UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File No. 2-91762
POLARIS AIRCRAFT INCOME FUND I
(Exact name of registrant as specified in its charter)
California 94-2938977
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
201 Mission Street, 27th Floor, San Francisco, California 94105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 284-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 1994.
Documents incorporated by reference: None
This document consists of 43 pages.
PART I
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 quarterly distributions of cash from operations, to maximize the
residual values of aircraft upon sale and to protect Partnership capital
through experienced management and diversification. PAIF-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 and sell aircraft for their own accounts and
for existing aircraft leasing programs sponsored 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 and its affiliates and GPA.
A brief description of the aircraft owned by the Partnership is set forth in
Item 2. The following table describes certain material terms of the
Partnership's aircraft leases as of December 31, 1994 which consist of three
leases to Viscount Air Service, Inc. (Viscount).
Number Lease
Lessee Aircraft Type of Aircraft Expiration Renewal Options
Viscount Boeing 737-200 1 8/99 (1) None
Viscount Boeing 737-200 1 9/97 (2) None
Viscount Boeing 737-200 1 9/97 (3) None
(1) The aircraft now leased to Viscount was previously leased to Jet Fleet
Corporation (Jet Fleet). The lease with Viscount was at a variable rate
based on aircraft usage through August 1994. The Partnership has
negotiated a new lease with Viscount for five years commencing in
September 1994. The new fixed lease rate is approximately 116% of the
prior average variable rate.
(2) The aircraft now leased to Viscount was previously leased to Braniff, Inc.
(Braniff). The new lease rate represents 35% of the rate specified under
the prior lease to Braniff.
(3) The aircraft now leased to Viscount was previously leased to America West
Airlines (America West). The new lease rate represents 56% of the rate
specified under the prior lease to America West.
The Partnership transferred four aircraft to aircraft inventory. American Air
Lease, Inc. (American Air Lease) defaulted under its lease of one Boeing
737-200 aircraft in June 1991 as discussed in Item 3 and three Boeing 737-200s
were off-lease as a result of the Braniff bankruptcy as discussed in the
2
Partnership's Annual Report to the Securities and Exchange Commission on Form
10-K (Form 10-K) for the year ended December 31, 1990. 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 as
discussed in Item 7.
The Partnership also owns one aircraft that was leased to Cambodia
International Airlines Company, Ltd. (Cambodia International) until Cambodia
International exercised an early termination option and returned the aircraft
to the Partnership in September 1993. The aircraft is currently being
remarketed for sale. The Partnership has leased two engines from this aircraft
and one engine, previously leased to Viscount (Item 7), to Canair Cargo Ltd,
(Canair) for three years beginning in May 1994 as discussed in Item 7. Canair
may renew the lease for one three-year period at the same rental rate. In
addition, as discussed in Item 7, the Partnership has leased one engine to
Viscount for five months beginning in December 1994. One additional engine has
been on-lease to Viscount through a joint venture with Polaris Aircraft Income
Fund II from April 1993 through November 1997. The following table describes
certain material terms of the Partnership's current engine leases.
Number Lease
Lessee Engine Type of Engines Expiration Renewal Options
Canair JT8D-9A 3 5/97 One three-year period
Viscount JT8D-9A 1 5/95 None
Viscount JT8D-9A 1 11/97 None
Approximately 600 commercial aircraft are currently available for sale or
lease, approximately 100 less than a year ago. The current surplus has
negatively affected market lease rates and fair market values of both new and
used aircraft. Current depressed demand for air travel has limited airline
expansion plans, with new aircraft orders and scheduled delivery being canceled
or substantially deferred. As profitability has declined, many airlines have
taken action to downsize or liquidate assets and many airlines have filed for
bankruptcy protection. The Partnership has been forced to adjust its estimates
of the residual values realizable from its aircraft and aircraft inventory,
which resulted in an increase in depreciation expense in 1994, 1993 and 1992,
as discussed in Item 7. 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, that bring Boeing
737-200 aircraft into compliance with Federal Aviation Administration (FAA)
Stage 3 noise restrictions, are now available at a cost of approximately $1.7
million for lighter weight aircraft and up to $3.0 million for aircraft with
heavier takeoff weights. Hushkits may not be cost effective on all aircraft
due to the age of some of the aircraft and the time required to fully amortize
the additional investment. Certain ADs applicable to all models of this
aircraft have been issued to prevent fatigue cracks and control corrosion. The
market for this type of aircraft, as for all Stage 2 narrowbody aircraft,
remains very soft.
The general partner believes that in addition to the factors cited above, the
current soft 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 Airworthiness Directives
(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.
3
Item 2. Properties
PAIF-I owns four commercial jet aircraft, five spare engines and certain
inventoried aircraft parts from its original portfolio of eleven commercial jet
aircraft. The portfolio includes three Boeing 737-200 aircraft leased to
Viscount and one Boeing 737-200 aircraft formerly leased to Cambodia
International that came off lease during September 1993. In 1990, the
Partnership sold its Boeing 737-200 Convertible Freighter aircraft formerly
leased to Aloha Airlines, Inc. (Aloha). In July 1992, the Partnership sold its
McDonnell Douglas DC-9-10 aircraft, which was formerly leased to Hawaiian
Airlines, Inc. (Hawaiian). In December 1994, Viscount exercised its option to
purchase one Boeing 737-200 aircraft it was leasing as discussed in Item 7.
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 as discussed in Item 7. Three engines from the inventoried
aircraft and two engines from the former Cambodia International aircraft are
currently leased as previously discussed in Item 1.
The following table describes the Partnership's current aircraft portfolio in
greater detail:
Year of Cycles
Aircraft Type Serial Number Manufacture As of 12/31/94
Boeing 737-200 19606 1968 61,409
Boeing 737-200 19615 1969 60,466
Boeing 737-200 19617 1969 58,686
Boeing 737-200 20125 1969 61,075
Item 3. Legal Proceedings
American Air Lease Settlement - On July 30, 1991, the Partnership filed a
complaint in the Superior Court of the State of California for the City and
County of San Francisco, seeking damages for unpaid rent and other defaults
against lessee American Air Lease, and guarantor Americom Leasing Group, Inc.
American Air Lease and the Partnership reached a settlement by which American
Air Lease agreed to provide the Partnership with certain cash payments, return
of the aircraft and a certain participation in the proceeds, if any, from the
default judgment American Air Lease obtained against its lessee, Pan African
Airways. By a court order dated December 16, 1992, the settlement was reduced
to a judgment. The Partnership has sought to enforce the cash award part of
the settlement against the lessee and the guarantor in New York courts and has
reached a settlement payment with the lessee and the guarantor. The
Partnership is presently negotiating with insurers to recover on insurance
proceeds.
America West Bankruptcy - On March 14, 1994, the Partnership was served with a
complaint by America West, as debtor-in-possession under its bankruptcy
proceeding in the United States Bankruptcy Court for the District of Arizona,
seeking recovery of certain rent and lease termination payments made by America
West to the Partnership related to a lease of a Partnership aircraft and prior
to the filing of America West's bankruptcy. America West asserted that the
payments constituted preferences avoidable in bankruptcy. Although the
complaint purported to have been filed in June of 1993, it in fact was not
served until March 14, 1994, and neither the Partnership nor Polaris Investment
4
Management Corporation, its general partner, had any prior knowledge of the
existence of the complaint. The Partnership moved for dismissal on the basis
that the complaint was untimely, and on June 10, 1994, the Bankruptcy Court
granted the Partnership's motion to dismiss.
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 federal 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 allows the Partnership to retain
the security deposits and maintenance reserves previously posted by Markair and
also allows the Partnership an unsecured claim against Markair for $445,000,
which was converted to subordinated debentures during 1994.
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. The Partnership has received a check from the bankruptcy estate in
full payment of the allowed administrative claim, subject, however, to the
requirement of the stipulation that 25% of such proceeds be held in a separate,
interest-bearing account pending notification by Braniff that all the allowed
administrative claims have been satisfied. The Partnership recognized 75% of
the total claim as revenue in the statement of operations in 1992 (Item 8). In
the third quarter of 1994, the Partnership was authorized to release one-half
of the 25% portion of the Partnership's administrative claim segregated
pursuant to the stipulation approved in 1992. At the end of 1994, the
Partnership was advised that the remaining one-half balance of the 25%
segregated portion of the administrative claim payment could be released. 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. However, no
action on the Partnership's proof of claim has been taken by the Bankruptcy
Court.
5
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 has
expired. On June 29, 1994 and July 14, 1994, respectively, plaintiffs filed
their first amended original petition and second amended original petition,
both of which added plaintiffs. On July 18, 1994, plaintiffs filed their
response and opposition to defendants' motion for partial summary judgment and
also moved for a continuance on the motion for partial summary judgment. On
August 11, 1994, after plaintiffs again amended their petition to add numerous
plaintiffs, the defendants withdrew their summary judgment motion and motion to
stay discovery, without prejudice to refiling these motions at a later date.
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.
On April 29, 1994 and June 30, 1994, plaintiffs filed third and fourth amended
original petitions which added additional plaintiffs. On April 24, 1994,
plaintiffs filed motions for (i) joinder and consolidation of cases in
arbitration, (ii) joinder and consolidation of cases not subject to
arbitration, and (iii) a pre-trial scheduling order. These motions were
amended on June 29, 1994 and, on August 22, 1994, plaintiffs filed a renewed
6
motion for consolidation and motion to set for jury. On August 31, 1994,
plaintiffs filed their fifth amended original petition which added additional
plaintiffs and also filed their second plea in intervention adding nearly 2,000
intervenors. On September 7, 1994, the court denied plaintiffs' motion to
consolidate and motion to set for jury, but determined to sever from the
primary lawsuit four plaintiffs and set the action for trial on November 7,
1994. On October 4, 1994, plaintiffs filed their sixth amended petition adding
as defendants: 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, Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Securities Corporation, General Electric Capital
Corporation, General Electric Financial Services, Inc., and General Electric
Company.
On October 14, 1994, defendants filed motions for summary judgment on the
grounds of, inter alia, statute of limitations and failure to state a claim.
The motions have been fully briefed and the parties are waiting for a decision
by the Texas trial court. On October 20, 1994, certain Polaris and General
Electric entities filed a motion to transfer venue, plea in abatement and
motion to dismiss the claims of non-Texas residents on the basis of forum non
conveniens. On November 1, 1994 and November 7, 1994, plaintiffs filed their
seventh and eighth amended original petitions. On November 4, 1994, plaintiffs
filed a motion for summary judgment, motion for collateral estoppel, and motion
for summary judgment on the issue of fraudulent concealment. On November 7,
1994, plaintiffs filed a second motion for summary judgment. These motions
were supplemented on November 10, 1994. Defendants filed responses to these
motions on November 23, 1994.
On November 7, 1994, the Partnership and other Polaris and General Electric
entities filed in the Court of Appeals for the 4th Judicial District San
Antonio, Texas: (1) an emergency motion to stay trial court proceedings, and
(2) a motion for leave to file petition for writ of mandamus, together with
relator's petition for writ of mandamus, supporting brief and record. These
motions, which concern trial court rulings regarding venue, discovery, and
trial settings, were denied by the Court of Appeals on November 9, 1994. On
November 14, 1994, the Partnership and other Polaris and General Electric
entities filed in the Texas Supreme Court motions (a) for emergency stay of
trial court proceedings, and (b) for leave to file petition for writ of
mandamus, together with relators' petition and writ of mandamus, supporting
brief and record. On November 15, 1994, the Supreme Court granted the
emergency motion to stay trial court proceedings pending determination of
relators' motion for leave to file petition for writ of mandamus, which
concerns trial court rulings regarding venue, discovery, and trial settings.
On November 16, 1994, plaintiffs filed an emergency motion to lift the stay.
On February 16, 1995, the Texas Supreme Court denied leave to file the petition
and writ of mandamus and the stay of trial court proceedings was lifted. On
February 21, 1995, defendants filed a motion for a continuance of the case.
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.
7
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, defendants filed a Notice of Removal to the United States District Court
for the Northern District of Ohio, Eastern Division.
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, where the Partnership is named as a
nominal defendant, the Partnership is not a party to these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
PART II
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, 1994
Limited Partnership Interest: 6,947
General Partnership Interest: 1
c) Dividends:
Distributions of cash from operations commenced in 1987. The Partnership
made cash distributions to limited partners of $1,349,832 and $1,400,451,
or $8.00 and $8.30 per limited partnership unit during January 1994 and
1993, respectively.
Item 6. Selected Financial Data
1994 1993 1992 1991 1990
Revenues $ 3,081,215 $ 2,823,141 $ 3,541,108 $ 2,831,321 $ 6,351,070
Net Income (Loss) 829,960 (3,084,396) (12,536,518) (15,804,784) (1,014,923)
Net Income (Loss)
allocated to
Limited Partners 686,691 (3,193,583) (12,411,153) (15,731,092) (1,089,130)
Net Income (Loss)
per Limited
Partnership Unit 4.07 (18.93) (73.56) (93.23) (6.45)
Cash Distributions
per Limited
Partnership Unit 8.00 8.30 - 5.00 5.00
Total Assets 16,487,091 16,831,113 22,733,308 36,090,023 56,402,689
Partners' Capital 14,974,251 15,644,104 20,284,557 32,821,075 49,563,242
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership owns a portfolio of four used Boeing 737-200 commercial jet
aircraft, five spare engines and certain inventoried aircraft parts out of its
original portfolio of eleven aircraft. Three of the aircraft are leased to
Viscount Air Service, Inc. (Viscount). The lease of one aircraft to Cambodia
International Airlines Company, Ltd. (Cambodia International) was terminated
early by the lessee in September 1993 and the aircraft was returned to the
Partnership. This aircraft is being remarketed for sale. The Partnership has
leased the two engines from this aircraft and one engine previously leased to
Viscount, to Canair Cargo Ltd. (Canair). In addition, the Partnership
transferred four aircraft to aircraft inventory. These aircraft have been
disassembled for sale of their component parts. Two engines from these
aircraft are leased to Viscount, one of which is through a joint venture with
Polaris Aircraft Income Fund II (PAIF-II). The Partnership has sold three
aircraft from its original aircraft portfolio: a Boeing 737-200 Convertible
Freighter in 1990, a McDonnell Douglas DC-9-10 in 1992 (as discussed below),
and a Boeing 737-200 in 1993 (as discussed below).
Partnership Operations
The Partnership recorded net income of $829,960, or $4.07 per limited
partnership unit for the year ended December 31, 1994, compared to net losses
of $3,084,396 and $12,536,518, or $18.93 and $73.56 per limited partnership
unit, for the years ended December 31, 1993 and 1992, respectively. The losses
for 1993 and 1992 resulted from the Braniff Airlines, Inc. (Braniff) and other
lessee defaults and the extended period that the related aircraft were off
lease due to market conditions. The Partnership incurred substantial
maintenance expenses to remarket these aircraft as well as legal expenses
related to the defaults. The significant improvement in the Partnership's
operating results for the year ended December 31, 1994, as compared to 1993 and
1992, is due primarily to significantly lower depreciation and amortization
expenses, aircraft operating expenses and interest expense in 1994.
Depreciation adjustments in 1994, 1993 and 1992 were approximately $260,000,
$2.5 million and $7.9 million, 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 addition, no depreciation
expense was recognized after the third quarter of 1993 on one Boeing 737-200
aircraft as a result of the sale of this aircraft to Viscount. Two additional
Boeing 737-200s were fully depreciated to their estimated residual value in
June 1994 and November 1994, respectively.
The Partnership incurred significantly increased maintenance, repair and legal
expenses in 1993 and 1992 in connection with the repossession of leased
aircraft following several lessee defaults, as discussed in Note 5 to the
financial statements (Item 8). During 1993 and 1992, the Partnership also
recognized as operating expense the estimated costs of disassembling four
aircraft transferred to aircraft inventory. In 1994, all lessees have
performed as required by their leases or, with respect to Viscount, the
restructuring agreement as discussed later, and operating expenses were
reduced.
Interest expense declined in 1993 from the prior-year level as the Partnership
repaid, during the third quarter of 1993, its outstanding note originally used
to finance improvements and repairs to aircraft formerly on lease to Braniff.
No interest expense was incurred during 1994.
10
Further impacting the improved operating results in 1994 as compared to 1993
was an increase in total revenues during 1994, primarily as a result of
interest earned on the sale of the Partnership's Boeing 737-200 aircraft to
Viscount as discussed later.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all payments due under the current
leases to Viscount and Canair. However, to assist Viscount with the funding of
costs associated with Federal Aviation Regulation compliance relating to the
Partnership's aircraft, the Partnership entered into an agreement with Viscount
under which it agreed to defer certain rents due the Partnership on three
aircraft and one spare engine. The deferred rents, which aggregate $753,200,
are being repaid by Viscount with interest over the remaining lease terms. The
agreement with Viscount also stipulates that the Partnership will advance
Viscount $486,000, primarily for maintenance expenses incurred by Viscount
relating to the Partnership's aircraft. In accordance with the agreement, the
Partnership advanced Viscount $486,000 during 1994 which is being repaid by
Viscount with interest over a 30-month period beginning in January 1995 as
discussed later.
During 1994, American International Airways, Inc. (American International) paid
to the Partnership $586,963, the remaining balance of the note generated from
the aircraft installment sale. In addition, Viscount exercised its option to
purchase the Boeing 737-200 aircraft it was leasing and paid $437,022 to the
Partnership in December 1994.
The Partnership receives maintenance reserve payments from certain of its
lessees that may be reimbursed to the lessee or applied against certain costs
incurred by the Partnership for maintenance work performed on the Partnership's
aircraft, as specified in the leases. Maintenance reserve balances remaining
at the termination of the lease may be used by the Partnership to offset future
maintenance expenses. The net maintenance reserves payments aggregate
$1,239,595 as of December 31, 1994.
Payments of $912,263 have been received during 1994 from the sales of parts
from the four disassembled aircraft. A portion of the Partnership's cash
reserves as of December 31, 1994 was distributed to the partners during January
1995. The remaining cash reserve balance, combined with the rental revenue
generated by the Partnership's aircraft leases, is expected to be sufficient to
cover the Partnership's normal operating and administrative expenses for 1995.
Cash Distributions - Cash distributions to limited partners during 1994 and
1993 were $1,349,832 and $1,400,451, respectively. Cash distributions per
limited partnership unit were $8.00 and $8.30 during 1994 and 1993,
respectively. No cash distributions were made during 1992. No other cash was
available for distribution in 1994 or 1993 as the net cash generated from
operations is being reserved to cover potential costs of remarketing the
Partnership's off-lease aircraft and to fund the costs associated with the
Viscount restructuring agreement as discussed below.
The timing and amount of future cash distributions to partners are not yet
known and will depend upon the Partnership's ability to remarket the off-lease
aircraft, the Partnership's future cash requirements, the receipt of the rental
payments from Viscount and Canair, the receipt of the deferred rental payments
and financing payments from Viscount, and the receipt of payments generated
from the aircraft disassembly process.
11
Remarketing Update
Sale of McDonnell Douglas DC-9-10 Aircraft - As discussed in Note 4 to the
financial statements (Item 8), in 1992 the Partnership entered into an
agreement with American International for the installment sale of one McDonnell
Douglas DC-9-10 aircraft. In November 1994, American International paid the
remaining balance of the note of $586,963.
Sale of Boeing 737-200 Aircraft - In October 1993, the Partnership leased to
Viscount one Boeing 737-200 aircraft formerly on lease to Aviateca, S.A. The
lease provided Viscount the right to exercise a purchase option at varying
dates and purchase prices throughout the term of the lease. 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 of $970,000 in 1993,
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.
Aircraft Lease to Viscount - The lease of one Boeing 737-200 aircraft to
Viscount continued on a month-to-month basis through August 1994. Viscount
performed certain maintenance and modification work on the aircraft totaling
approximately $150,000, which the Partnership paid from maintenance reserves
previously received by the Partnership from Viscount. The Partnership entered
into a new lease with Viscount for a five-year term which commenced in
September 1994. The new lease rate is $40,000 per month, which is
approximately 116% of the prior average rate.
Engine Lease to Canair - The Partnership has leased two engines from the
aircraft formerly on lease to Cambodia International 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.
Engine Lease to Viscount - Two engines from the disassembled aircraft were
transferred from aircraft inventory in 1994 and reflected as aircraft at an
aggregate value of $360,000 in the December 31, 1994 balance sheet (Item 8).
The Partnership leased these engines to Viscount for 52 days. Rental revenue
of $27,260 was recognized during 1994. One of these engines was subsequently
leased to 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.
Remarketing of Remaining Aircraft - The Partnership is continuing remarketing
efforts for the former Cambodia International aircraft returned in September
1993 for sale; however, the market for this aircraft continues to be very weak.
In addition to remarketing costs, the Partnership is responsible for payment of
all routine expenses associated with the aircraft while off lease, including
storage, insurance and maintenance, as well as costs of compliance with all
non-routine inspections and modifications mandated by the Federal Aviation
Administration (FAA).
12
Viscount Restructuring Agreement
Rent Deferral - To assist Viscount with the funding of costs associated with
Federal Aviation Regulation compliance relating to the Partnership's aircraft,
the Partnership entered into an agreement with Viscount to defer certain rents
due the Partnership on three aircraft and one spare engine for a period of up
to six months. The deferred rents, which will aggregate $753,200, are being
repaid by Viscount with interest at a rate of 6% per annum beginning in October
1994, over the remaining terms of the leases.
Maintenance Advance - The Partnership has also agreed to extend a line of
credit to Viscount for $486,000 to be used primarily for maintenance expenses
relating to the Partnership's aircraft. In accordance with the agreement, the
Partnership advanced Viscount $486,000 during 1994. Payments of interest at
variable rates ranging from 8.75% to 9.18% per annum were paid by Viscount
beginning in September 1994. Beginning in January 1995, level payments to
amortize the advance over a 30-month period, with interest at a rate of 11.53%
per annum, are being paid in arrears.
Option - The Partnership has the option to acquire approximately 2.3% of the
issued and outstanding shares of Viscount stock as of July 26, 1994 for an
option price of approximately $349,000. The option may be exercised at any
time during the option period, which expires on July 20, 1999. This option is
carried at zero value in the balance sheet as of December 31, 1994 (Item 8) due
to the uncertainty of its realizability.
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. It is anticipated that the disassembly and
sales process will take at least three years. The Partnership has borne the
estimated cost of disassembly of approximately $250,000 for the four aircraft,
and will receive the proceeds from the sale of such parts, net of overhaul
expenses if necessary, and commissions paid to Soundair. During 1994 and 1993,
the Partnership paid $18,120 and $93,050, respectively, for aircraft
disassembly costs. The Partnership received net proceeds from the sale of
aircraft inventory of $912,263 and $199,621 during 1994 and 1993, respectively.
Three of the aircraft formerly on lease to Braniff have been recorded as
aircraft inventory in the amount of $2.85 million as of December 31, 1992 and
one additional aircraft formerly on lease to American Air Lease was recorded as
aircraft inventory in the amount of $900,000 as of December 31, 1993. Upon
transferring the first three aircraft to aircraft inventory, the Partnership
recorded downward adjustments to the aircraft net book value in 1992 of
$3.15 million. During 1994 and 1993, the Partnership recorded additional
downward adjustments to the inventory value of $261,170 and $959,112, to
reflect the then-current estimate of net realizable aircraft inventory value.
These adjustments are reflected as increased depreciation expense in the
corresponding years' statement of operations (Item 8). During 1994, two
engines were removed from the disassembly program at an aggregate value of
$360,000 and leased as previously discussed.
13
Claims Related to Lessee Defaults
Receipt of Braniff Bankruptcy Claim - As discussed in Item 3, in 1992 the
Partnership received full payment of the Braniff administrative 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 (Item 8).
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 is also
entitled to retain security deposits in the amount of $74,075. Both amounts
are recognized as revenue in claims related to lessee defaults in the 1994
statement of operations (Item 8). The Partnership is proceeding to recover
under the judgment through collection of insurance claim proceeds from insurers
and judicial enforcement in New York against American Air Lease.
Receipt of Markair, Inc. (Markair) Claim - As discussed in Item 3, the
Bankruptcy Court approved a plan of reorganization for Markair and a
stipulation allowing the Partnership to retain the security deposits and
maintenance reserves and an unsecured claim against Markair for $445,000. The
unsecured claim was converted to 10% subordinated debentures during 1994.
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).
Reconciliation of Book Income to Taxable Income
The following is a reconciliation between net income per limited partnership
unit reflected in the accompanying financial statements (Item 8) and the
information provided to limited partners for federal income tax purposes:
1994 book net income per limited partnership unit $ 4.07
Adjustments for tax purposes:
Recognition of revenue from secured debentures 2.58
Recognition of revenue from increase in maintenance reserves 4.99
Additional expense from disbursement of maintenance reserves (2.45)
Book depreciation in excess of tax depreciation 9.37
Net tax loss on sale of inventory and writedown of inventory (5.98)
Items capitalized for tax and expensed for book 0.53
--------
1994 taxable income per limited partnership unit $ 13.11
========
The differences between net income for book purposes and net income for tax
purposes are the result of timing differences of certain revenue and
deductions. During 1994, an unsecured claim by the Partnership against Markair
was converted into 10% subordinated debentures. The expected principal
payments from these debentures were not recorded for book due to the
uncertainty of collection. The Partnership recognized the full principal
amount of the debentures as revenue for tax purposes in 1994. Certain
increases in the Partnership's book maintenance reserve liability were also
14
recognized as revenue for tax purposes. Disbursements from the Partnership's
book maintenance reserve are capitalized or expensed for tax purposes, as
appropriate.
The Partnership computes depreciation using the straight-line method for
financial reporting and generally an accelerated method for tax purposes. As a
result, the current year book depreciation expense is greater than the tax
depreciation expense computed under the accelerated method. Certain aircraft
were disassembled and held in inventory until their component parts can be
sold. A net tax loss resulted from the sale of these component parts along
with a writedown to tax basis inventory value. For book purposes, such assets
are reflected at estimated net realizable value. Finally, certain costs were
capitalized for tax purposes and expensed for book purposes.
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 uncover 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.
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.
The Partnership's existing leases require the lessees to maintain the
Partnership's aircraft in accordance with an FAA-approved maintenance program
during the lease term. At the end of the leases, each lessee is generally
required to return the aircraft in airworthy condition including compliance
with all ADs for which action is mandated by the FAA during the lease term. In
negotiating subsequent leases, market conditions currently generally require
that the Partnership bear some or all of the costs of compliance with future
ADs or ADs that have been issued, which did not require action during the
previous lease term. The ultimate effect on the Partnership of compliance with
the FAA maintenance standards is not determinable at this time and will depend
on a variety of factors, including the state of the commercial aircraft
15
industry, the timing of the issuance of ADs, and the status of compliance
therewith at the expiration of the current leases.
Aircraft Noise - Another issue which has affected the airline industry is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are, with
few exceptions, no longer allowed to operate from civil airports in the United
States. Stage 2 aircraft meet current FAA requirements, subject to the phase-
out rules discussed below. Stage 3 aircraft are the most quiet and Stage 3 is
the standard for all new aircraft.
On September 24, 1991, the FAA issued final rules on the phase-out of Stage 2
aircraft by the end of this decade. The current U.S. fleet is comprised of
approximately 57% Stage 3 aircraft and 43% Stage 2 aircraft. 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).
- Carryforward credits will be awarded to operators for early additions of
Stage 3 aircraft to their fleets. These credits may be used to reduce
either the number of Stage 2 aircraft it must phase-out or the number of
Stage 3 aircraft it must phase-in by the next interim compliance date.
The credits must be used by that operator, however, and cannot be
transferred or sold to another operator.
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. The rule has specific exceptions for
leased aircraft and does allow the continued use of Stage 2 aircraft which were
in operation before November 1, 1990, although adoption of rules requiring the
eventual phase-out of Stage 2 aircraft is anticipated. The International Civil
Aviation Organization has also endorsed the phase-out of Stage 2 aircraft on a
world-wide basis by the year 2002.
The Partnership's entire fleet consists of Stage 2 aircraft. Hushkit
modifications, which allow Stage 2 aircraft to meet Stage 3 requirements, are
currently available for the Partnership's aircraft. However, while technically
feasible, hushkits may not be cost effective on all models due to the age of
some of the aircraft and the time required to fully amortize the additional
investment. The general partner will evaluate, as appropriate, the potential
benefits of hushkitting some or all of the Partnership's aircraft. It is
unlikely, however, that the Partnership will incur such costs unless they can
be substantially recovered through a lease.
16
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 - Approximately 600 commercial aircraft are currently
available for sale or lease, approximately 100 less than a year ago. The
current surplus has negatively affected market lease rates and fair market
values of both new and used aircraft. Current depressed demand for air travel
has limited airline expansion plans, with new aircraft orders and scheduled
delivery being canceled or substantially deferred. As profitability has
declined, many airlines have taken action to downsize or liquidate assets and
many airlines have filed for bankruptcy protection.
Effects on the Partnership's Aircraft - To ensure that the carrying value of
each asset equals its estimated residual value at the end of its expected
holding period, where appropriate, the Partnership has made downward
adjustments to its estimates of aircraft residual value during 1993 and 1992
for certain of its on-lease aircraft. In addition, during 1994, 1993 and 1992,
the Partnership recognized downward adjustments totaling approximately
$260,000, $2.5 million and $7.9 million, respectively, to the book value for
certain of its aircraft and, with respect to 1994 and 1993, the adjustments
also included adjustments to aircraft inventory. These adjustments are
included in depreciation expense in the corresponding years statement of
operations (Item 8).
The Partnership's aircraft leases expire between September 1997 and August
1999. To the extent that the Partnership's Boeing aircraft continue to be
adversely affected by industry events, the Partnership will evaluate each
aircraft as it comes off lease to determine whether a re-lease or a sale at the
then-current market rates would be most beneficial for unit holders.
17
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND I
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994 AND 1993
TOGETHER WITH
AUDITORS' REPORT
18
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, 1994 and 1993, 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, 1994.
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, 1994 and 1993, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
January 24, 1995
19
POLARIS AIRCRAFT INCOME FUND I
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
1994 1993
ASSETS:
CASH AND CASH EQUIVALENTS $ 7,486,952 $ 144,725
SHORT-TERM INVESTMENTS, at cost which
approximates market value - 4,715,326
----------- -----------
Total Cash and Cash Equivalents and
Short-Term Investments 7,486,952 4,860,051
RENT AND INTEREST RECEIVABLE 1,105,843 233,654
NOTES RECEIVABLE 486,000 1,597,385
AIRCRAFT at cost, net of accumulated
depreciation of $24,013,057 in 1994 and
$22,436,643 in 1993 6,489,292 7,705,706
AIRCRAFT INVENTORY 919,004 2,434,317
----------- -----------
$16,487,091 $16,831,113
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 102,288 $ 142,483
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 45,957 14,000
LESSEE SECURITY DEPOSITS 125,000 224,075
MAINTENANCE RESERVES 1,239,595 806,451
----------- -----------
Total Liabilities 1,512,840 1,187,009
----------- -----------
PARTNERS' CAPITAL (DEFICIT):
General Partner (578,793) (572,081)
Limited Partners, 168,729 units issued and
outstanding 15,553,044 16,216,185
----------- -----------
Total Partners' Capital 14,974,251 15,644,104
----------- -----------
$16,487,091 $16,831,113
=========== ===========
The accompanying notes are an integral part of these statements.
20
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1994 1993 1992
REVENUES:
Rent from operating leases $ 1,765,947 $ 1,929,525 $ 1,477,138
Claims related to lessee defaults 815,888 701,074 1,769,566
Gain on sale of equipment - - 97,895
Interest and other 499,380 192,542 196,509
------------ ------------ ------------
Total Revenues 3,081,215 2,823,141 3,541,108
------------ ------------ ------------
EXPENSES:
Depreciation and amortization 1,837,584 5,081,327 13,917,395
Management and advisory fees 84,066 100,667 73,856
Operating 164,557 532,294 1,772,277
Interest - 39,810 147,708
Administration and other 165,048 153,439 166,390
------------ ------------ ------------
Total Expenses 2,251,255 5,907,537 16,077,626
------------ ------------ ------------
NET INCOME (LOSS) $ 829,960 $ (3,084,396) $(12,536,518)
============ ============ ============
NET INCOME (LOSS)
ALLOCATED TO THE
GENERAL PARTNER $ 143,269 $ 109,187 $ (125,365)
============ ============ ============
NET INCOME (LOSS)
ALLOCATED TO
LIMITED PARTNERS $ 686,691 $ (3,193,583) $(12,411,153)
============ ============ ============
NET INCOME (LOSS)
PER LIMITED
PARTNERSHIP UNIT $ 4.07 $ (18.93) $ (73.56)
============ ============ ============
The accompanying notes are an integral part of these statements.
21
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
General Limited
Partner Partners Total
Balance, December 31, 1991 $ (400,297) $33,221,372 $ 32,821,075
Net loss (125,365) (12,411,153) (12,536,518)
---------- ----------- ------------
Balance, December 31, 1992 (525,662) 20,810,219 20,284,557
Net income (loss) 109,187 (3,193,583) (3,084,396)
Cash distributions to partners (155,606) (1,400,451) (1,556,057)
---------- ----------- ------------
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
========== =========== ============
The accompanying notes are an integral part of these statements.
22
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1994 1993 1992
OPERATING ACTIVITIES:
Net income (loss) $ 829,960 $ (3,084,396) $(12,536,518)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,837,584 5,081,327 13,917,395
Gain on sale of equipment - - (97,895)
Changes in operating assets and liabilities:
Decrease (increase) in rent and interest
receivables (872,189) (111,421) 344,050
Decrease in inventory - 250,000 -
Increase (decrease) in payable to affiliates (40,195) (60,899) 3,986
Increase (decrease) in accounts payable
and accrued liabilities 31,957 (52,021) (66,092)
Decrease in lessee security deposits (99,075) (288,125) (75,875)
Increase (decrease) in maintenance reserves 433,144 (45,697) 427,946
Increase (decrease) in deferred income - (35,000) 35,000
---------- ---------- ----------
Net cash provided by operating activities 2,121,186 1,653,768 1,951,997
---------- ---------- ----------
INVESTING ACTIVITIES:
Increase in notes receivable (486,000) - -
Principal payments on notes receivable 1,597,385 271,295 289,532
Net proceeds from sale of aircraft inventory 912,263 199,621 -
Inventory disassembly costs (18,120) (93,050) -
Improvements to aircraft - - (105,162)
Lease acquisition fees - - (11,233)
Expenses related to sale of aircraft - - (7,107)
---------- ---------- ----------
Net cash provided by investing activities 2,005,528 377,866 166,030
---------- ---------- ----------
FINANCING ACTIVITIES:
Principal payments on notes payable - (780,000) (1,040,000)
Cash distributions to partners (1,499,813) (1,556,057) -
---------- ---------- ----------
Net cash used in financing activities (1,499,813) (2,336,057) (1,040,000)
---------- ---------- ----------
CHANGES IN CASH AND CASH
EQUIVALENTS AND SHORT-TERM
INVESTMENTS 2,626,901 (304,423) 1,078,027
CASH AND CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS AT
BEGINNING OF YEAR 4,860,051 5,164,474 4,086,447
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS AT END
OF YEAR $ 7,486,952 $ 4,860,051 $ 5,164,474
============ ============ ============
The accompanying notes are an integral part of these statements.
23
POLARIS AIRCRAFT INCOME FUND I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
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
financial statements and files its tax returns on the accrual basis of
accounting.
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds.
Short-Term Investments - The Partnership classifies all liquid investments with
original maturities of three months or less as short-term investments.
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 is calculated based upon the number of days that the aircraft are
in service.
The Partnership periodically reviews the estimated realizability of the
residual values at the end of each aircraft's economic life. For any downward
adjustment in estimated residual, or decrease in the estimated remaining
economic life, the depreciation expense over the remaining life of the aircraft
is increased. If the expected net income generated from the lease (rental
revenue, net of management fees, less adjusted depreciation and an allocation
of estimated administrative expense) results in a net loss, that loss will be
recognized currently. Off-lease aircraft are carried at the lower of
depreciated cost or estimated net realizable value. A further adjustment is
made for those aircraft, if any, that require substantial maintenance work.
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 appropriate
period. These costs are also subject to the periodic evaluation discussed
above.
Aircraft Inventory - Aircraft held in inventory for sale are reflected at the
lower of depreciated cost or estimated net realizable value. Proceeds from
sales are applied against inventory until book value is fully recovered.
Other Assets - Lease acquisition costs are capitalized as other assets and
amortized using the straight-line method over the term of the lease.
Operating Leases - Certain of the aircraft leases are accounted for as
operating leases with the exception of one lease which was recognized as a sale
in 1993 as discussed in Note 4. Lease revenues are recognized in equal
installments over the terms of the leases.
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.
24
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, 1994, 1993
and 1992.
Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
Financial Accounting Pronouncements - SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," and the related SFAS No. 118, which together require
that certain impaired loans be measured based on the present value of expected
cash flows discounted at the loan's effective interest rate; or, alternatively,
at the loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. This statement has been adopted as of
January 1, 1995. The Partnership does not expect the adoption of this
statement to have a significant impact on its financial position or results of
operations.
Reclassification - Certain 1993 and 1992 balances have been reclassified to
conform to the 1994 presentation.
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 affiliates are described in Note 9.
3. Aircraft
The Partnership owns four 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 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.
25
One Boeing 737-200 Convertible Freighter - This aircraft was acquired for
$7,613,333 in 1985 and leased to Aloha Airlines, Inc. (Aloha) 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 (Note 5). The aircraft was sold in 1992 (Note
4).
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.
(Delta) 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 Federal Bankruptcy Code and returned the aircraft to
the Partnership. Substantial maintenance work has been completed on these
aircraft and the aircraft have been re-leased to various lessees or
disassembled as described below.
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 Air Service, Inc. (Viscount) through a
joint venture with Polaris Aircraft Income Fund II from April 1993 through
November 1997. Two additional engines from these aircraft were subsequently
transferred from aircraft inventory in 1994 and reflected as aircraft at an
aggregate value of $360,000 in the December 31, 1994 balance sheet. 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.
One aircraft was leased to American Air Lease, Inc. (American Air Lease) from
February 1990 until the lessee's default in June 1991 at approximately 88% of
the prior rate (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. (America West) from
August 1990 until June 1991 at approximately 70% of the prior rate . The
aircraft was then leased to Viscount at 56% of the prior rate from February
1992 until September 1997 (Note 8).
One aircraft was leased to Viscount from April 1992 through September 1997 at
35% of the prior rate (Note 8).
Two aircraft were leased to Markair, Inc. (Markair) at approximately 57% of the
prior rate 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 at 54% of the prior rate. In October 1993, this
aircraft was leased to Viscount. Rental payments for an interim lease term
through December 1, 1993 were at a variable rate based on usage. Thereafter and
through the end of the lease term in December 1996, the basic rent payments are
100% of the prior rate received from Aviateca. The lease provides Viscount the
right to exercise a purchase option at varying dates and purchase prices
throughout the term of the lease and a nominal purchase price option at the end
of the lease term. As a result, the Partnership recognized this transaction as
a sale in 1993. In December 1994, Viscount exercised its option to purchase
the aircraft (Note 4).
26
The second aircraft formerly leased to Markair was leased to Cambodia
International Airlines Company, Ltd. (Cambodia International) from November
1992 through November 1994 at 62% of the prior rate. The lease provided the
lessee an early termination option after six months. The lessee exercised this
option and returned the aircraft to the Partnership in September 1993. The
aircraft is currently being remarketed for sale or re-lease. The Partnership
has 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 (Jet Fleet) at approximately
44% of the prior rate from May 1992 until the lessee's default in September
1992 (Note 5). The aircraft was then leased to Viscount at a variable rate
based on usage from November 1992 until February 1993, although Viscount had
the option to extend the lease for five years and the option to purchase the
aircraft at the end of the extended lease term. Viscount elected not to extend
the lease and the Partnership agreed to allow Viscount to operate the aircraft
under the same terms, on a month-to-month basis through August 1994. Viscount
performed certain maintenance and modification work on the aircraft totaling
approximately $150,000, which the Partnership paid from maintenance reserves
previously received by the Partnership from Viscount. The Partnership entered
into a new lease with Viscount for a five-year term which commenced in
September 1994. The new lease rate is $40,000 per month, which is
approximately 116% of the prior average rate (Note 8).
Remarketing of Remaining Aircraft - The Partnership is continuing remarketing
efforts for the one remaining off-lease aircraft for sale. However, the market
for this aircraft continues to be very weak.
The following is a schedule by year of future minimum rental revenue under the
existing leases:
Year Amount
1995 $1,976,000
1996 1,946,000
1997 1,463,600
1998 480,000
1999 and thereafter 320,000
----------
Total $6,185,600
==========
To ensure that the carrying value of each asset equals its estimated residual
value at the end of its expected holding period, where appropriate, the
Partnership has made downward adjustments to its estimates of aircraft residual
value during 1993 and 1992 for certain of its on-lease aircraft (Note 1). In
addition, during 1994, 1993 and 1992, the Partnership recognized downward
adjustments totaling approximately $260,000, $2.5 million and $7.9 million,
respectively, to the book value for certain of its aircraft and, with respect
to 1994 and 1993, the adjustments also included adjustments to aircraft
inventory as described in Note 6. These adjustments are included in
depreciation expense in the statements of operations.
4. Sale of Equipment
Sale of McDonnell Douglas DC-9-10 Aircraft - In 1992, the Partnership entered
into an agreement with American International Airways, Inc. (American
27
International) for the installment sale of this aircraft. The Partnership
recognized a loss on the sale of $7,105 in 1992. American International made a
$100,000 down payment and monthly installment payments of $18,000. At December
31, 1993, the note receivable balance was $732,068. In November 1994, American
International paid the remaining balance of the note of $586,963.
Sale of Other Equipment - The Partnership recognized a gain of $105,000 on the
sale of overhead bin kits in 1992, which more than offset the loss on the sale
of the McDonnell Douglas DC-9-10 aircraft as described above.
Sale of Boeing 737-200 Aircraft - In October 1993, the Partnership leased to
Viscount one Boeing 737-200 aircraft formerly on lease to Aviateca. The lease
provided Viscount the right to exercise a purchase option at varying dates and
purchase prices throughout the term of the lease. 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.
Depreciation expense was increased by approximately $1.5 million in 1993 to
reflect the writedown of the aircraft to the sale price. The Partnership
recorded a note receivable of $970,000 in 1993, which was reduced by payments
received from Viscount less interest. The note receivable balance was
$865,317 on December 31, 1993. 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.
5. Claims Related to Lessee Defaults
The Partnership has incurred approximately $10.5 million for costs resulting
from the Braniff bankruptcy. Excluding the claim from the bankruptcy court
discussed below, the costs have been paid from amounts received from Braniff of
approximately $2.7 million, the Partnership's cash reserves, and a portion of
the proceeds from the sale of the former Aloha aircraft.
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. The Partnership recognized 75% of the total as revenue in claims
related to lessee defaults in the 1992 statement of operations. 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.
Hawaiian - Hawaiian defaulted on its lease in November 1990, however, as a
result of legal action taken by the Partnership, during 1992 Hawaiian paid all
amounts due under a settlement agreement reached in 1991, a portion of which
was recognized as revenue in claims related to lessee defaults in the 1992
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
28
Americom Leasing Group, Inc. (Americom). The Partnership had a cash security
deposit equal to approximately four and one half month's rent which was applied
against unpaid rent during 1992. American Air Lease and the Partnership
reached a settlement consisting of certain cash payments (Note 5), 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 is
proceeding 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 is also entitled to retain security deposits in the amount of
$74,075. Both amounts are recognized as revenue in claims related to lessee
defaults in the 1994 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 Federal 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.
Jet Fleet - In September 1992, the Partnership repossessed the aircraft due to
the lessee's failure to maintain adequate insurance and pay maintenance reserve
payments as required under the lease. Jet Fleet had paid rent through
September 1992. Thereafter, Jet fleet filed for bankruptcy protection in
United States Bankruptcy Court. The Partnership filed a proof of claim in the
Jet Fleet bankruptcy to recover its damages. However, no action on the
Partnership's proof of claim has been taken by the Bankruptcy Court.
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. It is anticipated that the disassembly and
sales process will take at least three years. The Partnership has borne the
estimated cost of disassembly of approximately $250,000 for the four aircraft,
and will receive the proceeds from the sale of such parts, net of overhaul
expenses if necessary, and commissions paid to Soundair. During 1994 and 1993,
the Partnership paid $18,120 and $93,050, respectively, for aircraft
disassembly costs. The Partnership received net proceeds from the sale of
aircraft inventory of $912,263 and $199,621 during 1994 and 1993, respectively.
29
Three of the aircraft formerly on lease to Braniff have been recorded as
aircraft inventory in the amount of $2.85 million as of December 31, 1992 and
one additional aircraft formerly on lease to American Air Lease was recorded as
aircraft inventory in the amount of $900,000 as of December 31, 1993. Upon
transferring the first three aircraft to aircraft inventory, the Partnership
recorded downward adjustments to the aircraft net book value in 1992 of
$3.15 million. During 1994 and 1993, the Partnership recorded additional
downward adjustments to the inventory value of $261,170 and $959,112, 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.
7. Note Payable
In December 1988, the Partnership borrowed $5,200,000 from Bank of America
National Trust and Savings Association, at an interest rate of 10.17%. The
Partnership was required to make principal payments in twenty quarterly
installments and monthly interest payments commencing December 31, 1988. The
Partnership paid a fee of $40,000 in consideration for the loan. The
Partnership paid interest expense on the note of $39,810 and $147,708 during
1993 and 1992, respectively. The Partnership repaid the note payable upon
maturity in September 1993.
8. Viscount Restructuring Agreement
Rent Deferral - To assist Viscount with the funding of costs associated with
Federal Aviation Regulation compliance relating to the Partnership's aircraft,
the Partnership has entered into an agreement with Viscount to defer certain
rents due the Partnership on three aircraft and one spare engine for a period
of up to six months. The deferred rents, which will aggregate $753,200, are
being repaid by Viscount with interest at a rate of 6% per annum beginning in
October 1994, over the remaining terms of the leases.
Maintenance Advance - The Partnership has also agreed to extend a line of
credit to Viscount for $486,000 to be used primarily for maintenance expenses
relating to the Partnership's aircraft. In accordance with the agreement, the
Partnership advanced Viscount $486,000 during 1994. Payments of interest at
variable rates ranging from 8.75% to 9.18% per annum were paid by Viscount
beginning in September 1994. Beginning in January 1995, level payments to
amortize the advance over a 30-month period, with interest at a rate of 11.53%
per annum, will be due in arrears.
Option - The Partnership has the option to acquire approximately 2.3% of the
issued and outstanding shares of Viscount stock as of July 26, 1994 for an
option price of approximately $349,000. The option may be exercised at any
time during the option period, which expires on July 20, 1999. This option is
carried at zero value in the accompanying balance sheet as of December 31, 1994
due to the uncertainty of its realizability.
30
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 1994, 1993 and 1992, the Partnership paid management fees
to PIMC of $80,346, $96,392 and $66,902, respectively. Management fees
payable to PIMC at December 31, 1994 and 1993 were $37,628 and $33,908,
respectively.
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets.
In 1994, 1993 and 1992, $201,083, $189,728 and $180,607 were reimbursed
to PIMC by the Partnership for administrative expenses. Administrative
reimbursements of $30,933 and $43,050 were payable to PIMC at December
31, 1994 and 1993, respectively. Partnership reimbursements to PIMC
for maintenance and remarketing costs of $264,295, $731,174 and
$1,701,283 were paid in 1994, 1993, and 1992, respectively.
Maintenance and remarketing reimbursements of $33,727 and $65,525 were
payable to PIMC at December 31, 1994 and 1993, respectively.
c. A 10% interest 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 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 shall be paid only after limited partners have received
distributions in an aggregate amount equal to their capital
contributions plus a cumulative non-compounded 8% percent 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 May 1993 at a fair market rental rate. The Partnership recognized
rental revenue on this engine of $146,000 and $98,000 in 1994 and 1993,
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.
31
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1994 and 1993 are as
follows:
Reported Amounts Tax Basis Net Difference
1994: Assets $ 16,487,091 $ 29,880,086 $ (13,392,995)
Liabilities 1,512,840 273,244 1,239,596
1993: Assets $ 16,831,113 $ 29,117,249 $ (12,286,136)
Liabilities 1,187,009 380,558 806,451
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
32
PART III
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), have recently restructured their operations and businesses (the
Polaris Restructuring). In connection therewith, PIMC has entered into a
services agreement dated as of July 1, 1994 (the Services Agreement) with GE
Capital Aviation Services, Inc. (the Servicer or GECAS), a Delaware corporation
which is a wholly owned subsidiary of General Electric Capital Corporation, a
New York corporation (GE Capital). GE Capital has been PHC's parent company
since 1986. As subsidiaries of GE Capital, the Servicer and PIMC are
affiliates.
The GE Capital Restructuring - GE Capital has recently completed a
restructuring (the GE Capital Restructuring) of its commercial aviation
operations, and as a result the owned and managed aircraft portfolios of
certain of its affiliates, including its Polaris affiliates, are now managed by
GECAS, subject in the case of Polaris investment programs to overall management
and supervision by PIMC. The business of GECAS has combined commercial
aviation activities formerly conducted by GE Capital's Polaris affiliates and
its Transportation and Industrial Funding Corporation division (the T&I
Division). In addition, GECAS will provide a significant range of aircraft
management services to GPA Group plc, a public limited company organized in
Ireland, together with its consolidated subsidiaries.
The Polaris Restructuring - In connection with the GE Capital Restructuring,
the Servicer hired many of the employees who had performed the functions for
Polaris and its investment programs (including the Partnership) that are now
performed by the Servicer for PHC owned aircraft and for Polaris investment
programs under the Services Agreement and under similar services agreements
entered into by PIMC and/or PALC with the Servicer relating to other Polaris
investment programs.
In order to allow it to continue to be able to discharge its responsibilities
as general partner of the Partnership, PIMC has retained certain of its
employees. As of December 31, 1994, PIMC had seven full-time employees. In
addition, certain employees of GECAS will serve as officers and directors of
PIMC. The following management personnel will serve in the capacities shown
opposite their names:
Name PIMC Title
Howard L. Feinsand President; Director
Richard J. Adams Vice President; Director
Rodney Sirmons Director
James W. Linnan Vice President
John E. Flynn Vice President
Robert W. Dillon Vice President; Assistant Secretary
James F. Walsh Chief Financial Officer
William C. Bowers 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.
33
Mr. Feinsand, 47, Senior Vice President and Manager, Capital Markets, Pricing
and Investor Programs of GECAS, joined PIMC and PALC as Vice President, General
Counsel and Assistant Secretary in April 1989. Effective July 1989,
Mr. Feinsand assumed the position of Senior Vice President, and served as
General Counsel and Secretary from July 1989 to August 1992. Mr. Feinsand, an
attorney, was a partner in the New York law firm of Golenbock and Barell from
1987 through 1989. In his previous capacities, Mr. Feinsand served as counsel
to PIMC and PALC. Mr. Feinsand also serves as a director on the board of Duke
Realty Investments, Inc. Effective July 1, 1994, Mr. Feinsand held the
positions of President and Director of PIMC.
Mr. Adams, 61, Senior Vice President, Aircraft Marketing - North America,
served as 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. Effective July 1, 1994, Mr.
Adams held the positions of Vice President and Director of PIMC.
Mr. Sirmons, 48, is Vice President, Portfolio and Risk Management for GECAS.
During the last twenty-one years, he has held a variety of credit, underwriting
and financial positions with several businesses within GE Capital and its
predecessor. Effective July 1, 1994, Mr. Sirmons held the position of Director
of PIMC.
Mr. Linnan, 53, became Vice President - Financial Management of PIMC and PALC
effective April 1991, having previously served as Vice President - Investor
Marketing of PIMC and PALC since July 1986. Effective July 1, 1994, Mr. Linnan
held the position of Vice President of PIMC.
Mr. Flynn, 54, Senior Vice President and Manager, Task Force Marketing and
General Manager, Cargo, of GECAS, served as Senior Vice President, Aircraft
Marketing for PIMC and PALC effective April 1991, having previously served as
Vice President, North America of PIMC and PALC effective July 1989. Mr. Flynn
joined PALC in March 1989 as Vice President, Cargo. For the two years prior to
joining PALC, Mr. Flynn was a transportation consultant. Effective July 1,
1994, Mr. Flynn held the position of Vice President of PIMC.
Mr. Dillon, 53, became 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. Walsh, 45, Senior Vice President and Chief Financial Officer of GECAS,
joined PIMC and PALC in March 1987. He served as Senior Vice President and
Chief Financial Officer, having previously served as Vice President and Chief
Financial Officer. Effective October, 1993, Mr. Walsh resigned as Senior Vice
President and Chief Financial Officer of PIMC to assume new responsibilities at
GE Capital. Effective July 1, 1994, Mr. Walsh held the position of Chief
Financial Officer of PIMC.
Mr. Bowers, 48, Senior Vice President and Associate General Counsel of GECAS,
joined that company in November, 1993. Prior to joining GECAS, Mr. Bowers, an
attorney, was General Counsel of GPA Capital, the capital markets division of
GPA Group plc, from June, 1990 to October, 1993. Prior to joining GECAS, Mr.
Bowers was a partner in the New York office of Paul, Hastings, Janofsky &
Walker from January, 1988 until June, 1990, having joined that firm as an Of
Counsel in October, 1985. Effective November 18, 1994, Mr. Bowers held the
position of Secretary of PIMC.
Through the personnel it has retained, PIMC will oversee the services to be
performed by the Servicer under the Services Agreement, make decisions as to
34
matters that are effectively reserved to PIMC for decision by the Services
Agreement, receive and analyze reports received from the Servicer, and
otherwise discharge its responsibilities as general partner of the Partnership
(See "The Services Agreement"). In addition, PIMC will continue to perform
investor relations services for the Partnership and will continue to supervise
ReSource/Phoenix, a division of Phoenix Leasing Incorporated which, since
August 1993, has been performing substantially all of the accounting and
financial reporting services previously performed by PIMC, pursuant to a
Program Accounting and Financial Reporting Administration Agreement. Since
July 1994, ReSource/Phoenix has also provided database time-share services,
data processing services and investor transfer services pursuant to a Time-
Share and Transfer Services Agreement.
GECAS - GECAS is a global commercial aviation financial services company that
(i) offers a broad range of financial products to airlines and aircraft
operators, aircraft owners, lenders and investors, including financing leases,
operating leases, tax-advantaged and other incentive-based financing and debt
and equity financing, and (ii) provides management, marketing and technical
support services to aircraft owners, lenders and investors, including GE
Capital, its affiliates, and certain third parties.
GECAS is the world's largest manager of commercial aircraft. From time to
time, GE Capital and its affiliates are likely to acquire additional new and
used aircraft which are expected to be included in the portfolio to be managed
by GECAS. GECAS's managed portfolio includes other aircraft of the same type
as those owned by the Partnership. Accordingly, the Servicer may have certain
conflicts of interest in performing its duties under the Services Agreement.
(See "The Services Agreement", herein.)
The Servicer has represented to PIMC that during the term of the Services
Agreement the Servicer's net worth will be greater than $25,000,000, and has
agreed during such term not to pay or make any dividends or distributions to
its shareholder(s) which would have the effect of reducing the Servicer's net
worth below that amount.
The Services Agreement - Under the Services Agreement, PIMC has engaged the
Servicer to perform, or arrange for the performance of, aircraft management
services, aircraft leasing and sales services, and certain portfolio management
services. These services will include, inter alia, managing the Partnership's
portfolio of aircraft, arranging for the re-leasing and sale of aircraft,
preparing certain reports for the Partnership, employing persons to perform
services for the Partnership, and otherwise performing various portfolio and
partnership management functions. PIMC will continue to serve as general
partner of the Partnership and will retain all of its rights, powers and
interests as general partner. In its capacity as general partner, PIMC will
exercise supervisory control over the Servicer's rendering of services in
connection with the Partnership and will continue to have control and overall
management of all matters relating to the Partnership's ongoing business and
operations. The Servicer is not becoming a general partner of the Partnership
and is not assuming any fiduciary duty that PIMC, as general partner, has had
or will have.
As compensation for services provided by the Servicer, PIMC will pay to the
Servicer (i) a portion of the aircraft management fees, cash available from
operations and cash available from sales proceeds received by PIMC under the
Partnership Agreement, and (ii) all sales commissions received by PIMC under
the Partnership Agreement with respect to sales of Partnership aircraft
arranged by the Servicer. The Servicer will also receive an amount equal to
the reimbursement for Partnership expenses which PIMC receives from the
Partnership on account of expenses incurred by the Servicer in performing
35
services pursuant to the Services Agreement. The expense reimbursement
limitations in the Partnership Agreement will not be affected by the Services
Agreement.
The Services Agreement recognizes that the Servicer will be providing services
with respect to the separate aircraft of GE Capital and its affiliates as well
as with respect to the aircraft of third parties, and that conflicts of
interest may arise as a result. The Servicer is required to perform services
under the Services Agreement in good faith and, to the extent that a particular
Partnership aircraft and other aircraft then in the Servicer's managed
portfolio are substantially similar in terms of relevant objectively
identifiable characteristics, the Servicer must not discriminate between such
aircraft on the basis of ownership, fees payable to the Servicer, or on an
unreasonable basis. The Services Agreement also requires the Servicer to
perform services in accordance with all applicable laws, in a manner consistent
with all applicable provisions of the Partnership Agreement, and with such care
and in accordance with such standards of performance as would have been applied
to PIMC had PIMC performed the services directly.
The Services Agreement requires the Servicer to take any actions relating to
the Services Agreement that PIMC may direct so long as such actions are
reasonably deemed by PIMC to be necessary or appropriate in order to permit
PIMC to fulfill its fiduciary duties as general partner of the Partnership or
otherwise to be in the best interest of the Partnership or its limited
partners. Furthermore, certain actions with respect to the Partnership may not
be taken by the Servicer without the prior approval of PIMC. Such actions
include, among others: (i) selling or otherwise disposing of one or more
aircraft by the Partnership (including the sale or other disposition of an
aircraft as parts or scrap); (ii) entering into any new lease (or any renewal
or extension of an existing lease) with respect to any aircraft; (iii)
terminating or modifying any lease with respect to any aircraft; (iv) financing
or refinancing one or more aircraft by the Partnership; (v) making material
capital, maintenance or inspection expenditures for the Partnership;
(vi) hiring any broker to sell or lease any aircraft; (vii) entering into any
contract (including any contract of sale), agreement or instrument other than a
contract, agreement or instrument entered into in the ordinary course of
business that has a term of less than one year and that does not contemplate
payments which will exceed, over the term of the contract, agreement or
instrument, $100,000 in the aggregate; (viii) changing in any material respect
the type or amount of insurance coverage in place for the Partnership; and (ix)
incurring any Partnership expenses for which the Servicer will seek
reimbursement pursuant to the Services Agreement which exceed in the aggregate,
for any calendar month, the sum of $10,000. Absent PIMC authorization, it is
contemplated that the Servicer will not enter into contracts, agreements or
instruments on behalf of the Partnership.
Absent earlier termination based on certain events (including the withdrawal,
removal or replacement of PIMC as general partner of the Partnership), the
Services Agreement will terminate upon the completion of the winding up and
liquidation of the Partnership and the distribution of all of its assets.
36
Certain Legal Proceedings:
As reported in the Partnership's 1990 Form 10-K, on June 8, 1990, a purported
class action entitled Harner, et al., v. Prudential Bache Securities, Inc. et
al., (to which the Partnership was not a party) was filed by certain purchasers
of units in a 1983 and 1984 public offering in several corporate aircraft
public partnerships. Polaris Aircraft Leasing Corporation and Polaris
Investment Management Corporation were named as two of the defendants in this
action. On September 24, 1991, the court entered an order in favor of Polaris
Aircraft Leasing Corporation and Polaris Investment Management Corporation
granting their motion for summary judgment and dismissing the plaintiffs'
complaint with prejudice. On March 13, 1992, plaintiff filed a notice of
appeal to the United States Court of Appeals for the Sixth Circuit. On
August 21, 1992, the Sixth Circuit ordered consolidation of the appellants'
causes for the purposes of briefing and submission. On September 9, 1994, the
Sixth Circuit affirmed the lower court's decision dismissing the action.
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. 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
37
to stay. Defendants subsequently filed with the Third District Court of Appeal
a petition for writ of certiorari to review the lower court's order denying the
motion to stay. On October 19, 1993, the Court of Appeal granted the writ of
certiorari, quashed the order, and remanded the action with instruction to
grant the stay. The Partnership is not named as a defendant in this action.
On or around May 14, 1993, a purported class action entitled Moross, et al., v.
Polaris Holding Company, et al., was filed in the United States District Court
for the District of Arizona. This purported class action was filed on behalf
of investors in Polaris Aircraft Income Funds I - VI by nine investors in such
Polaris Aircraft Income Funds. The complaint alleges that defendants violated
Arizona state securities statues and committed negligent misrepresentation and
breach of fiduciary duty by misrepresenting and failing to disclose material
facts in connection with the sale of limited partnership units in the above-
named funds. An amended complaint was filed on September 17, 1993, but has not
been served upon defendants. On or around October 4, 1993, defendants filed a
notice of removal to the United States District Court for the District of
Arizona. Defendants also filed a motion to stay the action pending the final
determination of a prior filed action in the Supreme Court for the State of New
York entitled Weisl v. Polaris Holding Company ("Weisl") and to defendants'
time to respond to the complaint until 20 days after disposition of the motion
to action pending resolution of the motions for class certification and motions
to dismiss pending in Weisl. On January 20, 1994, the court stayed the action
and required defendants to file status reports every sixty days setting forth
the status of the motions in Weisl. 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 or around March 13, 1993, a purported class action entitled Kahn v. Polaris
Holding Company, et al., was filed in the Supreme Court of the State of New
York, County of New York. This purported class action on behalf of investors
in Polaris Aircraft Income Fund V ("PAIF V") was filed by one investor in PAIF
V. The complaint names as defendants Polaris Investment Management
Corporation, Polaris Holding Company, its affiliates and others. The complaint
charges defendants with common law fraud, negligent misrepresentation and
38
breach of fiduciary duty in connection with certain misrepresentations and
omissions allegedly made in connection with the sale of interest in PAIF V.
Plaintiffs seek compensatory and consequential damages in an unspecified
amount, plus interest, disgorgement and restitution of all earnings, profits
and other benefits received by defendants as a result of their alleged
practices, and attorneys' fees and costs. Defendants' time to move, answer or
otherwise plead with respect to the complaint was extended by stipulation up to
and including April 24, 1995. The Partnership is not named as a defendant in
this action.
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.
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 is being
coordinated with In re Prudential.
On or about February 6, 1995, a class action complaint entitled Cohen, et al.
v. J.B. Hanauer & Company, et al. was filed in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida. The
complaint names J.B. Hanauer & Company, General Electric Capital Corporation,
General Electric Financial Services, Inc., and General Electric Company as
defendants. The action purports to be on behalf of "approximately 5,000
persons throughout the United States" who purchased units in Polaris Aircraft
Income Funds I through VI. The complaint sets forth various causes of action
which include allegations against certain or all of the defendants (i) for
violation of Section 12(2) of the Securities Act of 1933, as amended, by a
registered broker dealer and for violation of Section 15 of such act by all
defendants in connection with certain public offerings, including that of the
39
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 fraud in connection with such offerings;
(iii) for alleged negligent misrepresentation in connection with such
offerings; (iv) for alleged breach of fiduciary duties; (v) for alleged breach
of third party beneficiary contracts; (vi) for alleged violations of the NASD
Rules of Fair Practice by a registered broker dealer; and (vii) for alleged
breach of implied covenants in the customer agreements by a registered broker
dealer. The complaint seeks an award of compensatory and punitive damages and
other remedies. The Partnership is not named as a defendant in this action.
On or about January 12, 1995, a class action complaint entitled Cohen, et al.
v. Kidder Peabody & Company, Inc., et al. was filed in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida. The
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 complaint sets forth various causes
of action which include allegations against certain or all of the defendants
(i) for violation of Section 12(2) of the Securities Act of 1933, as amended,
by a registered broker dealer and for violation of Section 15 of such act by
all defendants in connection with certain public offerings 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 fraud in connection with such offerings; (iii) for alleged negligent
misrepresentation in connection with such offerings; (iv) for alleged breach of
fiduciary duties; (v) for alleged breach of third party beneficiary contracts;
(vi) for alleged violations of the NASD Rules of Fair Practice by a registered
broker dealer; and (vii) for alleged breach of implied covenants in the
customer agreements by a registered broker dealer. The complaint seeks an
award of compensatory and punitive damages and other remedies. 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 1994 all
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were met.
40
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 $80,346 were paid to PIMC in 1994.
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:
(1) (2) (3) (4)
Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
General Polaris Investment Represents a 10.0% interest 100%
Partner Management of all cash distributions,
Interest Corporation gross income in an amount
equal to 9.09% of distributed
cash available from operations,
and a 1% interest in net income
or loss
c) There are no arrangements known to PAIF-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. Certain Relationships and Related Transactions
None.
41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Financial Statements.
The following are included in Part II of this report:
Page No.
Report of Independent Public Accountants 19
Balance Sheets 20
Statements of Operations 21
Statements of Changes in Partners' Capital (Deficit) 22
Statements of Cash Flows 23
Notes to Financial Statements 24
2. Reports on Form 8-K.
None.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
10. Material Contracts.
a) Services Agreement.
27. Financial Data Schedules (Filed electronically only).
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.
42
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 23, 1995 By: /S/ Howard L. Feinsand
-------------- -----------------------------
Date Howard L. Feinsand, 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/Howard L. Feinsand March 23, 1995
--------------------- Chairman of the Board and --------------
(Howard L. Feinsand) President of Polaris
Investment Management
Corporation, General Partner
of the Registrant
/S/Richard J. Adams March 23, 1995
------------------- Vice President and Director of --------------
(Richard J Adams) Polaris Investment Management
Corporation, General Partner
of the Registrant
/S/James F. Walsh March 23, 1995
----------------- Chief Financial Officer of --------------
(James F. Walsh) Polaris Investment Management
Corporation, General Partner
of the Registrant
43