UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 2-91762
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POLARIS AIRCRAFT INCOME FUND I
State of Organization: California
IRS Employer Identification No. 94-2938977
201 Mission Street, 27th Floor, San Francisco, California 94105
Telephone - (415) 284-7400
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
This document consists of 16 pages.
POLARIS AIRCRAFT INCOME FUND I
FORM 10-Q - For the Quarterly Period Ended September 30, 1996
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - September 30, 1996 and
December 31, 1995..........................................3
b) Statements of Operations - Three and Nine Months
Ended September 30, 1996 and 1995..........................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1995
and Nine Months Ended September 30, 1996...................5
d) Statements of Cash Flows - Nine Months
Ended September 30, 1996 and 1995..........................6
e) Notes to Financial Statements..............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........12
Part II. Other Information
Item 1. Legal Proceedings......................................14
Item 5. Other Information......................................15
Item 6. Exhibits and Reports on Form 8-K.......................15
Signature .......................................................16
2
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND I
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 9,733,727 $ 9,807,315
RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $0 in 1996 and
$811,131 in 1995 44,774 32,863
NOTES RECEIVABLE, net of allowance for
credit losses of $144,884 in 1995 633,222 1,040,505
AIRCRAFT, net of accumulated depreciation of
$20,109,279 in 1996 and $19,166,733 in 1995 4,465,570 5,408,116
------------ ------------
$ 14,877,293 $ 16,288,799
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 51,906 $ 51,757
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 416,525 98,410
LESSEE SECURITY DEPOSITS 70,925 145,925
MAINTENANCE RESERVES 3,294,841 2,165,714
------------ ------------
Total Liabilities 3,834,197 2,461,806
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (618,144) (590,280)
Limited Partners, 168,729 units
issued and outstanding 11,661,240 14,417,273
------------ ------------
Total Partners' Capital 11,043,096 13,826,993
------------ ------------
$ 14,877,293 $ 16,288,799
============ ============
The accompanying notes are an integral part of these statements.
3
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
Rent from operating leases $ 475,000 $ 540,800 $ 1,463,900 $ 1,553,450
Interest 126,711 157,648 365,021 417,992
Claims related to lessee defaults -- 400,000 -- 409,698
Gain on sale of aircraft inventory 89,738 -- 346,508 --
Other 468 -- 15,033 102,297
----------- ----------- ----------- -----------
Total Revenues 691,917 1,098,448 2,190,462 2,483,437
----------- ----------- ----------- -----------
EXPENSES:
Depreciation 314,182 195,294 942,546 700,882
Management fees to general partner 24,337 27,039 58,837 77,672
Provision for credit losses 354,019 -- 663,600 --
Operating 104,698 500,314 381,048 534,409
Administration and other 35,351 36,740 116,178 118,003
----------- ----------- ----------- -----------
Total Expenses 832,587 759,387 2,162,209 1,430,966
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (140,670) $ 339,061 $ 28,253 $ 1,052,471
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO THE GENERAL PARTNER $ (1,407) $ 3,391 $ 253,351 $ 153,930
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ (139,263) $ 335,670 $ (225,098) $ 898,541
=========== =========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (0.83) $ 1.99 $ (1.33) $ 5.33
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
4
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1995 and
Nine Months Ended September 30, 1996
------------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1994 $ (578,793) $ 15,553,044 $ 14,974,251
Net income 147,868 298,425 446,293
Cash distributions to partners (159,355) (1,434,196) (1,593,551)
------------ ------------ ------------
Balance, December 31, 1995 (590,280) 14,417,273 13,826,993
Net income (loss) 253,351 (225,098) 28,253
Cash distributions to partners (281,215) (2,530,935) (2,812,150)
------------ ------------ ------------
Balance, September 30, 1996 $ (618,144) $ 11,661,240 $ 11,043,096
============ ============ ============
The accompanying notes are an integral part of these statements.
5
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net income $ 28,253 $ 1,052,471
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 942,546 700,882
Net provision for credit losses (471,908) --
Changes in operating assets and liabilities:
Decrease in rent and other receivables 799,220 232,025
Increase (decrease) in payable to affiliates 149 (25,682)
Increase in accounts payable and accrued liabilities 318,115 490,403
Increase (decrease) in lessee security deposits (75,000) 20,925
Increase in maintenance reserves 1,129,127 996,363
------------ ------------
Net cash provided by operating activities 2,670,502 3,467,387
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 300,000
Principal payments on note receivable 68,060 116,288
Increase in aircraft capitalized costs -- (244,000)
Net proceeds from sale of aircraft inventory -- 482,836
------------ ------------
Net cash provided by investing activities 68,060 655,124
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (2,812,150) (1,593,551)
------------ ------------
Net cash used in financing activities (2,812,150) (1,593,551)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (73,588) 2,528,960
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 9,807,315 7,486,952
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 9,733,727 $ 10,015,912
============ ============
The accompanying notes are an integral part of these statements.
6
POLARIS AIRCRAFT INCOME FUND I
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Principles and Policies
In the opinion of management, the financial statements presented herein include
all adjustments, consisting only of normal recurring items, necessary to
summarize fairly Polaris Aircraft Income Fund I's (the Partnership's) financial
position and results of operations. The financial statements have been prepared
in accordance with the instructions of the Quarterly Report to the Securities
and Exchange Commission (SEC) Form 10-Q (Form 10-Q) and do not include all of
the information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto for the years ended December 31, 1995, 1994, and
1993 included in the Partnership's 1995 Annual Report to the SEC on Form 10-K
(Form 10-K).
Aircraft and Depreciation - The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual value is computed using
the straight-line method over the estimated economic life of the aircraft which
was originally estimated to be 12 years. Depreciation in the year of acquisition
was calculated based upon the number of days that the aircraft were in service.
The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life based on estimated
residual values obtained from independent parties which provide current and
future estimated aircraft values by aircraft type. For any downward adjustment
in estimated residual value or decrease in the projected remaining economic
life, the depreciation expense over the projected remaining economic life of the
aircraft is increased.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, an impairment
loss is recognized. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 121, as discussed below, measurement of an impairment loss will be
based on the "fair value" of the asset as defined in the statement.
Capitalized Costs - Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement. These costs are also subject to periodic
evaluation as discussed above.
Financial Accounting Pronouncements - SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," requires the Partnership to disclose the fair
value of financial instruments. Cash and cash equivalents is stated at cost,
which approximates fair value. The fair value of the Partnership's notes
receivable is estimated by discounting future estimated cash flows using current
interest rates at which similar loans would be made to borrowers with similar
credit ratings and remaining maturities. The carrying value of the maintenance
cost-sharing note receivable from Nations Air Express, Inc. (Nations Air), as
discussed in Note 4, approximates its estimated fair value. The carrying value
of the engine finance sale note receivable discussed in Note 2 approximates the
estimated fair value of the collateral.
The Partnership adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," as of January 1,
7
1996. This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Partnership estimates that this pronouncement will
not have a material impact on the Partnership's financial position or results of
operations unless events or circumstances change that would cause projected net
cash flows to be adjusted. No impairment loss was recognized by the Partnership
during the first three quarters of 1996.
2. Viscount Air Services, Inc. (Viscount) Default and Bankruptcy Filing
On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
Tucson, Arizona. In April 1996, GE Capital Aviation Services, Inc. (GECAS), on
behalf of the Partnership, First Security Bank, National Association (formerly
known as First Security Bank of Utah, National Association) (FSB), the
owner/trustee under the Partnership's leases with Viscount (the Leases),
Viscount, certain guarantors of Viscount's indebtedness and others executed in
April 1996 a Compromise of Claims and Stipulation under Section 1110 of the
Bankruptcy Code (the Compromise and Stipulation), which was subsequently
approved by the Bankruptcy Court. The Compromise and Stipulation provided that
in the event that Viscount failed to promptly and timely perform its monetary
obligations under the Leases and the Compromise and Stipulation, without further
order of the Bankruptcy Court, GECAS would be entitled to immediate possession
of the aircraft for which Viscount failed to perform and Viscount would deliver
such aircraft and all records related thereto to GECAS.
GECAS agreed to a rescheduling of Viscount's September 1996 rent obligations to
allow Viscount to make a 25% payment on September 3, 1996, with any defaults to
be cured on or before September 6, 1996. The remainder of the rents and all
maintenance reserve obligations were to be paid on September 10, 1996, with any
defaults to be cured on or before September 13, 1996. Viscount agreed to the
proposed cure dates and waived any requirement for a notice of default to be
sent. Viscount failed to make the rent and maintenance reserve payments on
September 10, 1996 and asserted that it was entitled to various credits and
offsets with respect to such obligations. GECAS disputed Viscount's assertions
and notified Viscount that it was in default under the Leases and the Compromise
and Stipulation. On September 18, 1996, GECAS (on behalf of the Partnership,
Polaris Holding Company, Polaris Aircraft Income Fund II, Polaris Aircraft
Income Fund IV and Polaris Aircraft Investors XVIII) (collectively, the Polaris
Entities) and Viscount entered into a Stipulation and Agreement (the Stipulation
and Agreement) by which Viscount agreed to voluntarily return all of the Polaris
Entities' aircraft and engines, turn over possession of the majority of its
aircraft parts inventory, and cooperate with GECAS in the transition of aircraft
equipment and maintenance, in exchange for which, upon Bankruptcy Court approval
of the Stipulation and Agreement, the Polaris Entities would waive their pre-
and post-petition claims against Viscount for amounts due and unpaid.
The Stipulation and Agreement provides that upon the return and surrender of
possession of the Partnership's three airframes and eight engines (two of which
were spare engines), Viscount's rights and interests therein shall terminate. As
of September 13, 1996, Viscount had returned (or surrendered possession of) two
of the Partnership's airframes and seven of the Partnership's engines. One of
the returned airframes (together with one installed engine) is currently in the
possession of and being operated by Nations Air, with whom the Partnership is
currently negotiating the terms of a potential direct lease. Six of the seven
returned engines are in the possession of certain maintenance facilities and
will require maintenance work in order to be made operable. Viscount returned
the Partnership's remaining airframe and one installed engine on October 1,
1996, as discussed in Note 7.
8
GECAS, on behalf of the Polaris Entities, is evaluating the spare parts
inventory to which Viscount relinquished possession in order to determine its
condition and value, the portion allocable to the Partnership, and the
Partnership's alternatives for the use and/or disposition of such parts. A
significant portion of the spare parts inventory is currently in the possession
of third party maintenance and repair facilities with whom GECAS anticipates
that it will need to negotiate for the repair and/or return of these parts.
The Stipulation and Agreement also provides that the Polaris Entities, GECAS and
FSB shall release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court approved the Stipulation and Agreement on October 23, 1996
as discussed in Note 7.
Viscount's affiliates, Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc.,
assumed Viscount's engine finance sale note to the Partnership as provided under
the Compromise and Stipulation. Payments are scheduled to begin October 31,
1996. The note balance was $455,685 plus accrued interest at September 30, 1996
and December 31, 1995.
As discussed in the Partnership's June 30, 1996 Form 10-Q, the Partnership
recorded allowances for credit losses of approximately $1.25 million for the
aggregate unsecured receivables from Viscount. The line of credit, which was
advanced to Viscount in 1994, was, in accordance with the Compromise and
Stipulation, secured by certain of Viscount's trade receivables and spare parts.
The Stipulation and Agreement releases the Partnership's claim against
Viscount's trade receivables. As a result, the Partnership recorded an
additional allowance for credit losses of approximately $354,000 during the
third quarter of 1996, representing Viscount's outstanding balance of the line
of credit and accrued interest. Payments received by the Partnership from the
sale of the spare aircraft parts (as discussed above), if any, will be recorded
as revenue when received. The Stipulation and Agreement provides that, upon
entry of a final non-appealable court order approving it, the Partnership would
waive its pre- and post-petition claims against Viscount for all amounts due and
unpaid. As a result, the Partnership considers all receivables from Viscount to
be uncollectible and has written-off, during the third quarter of 1996, all
notes, rents and interest receivable balances from Viscount.
The Partnership has evaluated the condition of the returned equipment and
current market conditions in order to determine the cost of placing such
equipment in airworthy condition and to determine whether such equipment should
be marketed for sale or re-lease. The Partnership estimates that very
substantial maintenance and refurbishment costs will be required with respect to
the re-lease of any equipment returned to the Partnership. To remarket all of
the three aircraft for re-lease, maintenance and refurbishment costs may well
exceed an estimated $3.2 million. A portion of these costs would likely be paid
from the Partnership's current maintenance reserves. The balance would likely be
paid from the Partnership's cash reserves and would be capitalized or expensed.
Alternatively, with respect to a sale of any of the Partnership's equipment,
such sale would likely be made on an "as is, where is" basis, without the
Partnership incurring substantial maintenance costs. As noted above, the
Partnership is currently negotiating with Nations Air the terms of a potential
direct lease of the Partnership's aircraft Nations Air is currently operating.
The Partnership estimates that a sale of the remaining two aircraft and spare
engines on an "as is, where is" basis would maximize the economic return on this
equipment to the Partnership.
Viscount's failure to perform its financial obligations to the Partnership has
had a material adverse effect on the Partnership's financial position. As a
result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership
has incurred legal costs of approximately $375,000, which are reflected in
operating expense in the Partnership's statement of operations for the nine
months ended September 30, 1996.
9
3. CanAir Cargo Ltd. (CanAir) Payment Deferral
CanAir has been allowed to defer certain rent and maintenance reserve payments
due the Partnership. The deferred rents, which aggregated $60,000, and the
deferred maintenance reserve payments, which aggregated approximately $50,000,
are being repaid by CanAir with interest at a rate of 11.25% per annum through
May 1997. The Partnership has received all scheduled deferred payments from
CanAir through September 30, 1996.
4. Nations Air Note Receivable
As discussed in the Form 10-K, the Partnership and Nations Air agreed to share
in the cost of certain maintenance work on the aircraft formerly sub-leased by
Nations Air. The Partnership loaned Nations Air its portion of the maintenance
cost of $264,108 to be repaid in twelve monthly installments, with interest at a
variable rate, beginning in November 1995. As of September 30, 1996, Nations Air
was five months delinquent on its maintenance cost-sharing note payments to the
Partnership. The balance of the note, which was due in full in October 1996, has
not currently been paid by Nations Air as discussed in Note 7. The Partnership
currently classifies this note receivable as impaired due to this payment
delinquency. However, the Partnership believes that, as of September 30, 1996,
this note is collectible and has not recorded any allowance for credit losses
for this note. As of September 30, 1996, the balance of the note receivable was
$177,537 plus accrued interest.
5. Disassembly of Aircraft
As discussed in the Form 10-K, certain of the Partnership's aircraft were
disassembled and their component parts were sold. Net proceeds received by the
Partnership from the sale of these component parts were applied against aircraft
inventory until 1995 when the book value of the inventory was fully recovered.
Net proceeds of $89,738 and $346,508 received during the three and nine months
ended September 30, 1996, respectively, were recorded as gain on sale of
aircraft inventory.
6. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for the
Three Months Ended Payable at
September 30, 1996 September 30, 1996
------------------ ------------------
Aircraft Management Fees $ 61,161 $ 1,484
Out-of-Pocket Administrative Expense
Reimbursement 169,855 49,450
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 28,311 972
-------- --------
$259,327 $ 51,906
======== ========
10
7. Subsequent Events
Viscount Stipulation and Agreement - As discussed in Note 2, Viscount returned
the one remaining Partnership airframe and one installed engine on October 1,
1996 pursuant to the Stipulation and Agreement. On October 23, 1996, the
Bankruptcy Court approved the Stipulation and Agreement. The Partnership is
currently negotiating with Nations Air the terms of a potential direct lease of
the Partnership's aircraft Nations Air is currently operating. The Partnership
is currently remarketing the remaining two aircraft and spare engines for sale.
Nations Air Payment Delinquency - As discussed in Note 4, as of September 30,
1996, Nations Air was five months delinquent on its maintenance cost-sharing
monthly note payments to the Partnership. In addition, a balloon payment of
approximately $82,000, which was due on October 1, 1996 has not currently been
paid by Nations Air.
Under the prior Nations Air sublease with Viscount, Nations Air paid rent and
maintenance reserve payments directly to the Partnership. These payments
continued through September 1996. Nations Air has not currently paid to the
Partnership the rent and maintenance reserve payments due in October and
November 1996 which aggregate approximately $261,000. The Partnership is
currently in discussions with Nations Air to resolve these payment
delinquencies, which aggregate approximately $443,000, and to negotiate the
terms of a potential direct lease of the Partnership's aircraft.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Polaris Aircraft Income Fund I (the Partnership) owns a portfolio of three used
Boeing 737-200 commercial jet aircraft, five spare engines and certain
inventoried aircraft parts out of its original portfolio of eleven aircraft. The
three aircraft were returned to the Partnership by Viscount Air Services, Inc.
(Viscount), as discussed below. One of these aircraft is currently being
operated by Nations Air Express, Inc. (Nations Air), its former sub-lessee. The
Partnership is negotiating a potential direct lease with Nations Air for this
aircraft. The two additional aircraft returned by Viscount are currently being
remarketed for sale. The Partnership leased three spare engines to CanAir Cargo
Ltd. (CanAir). In addition, the Partnership transferred four aircraft to
aircraft inventory during 1992 and 1993. These aircraft have been disassembled
for sale of their component parts. Two engines, which were formerly leased to
Viscount, were returned to the Partnership in May and October 1996 and are
currently being remarketed for sale. One additional engine from these aircraft
was sold to Viscount during 1995. Viscounts affiliates, Rock-It Cargo USA, Inc.
(Rock-It Cargo) and Riverhorse Investments, Inc. (Riverhorse Investments)
assumed the note for this engine sale. The Partnership has sold three aircraft
and one airframe from its original aircraft portfolio: a Boeing 737-200
Convertible Freighter in 1990, a McDonnell Douglas DC-9-10 in 1992, a Boeing
737-200 in 1993 and the airframe from a Boeing 737-200 aircraft in April 1995.
Remarketing Update
As discussed in Note 2 to the financial statements, in September and October
1996, Viscount returned or surrendered possession of the Partnership's three
aircraft and two spare engines. The Partnership is currently negotiating with
Nations Air the terms of a potential direct lease of the Partnership's aircraft
Nations Air is currently operating. The Partnership estimates that a sale of the
remaining two aircraft and spare engines on an "as is, where is" basis would
maximize the economic return on this equipment to the Partnership. As a result,
the Partnership is currently remarketing this equipment for sale.
Partnership Operations
The Partnership recorded a net loss of $140,670 or $0.83 per limited partnership
unit, for the three months ended September 30, 1996, compared to net income of
$339,061 or $1.99 per unit for the same period in 1995. The Partnership recorded
net income of $28,253, or an allocated net loss of $1.33 per limited partnership
unit, for the nine months ended September 30, 1996, compared to net income of
$1,052,471 or $5.33 per unit for the same period in 1995. The significant
decline in operating results during the three and nine months ended September
30, 1996, as compared to the same periods in 1995, is primarily the result of
higher revenues in 1995, combined with provisions for credit losses which were
recorded by the Partnership during 1996 for certain rent, loan and interest
receivables from Viscount, and legal expenses incurred during the first three
quarters of 1996 related to the Viscount defaults and Chapter 11 bankruptcy
filing.
During the third quarter of 1995, the Partnership recognized as revenue $400,000
that it received from the insurers of the Partnership's former lessee American
Air Lease for payment of insurance proceeds.
The Partnership recorded an allowance for credit losses of $309,581 during the
first quarter of 1996 for certain unpaid rent and accrued interest receivables
from Viscount as a result of Viscount's default on certain obligations due the
12
Partnership and Viscount's subsequent bankruptcy filing. The Partnership
recorded an allowance for credit losses of $354,019 during the third quarter of
1996 for Viscount's outstanding balance of the line of credit and accrued
interest. In addition, the Partnership recognized legal expenses of
approximately $375,000 related to the Viscount defaults and Chapter 11
bankruptcy filing. These legal costs are included in operating expense in the
Partnership's statement of operations for the nine months ended September 30,
1996.
Liquidity and Cash Distributions
Liquidity - As discussed in Note 2 to the financial statements and in Part II,
Item 1, the Viscount Stipulation and Agreement specifies, among other things,
that the Partnership waive its pre- and post-petition claims against Viscount
for amounts due and unpaid. As a result, the Partnership recorded an additional
allowance for credit losses of $354,019 during the third quarter of 1996,
representing Viscount's outstanding balance of the line of credit and accrued
interest. In addition, the Partnership currently considers all receivables from
Viscount to be uncollectible and has written-off, during the third quarter of
1996, all notes, rents and interest receivable balances from Viscount. Viscounts
affiliates, Rock-It Cargo and Riverhorse Investments, assumed the engine finance
sale note from Viscount. Rock-It Cargo and Riverhorse Investments agreed to pay
the note balance, including past due interest, in 45 installments beginning on
October 31, 1996.
As discussed in Notes 4 and 7 to the financial statements, Nations Air is
currently delinquent on its maintenance cost-sharing payments to the
Partnership. In addition, under the prior Nations Air sublease with Viscount,
Nations Air paid rent and maintenance reserve payments directly to the
Partnership. These payments continued through September 1996. Nations Air has
not currently paid to the Partnership the rent and maintenance reserve payments
due in October and November 1996. The Partnership is currently in discussions
with Nations Air to resolve these payment delinquencies, which aggregate
approximately $443,000, and to negotiate the terms of a potential direct lease
of the Partnership's aircraft.
The Partnership receives maintenance reserve payments from 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 or
engines, as specified in the leases. Maintenance reserve balances remaining at
the termination of the lease, if any, may be used by the Partnership to offset
future maintenance expenses or recognized as revenue. The net maintenance
reserves balances aggregate $3,294,841 as of September 30, 1996.
The Partnership's cash reserve balance is being retained to cover the costs that
the Partnership may incur as a result of the Viscount default and bankruptcy,
including potential aircraft maintenance, remarketing and transition costs.
Cash Distributions - Cash distributions to limited partners were $2,530,935, or
$15.00 per limited partnership unit and $1,434,196, or $8.50 per unit for the
first quarters of 1996 and 1995, respectively. The timing and amount of future
cash distributions to partners are not yet known and will depend upon the
Partnership's future cash requirements, including the costs that may be incurred
to remarket the former Viscount aircraft and spare engines and the receipt of
rental payments from CanAir.
13
Part II. Other Information
--------------------------
Item 1. Legal Proceedings
As discussed in Item 3 of Part I of Polaris Aircraft Income Fund I's (the
Partnership) 1995 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the periods ended March 31, 1996
and June 30, 1996, there are a number of pending legal actions or proceedings
involving the Partnership. Except as described below, there have been no
material developments with respect to any such actions or proceedings during the
period covered by this report.
Viscount Air Services, Inc. (Viscount) Bankruptcy - As previously reported, GE
Capital Aviation Services (GECAS), on behalf of the Partnership and other
entities, and Viscount and its affiliates, executed an agreement (Compromise and
Stipulation) regarding, among other things, resumption of payments under the
leases. The Compromise and Stipulation, which was subsequently approved by the
Bankruptcy Court, also provided that if Viscount failed to meet its monetary
obligations, the Partnership would be entitled to immediate possession of the
aircraft for which Viscount failed to perform, and Viscount would deliver to
GECAS all records related thereto, without further order of the Bankruptcy
Court.
GECAS agreed to a rescheduling of Viscount's September rent obligations, but
Viscount was ultimately unable to meet its cure obligations on or before the
agreed-upon cure date of September 13, 1996. On September 18, 1996, GECAS (on
behalf of the Partnership and other entities) and Viscount entered into a
Stipulation and Agreement by which Viscount agreed to voluntarily return all of
the Partnership's aircraft and engines, turn over possession of the majority of
its aircraft parts inventory, and cooperate with GECAS in the transition of
aircraft equipment and maintenance, in exchange for which, upon Bankruptcy Court
approval of the Stipulation and Agreement, the Partnership would waive its right
to pre- and post-petition claims against Viscount for amounts due and unpaid
(approximately $1.6 million).
As of September 13, 1996, Viscount surrendered possession of two of the
Partnership's aircraft and two spare engines, and on October 1, 1996, the third
aircraft was returned to the Partnership. One of the three aircraft is currently
in the possession of, and is being operated by, Nations Air Express, Inc., with
whom the Partnership is negotiating a potential direct lease.
Viscount's affiliates, Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc.,
assumed Viscount's obligations under the finance sale note for the spare engine,
and payments began October 31, 1996.
The Partnership estimates that a sale of the remaining two aircraft and spare
engines on an "as is, where is" basis would maximize the economic return on this
equipment to the Partnership. As a result, the Partnership is currently
remarketing this equipment for sale.
Other Proceedings - Item 10 in Part III of the Partnership's 1995 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the periods ended March 31,
1996 and June 30, 1996 discuss certain actions which have been filed against
Polaris Investment Management Corporation and others in connection with the sale
of interests in the Partnership and the management of the Partnership. With the
exception of Novak, et al v. Polaris Holding Company, et al, (which has been
dismissed, as discussed in Item 10 of the Partnership's 1995 Form 10-K) where
the Partnership was named as a defendant for procedural purposes, the
Partnership is not a party to these actions. Except as discussed below, there
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have been no material developments during the period covered by this report with
respect to any of the actions described in Item 10 in Part III of the
Partnership's 1995 Form 10-K and Item 1 in Part II of the Partnership's Form
10-Q for the periods ended March 31, 1996 and June 30, 1996.
Wilson et al. v. Polaris Holding Company et al. - On October 1, 1996, a
complaint was filed in the Superior Court of the State of California for the
County of Sacramento by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I through VI.
The complaint names Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Capital Services, Inc., General
Electric Capital Corporation, GE Capital Aviation Services, Inc. and DOES 1-100
as defendants. The Partnership has not been named as a defendant. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, negligence, breach of contract, and breach of fiduciary duty.
The complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest and rescission with respect to the Polaris Aircraft
Income Funds sold to plaintiffs. Defendants time to answer or otherwise respond
to the complaint is November 18, 1996.
B&L Industries, Inc. et al. v. Polaris Holding Company et al. - On August 16,
1996, defendants filed a motion to dismiss plaintiffs' amended complaint. The
motion is returnable on January 16, 1997.
In re Prudential Securities Inc. Limited Partnerships Litigation - The trial,
which was scheduled for November 11, 1996, has not proceeded and no new trial
date has been set.
Item 5. Other Information
James W. Linnan resigned as Director and President of Polaris Investment
Management Corporation effective December 31, 1996. Mr. Linnan's replacement has
not presently been named. Mr. Linnan will continue to serve in those capacities
through the effective date of his resignation.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedule
b) Reports on Form 8-K
One report, dated September 18, 1996 on Form 8-K, was filed on October 4,
1996, pursuant to Item 5 of that form. No financial statements were filed
as a part of that report.
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SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND I
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
November 12, 1996 By: /S/Marc A. Meiches
- ---------------------------------- ------------------
Marc A. Meiches
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
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