements are related to the projected cash flows analysis in determining the fair value of assets.
Cash and Cash Equivalents - This includes deposits at banks and investments in money market funds. Cash and Cash Equivalents are stated at cost, which approximates fair value.
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 12 years. Depreciation in the year of acquisition was calculated based upon the number of days that the aircraft were in service.
The Partnership periodically reviews the estimated realizability of the residual values at the projected end of each aircraft's economic life based on estimated residual values obtained from independent parties which provide current and future estimated aircraft values by aircraft type. For any downward adjustment in estimated residual value or decrease in the projected remaining economic life, the depreciation expense over the projected remaining economic life of the aircraft is increased.
If the projected net cash flow for each aircraft (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) is less than the carrying value of the aircraft, an impairment loss is recognized. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 121, as discussed in Note 3, measurement of an impairment loss will be based on the "fair value" of the asset as defined in the statement.
Capitalized Costs - Aircraft modification and maintenance costs which are determined to increase the value or extend the useful life of the aircraft are capitalized and amortized using the straight-line method over the estimated useful life of the improvement. These costs are also subject to periodic evaluation as discussed above.
Aircraft Inventory - Proceeds from sales had been applied against inventory until the book value was fully recovered. The remaining book value of the inventory was recovered in 1995. Proceeds in excess of the inventory net book value are recorded as revenue when received.
Operating Leases - Certain of the aircraft leases are accounted for as operating leases. Operating lease revenues are recognized in equal installments over the terms of the leases.
Maintenance Reserves - The Partnership receives maintenance reserve payments from certain of its lessees that may be reimbursed to the lessee or applied against certain costs incurred by the Partnership or lessee for maintenance work performed on the Partnership's aircraft or engines, as specified in the leases. Maintenance reserve payments are recognized when received and balances remaining at the termination of the lease, if any, may be used by the Partnership to offset future maintenance expenses or recognized as revenue.
Operating Expenses - Operating expenses include costs incurred to maintain, insure, lease and sell the Partnership's aircraft, including costs related to lessee defaults and costs of disassembling aircraft inventory.
Net Income (Loss) Per Limited Partnership Unit - Net income (loss) per limited partnership unit is based on the limited partners' share of net income (loss), and the number of units outstanding for the years ended December 31, 1996, 1995 and 1994.
Income Taxes - The Partnership files federal and state information income tax returns only. Taxable income or loss is reportable by the individual partners.
Receivables - The Partnership has recorded an allowance for credit losses for certain impaired note and rent receivables as a result of uncertainties regarding their collection as discussed in Note 7. The Partnership recognizes revenue on impaired notes and receivables only as payments are received.
1996 1995 ---- ----
Allowance for credit losses, beginning of year $ (956,015) $ -- Provision for credit losses (1,055,050) (956,015) Write-downs 1,585,362 -- Collections 14,253 -- ----------- ----------- Allowance for credit losses, end of year $ (411,450) $ (956,015) =========== ===========
The fair value of the notes receivable is estimated by discounting future estimated cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.
2. Organization and the Partnership
The Partnership was formed on June 27, 1984 for the purpose of acquiring and leasing aircraft. It will terminate no later than December 2010. Upon organization, both the general partner and the initial limited partner contributed $500. The Partnership recognized no profits or losses during the period ended December 31, 1984. The offering of limited partnership units terminated on December 31, 1985, at which time the Partnership had sold 168,729 units of $500, representing $84,364,500. All unit holders were admitted to the Partnership on or before January 1, 1986.
Polaris Investment Management Corporation (PIMC), the sole general partner of the Partnership, supervises the day-to-day operations of the Partnership. PIMC is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC). Polaris Holding Company (PHC) is the parent company of PALC. General Electric Capital Corporation (GE Capital), an affiliate of General Electric Company, owns 100% of PHC's outstanding common stock. PIMC has entered into a services agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc. (GECAS). Allocations to related parties are described in Note 9.
3. Aircraft
At December 31, 1996, the Partnership owned three aircraft, five spare engines and certain inventoried aircraft parts from its original portfolio of eleven used commercial jet aircraft, which were acquired and leased or sold as discussed below. All aircraft acquired from an affiliate were purchased within one year of the affiliate's acquisition at the affiliate's original price paid. The aircraft leases are net operating leases, requiring the lessees to pay all operating expenses associated with the aircraft during the lease term. In addition, the leases require the lessees to comply with Airworthiness Directives (ADs) which have been or may be issued by the Federal Aviation Administration (FAA) and require compliance during the lease term. In addition to basic rent, the lessees are generally required to pay supplemental amounts based on flight hours or cycles into a maintenance reserve account, to be used for heavy maintenance of the engines or airframe. The leases generally state a minimum acceptable return condition for which the lessee is liable under the terms of the lease agreement. In the event of a lessee default, these return conditions are not likely to be met.
The following table describes the Partnership's aircraft portfolio at December 31, 1996 in greater detail:
Year of Aircraft Type Serial Number Manufacture - ------------- ------------- ----------- Boeing 737-200 19606 1968 Boeing 737-200 19617 1969 Boeing 737-200 20125 1969
One Boeing 737-200 Convertible Freighter - This aircraft was acquired for $7,613,333 in 1985 and leased to Aloha Airlines, Inc. through October 1990. The aircraft was then sold to Transport Aerien Transregional S.A. in 1990.
One McDonnell Douglas DC-9-10 - This aircraft was purchased for $4,400,000 in 1986 and leased to Hawaiian Airlines, Inc. (Hawaiian) until Hawaiian defaulted on its lease in November 1990. In 1992, the Partnership entered into an agreement with American International Airways, Inc. (American International) for the installment sale of this aircraft. American International paid to the Partnership the remaining balance of the note in November 1994.
Nine Boeing 737-200 - These aircraft were purchased for $60,367,500 in 1986 and leased to Western Airlines, Inc. (Western). In 1987, Delta Airlines, Inc. acquired Western and assumed all obligations of Western through the expiration of the aircraft leases with the Partnership. The aircraft were then leased to Braniff, Inc. (Braniff) until 1989, when Braniff filed a petition under Chapter 11 of the United States Bankruptcy Code and returned the aircraft to the Partnership (Note 5).
In 1992, three of the aircraft were transferred to aircraft inventory and have been disassembled for sale of their component parts (Note 6). One engine from these aircraft was leased to Viscount through a joint venture with Polaris Aircraft Income Fund II from April 1993 through November 1997. This engine was returned to the Partnership in September 1996 as discussed in Note 7. Two additional engines from these aircraft were subsequently transferred from aircraft inventory in 1994. The Partnership leased these two engines to Viscount for 52 days. Rental revenue of $27,260 was recognized during 1994. One of these engines was subsequently leased to CanAir Cargo Ltd. (CanAir) as discussed below. The other engine was subsequently re-leased to Viscount for five months beginning in December 1994 at a rental rate of $7,500 per month. The Partnership re-leased this engine to Viscount for one year beginning in June 1995 at the same rental rate.
One aircraft was leased to American Air Lease, Inc. (American Air Lease) from February 1990 until the lessee's default in June 1991 (Note 5). The aircraft was transferred to aircraft inventory in 1993 and has been disassembled for sale of its component parts (Note 6).
One aircraft was leased to America West Airlines, Inc. from August 1990 until June 1991. The aircraft was then leased to Viscount at 56% of the prior rate from February 1992 until September 1997. The aircraft was returned to the Partnership in September 1996 as discussed in Note 7.
One aircraft was leased to Viscount from April 1992 through September 1997. This aircraft was returned to the Partnership in September 1996 as discussed in Note 7.
Two aircraft were leased to Markair, Inc. (Markair) from May 1991 until the lessee's default in June 1992 (Note 5). One of the Markair aircraft was then leased to Aviateca, S.A. (Aviateca) from July 1992 until December 1992. In October 1993, this aircraft was leased to Viscount through December 1996. The Partnership recognized this transaction as a sale in 1993 as a result of the nominal purchase price option provided in the lease upon expiration of the lease in December 1996. The Partnership recorded a note receivable in 1993 for the sales price, which was reduced by payments received from Viscount less interest. In December 1994, Viscount exercised its option to purchase the aircraft. As specified in the lease agreement, the Partnership applied to the note balance a security deposit of $25,000 and maintenance reserves of $237,978, which were previously paid to the Partnership by Viscount. Viscount paid the remaining balance of the note of $437,022 to the Partnership and the Partnership transferred title to the aircraft to Viscount.
The second aircraft formerly leased to Markair was leased to Cambodia International Airlines Company, Ltd. (Cambodia International) from November 1992 through September 1993. In April 1995, the Partnership sold the airframe to Pinnacle Aircraft Leasing, Inc. for $300,000. No gain or loss was recorded on the sale as the sales price of the airframe equaled its net book value. The Partnership leased the two engines from this aircraft and one engine previously leased to Viscount, as previously discussed, to CanAir beginning in May 1994 for 36 months. The rental rate was variable based on usage through August 1994. Beginning in September 1994 through the end of the lease term in May 1997, the rental rate is fixed at $10,000 per engine per month.
One aircraft was leased to Jet Fleet Corporation from May 1992 until the lessee's default in September 1992. The aircraft was then leased to Viscount from November 1992 until August 1994. The Partnership entered into a new lease with Viscount for a five-year term which commenced in September 1994. Viscount subsequently entered into a sub-lease agreement for the aircraft with Nations Air for a term of one year through February 1996. The sublease was extended through February 1998. Rent and maintenance reserve payments due to Viscount from Nations Air were paid directly to the Partnership and were applied against payments due the Partnership from Viscount. This aircraft was returned to the Partnership in February 1997 as discussed in Note 7 and Note 8.
The Partnership, Viscount and Nations Air agreed to share in the cost of certain heavy maintenance work performed on the aircraft sub-leased to Nations Air. The agreement stipulates that the Partnership loan Nations Air its portion of the maintenance cost of $264,108 to be repaid by Nations Air in twelve monthly installments, with interest at a variable rate, beginning in November 1995. The Partnership also loaned Viscount its portion of the maintenance cost of $154,108 to be repaid by Viscount in monthly installments of $10,000, with interest at a variable rate, beginning in November 1995. As discussed in Note 7 Viscount defaulted on this note receivable. Nations Air also defaulted on their note payments and the Partnership has provided an allowance for credit losses at December 31, 1996 for the outstanding balance. The Partnership's share of the maintenance cost was approximately $903,000, of which approximately $329,000 was paid from maintenance reserves previously paid to the Partnership by Viscount
and Nations Air. The Partnership recognized approximately $574,000 of this heavy maintenance work as operating expense in the 1995 statement of operations.
The following is a schedule by year of future minimum rental revenue under the existing leases:
Year Amount ---- ------ 1997 $150,000 1998 -- 1999 -- 2000 -- 2001 and thereafter -- --------
Total $150,000 ========
Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the statement provides that the Partnership should estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the projected net undiscounted cash flow for each aircraft (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) is less than the carrying value of the aircraft, an impairment loss is recognized. Pursuant to the statement, measurement of an impairment loss for long-lived assets will be based on the "fair value" of the asset as defined in the statement.
SFAS No. 121 states that the fair value of an asset is the amount at which the asset could be bought or sold in a current transaction between willing parties, i.e., other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and will be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value will be based on the best information available in the circumstances. Pursuant to the statement, the estimate of fair value will consider prices for similar assets and the results of valuation techniques to the extent available in the circumstances. Examples of valuation techniques include the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis.
The Partnership recognized impairment losses aggregating approximately $400,000, $115,000 and approximately $260,000, or $2.37, $0.67 and $1.53 per limited Partnership unit, as increased depreciation expense in 1996, 1995 and 1994, respectively. In 1996, the Partnership concluded that a sale of the returned aircraft and spare engines on an "as is, where is" basis would maximize the economic return on this equipment to the Partnership. In determining the impairment loss, the Partnership estimated the fair value of the aircraft and equipment based on the estimated sale price less cost to sell, and then deducted this amount from the carrying value of the aircraft.
The Partnership's future earnings are impacted by the net effect of the adjustments to the carrying values of the aircraft (which has the effect of decreasing future depreciation expense) and the downward adjustments to the estimated residual values (which has the effect of increasing future depreciation expense).
As discussed above, the Partnership uses information obtained from third party valuation services in arriving at its estimate of fair value for purposes of determining residual values. The Partnership will use similar information, plus available information and estimates related to the Partnership's aircraft, to determine an estimate of fair value to measure impairment as required by the
statement. The estimates of fair value can vary dramatically depending on the condition of the specific aircraft and the actual marketplace conditions at the time of the actual disposition of the asset. If assets are deemed impaired, there could be substantial write-downs in the future.
4. Sale of Equipment
Sale of Engine - One engine was transferred from aircraft inventory to aircraft at an estimated fair value of $200,000 during 1995. The Partnership incurred certain maintenance and refurbishment costs on this engine aggregating $244,000, which were capitalized in 1995. The Partnership leased this engine to Viscount for one year beginning in July 1995 at a rental rate of $10,500 per month with an early termination option. The Partnership subsequently sold this engine to Viscount for a sales price of $461,849 and recorded a gain on sale of $17,849 in 1995. The Partnership recorded a note receivable for the sales price and agreed to accept payment in 57 installments of $10,500, with interest at a rate of 11.265% per annum. As discussed in Note 7, Viscount defaulted on certain payments due the Partnership, including payments on this note receivable. In October 1996, Viscount's affiliates, Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc., assumed Viscount's engine finance sale note to the Partnership as discussed in Note 7. The note balance was $418,145 at December 31, 1996 and $455,685 at December 31, 1995.
5. Claims Related to Lessee Defaults
Receipt of Braniff Bankruptcy Claim - In July 1992, the Bankruptcy Court approved a stipulation embodying a settlement among PIMC, on behalf of the Partnership, the Braniff Creditor committees and Braniff in which it was agreed that First Security Bank of Utah, National Association, acting as trustee for the Partnership, would be allowed an administrative claim in the bankruptcy proceeding of approximately $2,076,923. In 1992, the Partnership received full payment of the claim, subject, however, to the requirement that 25% of total proceeds be held by PIMC in a separate, interest-bearing account pending notification by Braniff that all of the allowed administrative claims have been satisfied. During 1994, the Partnership was advised that the 25% portion of the administrative claim proceeds with interest could be released by PIMC to the Partnership. As a result, the Partnership recognized $611,618 as revenue in claims related to lessee defaults in the 1994 statement of operations.
American Air Lease - The Partnership filed suit in 1991 seeking damages for unpaid rent and other defaults against lessee American Air Lease and guarantor Americom Leasing Group, Inc. (Americom). American Air Lease and the Partnership reached a settlement consisting of certain cash payments, return of the aircraft and participation in any recovery proceeds of American Air Lease's default judgment against its lessee, Pan African Airways. Concurrent with the court-approved settlement agreement, in December 1992, the lease was terminated and the Partnership took possession of the aircraft. The Partnership proceeded to recover under the judgment through collection of insurance claim proceeds from insurers and judicial enforcement in New York against American Air Lease. The aircraft was transferred to aircraft inventory in 1993 and has been disassembled for sale of its component parts (Note 6). In November 1994, the Partnership received $91,452 representing settlement of Americom's and American Air Lease's obligation to pay the original settlement judgement. The Partnership was also entitled to retain security deposits in the amount of $74,075. Both amounts were recognized as revenue in claims related to lessee defaults in the 1994 statement of operations. The Partnership settled its claim against the insurers of American Air Lease for payment of insurance proceeds of $400,000. The Partnership received the $400,000 in July 1995 and recognized the full amount as revenue in claims related to lessee defaults in the 1995 statement of operations.
Markair - The Partnership terminated the leases and repossessed the two aircraft in June 1992, and Markair filed a petition for reorganization under Chapter 11
of the United States Bankruptcy Code. The Partnership filed a proof of claim in the case to recover damages for past-due rent and for Markair's failure to meet return conditions with respect to the Partnership's aircraft. In August 1993, the Bankruptcy Court approved a plan of reorganization for Markair and a stipulation allowed the Partnership an unsecured claim against Markair for $445,000 which was converted to 10% subordinated debentures during 1994. During 1994 and 1995, the Partnership received a nominal principal and interest payments on the debentures. Markair defaulted on its payment obligations on the debentures, and the trustee, Key Bank of Washington, is taking steps to protect the interests of the debenture holders, including the Partnership.
6. Disassembly of Aircraft
In an attempt to maximize the economic return from its off-lease aircraft, the Partnership entered into an agreement with Soundair, Inc. (Soundair) on October 31, 1992, for the disassembly of certain of the Partnership's aircraft and the sale of their component parts. The Partnership recognized the estimated cost of disassembly of approximately $250,000 for the four aircraft during 1993 and is receiving the proceeds from the sale of such parts, net of overhaul expenses if necessary, and commissions paid to Soundair.
During 1995 and 1994, the Partnership recorded downward adjustments to the inventory value of $115,000 and $261,170, respectively, to reflect the current estimate of net realizable aircraft inventory value. These adjustments are reflected as increased depreciation expense in the corresponding years' statement of operations. During 1994, two engines were removed from the disassembly program at an aggregate value of $360,000 and leased as discussed in Note 3. During 1995, one additional engine was removed from the disassembly program at an aggregate value of $200,000 and subsequently sold as discussed in Note 4.
Proceeds from sales are applied against inventory until book value was fully recovered. During 1995 and 1994, the Partnership applied net proceeds from the sale of aircraft inventory of $604,003 and $912,263, respectively against aircraft inventory, reducing the net book value of the Partnership's aircraft inventory to zero. Payments received by the Partnership of $477,832 and $558 in excess of the net book value during 1996 and 1995, respectively were recorded as gain on sale of aircraft inventory in the corresponding years' statement of operations.
7. Viscount Restructuring Agreement and Default
On January 24, 1996, Viscount filed a petition for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First Security Bank, National Association (formerly known as First Security Bank of Utah, National Association) (FSB), the owner/trustee under the Partnership's leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's indebtedness and others executed in April 1996 a Compromise of Claims and Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and Stipulation), which was subsequently approved by the Bankruptcy Court. The Compromise and Stipulation provided that in the event that Viscount failed to promptly and timely perform its monetary obligations under the Leases and the Compromise and Stipulation, without further order of the Bankruptcy Court, GECAS would be entitled to immediate possession of the aircraft for which Viscount failed to perform and Viscount would deliver such aircraft and all records related thereto to GECAS.
Viscount defaulted on and was unable to cure its September rent obligations. However, Viscount took the position that it was entitled to certain offsets and asserted defenses to the September rent obligations. On September 18, 1996, GECAS (on behalf of the Partnership and other entities) and Viscount entered into a Stipulation and Agreement by which Viscount agreed to voluntarily return all of the Partnership's aircraft and engines, turn over possession of the
majority of its aircraft parts inventory, and cooperate with GECAS in the transition of aircraft equipment and maintenance, in exchange for which, upon Bankruptcy Court approval of the Stipulation and Agreement, the Partnership would waive its right to pre- and post-petition claims against Viscount for amounts due and unpaid.
The Stipulation and Agreement provided that upon the return and surrender of possession of the Partnership's three airframes and eight engines (two of which were spare engines), Viscount's rights and interests therein would terminate. As of September 18, 1996, Viscount had returned (or surrendered possession of) two of the Partnership's airframes and seven of the Partnership's engines. One of the returned airframes (together with one installed engine) was in the possession of and operated by Nations Air. Six of the seven returned engines are in the possession of certain maintenance facilities and will require maintenance work in order to be made operable. Viscount returned the Partnership's remaining airframe and one installed engine on October 1, 1996. Nations Air returned this airframe and one installed engine to the Partnership in February 1997.
GECAS, on behalf of the Polaris Entities, is evaluating the spare parts inventory to which Viscount relinquished possession in order to determine its condition and value, the portion allocable to the Partnership, and the Partnership's alternatives for the use and/or disposition of such parts. A significant portion of the spare parts inventory is currently in the possession of third party maintenance and repair facilities with whom GECAS anticipates that it will need to negotiate for the repair and/or return of these parts.
The Stipulation and Agreement also provides that the Polaris Entities, GECAS and FSB shall release any and all claims against Viscount, Viscount's bankruptcy estate, and the property of Viscount's bankruptcy estate, effective upon entry of a final non-appealable court order approving the Stipulation and Agreement. The Bankruptcy Court entered such an order approving the Stipulation and Agreement on October 23, 1996.
As discussed in Note 4, in October 1996, Viscount's affiliates, Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc., assumed Viscount's engine finance sale note to the Partnership as provided under the Compromise and Stipulation.
During 1996 and 1995, the Partnership recorded allowances for credit losses of and $1,055,050 and $956,015, respectively for outstanding receivables from Viscount and Nations Air. The Stipulation and Agreement provides that, upon entry of a final non-appealable court order approving it, the Partnership would waive its pre- and post-petition claims against Viscount for all amounts due and unpaid. As a result, the Partnership considers all receivables from Viscount to be uncollectible and has written-off, during the third quarter of 1996, all notes, rents and interest receivable balances from Viscount. Payments received by the Partnership from the sale of the spare aircraft parts (as discussed above), if any, will be recorded as revenue when received.
The Partnership evaluated the condition of the returned equipment and estimated that very substantial maintenance and refurbishment costs aggregating approximately $3.2 million would be required if the Partnership decided to re-lease the returned aircraft and spare engines. Alternatively, if the Partnership decided to sell the returned aircraft and spare engines, such sale could be made on an "as is, where is" basis, without the Partnership incurring substantial maintenance costs.. Based on its evaluation, the Partnership concluded that a sale of the remaining aircraft and spare engines on an "as is, where is" basis would maximize the economic return on this equipment to the Partnership.
Viscount's failure to perform its financial obligations to the Partnership has had a material adverse effect on the Partnership's financial position. As a result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership has incurred legal costs of approximately $414,000, which are reflected in operating expense in the Partnership's 1996 statement of operations.
8. Nations Air Default and Litigation
On or about December 20, 1996, First Security Bank, National Association (FSB), as trustee for the Partnership, filed an action against Nations Air Express, Inc. (Nations Air) in the United States District Court for the Northern District of California. This action involves aircraft owned by FSB, as trustee for the Partnership which were leased to Viscount Air Services, Inc. (Viscount), and subleased by Viscount to Nations Air. The claims arise out of the possession and use of the aircraft by Nations Air following the commencement of Viscount's bankruptcy proceedings. As discussed in connection with Viscount's bankruptcy in Note 7, the Partnership's aircraft was returned in February 1997. In this action FSB is seeking to recover damages for unpaid rent and maintenance, and interest on such unpaid amounts, in the amount of approximately $1,248,000.
9. Related Parties
Under the Limited Partnership Agreement (Partnership Agreement), the Partnership paid or agreed to pay the following amounts to PIMC and/or its affiliates in connection with services rendered:
a. An aircraft management fee equal to 5% of gross rental revenues with respect to operating leases of the Partnership, payable upon receipt of the rent. In 1996, 1995 and 1994, the Partnership paid management fees to PIMC of $64,396, $98,922 and $80,346, respectively. Management fees payable to PIMC at December 31, 1996 and 1995 were $941 and $2,000, respectively.
b. Reimbursement of certain out-of-pocket expenses incurred in connection with the management of the Partnership and its assets. In 1996, 1995 and 1994, $203,253 $146,375 and $201,083 were reimbursed to PIMC by the Partnership for administrative expenses. Administrative reimbursements of $47,052 and $36,472 were payable to PIMC at December 31, 1996 and 1995, respectively. Partnership reimbursements to PIMC for maintenance and remarketing costs of $200,032, $302,657 and $264,295 were paid in 1996, 1995, and 1994, respectively. Maintenance and remarketing reimbursements of $29,683 and $13,285 were payable to PIMC at December 31, 1996 and 1995, respectively.
c. A 10% interest to PIMC in all cash distributions and sales proceeds, gross income in an amount equal to 9.09% of distributed cash available from operations and 1% of net income or loss and taxable income or loss, as such terms are defined in the Partnership Agreement.
d. A subordinated sales commission to PIMC of 3% of the gross sales price of each aircraft for services performed upon disposition and reimbursement of out-of-pocket and other disposition expenses. Subordinated sales commissions will be paid only after limited partners have received distributions in an aggregate amount equal to their capital contributions plus a cumulative non-compounded 8% per annum return on their adjusted capital contributions, as defined in the Partnership Agreement. The Partnership did not pay or accrue a sales commission on any aircraft sales to date as the above subordination threshold has not been met.
e. One engine from the Partnership's aircraft was leased to Viscount through a joint venture agreement with Polaris Aircraft Income Fund II from April 1993 through March 1996 at a fair market rental rate. The Partnership recognized rental revenue on this engine of $46,400, $146,000 and $146,000 in 1996, 1995 and 1994, respectively.
10. Income Taxes
Federal and state income tax regulations provide that taxes on the income or loss of the Partnership are reportable by the partners in their individual income tax returns. Accordingly, no provision for such taxes has been made in the accompanying financial statements.
The net differences between the tax basis and the reported amounts of the Partnership's assets and liabilities at December 31, 1996 and 1995 are as follows:
Reported Amounts Tax Basis Net Difference ---------------- --------- --------------
1996: Assets $ 14,254,000 $ 28,676,857 $(14,422,857) Liabilities 3,830,572 766,709 3,063,863
1995: Assets $ 16,288,799 $ 29,774,131 $(13,485,332) Liabilities 2,461,806 492,567 1,969,239
11. Reconciliation of Book Net Income (Loss) to Taxable Net Income (Loss)
The following is a reconciliation between net income (loss) per limited partnership unit reflected in the financial statements and the information provided to limited partners for federal income tax purposes:
The differences between net income and loss for book purposes and net income and loss for tax purposes result from the temporary differences of certain revenue and deductions.
For book purposes, rental revenue is generally recorded as it is earned. For tax purposes, certain temporary differences exist in the recognition of revenue. Increases in the Partnership's book maintenance reserve liability were recognized as rental revenue for tax purposes. Disbursements from the Partnership's book maintenance reserves are capitalized or expensed for tax purposes, as appropriate.
The Partnership computes depreciation using the straight-line method for financial reporting purposes and generally an accelerated method for tax
purposes. The Partnership also periodically evaluates the ultimate recoverability of the carrying values and the economic lives of its aircraft for book purposes and, accordingly recognized adjustments which increased book depreciation expense. As a result, the current year book depreciation expense is greater than the tax depreciation expense computed under the accelerated method. These differences in depreciation methods result in book to tax differences on the sale of aircraft. In addition, certain costs were capitalized for tax purposes and expensed for book purposes.
12. Subsequent Event
Sale of two Boeing 737-200s - In January, 1997, the Partnership received a deposit of $162,000 toward the sales price of $1,620,000 for the sale of two Boeing 737-200s formerly leased to Viscount. These aircraft were returned to the Partnership in September and October 1996 pursuant to the Stipulation and Agreement as further discussed in Note 7. The Partnership received the remaining $1,458,000 in March 1997.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Polaris Aircraft Income Fund I (PAIF-I or the Partnership) has no directors or officers. Polaris Holding Company (PHC) and its subsidiaries, including Polaris Aircraft Leasing Corporation (PALC) and Polaris Investment Management Corporation (PIMC), the general partner of the Partnership (collectively Polaris), restructured their operations and businesses (the Polaris Restructuring) in 1994. In connection therewith, PIMC entered into a services agreement dated as of July 1, 1994 (the Services Agreement) with GE Capital Aviation Services, Inc. (GECAS), a Delaware corporation which is a wholly owned subsidiary of General Electric Capital Corporation, a New York corporation (GE Capital). GE Capital has been PHC's parent company since 1986. As subsidiaries of GE Capital, the Servicer and PIMC are affiliates.
The officers and directors of PIMC are:
Name PIMC Title ---------------- ---------------------------------------
Eric M. Dull President; Director Marc A. Meiches Vice President; Chief Financial Officer Richard J. Adams Vice President; Director Norman C. T. Liu Vice President; Director Edward Sun Vice President Richard L. Blume Vice President; Secretary Robert W. Dillon Vice President; Assistant Secretary
Substantially all of these management personnel will devote only such portion of their time to the business and affairs of PIMC as deemed necessary or appropriate.
Mr. Dull, 36, assumed the position of President and Director of PIMC effective January 1, 1997. Mr. Dull previously was a Director of PIMC from March 31, 1995 to July 31, 1995. Mr. Dull holds the position of Executive Vice President - Portfolio Management of GECAS, having previously held the position of Senior Vice President - Underwriting Risk Management of GECAS. Prior to joining GECAS, Mr. Dull held various positions with Transportation and Industrial Funding Corporation (TIFC).
Mr. Meiches, 44, assumed the position of Vice President and Chief Financial Officer of PIMC effective October 9, 1995. Mr. Meiches presently holds the positions of Executive Vice President and Chief Financial Officer of GECAS. Prior to joining GECAS, Mr. Meiches has been with General Electric Company (GE) and its subsidiaries since 1978. Since 1992, Mr. Meiches held the position of Vice President of the General Electric Capital Corporation Audit Staff. Between 1987 and 1992, Mr. Meiches held Manager of Finance positions for GE Re-entry Systems, GE Government Communications Systems and the GE Astro-Space Division.
Mr. Adams, 63, assumed the position of Senior Vice President - Aircraft Sales and Leasing of PIMC and PALC effective August 1992, having previously served as Vice President - Aircraft Sales & Leasing - Vice President, North America, and Vice President - Corporate Aircraft since he joined PALC in August 1986. Mr. Adams presently holds the position of Senior Vice President - Aircraft Marketing, North America, of GECAS. Effective July 1, 1994, Mr. Adams held the positions of Vice President and Director of PIMC.
Mr. Liu, 39, assumed the position of Vice President of PIMC effective May 1, 1995 and has assumed the position of Director of PIMC effective July 31, 1995. Mr. Liu presently holds the position of Executive Vice President - Marketing and Structured Finance of GECAS, having previously held the position of Executive Vice President - Capital Funding and Portfolio Management of GECAS. Prior to
joining GECAS, Mr. Liu was with General Electric Capital Corporation for nine years. He has held management positions in corporate Business Development and in Syndications and Leasing for TIFC. Mr. Liu previously held the position of managing director of Kidder, Peabody & Co., Incorporated.
Mr. Sun, 47, assumed the position of Vice President of PIMC effective May 1, 1995. Mr. Sun presently holds the position of Senior Vice President - Structured Finance of GECAS. Prior to joining GECAS, Mr. Sun held various positions with TIFC since 1990.
Mr. Blume, 55, assumed the position of Secretary of PIMC effective May 1, 1995 and Vice President of PIMC effective October 9, 1995. Mr. Blume presently holds the position of Executive Vice President and General Counsel of GECAS. Prior to joining GECAS, Mr. Blume was counsel at GE Aircraft Engines since 1987.
Mr. Dillon, 55, assumed the position of Vice President - Aviation Legal and Insurance Affairs, effective April 1989. Previously, he served as General Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994, Mr. Dillon held the positions of Vice President and Assistant Secretary of PIMC. Mr. Dillon presently holds the position of Senior Vice President and Managing Counsel of GECAS.
Certain Legal Proceedings:
On October 27, 1992, a class action complaint entitled Weisl, Jr. et al. v. Polaris Holding Company, et al. was filed in the Supreme Court of the State of New York for the County of New York. The complaint sets forth various causes of action which include allegations against certain or all of the defendants (i) for alleged fraud in connection with certain public offerings, including that of the Partnership, on the basis of alleged misrepresentation and alleged omissions contained in the written offering materials and all presentations allegedly made to investors; (ii) for alleged negligent misrepresentation in connection with such offerings; (iii) for alleged breach of fiduciary duties; (iv) for alleged breach of third party beneficiary contracts; (v) for alleged violations of the NASD Rules of Fair Practice by certain registered broker dealers; and (vi) for alleged breach of implied covenants in the customer agreements by certain registered brokers. The complaint seeks an award of compensatory and other damages and remedies. On January 19, 1993, plaintiffs filed a motion for class certification. On March 1, 1993, defendants filed motions to dismiss the complaint on numerous grounds, including failure to state a cause of action and statute of limitations. On July 20, 1994, the court entered an order dismissing almost all of the claims in the complaint and amended complaint. Certain claims, however, remain pending. Plaintiffs filed a notice of appeal on September 2, 1994. On April 25, 1996, the Appellate Division for the First Department affirmed the trial court's order which had dismissed most of plaintiffs' claims. The Partnership is not named as a defendant in this action.
On or around February 17, 1993, a civil action entitled Einhorn, et al. v. Polaris Public Income Funds, et al. was filed in the Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida against, among others, Polaris Investment Management Corporation and Polaris Depositary Company. Plaintiffs seek class action certification on behalf of a class of investors in Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft Income Fund VI who purchased their interests while residing in Florida. Plaintiffs allege the violation of Section 517.301, Florida Statutes, in connection with the offering and sale of units in such Polaris Aircraft Income Funds. Among other things, plaintiffs assert that the defendants sold interests in such Polaris Aircraft Income Funds while "omitting and failing to disclose the material facts questioning the economic efficacy of" such Polaris Aircraft Income Funds. Plaintiffs seek rescission or damages, in addition to interest, costs, and attorneys' fees. On April 5, 1993, defendants filed a motion to stay this action pending the final determination of a prior filed action in the Supreme Court for the State of New York entitled Weisl v. Polaris Holding Company. On that date, defendants also filed a motion to dismiss the complaint on the grounds of failure to attach necessary documents, failure to plead fraud with particularity and failure to plead reasonable reliance. On April 13, 1993,
the court denied the defendants' motion to stay. On May 7, 1993, the court stayed the action pending an appeal of the denial of the motion to stay. Defendants subsequently filed with the Third District Court of Appeal a petition for writ of certiorari to review the lower court's order denying the motion to stay. On October 19, 1993, the Court of Appeal granted the writ of certiorari, quashed the order, and remanded the action with instruction to grant the stay. The Partnership is not named as a defendant in this action.
On or around May 14, 1993, a purported class action entitled Moross, et al. v. Polaris Holding Company, et al. was filed in the United States District Court for the District of Arizona. This purported class action was filed on behalf of investors in Polaris Aircraft Income Funds I - VI by nine investors in such Polaris Aircraft Income Funds. The complaint alleges that defendants violated Arizona state securities statutes and committed negligent misrepresentation and breach of fiduciary duty by misrepresenting and failing to disclose material facts in connection with the sale of limited partnership units in the above-named funds. An amended complaint was filed on September 17, 1993, but has not been served upon defendants. On or around October 4, 1993, defendants filed a notice of removal to the United States District Court for the District of Arizona. Defendants also filed a motion to stay the action pending the final determination of a prior filed action in the Supreme Court for the State of New York entitled Weisl v. Polaris Holding Company ("Weisl") and to defendants' time to respond to the complaint until 20 days after disposition of the motion to action pending resolution of the motions for class certification and motions to dismiss pending in Weisl. On January 20, 1994, the court stayed the action and required defendants to file status reports every sixty days setting forth the status of the motions in Weisl. On April 18, 1995, this action was transferred to the Multi-District Litigation described below. The Partnership is not named as a defendant in this action.
On September 21, 1993, a purported derivative action entitled Novak, et al. v. Polaris Holding Company, et al. was filed in the Supreme Court of the State of New York, County of New York. This action was brought on behalf of the Partnership, Polaris Aircraft Income Fund II and Polaris Aircraft Income Fund III. The complaint names as defendants Polaris Holding Company, its affiliates and others. Each of the Partnership, Polaris Aircraft Income Fund II and Polaris Aircraft Income Fund III is named as a nominal defendant. The complaint alleges, among other things, that defendants mismanaged the Partnership and the other Polaris Aircraft Income Funds, engaged in self-dealing transactions that were detrimental to the Partnership and the other Polaris Aircraft Income Funds and failed to make required disclosure in connection with the sale of the units in the Partnership and the other Polaris Aircraft Income Funds. The complaint alleges claims of breach of fiduciary duty and constructive fraud and seeks, among other things an award of compensatory and punitive damages in an unspecified amount, re-judgment interest, and attorneys' fees and costs. On January 13, 1994, certain of the defendants, including Polaris Holding Company, filed motions to dismiss the complaint on the grounds of, among others, failure to state a cause of action and failure to plead the alleged wrong in detail. On August 11, 1994, the court denied in part and granted in part defendants' motions to dismiss. Specifically, the court denied the motions as to the claims for breach of fiduciary duty, but dismissed plaintiffs' claim for constructive fraud with leave to replead. On October 7, 1994, defendants filed a notice of appeal. On November 15, 1994, defendants submitted an answer to the remaining causes of action. On July 7, 1995, defendants filed briefs in support of their appeal from that portion of the trial court's order denying the motion to dismiss. On March 14, 1996, the appellate court reversed the trial court's order denying the motion to dismiss, and dismissed the complaint.
On June 8, 1994, a consolidated complaint captioned In re Prudential Securities Inc. Limited Partnerships Litigation was filed in the United States District Court for the Southern District of New York, purportedly consolidating cases that had been transferred from other federal courts by the Judicial Panel on Multi- District Litigation. The consolidated complaint names as defendants Prudential entities and various other sponsors of limited partnerships sold by Prudential, including Polaris Holding Company, one of its former officers, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation and Polaris Securities Corporation. The complaint alleges that the Prudential defendants created a scheme for the sale of approximately $8-billion of limited
partnership interests in 700 assertedly high-risk limited partnerships, including the Partnership, to approximately 350,000 investors by means of false and misleading offering materials; that the sponsoring organizations (including the Polaris entities) participated with the Prudential defendants with respect to, among other things, the partnerships that each sponsored; and that all of the defendants conspired to engage in a nationwide pattern of fraudulent conduct in the marketing of all limited partnerships sold by Prudential. The complaint alleges violations of the federal Racketeer Influenced and Corrupt Organizations Act and the New Jersey counterpart thereof, fraud, negligent misrepresentation, breach of fiduciary duty and breach of contract. The complaint seeks rescission, unspecified compensatory damages, treble damages, disgorgement of profits derived from the alleged acts, costs and attorneys fees. On October 31, 1994, Polaris Investment Management Corporation and other Polaris entities filed a motion to dismiss the consolidated complaint on the grounds of, inter alia, statute of limitations and failure to state a claim. The Partnership is not named as a defendant in this action. Prudential Securities, Inc., on behalf of itself and its affiliates has made an Offer of Settlement. A class has been certified for purposes of the Prudential Settlement and notice to the class has been sent. Any questions concerning Prudential's Offer of Settlement should be directed to 1-800-327-3664, or write to the Claims Administrator at:
Prudential Securities Limited Partnerships Litigation Claims Administrator P.O. Box 9388 Garden City, New York 11530-9388
On June 5, 1996, the Court certified a class with respect to claims against Polaris Holding Company, one of its former officers, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, and Polaris Securities Corporation. The class is comprised of all investors who purchased securities in any of Polaris Aircraft Income Funds I through VI during the period from January 1985 until January 29, 1991, regardless of which brokerage firm the investor purchased from. Excepted from the class are those investors who settled in the SEC/Prudential settlement or otherwise opted for arbitration pursuant to the settlement and any investor who has previously released the Polaris defendants through any other settlement. On June 10, 1996, the Court issued an opinion denying summary judgment to Polaris on plaintiffs' Section 1964(c) and (d) RICO claims and state causes of action, and granting summary judgment to Polaris on plaintiffs' Section 1964(a) RICO claims and the New Jersey State RICO claims. On August 5, 1996, the Court signed an order providing for notice to be given to the class members. The trial, which was scheduled for November 11, 1996, has not proceeded, and no new trial date has been set.
A further litigation captioned Romano v. Ball et. al, an action by Prudential Insurance Company policyholders against many of the same defendants (including Polaris Investment Management Corporation and Polaris Aircraft Leasing Corporation), has also been commenced by policy holders of the Prudential Insurance Company as a purported derivative action on behalf of the Prudential Insurance Company. The complaint alleges claims under the federal Racketeer Influenced and Corrupt Organizations Act, as well as claims for waste, mismanagement and intentional and negligent misrepresentation, and seeks unspecified compensatory, treble and punitive damages. The case, which was being coordinated with In re Prudential, has been settled and the action dismissed pursuant to a court order dated December 18, 1996.
On or about January 12, 1995, a class action complaint entitled Cohen, et al. v. Kidder Peabody & Company, Inc., et al. was filed in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida, and on March 31, 1995 the case was removed to the United States District Court for the Southern District of Florida. An amended class action complaint (the "amended complaint"), which renamed this action Bashein, et al. v. Kidder, Peabody & Company Inc., et al. was filed on June 13, 1995. The amended complaint names Kidder Peabody & Company, Inc., General Electric Capital Corporation, General Electric Financial Services, Inc., and General Electric Company as defendants. The action purports to be on behalf of "approximately 20,000 persons throughout the United States" who purchased units in Polaris Aircraft Income Funds III through VI. The amended complaint sets forth various causes of action purportedly arising in connection with the public offerings of Polaris Aircraft
Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, and Polaris Aircraft Income Fund VI. Specifically, plaintiffs assert claims for violation of Sections 12(2) and 15 of the Securities Act of 1933, fraud, negligent misrepresentation, breach of fiduciary duty, breach of third party beneficiary contract, violation of NASD Rules of Fair Practice, breach of implied covenant, and breach of contract. Plaintiffs seek compensatory damages, interest, punitive damages, costs and attorneys' fees, as well as any other relief the court deems just and proper. Defendants moved to dismiss the amended complaint on June 26, 1995. On October 2, 1995, the court denied the defendants' motion to dismiss. While the motion to dismiss was pending, plaintiffs filed a motion for leave to file a second amended complaint, which was granted on October 3, 1995. Defendants thereafter filed a motion to dismiss the second amended complaint, and defendants' motion was denied by Court Order dated December 26, 1995. On February 12, 1996, defendants answered. This case was reassigned (from Hurley, J. To Lenard, J.) on February 18, 1996, and on March 18, 1996, plaintiffs moved for class certification. On the eve of class discovery, April 26, 1996, plaintiffs moved for a voluntary dismissal of Counts I and II (claims brought pursuant to the Securities Act of 1933) of the Second Amended Complaint and simultaneously filed a motion to remand this action to state court for lack of federal jurisdiction. Plaintiff's motion for voluntary dismissal of the federal securities law claims and motion for remand were granted on July 10, 1996. The Partnership is not named as a defendant in this action.
On or around April 13, 1995, a class action complaint entitled B & L Industries, Inc., et al. v. Polaris Holding Company, et al. was filed in the Supreme Court of the State of New York. The complaint names as defendants Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Peter G. Pfendler, Marc P. Desautels, General Electric Capital Corporation, General Electric Financial Services, Inc., General Electric Company, Prudential Securities Inc., and Kidder Peabody & Company Incorporated. The complaint sets forth various causes of action purportedly arising out of the public offerings of Polaris Aircraft Income Fund III and Polaris Aircraft Income Fund IV. Plaintiffs allege claims of fraud, negligent misrepresentation, breach of fiduciary duty, knowingly inducing or participating in breach of fiduciary duty, breach of third party beneficiary contract, violation of NASD Rules of Fair Practice, breach of implied covenant, and unjust enrichment. Plaintiffs seek compensatory damages, interest, general, consequential and incidental damages, exemplary and punitive damages, disgorgement, rescission, costs, attorneys' fees, accountants' and experts' fees, and other legal and equitable relief as the court deems just and proper. On October 2, 1995, defendants moved to dismiss the complaint. On August 16, 1996, defendants filed a motion to dismiss plaintiffs' amended complaint. The motion is returnable on July 17, 1997. The Partnership is not named as a defendant in this action.
On or around August 15, 1995, a complaint entitled Mary C. Scott v. Prudential Securities Inc. et al. was filed in the Court of Common Pleas, County of Summit, Ohio. The complaint names as defendants Prudential Securities Inc., Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund VI, P-Bache/A.G. Spanos Genesis Income Partners LP 1, Prudential-Bache Properties, Inc., A.G. Spanos Residential Partners - 86, Polaris Securities Corporation and Robert Bryan Fitzpatrick. Plaintiff alleges claims of fraud and violation of Ohio securities law arising out of the public offerings of Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund VI, and P-Bache/A.G. Spanos Genesis Income Partners LP 1. Plaintiff seeks compensatory damages, general, consequential and incidental damages, punitive damages, rescission, costs, attorneys' fees and other and further relief as the Court deems just and proper. The Partnership is not named as a defendant in this action. On September 15, 1995, defendants removed this action to the United States District Court, Eastern District of Ohio. On September 18, 1995, defendants sought the transfer of this action to the Multi-District Litigation and sought a stay of all proceedings by the district court, which stay was granted on September 25, 1995. The Judicial Panel transferred this action to the Multi-District Litigation on or about February 7, 1996.
On or around September 27, 1995, a complaint entitled Martha J. Harrison v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and Prudential Securities Incorporated. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages, attorney's fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
On or around December 8, 1995, a complaint entitled Overby, et al. v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. Plaintiffs allege claim of tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v. Prudential Securities Incorporated et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition adding as additional defendants General Electric Company, General Electric Capital Corporation and Smith Barney, Inc. Plaintiffs allege claims of tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v. Prudential Securities, Incorporated et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities Incorporated and Stephen Derby Gisclair. On or about January 18, 1996, plaintiff filed a First Supplemental and Amending Petition adding defendants General Electric Company and General Electric Capital Corporation. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v. General Electric Co., et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. Plaintiffs allege claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
On October 1, 1996, a complaint entitled Wilson et al. v. Polaris Holding Company et al. was filed in the Superior Court of the State of California for the County of Sacramento by over 500 individual plaintiffs who purchased limited partnership units in one or more of Polaris Aircraft Income Funds I through VI. The complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Capital Services, Inc., General Electric Capital Corporation, GE Capital Aviation Services, Inc. and DOES 1-100
as defendants. The Partnership has not been named as a defendant. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, negligence, breach of contract, and breach of fiduciary duty. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest and rescission with respect to the Polaris Aircraft Income Funds sold to plaintiffs. Defendants have filed an answer.
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 section of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants General Electric Company and General Electric Capital Corporation. Plaintiffs allege claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
On or about April 9, 1996, a summons and First Amended Complaint entitled Sara J. Bishop, et al. v. Kidder Peabody & Co., et al. was filed in the Superior Court of the State of California, County of Sacramento, by over one hundred individual plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds III, IV, V and VI and other limited partnerships sold by Kidder Peabody. The complaint names Kidder, Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100 as defendants. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest, and recission with respect to 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. On June 18, 1996, defendants filed a motion to transfer venue from Sacramento County to San Francisco County. The Court subsequently denied the motion. Defendants filed an answer in the action on August 30, 1996.
On or about May 7, 1996, a petition entitled Charles Rich, et al. v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. Plaintiffs allege claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
On or about March 4, 1996, a petition entitled Richard J. McGiven v. General Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. Plaintiff alleges claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. Plaintiff alleges claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. The Partnership is not named as a defendant in this action.
On or about October 15, 1996, a complaint entitled Joyce H. McDevitt, et al. v. Polaris Holding Company, et al. was filed in the Superior Court of the State of California, County of Sacramento, by individual plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100 as defendants. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest, and recission with respect to Polaris Aircraft Income Funds I-VI. The Partnership is not named as a defendant in this action.
On or about October 16, 1996, a complaint entitled Mary Grant Tarrer, et al. v.Kidder Peabody & Co.,et al. was filed in the Superior Court of the State of California, County of Sacramento, by individual plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds I-VI and other limited partnerships allegedly sold by Kidder Peabody. The complaint names Kidder, Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100 as defendants. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest, and recission with respect to Polaris Aircraft Income Funds I-VI and all other limited partnerships alleged to have been sold by Kidder Peabody to the plaintiffs. The Partnership is not named as a defendant in this action.
On or about November 6, 1996, a complaint entitled Janet K. Johnson, et al. v. Polaris Holding Company, et al. was filed in the Superior Court of the State of California, County of Sacramento, by individual plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100 as defendants. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest, and recission with respect to Polaris Aircraft Income Funds I-VI. The Partnership is not named as a defendant in this action.
On or about November 13, 1996, a complaint entitled Wayne W. Kuntz, et al. v. Polaris Holding Company, et al. was filed in the Superior Court of the State of California, County of Sacramento, by individual plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100 as defendants. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest, and recission with respect to Polaris Aircraft Income Funds I-VI. The Partnership is not named as a defendant in this action.
On or about November 26, 1996, a complaint entitled Thelma Abrams, et al. v. Polaris Holding Company, et al. was filed in the Superior Court of the State of California, County of Sacramento, by individual plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100 as defendants. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest, and recission with respect to Polaris Aircraft Income Funds I-VI. The Partnership is not named as a defendant in this action.
On or about January 16, 1997, a complaint entitled Enita Elphick, et al. v. Kidder Peabody & Co.,et al. was filed in the Superior Court of the State of California, County of Sacramento, by individual plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds I-VI and other limited partnerships allegedly sold by Kidder Peabody. The complaint names Kidder, Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100 as defendants. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest, and recission with respect to Polaris Aircraft Income Funds I-VI and all other limited partnerships alleged to have been sold by Kidder Peabody to the plaintiffs. The Partnership is not named as a defendant in this action.
On or about February 14, 1997, a complaint entitled George Zicos, et al. v. Polaris Holding Company, et al. was filed in the Superior Court of the State of California, County of Sacramento, by individual plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds I-VI. The complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100 as defendants. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest, and recission with respect to Polaris Aircraft Income Funds I-VI. The Partnership is not named as a defendant in this action.
Other Proceedings - Part I, Item 3 discusses certain other actions arising out of certain public offerings, including that of the Partnership, to which both the Partnership and its general partner are parties.
Disclosure pursuant to Section 16, Item 405 of Regulation S-K:
Based solely on its review of the copies of such forms received or written representations from certain reporting persons that no Forms 3, 4, or 5 were required for those persons, the Partnership believes that, during 1995 all filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were met.
Item 11.
Item 11. Executive Compensation
PAIF-I has no directors or officers. PAIF-I is managed by PIMC, the General Partner. In connection with management services provided, management and advisory fees of $64,396 were paid to PIMC in 1996 in addition to a 10% interest in all cash distributions as described in Note 9 to the financial statements (Item 8).
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) No person owns of record, or is known by PAIF-I to own beneficially, more than five percent of any class of voting securities of PAIF-I.
b) The General Partner of PAIF-I owns the equity securities of PAIF-I as set forth in the following table:
Title Name of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership of Class - -------- ---------------- -------------------- --------
General Polaris Investment Represents a 10.0% interest of all cash 100% Partner Management distributions, gross income in an Interest Corporation amount equal to 9.09% of distributed cash available from operations, and a 1% interest in net income or loss
c) There are no arrangements known to PAIF-I, including any pledge by any person of securities of PAIF-I, the operation of which may at a subsequent date result in a change in control of PAIF-I.
Item 13.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Financial Statements.
The following are included in Part II of this report: Page No. --------
Report of Independent Public Accountants 20 Balance Sheets 21 Statements of Operations 22 Statements of Changes in Partners' Capital (Deficit) 23 Statements of Cash Flows 24 Notes to Financial Statements 25
2. Reports on Form 8-K.
A Current Report on Form 8-K dated September 18, 1996 was filed during the fourth quarter of 1996 reporting, under Item 5, the status of a significant lessee default.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
27. Financial Data Schedule.
4. Financial Statement Schedules.
All financial statement schedules are omitted because they are not applicable, not required or because the required information is included in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND I (REGISTRANT) By: Polaris Investment Management Corporation General Partner
March 28, 1997 By: /S/ Eric M. Dull - -------------------- ----------------------- Date Eric M. Dull, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/Eric M. Dull President and Director of Polaris Investment March 28, 1997 - ----------------- Management Corporation, General Partner -------------- (Eric M. Dull) of the Registrant
/S/Marc A. Meiches Chief Financial Officer of Polaris Investment March 28, 1997 - ------------------ Management Corporation, General Partner -------------- (Marc A. Meiches) of the Registrant
/S/Richard J. Adams Vice President and Director of Polaris March 28, 1997 - ------------------- Investment Management Corporation, -------------- (Richard J. Adams) General Partner of the Registrant