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 March 31, 1999
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 High Ridge Road, Stamford, Connecticut 06927
Telephone - (203) 357-3776
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 14 pages.
POLARIS AIRCRAFT INCOME FUND I
FORM 10-Q - For the Quarterly Period Ended March 31, 1999
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1999 and
December 31, 1998...........................................3
b) Statements of Operations - Three Months Ended
March 31, 1999 and 1998.....................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1998
and Three Months Ended March 31, 1999.......................5
d) Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998...............................6
e) Notes to Financial Statements...............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........9
Part II. Other Information
Item 1. Legal Proceedings......................................12
Item 6. Exhibits and Reports on Form 8-K.......................12
Signature .......................................................13
2
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND I
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1999 1998
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $3,904,988 $6,418,582
RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $30,365 in
1999 and 1998 196,858 58,154
AIRCRAFT ENGINES, net of accumulated depreciation
of $78,750 in 1999 and $75,000 in 1998 881,250 885,000
---------- ----------
$4,983,096 $7,361,736
========== ==========
LIABILITIES AND PARTNERS' CAPITAL:
PAYABLE TO AFFILIATES $ 18,956 $ 10,538
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 353,382 371,742
LESSEE SECURITY DEPOSITS 45,000 45,000
MAINTENANCE RESERVES 1,907,591 1,814,393
---------- ----------
Total Liabilities 2,324,929 2,241,673
---------- ----------
PARTNERS' CAPITAL:
General Partner 219,928 493,422
Limited Partners, 168,729 units
issued and outstanding 2,438,239 4,626,641
---------- ----------
Total Partners' Capital 2,658,167 5,120,063
---------- ----------
$4,983,096 $7,361,736
========== ==========
The accompanying notes are an integral part of these statements.
3
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
REVENUES:
Rent from operating leases $ 90,000 $ 90,000
Gain on sale of aircraft inventory 196,858 49,453
Claims related to lessee defaults -- 231,072
Interest and other 50,561 72,104
-------- --------
Total Revenues 337,419 442,629
-------- --------
EXPENSES:
Depreciation 3,750 3,750
Management fees to general partner 4,500 4,500
Administration and other 25,784 40,966
-------- --------
Total Expenses 34,034 49,216
-------- --------
NET INCOME $303,385 $393,413
======== ========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 3,034 $ 3,934
======== ========
NET INCOME ALLOCATED TO
LIMITED PARTNERS $300,351 $389,479
======== ========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 1.78 $ 2.31
======== ========
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, 1998 and
Three Months Ended March 31, 1999
---------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1997 $ 392,302 $ 4,923,414 $ 5,315,716
Net income 251,101 1,053,059 1,304,160
Cash distributions to partners (149,981) (1,349,832) (1,499,813)
----------- ----------- -----------
Balance, December 31, 1998 493,422 4,626,641 5,120,063
Net income 3,034 300,351 303,385
Cash distributions to partners (276,528) (2,488,753) (2,765,281)
----------- ----------- -----------
Balance, March 31, 1999 $ 219,928 $ 2,438,239 $ 2,658,167
=========== =========== ===========
The accompanying notes are an integral part of these statements.
5
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 303,385 $ 393,413
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,750 3,750
Gain on sale of aircraft inventory (196,858) (49,453)
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivable 58,154 (141,223)
Increase (decrease) in payable to
affiliates 8,418 (3,490)
(Decrease) increase in accounts payable
and accrued liabilities (18,360) 6,075
Increase in maintenance reserves 93,198 71,622
Decrease in security deposits -- (50,000)
----------- -----------
Net cash provided by operating
activities 251,687 230,694
----------- -----------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory -- 49,453
----------- -----------
Net cash provided by investing
activities -- 49,453
----------- -----------
FINANCING ACTIVITIES:
Cash distributions to partners (2,765,281) (1,499,813)
----------- -----------
Net cash used in financing activities (2,765,281) (1,499,813)
----------- -----------
CHANGES IN CASH AND CASH
EQUIVALENTS (2,513,594) (1,219,666)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 6,418,582 6,466,511
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,904,988 $ 5,246,845
=========== ===========
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 and do not include all of the
information and note disclosures required by generally accepted accounting
principles (GAAP). These statements should be read in conjunction with the
financial statements and notes thereto for the years ended December 31, 1998,
1997, and 1996 included in the Partnership's 1998 Annual Report to the SEC on
Form 10-K.
2. 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
Three Months Ended Payable at
March 31, 1999 March 31, 1999
-------------- --------------
Aircraft Management Fees $ 6,000 $ 1,518
Out-of-Pocket Administrative Expense
Reimbursement 35,199 17,438
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 200 --
------- -------
$41,399 $18,956
======= =======
3. 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.
Such allocations are made using income or loss calculated under GAAP for book
purposes, which varies from income or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the general partner and 90% to the limited
partners.
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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.
4. Sale of Aircraft Inventory to Soundair, Inc.
The Partnership recognized income of $196,858 during the first quarter of 1999
from the sale of aircraft inventory to Soundair, Inc.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
At March 31, 1999, Polaris Aircraft Income Fund I (the Partnership) owned three
JT8D-9A engines and certain inventoried aircraft parts, which includes one
engine, out of its original portfolio of eleven aircraft. The three JT8D-9A
engines are leased to Royal Aviation Inc. and Royal Cargo, Inc. (Royal
Aviation).
Partnership Operations
The Partnership recorded net income of $303,385, or $1.78 per limited
partnership unit, for the three months ended March 31, 1999, compared to net
income of $393,413, or $2.31 per unit for the same period in 1998. The decline
in operating results during the first quarter of 1999, as compared to the same
period in 1998, was primarily the result of income recognized on payments
received from the Braniff, Inc. bankruptcy estate of $138,462 and on Jet Fleet
deposits of $92,610 following the closing of bankruptcy proceedings. This 1998
income was partially offset by gains on the sale of aircraft inventory in 1999
of $196,858, compared to $49,453 in 1998.
Interest income decreased during the first quarter of 1999, as compared to the
same period in 1998, primarily due to a decrease in the cash reserves over the
same period.
Administration and other expenses decreased during the three months ended March
31, 1999, as compared to the same period in 1998, primarily due to decreases in
consulting fees and printing and postage costs.
Liquidity and Cash Distributions
Liquidity - The Partnership receives maintenance reserve payments from Royal
Aviation 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 $1,907,591 as of March 31, 1999. One
engine underwent a maintenance event subsequent to March 31, 1999 which will
result in a reimbursement to the lessee of approximately $400,000.
Polaris Investment Management Corporation, the general partner, has determined
that the Partnership maintain cash reserves as a prudent measure to insure that
the Partnership has available funds in the event that the engines presently on
lease to Royal Aviation require remarketing and for other contingencies,
including expenses of the Partnership. The Partnership's cash reserves will be
monitored and may be revised from time to time as further information becomes
available in the future.
Cash Distributions - Cash distributions to limited partners during the three
months ended March 31, 1999 and 1998 were $2,488,753, or $14.75 per limited
partnership unit and $1,349,832, or $8.00 per unit, 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 receipt of
rental payments from Royal Aviation.
9
Impact of the Year 2000 Issue
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. As discussed in prior filings with the Securities
and Exchange Commission, the General Partner has engaged GE Capital Aviation
Services, Inc. ("GECAS") to provide certain management services to the
Partnership. Both the General Partner and GECAS are wholly-owned subsidiaries
(either direct or indirect) of General Electric Capital Corporation ("GECC").
All of the Partnership's operational functions are handled either by the General
Partner and GECAS or by third parties (as discussed in the following
paragraphs), and the Partnership has no information systems of its own.
GECC and GECAS have undertaken a global effort to identify and mitigate Year
2000 issues in their information systems, products and services, facilities and
suppliers as well as to assess the extent to which Year 2000 issues will impact
their customers. Each business has a Year 2000 leader who oversees a
multi-functional remediation project team responsible for applying a Six Sigma
quality approach in four phases: (1) define/measure -- identify and inventory
possible sources of Year 2000 issues; (2) analyze -- determine the nature and
extent of Year 2000 issues and develop project plans to address those issues;
(3) improve -- execute project plans and perform a majority of the testing; and
(4) control -- complete testing, continue monitoring readiness and complete
necessary contingency plans. The progress of this program is monitored at each
business, and company-wide reviews with senior management are conducted monthly.
The first three phases of the program have been completed for a substantial
majority of mission-critical activities. Management plans to have nearly all
significant information systems, products and services and facilities through
the control phase of the program by mid-1999.
As noted elsewhere, the Partnership has sold all of its aircraft-related assets
other than three aircraft engines on lease and the spare parts inventory, which
includes one engine. Three of the remaining engines are on lease with Royal
Aviation, Inc. and Royal Cargo, Inc., and under the terms of the leases, the
lessees have the obligation to repair and maintain the engines. GECAS is
requesting information from the lessees about the status of their Year 2000
program.
Aside from maintenance and other matters relating to the Partnership's
aircraft-related assets discussed above, the principal third-party vendors to
the Partnership are those providing the Partnership with services such as
accounting, auditing, banking and investor services. GECAS intends to apply the
same standards in determining the Year 2000 capabilities of the Partnership's
third-party vendors as GECAS will apply with respect to its outside vendors
pursuant to its internal Year 2000 program.
The scope of the global Year 2000 effort encompasses many thousands of
applications and computer programs; products and services; facilities and
facilities-related equipment; suppliers; and, customers. The Partnership, like
all business operations, is also dependent on the Year 2000 readiness of
infrastructure suppliers in areas such as utility, communications,
transportation and other services. In this environment, there will likely be
instances of failure that could cause disruptions in business processes or that
could affect customers' ability to repay amounts owed to the Partnership or
vendors' ability to provide services without interruption. The likelihood and
effects of failures in infrastructure systems, over which the Partnership has no
control, cannot be estimated. However, aside from the impact of any such
possible failures or the possibility of a disruption of the Partnership's
lessees' business caused by Year 2000 failures, the General Partner does not
10
believe that occurrences of Year 2000 failures will have a material adverse
effect on the financial position, results of operations or liquidity of the
Partnership.
To date, the Partnership has not incurred any Year 2000 expenditures nor does it
expect to incur any material costs in the future. However, the activities
involved in the Year 2000 effort necessarily involve estimates and projections
of activities and resources that will be required in the future. These estimates
and projections could change as work progresses.
11
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) 1998 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K), there are a number of pending legal actions or
proceedings involving the Partnership. There have been no material developments
with respect to any such actions or proceedings during the period covered by
this report.
Other Proceedings - Item 10 in Part III of the Partnership's 1998 Form 10-K
discusses 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. The Partnership is not a
party to these actions. There have been no material developments with respect to
any of the actions described therein during the period covered by this report.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedule (in electronic format only).
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter for
which this report is filed.
12
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
May 11, 1999 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)
13