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
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 High Ridge Road, Stamford, Connecticut 06927
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 357-3776
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. X
---
No formal market exists for the units of Limited Partnership interest and
therefore there exists no aggregate market value at December 31, 2001.
Documents incorporated by reference: None
This document consists of 35 pages.
PART I
Item 1. Business
Polaris Aircraft Income Fund I (PAIF-I or the Partnership) was formed primarily
to purchase and lease used commercial jet aircraft in order to provide
distributions of cash from operations, to maximize the residual values of
aircraft upon sale and to protect Partnership capital through experienced
management and diversification. PAIF-I was organized as a California Limited
Partnership on June 27, 1984 and will terminate no later than December 2010. As
of December 31, 2001, the only assets remaining were cash and spare parts in
inventory, which includes one engine.
PAIF-I has many competitors in the aircraft leasing market, including airlines,
aircraft leasing companies, other Limited Partnerships, banks and several other
types of financial institutions. This market is highly competitive and there is
no single competitor who has a significant influence on the industry. In
addition to other competitors, the General Partner, Polaris Investment
Management Corporation (PIMC), and its affiliates, including GE Capital Aviation
Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris
Holding Company (PHC) and General Electric Capital Corporation (GE Capital),
acquire, lease, finance, sell and remarket aircraft for their own accounts and
for existing aircraft and aircraft leasing programs managed by them. Further,
GECAS provides a significant range of aircraft management services to third
parties, including without limitation Airplanes Group, together with its
subsidiaries (APG), which leases and sells aircraft.
The Partnership leased three JT8D-9A engines to CanAir Cargo Ltd. (CanAir) for
three years beginning in May 1994. In 1997, the lease with CanAir was extended
for seven months. In August 1997, the engine lease was transferred to Royal
Aviation Inc. and Royal Cargo, Inc. (Royal Aviation) pursuant to an Aircraft
Lease Purchase Agreement. Under this agreement, the leases were extended to
August 2000 at the same rental rate. The engines were returned on September 7,
2000 upon the expiration of the lease. On July 19, 2001 the Partnership sold
these engines to Aeroturbine, Inc. on an as-is-where-is basis for $900,000. The
remaining inventory of spare parts, including one engine, has been made
available for sale such that the Partnership plans to liquidate all its assets
in an orderly manner and make a final distribution thereafter.
Item 2. Properties
At December 31, 2001, the Partnership owned certain inventoried parts, which
included one engine, out of its original portfolio of eleven aircraft. The three
JT8D-9A engines previously leased to Royal Aviation were redelivered to the
Partnership on September 7, 2000 upon the expiration of the lease. These engines
were sold to Aeroturbine, Inc. on July 19, 2001, on an as-is-where-is basis for
$900,000. The Partnership transferred four aircraft to aircraft inventory during
1992 and 1993. These aircraft were disassembled for sale of their component
parts. The Partnership sold its remaining inventory of aircraft parts from the
four disassembled aircraft, to Soundair, Inc., in 1998. Additionally, one of two
engines held in inventory was sold to Quantum Aviation Limited during 1998. The
Partnership has sold six 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, the airframe from a Boeing 737-200
aircraft in 1995 and three Boeing 737-200 aircraft in 1997.
2
Item 3. Legal Proceedings
Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's
2000 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Third District of Alaska. 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 that were
leased by Markair. In August 1993, the Bankruptcy Court approved a plan of
reorganization for Markair and a stipulation allowing the Partnership to retain
the security deposits and maintenance reserves previously posted by Markair, and
an unsecured claim against Markair for $445,000. The unsecured claim was
converted to subordinated debentures during 1994, and Markair defaulted on its
payment obligations on such debentures. On April 14, 1995, Markair commenced new
reorganization proceedings under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the Third District of Alaska. On
October 25, 1995, Markair converted its Chapter 11 reorganization proceeding
into a proceeding under Chapter 7 of the United States Bankruptcy Code in the
same court. The trustee, Key Bank of Washington, took steps to protect the
interests of the debenture holders, including the Partnership, by filing proofs
of claim in this proceeding. The Partnership has not received any distribution
from the bankrupt estate on the proofs of claim. There have been no material
developments with respect to this proceeding during the period covered by this
report.
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. The Partnership
filed a proof of claim to recover unpaid rent and other damages, and a proof of
administrative claim to recover damages for detention of aircraft,
non-compliance with court orders, post-petition use of engines and liquidated
damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor
committees entered into a settlement which allowed the Partnership an
administrative claim of approximately $2,076,923. The Bankruptcy Court made a
final disposition of the Partnership's claim by permitting the Partnership 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
one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured
claim of $769,231 in the proceedings.
In May of 1998, Braniff's bankrupt estate made a $200,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation, of which $138,462 was allocated to the
Partnership based on its pro rata share of the total claims. On January 20,
1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation, of which $58,154 was allocated to the
Partnership based on its pro rata share of the total claims. On January 16,
2001, Braniff's bankrupt estate made a $110,890 payment in respect of the
unsecured claims of the Partnership and other affiliates of Polaris Management
Corporation, of which $76,770 was allocated to the Partnership based on its pro
rata share of the total claims.
Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, this
action was filed in the District Court of Harris County, Texas against 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. The complaint alleges violations
of the Texas Securities Act, the Texas Deceptive Trade Practices Act, sections
11 and 12 of the Securities Act of 1933, common law fraud, fraud in the
3
inducement, negligent misrepresentation, negligence, breach of fiduciary duty
and civil conspiracy arising from the defendants' alleged misrepresentation and
failure 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, and double and treble damages under the
Texas Deceptive Trade Practices Act. The trial date for this action was set and
rescheduled by the trial court several times, and on September 2, 1999, the
court granted a stay of this action pending the submission of the remaining
plaintiffs' claims to arbitration. Subsequently, several of the plaintiffs filed
a motion with the Court to dismiss their claims, which the court granted.
On June 5, 2001, the remaining plaintiffs who did not ask the court to dismiss
their claims, Gerald and Judy Beckman, made a motion to retain the case on the
docket of the District Court of Harris County, Texas with respect to their
purported claims against all defendants except Prudential Insurance Company of
America and James J. Darr. On June 27, 2001, the Court entered a docket control
order providing for a schedule for discovery and a trial date of December 3,
2001. On October 17, 2001, the remaining plaintiffs entered into a settlement
agreement with 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, and General Electric Capital Corporation. The
Partnership did not contribute to the settlement payments and has no further
liability in respect of such matter.
CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act
of Canada - On July 28, 1997, CanAir obtained an order under the Companies'
Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of
Justice, General Division. The CCAA Order restrained CanAir's creditors,
including lessors, from exercising any rights arising from CanAir's default or
non-performance of its obligations until October 28, 1997 or further order of
the court. CanAir leased three engines from the Partnership, and a total of five
aircraft from Polaris Holding Company (Polaris) and General Electric Capital
Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August
1997 engine rent and maintenance reserve payment obligations to the Partnership.
On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for
Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties),
entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and
Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal
Aviation Inc.
At December 31, 1999, CanAir owed the GECAS Parties a total of approximately
$1.5 million. Of this amount, approximately $30,365 was owed to the Partnership
under the engine lease, exclusive of accrued interest and maintenance reserve
payment obligations.
The receiver appointed by the Ontario Court of Justice on behalf of CanAir's
creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well
as all of CanAir's other assets, including spare parts and accounts receivable.
The proceeds of the sale are being distributed to CanAir's creditors, including
the GECAS Parties. The receiver has distributed to the GECAS Parties a total of
1,076,116 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect of
the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian
Dollars (approximately $61,513 U.S. Dollars) have been allocated to the
Partnership based on its pro rata share of the total claims. Of the sale
proceeds, approximately 600,000 Canadian Dollars (approximately $384,608 U.S.
Dollars) remain to be distributed to CanAir's creditors by the receiver, subject
to a final court order as to the priorities of CanAir's creditors under the
receivership order and Canada's Personal Property Security Act (Ontario).
4
On February 15, 2000, the Partnership received the settlement of $61,513 in
connection with the CanAir Bankruptcy Settlement, which is comprised of amounts
received for rents, maintenance reserve obligations and accrued interest. A
portion of the proceeds was treated as a recovery of previously reserved rents
receivable. The allowance for credit losses of $30,365 was reversed and is
included in "Lessee Settlement" in the statement of operations.
On March 29, 2001, the receiver issued a check for 620,116 Canadian Dollars
(approximately $397,122 U.S. Dollars) to GECAS on behalf of the GECAS Parties.
Including this latest amount, the receiver has distributed to the GECAS Parties
a total amount in this liquidation of approximately $1,138,822 U.S. Dollars, of
which the Partnership's pro rata share is approximately $95,874 U.S. Dollars.
The Partnership's pro rata share of the latest distribution of $397,122 U.S.
Dollars is approximately $34,361 U.S. Dollars. After deducting the legal fees
related to this matter, out of the latest distribution, the Partnership received
a net pro rata share of $8,897 U.S. Dollars on June 27, 2001. The receiver has
advised that an amount of 9,473 Canadian Dollars (approximately $5,957 U.S.
Dollars) still remains with the receiver. An amount to be determined will be
paid to the Partnership prior to the end of the first quarter or shortly
thereafter.
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. The Partnership is not a party to
these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
5
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
a) Polaris Aircraft Income Fund I's 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, 2001
------------------ ----------------------------------
Limited Partnership Interest: 6,100
General Partnership Interest: 1
c) Dividends:
Distributions of cash from operations commenced in 1987. The
Partnership made cash distributions to Limited Partners of $843,645 or
$5.00 per Limited Partnership unit during both 2001 and 2000.
6
Item 6. Selected Financial Data
For the years ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $ 833,068 $ 475,931 $ 764,665 $1,464,953 $3,643,495
Net Income 686,041 272,372 600,019 1,304,160 3,188,131
Net Income
allocated to Limited
Partners 594,824 264,054 594,019 1,053,059 1,341,903
Net Income per Limited
Partnership Unit 3.53 1.57 3.52 6.24 7.95
Cash Distributions per
Limited Partnership
Unit 5.00 5.00 14.75 8.00 44.25
Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit 5.00 5.00 14.75 8.00 44.25
Total Assets 2,445,482 3,334,081 5,090,421 7,361,736 7,366,511
Partners' Capital 2,038,447 2,289,790 2,954,801 5,120,063 5,315,716
7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we identified the most critical
accounting principles upon which our financial status depends. We determined the
critical principles by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to lease revenue recognition,
depreciation policies, and valuation of aircraft. We state these accounting
policies in the notes to the financial statements and in relevant sections in
this discussion and analysis.
Business Overview
At December 31, 2001, Polaris Aircraft Income Fund I (the Partnership) owned
certain inventoried aircraft parts, which included one engine, out of its
original portfolio of eleven aircraft. The three JT8D-9A engines that were
leased to Royal Aviation and were redelivered to the Partnership on September 7,
2000 were sold on July 19, 2001 to Aeroturbine, Inc. on an as-is-where-is basis
for $900,000. The Partnership transferred four aircraft to aircraft inventory
during 1992 and 1993. These aircraft were disassembled for sale of their
component parts. The Partnership sold its remaining inventory of aircraft parts
from the four disassembled aircraft, to Soundair, Inc., in 1998. Additionally,
one of two engines held in inventory was sold to Quantum Aviation Limited during
1998. Two engines formerly leased to Viscount, were returned to the Partnership
in 1996 and were sold in March 1997. One additional engine was sold to Viscount
during 1995. The Partnership has sold six 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, the airframe from a
Boeing 737-200 aircraft in 1995 and three Boeing 737-200 aircraft in 1997.
Remarketing Update
Polaris Investment Management Corporation (the General Partner or PIMC)
evaluates, from time to time, whether the investment objectives of the
Partnership are better served by continuing to hold the Partnership's remaining
portfolio of spare parts, including an engine, or marketing such portfolio for
sale. This evaluation takes into account the current and potential earnings of
the portfolio, the conditions in the markets for lease and sale and future
outlook for such markets, and the tax consequences of selling such property
rather than offering it for lease. The Partnership has made the engine along
with the remaining inventory of spare parts available for sale, with the
intention such that all the assets of the Partnership will be liquidated in an
orderly manner and a final distribution made thereafter.
Partnership Operations
The Partnership reported net income of $686,041, $272,372, and $600,019, or
$3.53, $1.57, and $3.52, per Limited Partnership unit for the years ended
December 31, 2001, 2000, and 1999, respectively. Operating results increased in
2001 as compared to 2000 primarily due to the release of maintenance reserves to
income, gain on the sale of three engines, and a decrease in depreciation,
management fees and operating expenses, partially offset by a decrease in rental
income and interest income. The decrease in 2000 as compared to 1999 was
primarily due to a decrease in rent and interest revenues, an increase in
administration and operating expenses, as well as a gain on the sale of aircraft
8
inventory recognized in 1999, partially offset by decreased management fees,
decreased depreciation expense and a lessee settlement received in 2000.
Rent from operating leases decreased in 2001 as compared to 2000 as well as in
2000 as compared to 1999 due to the expiration of the engine leases to Royal
Aviation in August 2000.
Interest income decreased in 2001 as compared to 2000, as well as in 2000 as
compared to 1999 due to a decrease in the cash reserves due to distributions as
well as lower rental income in connection with the expiration of the engine
leases to Royal Aviation.
Gain on sale of aircraft inventory increased in 2001 as compared to 2000 due to
the sale of the three engines that were on lease to Royal Aviation. Gain on sale
of aircraft inventory decreased in 2000 as compared to 1999 as a result of a
$206,099 gain on the sale of aircraft inventory in 1999. There were no such
sales in 2000.
Lessee settlement and other increased in 2001 as compared to 2000 primarily due
to a payment of $76,770 from Braniff's bankrupt estate. Lessee settlement and
other increased in 2000 as compared to 1999 due to a settlement in the CanAir
bankruptcy proceedings in February 2000, of which the Partnership received
$61,513.
Maintenance reserves increased in 2001 as a result of releasing of $631,316 of
maintenance reserves to income. The Partnership's three engines were sold on
July 19, 2001 on an as-is-where-is basis resulting in no further need to hold
maintenance reserves. There was no such income in 2000 or 1999.
Depreciation expense decreased to $-0- during 2001, as compared to $11,250 in
2000 and $15,000 in 1999, as a result of the engines coming off lease in August
2000.
Management fees decreased to $-0- during 2001, as compared to $12,000 in 2000
and $18,000 in 1999, due to the expiration of the engine leases to Royal
Aviation in August 2000.
Operating expenses decreased in 2001 as compared to 2000 and increased in 2000
as compared to 1999 primarily as a result of shipping and inspection fees paid
in connection with the return of the three JT8D-9A engines to the Partnership in
2000.
Administration and other expenses increased in 2000 as compared to 1999
primarily due to an increase in printing and postage costs and consulting fees.
Liquidity and Cash Distributions
Liquidity - While the Partnership had aircraft and engines on lease, the
Partnership received maintenance reserve payments from its lessee. During the
terms of the lease, such maintenance reserves could be applied to reimburse the
lessee or pay directly 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
were available to be used by the Partnership to offset future maintenance
expenses or recognized as revenue. Due to the fact that the Partnership sold its
three JT8D-9A engines in an as-is-where-is condition in July 2001 for $900,000,
the net maintenance reserve balance of $631,316 from the lease to Royal Aviation
was recognized as income during 2001. Two engines underwent a maintenance event
which resulted in a reimbursements to the lessee totaling $1,341,702 during
9
2000. Additionally, as a result of the expiration of the engine lease to Royal
Aviation, the Partnership returned a $45,000 security deposit during 2000.
The Partnership received payment of $206,099 in 1999 from the sale of parts from
the four disassembled aircraft. There was no such sale in 2000 or in 2001.
PIMC has determined that the Partnership maintain cash reserves as a prudent
measure to insure that the Partnership has available funds for winding up the
affairs of the Partnership and for other contingencies. The Partnership's cash
reserves will be monitored and may be revised from time to time as further
information becomes available in the future.
Cash Distributions - Cash distributions to Limited Partners during 2001, 2000
and 1999 were $843,646, $843,645 and $2,488,753, respectively. Cash
distributions per Limited Partnership unit were $5.00, $5.00, and $14.75 during
2001, 2000 and 1999, respectively. The timing and amount of the final cash
distribution to partners is not yet known and will depend upon the Partnership's
future cash requirements and the timing of the sale and amount of proceeds from
the sale of it's remaining inventory of spare parts including one engine.
Claims Related to Lessee Defaults
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. The Partnership
filed a proof of claim to recover unpaid rent and other damages, and a proof of
administrative claim to recover damages for detention of aircraft,
non-compliance with court orders, post-petition use of engines and liquidated
damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor
committees entered into a settlement which allowed the Partnership an
administrative claim of approximately $2,076,923. The Bankruptcy Court made a
final disposition of the Partnership's claim by permitting the Partnership 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
one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured
claim of $769,231 in the proceedings.
In May, 1998, Braniff's bankrupt estate made a $200,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation, of which $138,462 was allocated to the
Partnership based on its pro rata share of the total claims. On January 20,
1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation, of which $58,154 was allocated to the
Partnership based on its pro rata share of the total claims. On January 16,
2001, Braniff's bankrupt estate made a $110,890 payment in respect of the
unsecured claims of the Partnership and other affiliates of Polaris Management
Corporation, of which $76,770 was allocated to the Partnership based on its pro
rata share of the total claims. This amount is included in Lessee settlement and
other on the Statement of Operations.
CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act
of Canada - On July 28, 1997, CanAir obtained an order under the Companies'
Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of
Justice, General Division. The CCAA Order restrained CanAir's creditors,
including lessors, from exercising any rights arising from CanAir's default or
non-performance of its obligations until October 28, 1997 or further order of
the court. CanAir leased three engines from the Partnership, and a total of five
aircraft from Polaris Holding Company (Polaris) and General Electric Capital
10
Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August
1997 engine rent and maintenance reserve payment obligations to the Partnership.
On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for
Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties),
entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and
Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal
Aviation Inc.
At December 31, 1999, CanAir owed the GECAS Parties a total of approximately
$1.5 million. Of this amount, approximately $30,365 was owed to the Partnership
under the engine lease, exclusive of accrued interest and maintenance reserve
payment obligations.
The receiver appointed by the Ontario Court of Justice on behalf of CanAir's
creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well
as all of CanAir's other assets, including spare parts and accounts receivable.
The proceeds of the sale are being distributed to CanAir's creditors, including
the GECAS Parties. The receiver has distributed to the GECAS Parties a total of
1,076,116.04 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect
of the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian
Dollars ($61,513 U.S. Dollars) have been allocated to the Partnership based on
its pro rata share of the total claims. Of the sale proceeds, approximately
600,000 Canadian Dollars (approximately $384,608 U.S. Dollars converted as of
March 27, 2001) remain to be distributed to CanAir's creditors by the receiver,
subject to a final court order as to the priorities of CanAir's creditors under
the receivership order and Canada's Personal Property Security Act (Ontario).
On February 15, 2000, the Partnership received the settlement of $61,513 in
connection with the CanAir Bankruptcy Settlement, which is comprised of amounts
received for rents, maintenance reserve obligations and accrued interest. A
portion of the proceeds was treated as a recovery of previously reserved rents
receivable. The allowance for credit losses of $30,365 was reversed and is
included in "Lessee Settlement" in the statement of operations.
On March 29, 2001, the receiver issued a check for 620,116 Canadian Dollars
(approximately $397,122 U.S. Dollars) to GECAS on behalf of the GECAS Parties.
Including this latest amount, the receiver has distributed to the GECAS Parties
a total amount in this liquidation of approximately $1,138,822 U.S. Dollars, of
which the Partnership's pro rata share is approximately $95,874 U.S. Dollars.
The Partnership's pro rata share of the latest distribution of $397,122 U.S.
Dollars is approximately $34,361 U.S. Dollars. After deducting the legal fees
related to this matter, out of the latest distribution, the Partnership received
a net pro rata share of $8,897 U.S. Dollars on June 27, 2001. The receiver has
advised that an amount of 9,473 Canadian Dollars (approximately $5,957 U.S.
Dollars) still remains with the receiver. An amount to be determined will be
paid to the Partnership prior to the end of the first quarter or shortly
thereafter.
Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's
1999 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Third District of Alaska. 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 that were
leased by Markair. In August 1993, the Bankruptcy Court approved a plan of
reorganization for Markair and a stipulation allowing the Partnership to retain
the security deposits and maintenance reserves previously posted by Markair, and
an unsecured claim against Markair for $445,000. The unsecured claim was
converted to subordinated debentures during 1994, and Markair defaulted on its
payment obligations on such debentures. On April 14, 1995, Markair commenced new
11
reorganization proceedings under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the Third District of Alaska. On
October 25, 1995, Markair converted its Chapter 11 reorganization proceeding
into a proceeding under Chapter 7 of the United States Bankruptcy Code in the
same court. The trustee, Key Bank of Washington, took steps to protect the
interests of the debenture holders, including the Partnership, by filing proofs
of claim in this proceeding. The Partnership has not received any distribution
from the bankrupt estate on the proofs of claim. There have been no material
developments with respect to this proceeding during the period covered by this
report.
Industry Update
Demand for Aircraft - At year end 2001, there were approximately 16,445
passenger and freighter jet aircraft in the world fleet. As a result of a
slowdown in travel during the year as well as the large shift in travel levels
in the wake of the September 11th tragedy, 2,133 of those aircraft are currently
stored or out of active service. Air travel as measured by global revenue
passenger miles for 2001 is expected to be 5-6% less than the year 2000 when the
final numbers are compiled. 2002 traffic levels are expected to remain
relatively flat compared to 2001 due to the continued impact of September 11th.
The unprecedented and worldwide demand shock has had profound implications to
airlines as well as aircraft owners and manufacturers. Airlines are experiencing
huge losses, and are struggling to match capacity to demand. Manufacturers have
attempted to deliver the aircraft that were already in production and achieve
some stability in their production lines in the face of numerous requests for
deferrals from the airlines. Trading values and lease rates have declined,
particularly on older aircraft as the demand shock took a cyclical downturn into
a deep trough. As manufacturers reduced production, accelerated retirements of
older aircraft, and recovering traffic begin to reduce the aircraft surplus,
this cyclical downturn will reverse itself and the market will return to a
stable condition. This will take some time as manufacturers cannot drop
production overnight and owners will be reluctant to scrap aircraft that they
own despite the lack of a current market for them.
Maintenance of Aging Aircraft - The process of aircraft maintenance, including
engines, begins at the aircraft design stage. For aircraft operating under
Federal Aviation Administration (FAA) regulations, a review board consisting of
representatives of the manufacturer, FAA representatives and operating airline
representatives is responsible for specifying the aircraft's initial maintenance
program. The General Partner understands that this program is constantly
reviewed and modified throughout the aircraft's operational life.
Since 1988, the FAA, working with the aircraft manufacturers and operators, has
issued a series of Airworthiness Directives (Ads) which mandate that operators
conduct more intensive inspections, primarily of the aircraft fuselages. The
results of these mandatory inspections may result in the need for repairs or
structural modifications that may not have been required under pre-existing
maintenance programs.
Aircraft Noise - Another issue which has affected the airline industry is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are no
longer allowed to operate from civil airports in the United States. Stage 2
aircraft no longer meet FAA operational requirements, having been phased-out
under the rules discussed below. Stage 3 aircraft are the most quiet and is the
standard for all new aircraft.
Other countries have also adopted noise policies. The European Union (EU)
adopted a non-addition rule in 1989, which directed each member country to pass
the necessary legislation to prohibit airlines from adding Stage 2 aircraft to
their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the
12
year 2002. The International Civil Aviation Organization has also endorsed the
phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.
Legislation has been drafted and has been under review by the EU for sometime to
adopt anti-hushkitting regulations within member states. The legislation seeks
to ban hushkitted aircraft from being added to member states registers and
preclude all operation of hushkitted aircraft within the EU after certain
specific dates. Due to criticism by the US Government, the enactment of this
legislation has been deferred twice and it is now uncertain if it will ever be
enacted at this point. However, the effect of this proposal has been to reduce
the demand for hushkitted aircraft within the EU and its neighboring states,
including the former Eastern Block states.
13
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND I
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000
AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
TOGETHER WITH THE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
14
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, 2001 and 2000, and the
related statements of operations, changes in partners' capital and cash flows
for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States. 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, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Francisco, California,
February 1, 2002
15
POLARIS AIRCRAFT INCOME FUND I
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $2,445,482 $2,469,034
AIRCRAFT ENGINES, net of accumulated
depreciation of $101,250 in 2000 -- 858,750
OTHER ASSETS -- 6,297
---------- ----------
Total Assets $2,445,482 $3,334,081
========== ==========
LIABILITIES AND PARTNERS' CAPITAL :
PAYABLE TO AFFILIATES $ 38,214 $ 48,904
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 368,821 364,071
MAINTENANCE RESERVES -- 631,316
---------- ----------
Total Liabilities 407,035 1,044,291
---------- ----------
PARTNERS' CAPITAL :
General Partner 134,953 137,474
Limited Partners, 168,729 units
issued and outstanding 1,903,494 2,152,316
---------- ----------
Total Partners' Capital 2,038,447 2,289,790
---------- ----------
Total Liabilities and Partners' Capital $2,445,482 $3,334,081
========== ==========
The accompanying notes are an integral part of these statements.
16
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
REVENUES:
Rent from operating leases $ -- $240,000 $360,000
Interest 74,835 174,418 198,566
Gain on sale of engines 41,250 -- --
Gain on sale of aircraft inventory -- -- 206,099
Lessee settlement and other 85,667 61,513 --
Maintenance reserves 631,316 -- --
-------- -------- --------
Total Revenues 833,068 475,931 764,665
-------- -------- --------
EXPENSES:
Depreciation -- 11,250 15,000
Management fees to General Partner -- 12,000 18,000
Operating 5,900 36,238 --
Administration and other 141,127 144,071 131,646
-------- -------- --------
Total Expenses 147,027 203,559 164,646
-------- -------- --------
NET INCOME $686,041 $272,372 $600,019
======== ======== ========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 91,217 $ 8,318 $ 6,000
======== ======== ========
NET INCOME ALLOCATED
TO THE LIMITED PARTNERS $594,824 $264,054 $594,019
======== ======== ========
NET INCOME PER
LIMITED PARTNERSHIP UNIT $ 3.53 $ 1.57 $ 3.52
======== ======== ========
The accompanying notes are an integral part of these statements.
17
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
General Limited
Partner Partner Total
------- ------- -----
Balance, December 31, 1998 $ 493,422 $ 4,626,641 $ 5,120,063
Net income 6,000 594,019 600,019
Cash distributions to partners (276,528) (2,488,753) (2,765,281)
----------- ----------- -----------
Balance, December 31, 1999 222,894 2,731,907 2,954,801
Net income 8,318 264,054 272,372
Cash distributions to partners (93,738) (843,645) (937,383)
----------- ----------- -----------
Balance, December 31, 2000 $ 137,474 $ 2,152,316 $ 2,289,790
Net income 91,217 594,824 686,041
Cash distribution to partners (93,738) (843,646) (937,384)
----------- ----------- -----------
Balance, December 31, 2001 $ 134,953 $ 1,903,494 $ 2,038,447
=========== =========== ===========
The accompanying notes are an integral part of these statements.
18
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 686,041 $ 272,372 $ 600,019
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation -- 11,250 15,000
Gain on sale of engines (41,250) -- --
Gain on sale of aircraft inventory -- -- (206,099)
Changes in operating assets and
liabilities:
Decrease in rent and other
receivables -- 30,000 28,154
Decrease (increase) in other assets 6,297 (6,297) --
Increase (decrease) in payable to
affiliates (10,690) 37,688 678
Increase (decrease) in accounts
payable and accrued liabilities 4,750 (10,618) 2,947
Decrease in security deposits -- (45,000) --
Decrease in maintenance reserves (631,316) (1,073,399) (109,678)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 13,832 (784,004) 331,021
----------- ----------- -----------
INVESTING ACTIVITIES:
Net proceeds from sale of engines 900,000 -- --
Net proceeds from sale of aircraft
inventory -- 206,099
----------- ----------- -----------
Net cash provided by investing
activities 900,000 -- 206,099
----------- ----------- -----------
FINANCING ACTIVITIES:
Cash distributions to partners (937,384) (937,383) (2,765,281)
----------- ----------- -----------
Net cash used in financing
activities (937,384) (937,383) (2,765,281)
----------- ----------- -----------
CHANGES IN CASH AND CASH
EQUIVALENTS (23,552) (1,721,387) (2,228,161)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,469,034 4,190,421 6,418,582
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,445,482 $ 2,469,034 $ 4,190,421
=========== =========== ===========
The accompanying notes are an integral part of these statements.
19
POLARIS AIRCRAFT INCOME FUND I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
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, and prepares
its financial statements on the accrual basis of accounting. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States (GAAP) requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates. The most significant estimates with regard to
these financial statements are the residual values of the aircraft, the useful
lives of the aircraft, and the estimated amount and timing of cash-flows
associated with each aircraft, which are used to determine impairment, if any.
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds. Cash and Cash Equivalents are stated at cost, which
approximates fair value.
Aircraft and Depreciation - Prior to disposition, aircraft were recorded at
cost, which included acquisition costs. Depreciation to an estimated residual
value was 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 remaining aircraft engines were depreciated to an
estimated residual value using the straight line method over their estimated
economic life.
The Partnership periodically reviewed the estimated realizability of the
residual values at the projected end of each asset's economic life. 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 asset was increased.
If the projected net cash flow for each aircraft or engine (projected rental
revenue, net of management fees, less projected maintenance costs, if any, plus
the estimated residual value) was less than the carrying value of the aircraft
or engine, an impairment loss was recognized.
On July 19, 2001 the Partnership sold three engines to Aeroturbine, Inc. on an
as-is-where-is basis for $900,000. The only remaining non-cash asset is an
inventory of spare parts that includes one engine, and that has been made
available for sale such that the Partnership plans to liquidate all its assets
and make a final distribution thereafter. These assets are carried at zero value
as of December 31, 2001.
Capitalized Costs - Modification and maintenance costs which are determined to
increase the value or extend the useful life of the remaining assets are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement or the remaining lease life, if shorter. These
costs are also subject to periodic evaluation for impairment as discussed above.
Aircraft Inventory - Proceeds from sales had been applied against inventory
until the book value was fully recovered. The remaining book value of the
inventory was recovered in 1995. Proceeds in excess of the inventory net book
value are recorded as revenue when received.
20
Operating Leases - While the Partnership had aircraft and engines on lease, the
leases were accounted for as operating leases. Operating lease revenues were
recognized in equal installments over the terms of the leases.
Maintenance Reserves - The Partnership received maintenance reserve payments
from certain of its lessees that may be reimbursed to the lessee or applied
against certain costs incurred by the Partnership or lessee for maintenance work
performed on the Partnership's aircraft or engines, as specified in the leases.
Maintenance reserve payments are recognized when received and balances remaining
at the termination of the lease, if any, may be used by the Partnership to
offset required maintenance expenses or recognized as revenue. (See Note 3)
Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft, including costs related to
lessee defaults and costs of disassembling aircraft inventory.
Net Income Per Limited Partnership Unit - Net income per Limited Partnership
unit is based on the Limited Partners' share of net income, allocated in
accordance with the Partnership Agreement, and the number of units outstanding
for the years ended December 31, 2001, 2000 and 1999.
Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
Receivables - The Partnership had previously recorded an allowance for credit
losses for certain impaired note and rents receivable as a result of
uncertainties regarding their collection as discussed in Note 6. On February 15,
2000, the Partnership received an initial settlement of $61,513 in connection
with the CanAir Bankruptcy Settlement, which is comprised of amounts received
for rents, maintenance reserve obligations and accrued interest. A portion of
the proceeds was treated as a recovery of previously reserved rents receivable.
The allowance for credit losses of $30,365 was reversed and is included in
"Lessee Settlement" in the statement of operations.
2001 2000
---- ----
Allowance for credit losses,
beginning of year $ -- $(30,365)
Recovery of credit losses -- 30,365
Allowance for credit losses,
end of year
---------- --------
$ -- $ --
========== ========
New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that derivatives be
recognized in the balance sheet at fair value and specifies the accounting for
changes in fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133," to defer the effective date of SFAS 133 until fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
21
an Amendment of FASB Statement No. 133." SFAS 138 amends the accounting and
reporting standards of SFAS 133 for certain derivative instruments and certain
hedging activities. The Partnership adopted these pronouncements effective
January 1, 2001. Due to the fact that the Partnership does not utilize any
derivative instruments, these pronouncements did not have an impact on the
Partnership's balance sheet or statement of operations.
In June 2001, the FASB approved for issuance SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred and that the associated asset retirement costs be
capitalized as part of the carrying value of the related long-lived asset. SFAS
No. 143 will be effective January 1, 2003 for the Partnership. Management does
not expect this standard to have a material impact on the Partnership's balance
sheet or statement of operations.
In August 2001, the FASB approved for issuance SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 broadens the
presentation of discontinued operations to include more transactions and
eliminates the need to accrue for future operating losses. Additionally, SFAS
No. 144 prohibits the retroactive classification of assets as held for sale and
requires revisions to the depreciable lives of long-lived assets to be
abandoned. SFAS No. 144 will be effective January 1, 2002 for the Partnership.
Management does not expect this standard to have a material impact on the
Partnership's balance sheet or statement of operations.
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 offering of Limited Partnership units terminated on
December 31, 1985, at which time the Partnership had sold 168,729 units of $500,
representing $84,364,500. All unit holders were admitted to the Partnership on
or before January 1, 1986.
Polaris Investment Management Corporation (PIMC), the sole General Partner of
the Partnership, supervises the day-to-day operations of the Partnership. PIMC
is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC).
Polaris Holding Company (PHC) is the parent company of PALC. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company, owns
100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to related parties are described in Notes 7 & 8.
3. Maintenance Reserves
While the Partnership had aircraft and engines on lease, the Partnership
received maintenance reserve payments from its lessee. During the terms of the
lease, such maintenance reserves could be applied to reimburse the lessee or pay
directly 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 were
available to be used by the Partnership to offset future maintenance expenses or
recognized as revenue. Due to the fact that the Partnership sold its three
JT8D-9A engines in an as-is-where-is condition in July 2001 for $900,000, the
maintenance reserve balance of $631,316 from the lease to Royal Aviation was
recognized as income during 2001.
22
4. Aircraft and Aircraft Engines
At December 31, 2001, the Partnership owned certain inventoried aircraft parts,
which includes one engine, out of its original portfolio of eleven used
commercial jet aircraft.
Three Aircraft Engines - In 2000, the Partnership leased two engines from an
airframe previously sold and one engine previously leased to Viscount, to CanAir
Cargo Ltd. (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 was fixed at $10,000 per
engine per month. In April 1997, the engine lease with CanAir was extended for
seven months at the same lease rate. CanAir defaulted on its lease obligations
to the Partnership in July 1997. In August 1997 the lease was transferred to
Royal Aviation Inc. and Royal Air Cargo, Inc. (Royal Air) and the lease term was
extended to August 2000 at the current lease rate. On August 31, 2000, the lease
for the three JT8D-9A engines to Royal Aviation, Inc. and Royal Cargo, Inc.
(Royal Aviation) expired. The engines were returned on September 7, 2000 and
security deposit of $45,000 was refunded to Royal Aviation on November 21, 2000.
The Partnership sold these three engines on July 19, 2001 (See Note 5) and has
made available for sale the remaining inventory of spare parts such that all the
assets of the Partnership will be liquidated and a final distribution made
thereafter. These spare parts are carried at a value of zero as of December 31,
2001.
5. Sale of Aircraft Inventory and Engines
Sale of Engines in Inventory - On July 19, 2001, the Partnership sold the three
JT8D-9A engines to Aeroturbine, Inc. on an as-is-where-is basis for $900,000.
The Partnership received the proceeds for these engines in the third quarter of
2001. This sale resulted in a gain of $41,250 which is reflected in the
Statement of Operations.
Sale of Aircraft Inventory - During 1999, the Partnership received $206,099 for
the sale of consignment inventory.
6. Claims Related to Lessee Defaults
Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's
2000 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Third District of Alaska. 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 that were
leased by Markair. In August 1993, the Bankruptcy Court approved a plan of
reorganization for Markair and a stipulation allowing the Partnership to retain
the security deposits and maintenance reserves previously posted by Markair, and
an unsecured claim against Markair for $445,000. The unsecured claim was
converted to subordinated debentures during 1994, and Markair defaulted on its
payment obligations on such debentures. On April 14, 1995, Markair commenced new
reorganization proceedings under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the Third District of Alaska. On
October 25, 1995, Markair converted its Chapter 11 reorganization proceeding
into a proceeding under Chapter 7 of the United States Bankruptcy Code in the
same court. The trustee, Key Bank of Washington, took steps to protect the
interests of the debenture holders, including the Partnership, by filing proofs
of claim in this proceeding. The Partnership has not received any distribution
23
from the bankrupt estate on the proofs of claim. There have been no material
developments with respect to this proceeding during the period covered by this
report.
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. The Partnership
filed a proof of claim to recover unpaid rent and other damages, and a proof of
administrative claim to recover damages for detention of aircraft,
non-compliance with court orders, post-petition use of engines and liquidated
damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor
committees entered into a settlement which allowed the Partnership an
administrative claim of approximately $2,076,923. The Bankruptcy Court made a
final disposition of the Partnership's claim by permitting the Partnership 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
one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured
claim of $769,231 in the proceedings.
In May of 1998, Braniff's bankrupt estate made a $200,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation, of which $138,462 was allocated to the
Partnership based on its pro rata share of the total claims. On January 20,
1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation, of which $58,154 was allocated to the
Partnership based on its pro rata share of the total claims. On January 16,
2001, Braniff's bankrupt estate made a $110,890 payment in respect of the
unsecured claims of the Partnership and other affiliates of Polaris Management
Corporation, of which $76,770 was allocated to the Partnership based on its pro
rata share of the total claims.
CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act
of Canada - On July 28, 1997, CanAir obtained an order under the Companies'
Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of
Justice, General Division. The CCAA Order restrained CanAir's creditors,
including lessors, from exercising any rights arising from CanAir's default or
non-performance of its obligations until October 28, 1997 or further order of
the court. CanAir leased three engines from the Partnership, and a total of five
aircraft from Polaris Holding Company (Polaris) and General Electric Capital
Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August
1997 engine rent and maintenance reserve payment obligations to the Partnership.
On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for
Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties),
entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and
Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal
Aviation Inc.
At December 31, 1999, CanAir owed the GECAS Parties a total of approximately
$1.5 million. Of this amount, approximately $30,365 was owed to the Partnership
under the engine lease, exclusive of accrued interest and maintenance reserve
payment obligations.
The receiver appointed by the Ontario Court of Justice on behalf of CanAir's
creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well
as all of CanAir's other assets, including spare parts and accounts receivable.
The proceeds of the sale are being distributed to CanAir's creditors, including
the GECAS Parties. The receiver has distributed to the GECAS Parties a total of
1,076,116 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect of
the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian
Dollars (approximately $61,513 U.S. Dollars) have been allocated to the
Partnership based on its pro rata share of the total claims. Of the sale
proceeds, approximately 600,000 Canadian Dollars (approximately $384,608 U.S.
24
Dollars) remain to be distributed to CanAir's creditors by the receiver, subject
to a final court order as to the priorities of CanAir's creditors under the
receivership order and Canada's Personal Property Security Act (Ontario).
On February 15, 2000, the Partnership received the settlement of $61,513 in
connection with the CanAir Bankruptcy Settlement, which is comprised of amounts
received for rents, maintenance reserve obligations and accrued interest. A
portion of the proceeds was treated as a recovery of previously reserved rents
receivable. The allowance for credit losses of $30,365 was reversed and is
included in "Lessee Settlement" in the statement of operations.
On March 29, 2001, the receiver issued a check for 620,116 Canadian Dollars
(approximately $397,122 U.S. Dollars) to GECAS on behalf of the GECAS Parties.
Including this latest amount, the receiver has distributed to the GECAS Parties
a total amount in this liquidation of approximately $1,138,822 U.S. Dollars, of
which the Partnership's total cumulative pro rata share is approximately $95,874
U.S. Dollars. The Partnership's pro rata share of the latest distribution of
$397,122 U.S. Dollars is approximately $34,361 U.S. Dollars. After deducting the
legal fees related to this matter, out of the latest distribution, the
Partnership received a net pro rata share of $8,897 U.S. Dollars on June 27,
2001. This amount was included in Lessee settlement and other on the Statement
of Operations. The receiver has advised that an amount of 9,473 Canadian Dollars
(approximately $5,957 U.S. Dollars) still remains with the receiver. An amount
to be determined will be paid to the Partnership prior to the end of the first
quarter of 2002 or shortly thereafter, and will be recognized as income when
received.
7. 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 2001, 2000 and 1999, the Partnership paid management fees
to PIMC of $-0-, $15,018, and $18,000, respectively.
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and its assets. In 2001, 2000
and 1999, $89,435 $158,083, and $155,970 were reimbursed by the
Partnership to PIMC for administrative expenses. Administrative
reimbursements of $35,942 and $12,667 were payable to PIMC at December
31, 2001 and 2000, respectively. Partnership reimbursements to PIMC for
maintenance and remarketing costs of $9,592, $1,341,702, and $200 were
paid in cash in 2001, 2000, and 1999, respectively. Maintenance and
remarketing reimbursements of $2,272, and $36,237 were payable to PIMC
at December 31, 2001 and 2000, respectively.
c. A 10% interest to PIMC in all cash distributions and sales proceeds,
gross income in an amount equal to 9.09% of distributed cash available
from operations and 1% of net income or loss and taxable income or
loss, as such terms are defined in the Partnership Agreement. After the
Partnership has sold or disposed of aircraft representing 50% of the
total aircraft cost, gains from the sale or other disposition of
aircraft are generally allocated first to the General Partner until
such time that the General Partner's capital account is equal to the
amount to be distributed to the General Partner from the proceeds of
such sale or disposition. The General Partner received $93,738, $93,738
and $276,528 in 2001, 2000, and 1999 respectively.
25
d. A subordinated sales commission to PIMC of 3% of the gross sales price
of each aircraft for services performed upon disposition and
reimbursement of out-of-pocket and other disposition expenses.
Subordinated sales commissions will be paid only after Limited Partners
have received distributions in an aggregate amount equal to their
capital contributions plus a cumulative non-compounded 8% per annum
return on their adjusted capital contributions, as defined in the
Partnership Agreement. The Partnership did not pay or accrue a sales
commission on any aircraft sales to date as the above subordination
threshold has not been met.
e. In the event that, immediately prior to the dissolution and termination
of the Partnership, the General Partner shall have a deficit balance in
its tax basis capital account, then the General Partner shall
contribute in cash to the capital of the Partnership an amount which is
equal to such deficit (see Note 8).
8. Partners' Capital
The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the General Partner and the Limited Partners
(see Note 7). Such allocations are made using income or loss calculated under
GAAP for book purposes, which, as more fully described in Note 10, varies from
income or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, are distributed 10% to the General Partner and 90% to the Limited
Partners.
The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.
Had all the assets of the Partnership been liquidated at December 31, 2001 at
the current carrying value, the tax basis capital (deficit) accounts of the
General Partner and the Limited Partners is estimated to be $(1,329,811) and
$14,904,046, respectively.
9. Income Taxes
Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the accompanying financial statements.
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 2001 and 2000 are as
follows:
26
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
2001: Assets $ 2,445,482 $ 13,981,270 $(11,535,788)
Liabilities 407,035 407,035 -
2000: Assets $ 3,334,081 $ 15,949,326 $(12,615,245)
Liabilities 1,044,291 412,975 631,316
10. Reconciliation of Book Net Income to Taxable Net Income (Loss)
The following is a reconciliation between net income (loss) per Limited
Partnership unit reflected in the financial statements and the information
provided to Limited Partners for federal income tax purposes:
For the years ended December 31,
--------------------------------
2001 2000 1999
---- ---- ----
Book net income per Limited Partnership unit $ 3.53 $ 1.57 $ 3.52
Adjustments for tax purposes represent
differences between book and tax revenue
and expenses:
Rental and maintenance reserve revenue
recognition (3.70) 1.74 1.95
Depreciation (0.49) (0.58) (0.11)
Gain or loss on sale of aircraft or inventory (5.85) (0.47) (1.48)
Other revenue and expense items - (0.17) -
------- ------ ------
Taxable net income (loss) per Limited
Partnership unit $(6.51) $ 2.09 $ 3.88
====== ====== ======
The differences between net income and loss for book purposes and net income and
loss for tax purposes result from the temporary differences of certain revenue
and deductions.
For book purposes, rental revenue is generally recorded as it is earned on a
straight line basis for operating leases. For tax purposes, certain temporary
differences exist in the recognition of revenue which is generally recognized
when received. Increases in the Partnership's book maintenance reserve liability
were recognized as rental revenue for tax purposes. Disbursements from the
Partnership's book maintenance reserves are capitalized or expensed for tax
purposes, as appropriate.
The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
purposes. These differences in depreciation methods result in book to tax
differences on the sale of aircraft. In addition, certain costs were capitalized
for tax purposes and expensed for book purposes, which yields a different gain
or loss on the sale of aircraft or inventory.
11. Subsequent Event
Cash Distributions - The Partnership made a cash distribution of $1,054,556 or
$6.25 per Limited Partnership unit, to Limited Partners, and $117,173 to the
General Partner on January 15, 2002.
27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
28
PART III
Item 10. Directors and Executive Officers of the Registrant
Polaris Aircraft Income Fund I, A California Limited Partnership (PAIF-I or the
Partnership) has no directors or officers. Polaris Holding Company (PHC) and its
subsidiaries, including Polaris Aircraft Leasing Corporation (PALC) and Polaris
Investment Management Corporation (PIMC), the General Partner of the Partnership
(collectively Polaris), restructured their operations and businesses (the
Polaris Restructuring) in 1994. In connection therewith, PIMC entered into a
services agreement dated as of July 1, 1994 (the Services Agreement) with GE
Capital Aviation Services, Inc. (GECAS), a Delaware corporation which is a
wholly owned subsidiary of General Electric Capital Corporation, a Delaware
corporation (GE Capital). GE Capital has been PHC's parent company since 1986.
As subsidiaries of GE Capital, GECAS and PIMC are affiliates.
The officers and directors of PIMC are:
Name PIMC Title
--------------------------- ------------------------------------
William Carpenter President; Director
Keith Helming Chief Financial Officer
Melissa Hodes Vice President; Director
Norman C. T. Liu Vice President; Director
Ray Warman Secretary
Robert W. Dillon Assistant Secretary
Substantially all of these management personnel will devote only such portion of
their time to the business and affairs of PIMC as deemed necessary or
appropriate.
Mr. Carpenter, 38, assumed the position of President and Director of PIMC
effective October 1, 2001. Mr. Carpenter holds the position of Executive Vice
President and Chief Risk Manager of GECAS, having previously held the position
of Vice President - Chief Risk Manager of GECAS (Acting). Prior to joining GECAS
seven years ago, Mr. Carpenter was an aerospace engineer specializing in
aircraft handling qualities. Prior to that, Mr. Carpenter was a commissioned
officer and pilot in the United States Armed Forces.
Mr. Helming, 43, assumed the position of Chief Financial Officer of PIMC
effective October 1, 2000. Mr. Helming presently holds the positions of
Executive Vice President and Chief Financial Officer of GECAS. Mr. Helming has
been with General Electric Company (GE) and its subsidiaries since 1981. Prior
to joining GECAS, Mr. Helming served as the Senior Vice President of Finance at
GE Capital Fleet Services for three years. Prior to that, Mr. Helming was Chief
Financial Officer for GE Capital Global Consumer Finance U.K.
Ms. Hodes, 36, assumed the position of Director of PIMC effective May 19, 2000.
Ms. Hodes presently holds the position of Senior Vice President, Financial
Planning and Analysis for GECAS. Ms. Hodes has been with the General Electric
Company (GE) and its subsidiaries since 1987. Prior to joining GECAS, Ms. Hodes
held various financial management positions with GE Capital Card Services, GE
Audit Staff and GE Power Systems.
Mr. Liu, 44, assumed the position of Vice President of PIMC effective May 1,
1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the
position of Executive Vice President - Sales and Marketing of GECAS, having
29
previously held the position of Executive Vice President - Capital Funding and
Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was with General
Electric Capital Corporation for nine years. He has held management positions in
corporate Business Development for General Electric Capital Corporation and in
Syndications and Leasing for the Transportation & Industrial Funding division of
General Electric Capital Corporation. Mr. Liu previously held the position of
managing director of Kidder, Peabody & Co., Incorporated.
Mr. Warman, 53, assumed the position of Secretary of PIMC effective March 23,
1998. Mr. Warman has served as a GECAS Senior Vice President and Associate
General Counsel since March 1996 and for 13 years theretofore was a partner,
with an air-finance and corporate practice of the national law firm of Morgan,
Lewis & Bockius LLP.
Mr. Dillon, 60, held the position of Vice President - Aviation Legal and
Insurance Affairs, from April 1989 to October 1997. Previously, he served as
General Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994,
Mr. Dillon assumed the position of Assistant Secretary of PIMC. Mr. Dillon
presently holds the position of Senior Vice President and Associate General
Counsel of GECAS.
Certain Legal Proceedings:
On or around September 27, 1995, a complaint entitled Martha J. Harrison v.
General Electric Company, et. al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and Prudential Securities Incorporated. The Partnership is not
named as a defendant in this action. Plaintiff alleges claims of tort, breach of
fiduciary duty in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning
the inducement and solicitation of purchases arising out of the public offering
of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages,
attorney's fees, interest, costs and general relief.
On or around December 8, 1995, a complaint entitled Overby, et al. v. General
Electric Company, et al. was filed in the Civil District Court for the Parish of
Orleans, State of Louisiana. The complaint names as defendants General Electric
Company and General Electric Capital Corporation. The Partnership is not named
as a defendant in this action. Plaintiffs allege claims of tort, breach of
fiduciary duty, in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in
connection with the public offering of Polaris Aircraft Income Funds III and IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.
In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated, et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. The Partnership is not named as a
defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary
duty, in tort, contract and quasi-contract, violation of sections of the
Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection
with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs
seek compensatory damages, attorneys' fees, interest, costs and general relief.
30
In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v.
Prudential Securities. Incorporated, et al. was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint named as
defendants Prudential Securities Incorporated and Stephen Derby Gisclair. On or
about January 18, 1996, plaintiff filed a First Supplemental and Amending
Petition adding defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of sections of the Louisiana Blue Sky Law and
violation of the Louisiana Civil Code in connection with the public offering of
Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages,
attorneys' fees, interest, costs and general relief.
On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v.
General Electric Co., et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
in connection with the public offering of Polaris Aircraft Income Fund IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.
In or around December 1994, a complaint entitled John J. Jones, Jr. v.
Prudential Securities Incorporated, et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company and General Electric
Capital Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of section of the Louisiana Blue Sky Law and violation
of the Louisiana Civil Code concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund
III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.
On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint named as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
concerning the inducement and solicitation of purchases arising out of the
public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek
compensatory damages, attorneys' fees, interest, costs and general relief.
On or about May 7, 1996, a petition entitled Charles Rich. et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiffs allege claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Funds
III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief.
On or about March 4, 1996, a petition entitled Richard J. McGiven v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
31
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund V.
Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.
On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric
Company and General Electric Capital Corporation was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint names as
defendants General Electric Company and General Electric Capital Corporation.
The Partnership is not named as a defendant in this action. Plaintiff alleges
claims of tort concerning the inducement and solicitation of purchases arising
out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks
compensatory damages, attorneys' fees, interest, costs and general relief.
Sara J. Bishop, et al. v. Kidder, Peabody & Co., et al., Superior Court of
California, County of Sacramento; Wilson et al. v. Polaris Holding Company et
al., Superior Court of California, County of Sacramento, and ten other
California Actions(1) - In the California actions filed in 1996, approximately
4000 plaintiffs who purchased limited partnership units in Polaris Aircraft
Income Funds I through VI and other limited partnerships sold by Kidder, Peabody
named Kidder, Peabody, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, and General Electric Credit
Corporation and Does 1-100 as defendants. The Partnership was not named as a
defendant in these actions. The complaints all allege violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaints seek to recover compensatory damages and punitive damages in an
unspecified amount, interest, and rescission with respect to Polaris Aircraft
Income Funds III-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The California actions have been settled.
An additional settlement was entered into with certain plaintiffs who had
refused to participate in the first settlement. Plaintiffs' counsel advised the
Court that they would withdraw from representing the remaining plaintiffs --
approximately 330 -- who refused to participate in either of the settlements. In
July, 2000, plaintiffs' counsel submitted to the Court motions to withdraw as
counsel of record for all of the actions. The Court indicated that it would
grant such motions and thereafter would consider dismissing each of the actions
if no plaintiff came forward to prosecute. On August 2, 2001, the Court
conducted a series of status conferences in connection with each of the twelve
California actions and at the conferences dismissed most of the remaining
plaintiffs in those actions. On November 9, 2001, defendants moved for summary
judgment against most of the remaining plaintiffs based upon a settlement and
bar order entered in a multi-district litigation in 1997.
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.
- -----------------------------------
1 The ten other actions are Abrams, et al. v. Polaris Holding Company, et al.,
Elphick, et al. v. Kidder Peabody & Co., et al., Johnson, et al. v. Polaris
Holding Company, et al., Kuntz, et al. v. Polaris Holding Company, et al.,
McDevitt, et al. v. Polaris Holding Company, et al., Ouellette, et al. v. Kidder
Peabody & Co., et al., Rolph, et al. v. Polaris Holding Company, et al., Self,
et al. v. Polaris Holding Company, et al., Tarrer, et al. v. Kidder Peabody &
Co., et al., Zicos, et al. v. Polaris Holding Company, et al., all filed in
Superior Court of California, County of Sacramento.
32
Item 11. Executive Compensation
The Partnership has no directors or officers. The Partnership is managed by
PIMC, the General Partner. In connection with management services provided,
management and advisory fees of $-0- were paid to PIMC in 2001 in addition to a
10% interest in all cash distributions as described in Note 7 to the financial
statements (Item 8).
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) No person owns of record, or is known by the Partnership to own
beneficially, more than five percent of any class of voting securities
of the Partnership.
b) The General Partner of the Partnership owns the equity securities of
the Partnership as set forth in the following table:
Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
- -------- ---------------- -------------------- --------
General Polaris Investment Represents a 10.0% interest of all cash 100%
Partner Management distributions, gross income in an
Interest Corporation amount equal to 9.09% of distributed
cash available from operations, and a
1% interest in net income or loss
c) There are no arrangements known to the Partnership, including any
pledge by any person of securities of the Partnership, the operation of
which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions
None.
33
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 15
Balance Sheets 16
Statements of Operations 17
Statements of Changes in Partners' Capital 18
Statements of Cash Flows 19
Notes to Financial Statements 20
2. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
2001.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
99. Letter from the Partnership to the SEC regarding Arthur Andersen
LLP.
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.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND I
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner
March 28, 2002 By: /S/ William Carpenter
---------------------------- ----------------------------
Date William Carpenter, 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/William Carpenter President and Director of Polaris March 28, 2002
- -------------------- Investment Management Corporation, --------------
(William Carpenter) General Partner of the Registrant
/S/Keith Helming Chief Financial Officer of Polaris March 28, 2002
- ---------------- Investment Management Corporation, --------------
(Keith Helming) General Partner of the Registrant
/S/Melissa Hodes Vice President and Director of Polaris March 28, 2002
- ---------------- Investment Management Corporation, --------------
(Melissa Hodes) General Partner of the Registrant
/S/Norman C. T. Liu Vice President and Director of Polaris March 28, 2002
- ------------------- Investment Management Corporation, --------------
(Norman C. T. Liu) General Partner of the Registrant
35