Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
---------------------------
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ___ to ___
Commission File No. 2-91762
POLARIS AIRCRAFT INCOME FUND I
(Exact name of registrant as specified in its charter)
California 94-2938977
------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
201 Mission Street, 27th Floor, San Francisco, California 94105
--------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 284-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 1996.
Documents incorporated by reference: None
This document consists of 48 pages.
PART I
Item 1. Business
The principal objectives of Polaris Aircraft Income Fund I (PAIF-I or the
Partnership), are to purchase and lease used commercial jet aircraft in order to
provide distributions of cash from operations, to maximize the residual values
of aircraft upon sale and to protect Partnership capital through experienced
management and diversification. PAIF-I was organized as a California limited
partnership on June 27, 1984 and will terminate no later than December 2010.
PAIF-I has many competitors in the aircraft leasing market, including airlines,
aircraft leasing companies, other limited partnerships, banks and several other
types of financial institutions. This market is highly competitive and there is
no single competitor who has a significant influence on the industry. In
addition to other competitors, the general partner, Polaris Investment
Management Corporation (PIMC), and its affiliates, including GE Capital Aviation
Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris
Holding Company (PHC) and General Electric Capital Corporation (GE Capital),
acquire, lease, finance, sell and remarket aircraft for their own accounts and
for existing aircraft and aircraft leasing programs managed by them. Further,
GECAS provides a significant range of management services to GPA Group plc, a
public limited company organized in Ireland, together with its consolidated
subsidiaries (GPA), which acquires, leases and sells aircraft. Accordingly, in
seeking to re-lease and sell its aircraft, the Partnership may be in competition
with the general partner, its affiliates, and GPA.
A brief description of the aircraft owned by the Partnership is set forth in
Item 2.
American Air Lease, Inc. (American Air Lease) defaulted under its lease of one
Boeing 737-200 aircraft in June 1991, and three Boeing 737-200s were off-lease
as a result of the Braniff bankruptcy. As a result of market conditions, all
four of these aircraft were transferred to aircraft inventory during 1993 and
1992 and disassembled for sale of their component parts.
In 1995, the Partnership sold the airframe from one Boeing 737-200 aircraft that
was previously leased to Cambodia International Airlines Company, Ltd. (Cambodia
International) until Cambodia International returned the aircraft to the
Partnership in September 1993. The Partnership has leased two engines from this
aircraft and one engine, previously leased to Viscount, to CanAir Cargo Ltd.
(CanAir) for three years beginning in May 1994. CanAir has an option to renew
the lease for one three-year period at the same rental rate. The following table
describes certain material terms of the Partnership's engine leases as of
December 31, 1996.
Number Lease
Lessee Engine Type of Engines Expiration Renewal Options
- ------ ----------- ---------- ---------- ---------------
CanAir JT8D-9A 3 5/97 One three-year period
Industry-wide, approximately 280 commercial jet aircraft are currently available
for sale or lease, as of December 31, 1996, approximately 195 less than a year
ago, and at under 2.5% of the total available jet aircraft fleet, this is the
lowest level of availability since 1988. From 1991 to 1994, depressed demand for
travel limited airline expansion plans, with new aircraft orders and scheduled
deliveries being canceled or substantially deferred. As profitability declined,
many airlines took action to downsize or liquidate assets and some airlines were
forced to file for bankruptcy protection. Following three years of good traffic
growth accompanied by rising yields, this trend is reversing with many airlines
reporting record profits. As a result of this improving trend, just over 1200
new jet aircraft were ordered in 1996, making this the second highest ever order
2
year in the history of the industry. To date, this strong recovery has mainly
benefited Stage 3 narrow-bodies and younger Stage 2 narrow-bodies, many of which
are now being upgraded with hushkits, which, when installed on the aircraft,
bring Stage 2 aircraft into compliance with Federal Aviation Administration
(FAA) Stage 3 noise restrictions as discussed in the Industry Update section of
Item 7. Older Stage 2 narrow-bodies have shown only marginal signs of recovery
since the depressed 1991 to 1994 period. In 1996, several airline accidents have
occurred which have also impacted the older Stage 2 market. The Partnership has
been forced to adjust its estimates of the residual values realizable from its
aircraft, which resulted in an increase in depreciation expense, as discussed in
Items 7 and 8. A discussion of the current market condition for the type of
aircraft owned by the Partnership follows:
Boeing 737-200 - The Boeing 737-200 aircraft was introduced in 1967 and 150 were
delivered from 1967 through 1971. This two-engine, two-pilot aircraft provides
operators with 107 to 130 seats, meeting their requirements for economical lift
in the 1,100 nautical mile range. Hushkits which bring the Boeing 737-200
aircraft into compliance with FAA Stage 3 noise restrictions, are now available
at a cost of approximately $1.5 million per aircraft. Hushkits may not be cost
effective on all aircraft due to the age of some of the aircraft and the time
required to fully amortize the additional investment. Certain Airworthiness
Directives (ADs) applicable to all models of this aircraft have been issued by
the FAA to prevent fatigue cracks and control corrosion as discussed in Item 7.
The general partner believes that, in addition to the factors cited above, the
deteriorated market for the Partnership's aircraft reflects the airline
industry's reaction to the significant expenditures potentially necessary to
bring these aircraft into compliance with certain ADs issued by the FAA relating
to aging aircraft, corrosion prevention and control and structural inspection
and modification as discussed in the Industry Update section of Item 7.
Item 2. Properties
At December 31 1996, PAIF-I owned three commercial jet aircraft, five spare
engines and certain inventoried aircraft parts. The Partnership's entire fleet
consists of Stage 2 aircraft. Two of the Partnerships Boeing 737-200 aircraft
formerly on lease to Viscount were returned to the Partnership in September 1996
and sold in March 1997. One of the Partnership's Boeing 737-200 aircraft
formerly on lease to Viscount and subleased to Nations Air Express, Inc.(Nations
Air), was returned to the Partnership in February 1997. During 1992, the
Partnership transferred three Boeing 737-200 aircraft, formerly on lease to
Braniff, to aircraft inventory. In 1993, one additional Boeing 737-200 aircraft,
formerly on lease to American Air Lease, was transferred to aircraft inventory.
The inventoried aircraft, which are not included in the following table, have
been disassembled for sale of their component parts. Two engines from the former
Cambodia International aircraft and one engine formerly leased to Viscount are
currently leased to CanAir. Two engines formerly on lease to Viscount were
returned to the Partnership in May and October 1996. The Partnership has
determined that a sale of the remaining aircraft and spare engines on an "as is,
where is" basis would maximize the economic return on this equipment to the
Partnership.
The following table describes the Partnership's current aircraft portfolio:
Year of Cycles
Aircraft Type Serial Number Manufacture As of 10/31/96 (1)
------------- ------------- ----------- ------------------
Boeing 737-200 19606 1968 61,775
Boeing 737-200 (2) 19617 1969 60,330
Boeing 737-200 (2) 20125 1969 62,688
(1) Cycle information as of 12/31/96 was not available.
3
(2) Aircraft sold in March 1997.
Item 3. Legal Proceedings
Viscount Air Services, Inc. (Viscount) Bankruptcy - As previously reported in
the Partnership's 1995 Form 10-K, on January 24, 1996, Viscount filed a petition
for protection under Chapter 11 of the Federal Bankruptcy Code in the United
States Bankruptcy Court for the District of Arizona. On April 12, 1996, GE
Capital Aviation Services, Inc. (GECAS), as agent for the Partnership, First
Security Bank, National Association (formerly known as First Security Bank of
Utah, National Association) (FSB), the owner/trustee under the Partnership's
leases with Viscount, certain guarantors of Viscount's indebtedness and others
executed that certain Compromise of Claims and Stipulation under Section 1110 of
the Bankruptcy Code (the Compromise and Stipulation). Among other things, the
Compromise and Stipulation, which was subsequently approved by the Bankruptcy
Court, provided that if Viscount failed to meet its monetary obligations, the
Partnership would be entitled to immediate possession of the aircraft for which
Viscount failed to perform, and Viscount would deliver to GECAS all records
related thereto, without further order of the Bankruptcy Court. Pursuant to the
Compromise and Stipulation, Viscount, Rock-It Cargo USA, Inc. and Riverhorse
Investments, Inc., assumed Viscount's obligations under the finance sale note
for the spare engine, and payments began October 31, 1996.
Viscount defaulted on and was unable to cure its September rent obligations.
However, Viscount took the position that it was entitled to certain offsets and
asserted defenses to the September rent obligations. On September 18, 1996,
GECAS (on behalf of the Partnership and other entities) and Viscount entered
into a Stipulation and Agreement by which Viscount agreed to voluntarily return
all of the Partnership's aircraft and engines, turn over possession of the
majority of its aircraft parts inventory, and cooperate with GECAS in the
transition of aircraft equipment and maintenance, in exchange for which, upon
Bankruptcy Court approval of the Stipulation and Agreement, the Partnership
would waive its right to pre- and post-petition claims against Viscount for
amounts due and unpaid.
As of September 13 and 18, 1996, Viscount surrendered possession of two of the
Partnership's aircraft and two spare engines, and on October 1, 1996, the third
aircraft was returned to the Partnership. One of the three aircraft which was in
the possession of, and operated by, Nations Air, was returned to the Partnership
in February 1997. Shortly after the return of the Partnership's aircraft,
Viscount ceased business operations and is now in liquidation under the
supervision of a bankruptcy trustee.
The Stipulation and Agreement also provides that the Partnership, certain other
Polaris entities, GECAS and FSB shall release any and all claims against
Viscount, Viscount's bankruptcy estate, and the property of Viscount's
bankruptcy estate, effective upon entry of a final non-appealable court order
approving the Stipulation and Agreement. The Bankruptcy Court entered such an
order approving the Stipulation and Agreement on October 23, 1996.
As a result of the Stipulation and Agreement, all disputes between the
Partnership and Viscount have been resolved and there is no further pending
litigation with Viscount. Viscount has ceased operations and is currently
considered to be administratively insolvent, meaning that it does not have
sufficient funds to fully pay costs and expenses incurred after the commencement
of the bankruptcy case, which costs and expenses have priority over general
unsecured claims.
One of the Partnership's engines was located on an airframe (the "306 Aircraft")
owned by Polaris Aircraft Income Fund II ("Fund II"). The 306 Aircraft was
delivered to a maintenance facility in Tucson, Arizona called BAE Aviation, Inc.
dba Tucson Aerospace ("TA"). The maintenance and repairs on the 306 Aircraft
were partially or inadequately done and Fund II has challenged the amounts
charged by TA and its subcontractors, STS Services, Inc. ("STS") and Piping
4
Design Services, Inc., dba PDS Technical Services ("PDS"). TA, STS and PDS have
asserted mechanics liens against the 306 Aircraft. First Security Bank, National
Association, the owner trustee of the 306 Aircraft and of the Partnership's
engine placed thereon, commenced a lawsuit in the Superior Court of Arizona in
Pima County, Case No. C313027, to recover the airframe from TA, STS and PDS and
to determine the validity of the alleged liens, which are disputed. Because the
Partnership's engine was not physically located on the 306 Aircraft at the time,
the Partnership asserts that the alleged mechanic's liens are invalid as to the
Partnership's engine. FSB, on behalf of the Partnership, however, may need to
file a summary judgement motion requesting the Superior Court to determine that
the alleged liens do not extend to the Partnership's engine, if the parties to
the lawsuit are unable to reach agreement on this question.
Mercury Air Group v. Aero Costa Rica (ACORI), S.A., et al. - On or about October
9, 1996, an action entitled Mercury Air Group v. Aero Costa Rica (ACORI), S.A.,
et al. was filed in the Circuit Court, 11th Judicial District for Dade County,
Florida. The complaint names Aero Costa Rica (ACORI), S.A., Polaris Holding
Company, and First Security Bank, National Association (FSB), as trustee for the
Partnership, as defendants. The plaintiff is seeking leave to amend the
complaint to add additional defendants. The action was brought by a Florida fuel
supplier to enforce a foreclosure lien against an aircraft owned by FSB, as
trustee for the Partnership. The lien allegedly arises under a Florida statute
on account of unpaid fuel bills incurred at Florida airports when the aircraft,
while under lease to Viscount, was operated in subservice to Aero Costa Rica.
Nations Air Express, Inc. v. First Security Bank, National Association, et al. -
On or about December 12, 1996, an action entitled Nations Air Express, Inc. v.
First Security Bank, National Association, et al. was filed in the Georgia
Superior Court for Cobb County, Georgia. The complaint named First Security
Bank, National Association (FSB), as trustee for the Partnership, the
Partnership, GE Capital Aviation Services, Inc., and Polaris Holding Company as
defendants. The action alleged that the defendants fraudulently misled Nations
Air Express, Inc. (Nations Air) in connection with a direct lease to Nations
Air, and, as a consequence, the defendants were unjustly enriched as a result of
certain maintenance payments made to the defendants. Nations Air sought
injunctive relief to prevent the defendants from repossessing the aircraft in
question, $400,000 in damages, additional damages to be proven at trial and
punitive and exemplary damages also to be proven at trial. The action was
dismissed with prejudice on February 10, 1997 pursuant to a stipulation, but
Nations Air has now moved to set aside the dismissal with prejudice.
First Security Bank, National Association, as Owner Trustee v. Nations Air
Express, Inc. - On or about December 20, 1996, First Security Bank, National
Association (FSB), as trustee for the Partnership and for Polaris Holding
Company (PHC), filed an action against Nations Air Express, Inc. (Nations Air)
in the United States District Court for the Northern District of California.
This action involves two aircraft owned by FSB, as trustee for the Partnership
and PHC, respectively, which were leased to Viscount Air Services, Inc.
(Viscount), and subleased by Viscount to Nations Air. The claims arise out of
the possession and use of the aircraft by Nations Air following the commencement
of Viscount's bankruptcy proceedings. As discussed in connection with Viscount's
bankruptcy above, the Partnership's aircraft was returned in February, 1997, but
the other aircraft remains in the possession of Nations Air. In this action, FSB
is seeking (i) to have Nations Air turn over possession of the aircraft and
related records, and (ii) to recover damages for unpaid rent. Nations Air has
filed a counterclaim for damages for breach of contract, for unjust enrichment,
for tortious interference with prospective economic advantage, and for negligent
misrepresentation, all in amounts to be proved at trial.
Markair, Inc. (Markair) Bankruptcy - On June 6, 1992, the Partnership
repossessed two Boeing 737-200 aircraft leased to Markair, and formerly leased
to Braniff, for Markair's failure to make rental payments when due. Markair
commenced reorganization proceedings under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Third District of
Alaska, and on June 11, 1992, the Partnership filed a proof of claim in the case
to recover damages for past due rent and for Markair's failure to meet return
5
conditions with respect to the Partnership's aircraft. In August 1993, the
Bankruptcy Court approved a plan of reorganization for Markair and a stipulation
relating to the Partnership's claims against Markair. The stipulation approved
by the Bankruptcy Court allowed the Partnership to retain the security deposits
and maintenance reserves previously posted by Markair and also allowed the
Partnership an unsecured claim against Markair for $445,000, which was converted
to subordinated debentures during 1994. Markair has defaulted on its payment
obligations on such debentures. On April 14, 1995, Markair commenced new
reorganization proceedings under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the Third District of Alaska. On
October 25, 1995, Markair converted its Chapter 11 reorganization proceeding
into a proceeding under Chapter 7 of the United States Bankruptcy Code in the
same court. The trustee, Key Bank of Washington, is taking steps to protect the
interests of the debenture holders, including the Partnership.
Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition
under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy
Court for the Middle District of Florida, Orlando Division. On September 26,
1990 the Partnership filed a proof of claim to recover unpaid rent and other
damages, and on November 27, 1990, the Partnership filed a proof of
administrative claim to recover damages for detention of aircraft,
non-compliance with court orders and post-petition use of engines as well as
liquidated damages. On July 27, 1992, the Bankruptcy Court approved a
stipulation embodying a settlement among the Partnership, the Braniff creditor
committees and Braniff in which it was agreed that the Partnership would be
allowed an administrative claim in the bankruptcy proceeding of approximately
$2,076,923. As the final disposition of the Partnership's claim in the
Bankruptcy proceedings, the Partnership was permitted by the Bankruptcy Court to
exchange a portion of its unsecured claim for Braniff's right (commonly referred
to as a "Stage 2 Base Level right") under the FAA noise regulations to operate
nine Stage 2 aircraft and has been allowed a net remaining unsecured claim of
$6,923,077 in the proceedings.
Jet Fleet Bankruptcy - In September 1992, Jet Fleet, lessee of one of the
Partnership's aircraft, defaulted on its obligations under the lease for the
Partnership's aircraft by failing to pay reserve payments and to maintain
required insurance. The Partnership repossessed its Aircraft on September 28,
1992 at Sanford Regional Airport, Florida. Thereafter, Jet Fleet filed for
bankruptcy protection in the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division. On April 13, 1993, the Partnership filed a
proof of claim in the Jet Fleet bankruptcy to recover its damages. The bankrupt
estate was subsequently determined to be insolvent. Therefore, no payment of the
Partnership's claim can be expected. However, no action on the Partnership's
proof of claim has been taken by the Bankruptcy Court.
Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, an action
entitled Kepford, et al. v. Prudential Securities, Inc. was filed in the
District Court of Harris County, Texas. The complaint names Polaris Investment
Management Corporation, Polaris Securities Corporation, Polaris Holding Company,
Polaris Aircraft Leasing Corporation, the Partnership, Polaris Aircraft Income
Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV,
Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, General
Electric Capital Corporation, Prudential Securities, Inc., Prudential Insurance
Company of America and James J. Darr, as defendants. Certain defendants were
served with a summons and original petition on or about May 2, 1994. Plaintiffs'
original petition alleges that defendants violated the Texas Securities Act, the
Texas Deceptive Trade Practices Act, sections 11 and 12 of the Securities Act of
1933 and committed common law fraud, fraud in the inducement, negligent
misrepresentation, negligence, breach of fiduciary duty and civil conspiracy by
misrepresenting and failing to disclose material facts in connection with the
sale of limited partnership units in the Partnership and the other Polaris
Aircraft Income Funds. Plaintiffs seek, among other things, an award of
compensatory damages in an unspecified amount plus interest thereon, and double
and treble damages under the Texas Deceptive Trade Practices Act.
Certain defendants, including Polaris Investment Management Corporation and the
Partnership, filed a general denial on June 29, 1994 and a motion for summary
judgment on June 17, 1994 on the basis that the statute of limitations had
expired. On June 29, 1994 and July 14, 1994, respectively, plaintiffs filed
6
their first amended original petition and second amended original petition, both
of which added plaintiffs. On July 18, 1994, plaintiffs filed their response and
opposition to defendants' motion for partial summary judgment and also moved for
a continuance on the motion for partial summary judgment. On August 11, 1994,
after plaintiffs again amended their petition to add numerous plaintiffs, the
defendants withdrew their summary judgment motion and motion to stay discovery,
without prejudice to refiling these motions at a later date. On January 9, 1997,
the trial court issued a scheduling order setting a July 21, 1997 trial date.
Riskind, et al. v. Prudential Securities, Inc., et al. - An action entitled
Riskind, et al. v. Prudential Securities, Inc., et al. has been filed in the
District Court of the 165 Judicial District, Maverick County, Texas. This action
is on behalf of over 3,000 individual investors who purchased units in "various
Polaris Aircraft Income Funds," including the Partnership. The Partnership and
Polaris Investment Management Corporation received service of plaintiffs' second
amended original petition and, on June 13, 1994, filed an original answer
containing a general denial.
The second amended original petition names the Partnership, Polaris Investment
Management Corporation, Prudential Securities, Inc. and others as defendants and
alleges that these defendants violated the Texas Securities Act and the Texas
Deceptive Trade Practices Act and committed common law fraud, fraud in the
inducement, negligent misrepresentation, negligent breach of fiduciary duty and
civil conspiracy by misrepresenting and failing to disclose material facts in
connection with the sale of limited partnership units in the Partnership and the
other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an
award of compensatory damages in an unspecified amount plus interest thereon,
and double and treble damages under the Texas Deceptive Trade Practices Act.
Kidder, Peabody & Co. was added as an additional defendant by virtue of an
Intervenor's Amended Plea in Intervention filed on or about April 7, 1995.
Prudential Securities, Inc. reached a settlement with the plaintiffs. The trial
of the claims of one plaintiff, Robert W. Wilson, against Polaris Aircraft
Income Funds I-VI, Polaris Investment Management Corporation and various
affiliates of Polaris Investment Management Corporation, including General
Electric Capital Corporation, was commenced on July 10, 1995. On July 26, 1995,
the jury returned a verdict in favor of the defendants on all counts. Subsequent
to this verdict, all of the defendants (with the exception of Prudential
Securities, Inc., which had previously settled) entered into a settlement with
the plaintiffs. On February 26, 1997, the court issued an order notifying the
remaining plaintiffs, who did not accept the settlement with the non Prudential
defendants, that the action would be dismissed on April 21, 1997 for want of
prosecution unless the plaintiffs showed cause why the action should not be
dismissed.
Howland, et al. v. Polaris Holding Company, et al. - On or about February 4,
1994, a purported class action entitled Howland, et al. v. Polaris Holding
Company, et al. was filed in the United States District Court for the District
of Arizona on behalf of investors in Polaris Aircraft Income Funds I-VI. The
complaint names each of Polaris Investment Management Corporation, Polaris
Securities Corporation, Polaris Holding Company, Polaris Aircraft Leasing
Corporation, the Partnership, Polaris Aircraft Income Fund II, Polaris Aircraft
Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund
V, Polaris Aircraft Income Fund VI, General Electric Capital Corporation,
Prudential Securities, Inc., Prudential Securities Group, Inc., Prudential
Insurance Company of America, George W. Ball, Robert J. Sherman, James J. Darr,
Paul J. Proscia, Frank W. Giordano, William A. Pittman, Joseph H. Quinn, Joe W.
Defur, James M. Kelso and Brian J. Martin, as defendants. The complaint alleges
that defendants violated federal RICO statutes, committed negligent
misrepresentations, and breached their fiduciary duties by misrepresenting and
failing to disclose material facts in connection with the sale of limited
partnership units in the Partnership and the other Polaris Aircraft Income
Funds. Plaintiffs seek, among other things, an accounting of all monies invested
by plaintiffs and the class and the uses made thereof by defendants, an award of
compensatory, punitive and treble damages in unspecified amounts plus interest
thereon, rescission, attorneys' fees and costs. On August 3, 1994, the action
7
was transferred to the multi-district litigation in the Southern District of New
York entitled In re Prudential Securities Limited Partnerships Litigation,
discussed in Part III, Item 10 below.
Adams, et al. v. Prudential Securities, Inc., et al. On or about February 13,
1995, an action entitled Adams, et al. v. Prudential Securities, Inc. et al. was
filed in the Court of Common Pleas, Stark County, Ohio. The action names
Prudential Securities, Inc., Prudential Insurance Company of America, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris
Aircraft Leasing Corporation, Polaris Holding Company, General Electric Capital
Corporation, the Partnership, Polaris Aircraft Income Fund IV, Polaris Aircraft
Income Fund V, and James Darr as defendants. The complaint alleges that
defendants committed common law fraud, fraud in the inducement, negligent
misrepresentation, negligence, breach of fiduciary duty and civil conspiracy by
misrepresenting and failing to disclose material facts in connection with the
sale of limited partnership units in the Partnership and the other Polaris
Aircraft Income Funds. Plaintiffs seek, among other things, rescission of their
investments in the Partnership and the other Polaris Aircraft Income Funds, an
award of compensatory damages in an unspecified amount plus interest thereon,
and punitive damages in an unspecified amount. On or about March 15, 1995, this
action was removed to the United States District Court for the Northern District
of Ohio, Eastern Division. Subsequently, the Judicial Panel transferred this
action to the Multi-District Litigation filed in the united States District
Court for the Southern District of New York, which is described in Item 10 of
Part III below.
Other Proceedings - Part III, Item 10 discusses certain other actions which have
been filed against the general partner in connection with certain public
offerings, including that of the Partnership. With the exception of Novak, et al
v. Polaris Holding Company, et al, (which has been dismissed, as discussed in
Item 10) where the Partnership was named as a defendant for procedural purposes,
the Partnership is not a party to these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
a) Polaris Aircraft Income Fund I's (PAIF-I or the Partnership) limited
partnership interests (Units) are not publicly traded. Currently there
is no formal market for PAIF-I's Units and it is unlikely that any
market will develop.
b ) Number of Security Holders:
Number of Record Holders
Title of Class as of December 31, 1996
------------------ --------------------------------
Limited Partnership Interest: 6,532
General Partnership Interest: 1
c) Dividends:
Distributions of cash from operations commenced in 1987. The
Partnership made cash distributions to limited partners of $2,530,935
and $1,434,196, or $15.00 and $8.50 per limited partnership unit during
1996 and 1995, respectively.
9
Item 6. Selected Financial Data
For the years ended December 31,
--------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 2,781,212 $ 3,196,035 $ 3,081,215 $ 2,823,141 $ 3,541,108
Net Income (Loss) (591,415) 446,293 829,960 (3,084,396) (12,536,518)
Net Income (Loss)
allocated to Limited
Partners (838,569) 298,425 686,691 (3,193,583) (12,411,153)
Net Income (Loss) per
Limited Partnership Unit (4.97) 1.77 4.07 (18.93) (73.56)
Cash Distributions per
Limited Partnership
Unit 15.00 8.50 8.00 8.30 --
Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit* 15.00 8.50 8.00 8.30 --
Total Assets 14,254,000 16,288,799 16,487,091 16,831,113 22,733,308
Partners' Capital 10,423,428 13,826,993 14,974,251 15,644,104 20,284,557
* The portion of such distributions which represents a return of capital on an economic basis will
depend in part on the residual sale value of the Partnership's aircraft and thus will not be
ultimately determinable until the Partnership disposes of its aircraft. However, such portion may
be significant and may equal, exceed or be smaller than the amount shown in the above table.
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
At December 31, 1996, Polaris Aircraft Income Fund I (the Partnership) owned a
portfolio of three used Boeing 737-200 commercial jet aircraft, five spare
engines and certain inventoried aircraft parts out of its original portfolio of
eleven aircraft. The three aircraft were returned to the Partnership by Viscount
Air Services, Inc. (Viscount), as discussed below. One of these aircraft which
was in the possession of, and operated by Nations Air Express, Inc. (Nations
Air), its former sub-lessee, was returned to the Partnership in February 1997.
Two aircraft returned by Viscount were sold in March 1997 and the aircraft
returned by Nations Air is currently being remarketed for sale. The Partnership
leased three spare engines to CanAir Cargo Ltd. (CanAir). In addition, the
Partnership transferred four aircraft to aircraft inventory during 1992 and
1993. These aircraft have been disassembled for sale of their component parts.
Two engines formerly leased to Viscount, were returned to the Partnership in May
and October 1996 and are currently being remarketed for sale. One additional
engine from these aircraft was sold to Viscount during 1995. Viscounts
affiliates, Rock-It Cargo USA, Inc. (Rock-It Cargo) and Riverhorse Investments,
Inc. (Riverhorse Investments) assumed the note for this engine sale in October
1996. The Partnership has sold three aircraft and one airframe from its original
aircraft portfolio: a Boeing 737-200 Convertible Freighter in 1990, a McDonnell
Douglas DC-9-10 in 1992, a Boeing 737-200 in 1993 and the airframe from a Boeing
737-200 aircraft in April 1995.
Remarketing Update
Sub-lease of Boeing 737-200 - Viscount entered into a sub-lease agreement for
one of the Partnership's Boeing 737-200 aircraft with Nations Air for a term of
one year through February 1996. The sublease had been extended through February
1998. Rent and maintenance reserve payments due to Viscount from Nations Air
were paid directly to the Partnership and were applied against payments due the
Partnership from Viscount. Nations Air was past due on certain note and lease
payments due the Partnership at December 31, 1996. This aircraft was returned by
Nations Air in February 1997 and is currently being marketed for sale on an "as
is, where is" basis.
Viscount - As discussed in Note 7 to the financial statements, in September and
October 1996, Viscount returned or surrendered possession of the Partnership's
three aircraft and two spare engines pursuant to the Stipulation and Agreement.
The Partnership estimates that a sale of the remaining aircraft and spare
engines on an "as is, where is" basis would maximize the economic return on this
equipment to the Partnership. As a result, the Partnership is currently
marketing this equipment for sale.
Sale of two Boeing 737-200s - In January 1997, the Partnership received a
deposit of $162,000 toward the sales price of $1,620,000 for the sale of two
Boeing 737-200s formerly leased to Viscount. These aircraft were returned to the
Partnership in September and October 1996 pursuant to the Stipulation and
Agreement as further discussed in Note 7. The Partnership received the remaining
$1,458,000 in March 1997.
Partnership Operations
The Partnership recorded a net loss of $591,415, or $4.97 per limited
partnership unit for the year ended December 31, 1996, compared to net income of
$446,293, or $1.77 per limited partnership unit for the year ended December 31,
1995 and net income of $829,960, or $4.07 per limited partnership unit for the
year ended December 31, 1994. The decline in operating results in 1995, as
compared to 1994, was the result of a provision for credit losses of $956,015
recorded for certain rent and loan receivables from Viscount combined with
higher operating expenses and partially offset by lower depreciation expense in
1995. The decline in operating results in 1996, as compared to 1995, is the
11
result of increased depreciation expense for declines in the estimated
realizable values of the Partnership's aircraft, as discussed in the Industry
Update section, as well as lower rental and other revenues.
During 1996 and 1995, the Partnership recorded allowances for credit losses of
$1,055,050 and $956,015, respectively for outstanding receivables from Viscount
and Nations Air. The Stipulation and Agreement provides that, upon entry of a
final non-appealable court order approving it, the Partnership would waive its
pre- and post-petition claims against Viscount for all amounts due and unpaid.
As a result, the Partnership considers all receivables from Viscount to be
uncollectible and has written-off, during the third quarter of 1996, all notes,
rents and interest receivable balances from Viscount. Payments received by the
Partnership from the sale of the spare aircraft parts (as discussed above), if
any, will be recorded as revenue when received.
Depreciation adjustments in 1996, 1995 and 1994 were approximately $400,000,
$115,000 and $260,000, respectively, for declines in the estimated realizable
values of the Partnership's aircraft and aircraft inventory, as discussed later
in the Industry Update section. In 1996, the Partnership concluded that a sale
of the returned aircraft and spare engines on an "as is, where is" basis would
maximize the economic return on this equipment to the Partnership. In
determining the 1996 impairment loss, the Partnership estimated the fair value
of the aircraft and equipment based on the estimated sale price less cost to
sell, and then deducted this amount from the carrying value of the aircraft. Two
Boeing 737-200s were depreciated to their estimated residual value in June 1994
and November 1994, respectively.
In 1994, all lessees performed as required by their leases or restructuring
agreements, and operating expenses were reduced. In 1995, the Partnership agreed
to share in the cost of certain heavy maintenance work performed on the Boeing
737-200 aircraft sub-leased to Nations Air by Viscount. The Partnership
recognized approximately $574,000 of this heavy maintenance work as operating
expense in 1995. The Partnership recorded legal expenses of approximately
$414,000 related to the Viscount defaults and Chapter 11 bankruptcy filing.
These legal costs are included in operating expense in the Partnership's 1996
statement of operations.
Liquidity and Cash Distributions
Liquidity - As discussed in Note 7 to the financial statements, the Viscount
Stipulation and Agreement specifies, among other things, that the Partnership
waive its pre- and post-petition claims against Viscount for amounts due and
unpaid. As a result, the Partnership recorded an additional allowance for credit
losses of $643,600 in 1996, representing Viscount's outstanding balance of
rents, the line of credit and accrued interest. In addition, the Partnership
considers all receivables from Viscount to be uncollectible and has written-off,
during the third quarter of 1996, all notes, rents and interest receivable
balances from Viscount. Viscounts affiliates, Rock-It Cargo and Riverhorse
Investments, assumed the engine finance sale note from Viscount and agreed to
pay the note balance, including past due interest, in 45 installments beginning
on October 31, 1996.
As discussed in Notes 7 and 8 to the financial statements, Nations Air was
delinquent on its maintenance cost-sharing payments to the Partnership. In
addition, under the prior Nations Air sublease with Viscount, Nations Air paid
rent and maintenance reserve payments directly to the Partnership. These
payments continued through September 1996 and Nations Air has not paid the rent
and maintenance reserve payments since October 1996. Nations Air returned the
aircraft to the Partnership in February 1997. The Partnership is currently in
litigation with Nations Air regarding these payment defaults. As a result, the
Partnership has recorded an allowance for credit losses of $411,450,
representing the outstanding amounts due from Nations Air at December 31, 1996.
12
The Partnership receives maintenance reserve payments from certain lessees that
may be reimbursed to the lessee or applied against certain costs incurred by the
Partnership for maintenance work performed on the Partnership's aircraft or
engines, as specified in the leases. Maintenance reserve balances remaining at
the termination of the lease, if any, may be used by the Partnership to offset
future maintenance expenses or recognized as revenue. The net maintenance
reserves balances aggregate $3,217,368 as of December 31, 1996.
The Partnership received payments of approximately $478,000 in 1996 from the
sale of parts from the four disassembled aircraft. The remaining net book value
of the aircraft inventory was fully recovered during 1995. Payments of
approximately $604,000 and $912,000 had been received during 1995 and 1994,
respectively, from the sales of parts from the four disassembled aircraft.
The Partnership's cash reserve balance is being retained to cover the costs that
the Partnership has incurred as a result of the Viscount default and bankruptcy,
including potential aircraft maintenance, remarketing and transition costs.
Cash Distributions - Cash distributions to limited partners during 1996, 1995
and 1994 were $2,530,935, $1,434,196 and $1,349,832, respectively. Cash
distributions per limited partnership unit were $15.00, $8.50 and $8.00 during
1996, 1995 and 1994, respectively. The timing and amount of future cash
distributions to partners are not yet known and will depend upon the
Partnership's future cash requirements, including the costs that may be incurred
to remarket the former Viscount aircraft and spare engines and the receipt of
rental payments from CanAir.
Viscount Restructuring Agreement and Default
On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First
Security Bank, National Association (formerly known as First Security Bank of
Utah, National Association) (FSB), the owner/trustee under the Partnership's
leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's
indebtedness and others executed in April 1996 a Compromise of Claims and
Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation), which was subsequently approved by the Bankruptcy Court. Among
other things, the Compromise and Stipulation provided that in the event that
Viscount failed to promptly and timely perform its monetary obligations under
the Leases and the Compromise and Stipulation, without further order of the
Bankruptcy Court, GECAS would be entitled to immediate possession of the
aircraft for which Viscount failed to perform and Viscount would deliver such
aircraft and all records related thereto to GECAS.
Viscount defaulted on and was unable to cure its September rent obligations.
However, Viscount took the position that it was entitled to certain offsets and
asserted defenses to the September rent obligations. On September 18, 1996,
GECAS (on behalf of the Partnership and other entities) and Viscount entered
into a Stipulation and Agreement by which Viscount agreed to voluntarily return
all of the Partnership's aircraft and engines, turn over possession of the
majority of its aircraft parts inventory, and cooperate with GECAS in the
transition of aircraft equipment and maintenance, in exchange for which, upon
Bankruptcy Court approval of the Stipulation and Agreement, the Partnership
would waive its right to pre- and post-petition claims against Viscount for
amounts due and unpaid.
The Stipulation and Agreement provided that upon the return and surrender of
possession of the Partnership's three airframes and eight engines (two of which
were spare engines), Viscount's rights and interests therein would terminate. As
of September 18, 1996, Viscount had returned (or surrendered possession of) two
of the Partnership's airframes and seven of the Partnership's engines. One of
13
the returned airframes (together with one installed engine) was in the
possession of and being operated by Nations Air. Six of the seven returned
engines are in the possession of certain maintenance facilities and will require
maintenance work in order to be made operable. Viscount returned the
Partnership's remaining airframe and one installed engine on October 1, 1996.
Nations Air returned this airframe and one installed engine to the Partnership
in February 1997.
GECAS, on behalf of the Polaris Entities, is evaluating the spare parts
inventory to which Viscount relinquished possession in order to determine its
condition and value, the portion allocable to the Partnership, and the
Partnership's alternatives for the use and/or disposition of such parts. A
significant portion of the spare parts inventory is currently in the possession
of third party maintenance and repair facilities with whom GECAS anticipates
that it will need to negotiate for the repair and/or return of these parts.
The Stipulation and Agreement also provided that the Polaris Entities, GECAS and
FSB would release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court entered such an order approving the Stipulation and
Agreement on October 23, 1996.
As discussed in Note 4, Viscount's affiliates, Rock-It Cargo USA, Inc. and
Riverhorse Investments, Inc., assumed Viscount's engine finance sale note to the
Partnership as provided under the Compromise and Stipulation.
During 1996 and 1995, the Partnership recorded allowances for credit losses of
$1,055,050 and $956,015, respectively for outstanding receivables from Viscount
and Nations Air. The Stipulation and Agreement provides that, upon entry of a
final non-appealable court order approving it, the Partnership would waive its
pre- and post-petition claims against Viscount for all amounts due and unpaid.
As a result, the Partnership considers all receivables from Viscount to be
uncollectible and has written-off, during the third quarter of 1996, all notes,
rents and interest receivable balances from Viscount. Payments received by the
Partnership from the sale of the spare aircraft parts (as discussed above), if
any, will be recorded as revenue when received.
The Partnership evaluated the condition of the returned equipment and estimated
that very substantial maintenance and refurbishment costs aggregating
approximately $3.2 million would be required if the Partnership decided to
re-lease the returned aircraft and spare engines. Alternatively, if the
Partnership decided to sell the returned aircraft and spare engines, such sale
could be made on an "as is, where is" basis, without the Partnership incurring
substantial maintenance costs. Based on its evaluation, the Partnership
concluded that a sale of the remaining aircraft and spare engines on an "as is,
where is" basis would maximize the economic return on this equipment to the
Partnership.
Viscount's failure to perform its financial obligations to the Partnership has
had a material adverse effect on the Partnership's financial position. As a
result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership
has incurred legal costs of approximately $414,000, which are reflected in
operating expense in the Partnership's 1996 statement of operations.
Nations Air Default and Litigation
On or about December 20, 1996, First Security Bank, National Association (FSB),
as trustee for the Partnership, filed an action against Nations Air Express,
Inc. (Nations Air) in the United States District Court for the Northern District
of California. This action involves aircraft owned by FSB, as trustee for the
Partnership which were leased to Viscount Air Services, Inc. (Viscount), and
14
subleased by Viscount to Nations Air. The claims arise out of the possession and
use of the aircraft by Nations Air following the commencement of Viscount's
bankruptcy proceedings. As discussed in connection with Viscount's bankruptcy in
Note 7, the Partnership's aircraft was returned in February 1997. In this action
FSB is seeking to recover damages for unpaid rent and maintenance, and interest
on such unpaid amounts, in the amount of approximately $1,248,000.
Claims Related to Lessee Defaults
Receipt of American Air Lease, Inc. (American Air Lease) Claim - As discussed in
Item 3, the Partnership filed suit in 1991 seeking damages for unpaid rent and
other defaults against lessee American Air Lease and guarantor Americom Leasing
Group, Inc. (Americom). In November 1994, the Partnership received $91,452
representing settlement of Americom's and American Air Lease's obligation to pay
the original settlement judgement. The Partnership was also entitled to retain
security deposits in the amount of $74,075. Both amounts were recognized as
revenue in claims related to lessee defaults in the 1994 statement of operations
(Item 8). The Partnership settled its claim against the insurers of American Air
Lease for payment of insurance proceeds of $400,000. The Partnership received
the $400,000 in July 1995 and recognized the full amount as revenue in claims
related to lessee defaults in the 1995 statement of operations.
Markair, Inc. (Markair) Claim - As discussed in Item 3, the Partnership
terminated the leases and repossessed the two aircraft in June 1992 and Markair
filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code. The Partnership filed a proof of claim in the case to recover
damages for past-due rent and for Markair's failure to meet return conditions
with respect to the Partnership's aircraft. In August 1993, the Bankruptcy Court
approved a plan of reorganization for Markair and a stipulation allows the
Partnership to retain the security deposits and maintenance reserves and an
unsecured claim against Markair for $445,000 which was converted to 10%
subordinated debentures during 1994. The security deposits and maintenance
reserves, which were held by the Partnership under the leases with Markair,
totaled $748,951, of which $47,877 was applied during 1993 to rent owed the
Partnership by Markair. The balance of $701,074 was recognized as revenue in
claims related to lessee defaults in the 1993 statement of operations. During
1994, the Partnership earned interest on the debentures of $33,284 and received
a nominal principal payment of $5,459. The Partnership recognized the interest
and principal payment as revenue in claims related to lessee defaults in the
1994 statement of operations (Item 8). During 1995, the Partnership received an
additional principal payment and a partial interest payment aggregating $9,698,
which was recorded as revenue in claims related to lessee defaults in the 1995
statement of operations. Markair has defaulted on its payment obligations on the
debentures, and the trustee, Key Bank of Washington, is taking steps to protect
the interests of the debenture holders, including the Partnership.
Industry Update
Maintenance of Aging Aircraft - The process of aircraft maintenance begins at
the aircraft design stage. For aircraft operating under Federal Aviation
Administration (FAA) regulations, a review board consisting of representatives
of the manufacturer, FAA representatives and operating airline representatives
is responsible for specifying the aircraft's initial maintenance program. The
general partner understands that this program is constantly reviewed and
modified throughout the aircraft's operational life.
Since 1988, the FAA, working with the aircraft manufacturers and operators, has
issued a series of Airworthiness Directives (ADs) which mandate that operators
conduct more intensive inspections, primarily of the aircraft fuselages. The
results of these mandatory inspections may result in the need for repairs or
structural modifications that may not have been required under pre-existing
maintenance programs.
15
In addition, an AD adopted in 1990 requires replacement or modification of
certain structural items on a specific timetable. These structural items were
formerly subject to periodic inspection, with replacement when necessary. The
FAA estimates the cost of compliance with this AD to be approximately $900,000
per Boeing 737 aircraft, if none of the required work had been done previously.
The FAA also issued several ADs in 1993 updating inspection and modification
requirements for Boeing 737 aircraft. The FAA estimates the cost of these
requirements to be approximately $90,000 per aircraft. In general, the new
maintenance requirements must be completed by the later of March 1994, or 75,000
cycles for each Boeing 737. The extent of modifications required to an aircraft
varies according to the level of incorporation of design improvements at
manufacture.
In December 1990, the FAA adopted another AD intended to mitigate corrosion of
structural components, which would require repeated inspections from 5 years of
age throughout the life of an aircraft, with replacement of corroded components
as needed. Integration of the new inspections into each aircraft operator's
maintenance program was required by December 31, 1991 on Boeing aircraft.
In 1996, the manufacturer proposed certain Boeing 737 rudder system product
improvements of which some will be mandated by the FAA. Airworthiness Directives
issued in the last quarter of 1996 and the first quarter of 1997 on this subject
have not been of significant maintenance cost impact. The cost of compliance
with future FAA maintenance requirements not yet issued is not determinable at
this time.
Although the Partnership's existing leases require the lessees to maintain the
Partnership's aircraft in accordance with an FAA-approved maintenance program
during the lease term, all three of the aircraft which remained in the
Partnership's portfolio at December 31, 1996 were returned to the Partnership as
a result of a lease default and were not in compliance with all return
conditions required by the lease. As discussed in "Viscount Restructuring
Agreement and Default", the Partnership determined that a sale of such aircraft
on an "as is, where is" basis would maximize the economic return on this
aircraft to the Partnership.
Aircraft Noise - Another issue which has affected the airline industry is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are no
longer allowed to operate from civil airports in the United States. Stage 2
aircraft meet current FAA requirements, subject to the phase-out rules discussed
below. Stage 3 aircraft are the most quiet and is the standard for all new
aircraft.
On September 24, 1991, the FAA issued final rules on the phase-out of Stage 2
aircraft by the end of this decade. The key features of the rule include:
- Compliance can be accomplished through a gradual process of
phase-in or phase-out (see below) on each of three interim
compliance dates: December 31, 1994, 1996 and 1998. All Stage 2
aircraft must be phased out of operations in the contiguous United
States by December 31, 1999, with waivers available in certain
specific cases to December 31, 2003.
- All operators have the option of achieving compliance through a
gradual phase-out of Stage 2 aircraft (i.e., eliminate 25% of its
Stage 2 fleet on each of the compliance dates noted above), or a
gradual phase-in of Stage 3 aircraft (i.e., 55%, 65% and 75% of an
operator's fleet must consist of Stage 3 aircraft by the
respective interim compliance dates noted above).
The federal rule does not prohibit local airports from issuing more stringent
phase-out rules. In fact, several local airports have adopted more stringent
noise requirements which restrict the operation of Stage 2 and certain Stage 3
aircraft.
16
Other countries have also adopted noise policies. The European Union (EU)
adopted a non-addition rule in 1989, which directed each member country to pass
the necessary legislation to prohibit airlines from adding Stage 2 aircraft to
their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the
year 2002. The International Civil Aviation Organization has also endorsed the
phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.
At December 31, 1996, the Partnership's entire fleet consisted of three Stage 2
aircraft. Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3
requirements, were available for the Partnership's aircraft. However, while
technically feasible, hushkits were not judged by the Partnership to be cost
effective due to the age and maintenance condition of the aircraft and the time
required to fully amortize the additional investment.
Implementation of the Stage 3 standards has adversely affected the value of
Stage 2 aircraft, as these aircraft will require eventual modification to be
operated in the U.S. or other countries with Stage 3 standards after the
applicable dates.
Demand for Aircraft - Industry-wide, approximately 280 commercial jet aircraft
were available for sale or lease at December 31, 1996, approximately 195 less
than a year ago, and at under 2.5% of the total available jet aircraft fleet,
this is the lowest level of availability since 1988. From 1991 to 1994,
depressed demand for travel limited airline expansion plans, with new aircraft
orders and scheduled deliveries being canceled or substantially deferred. As
profitability declined, many airlines took action to downsize or liquidate
assets and some airlines were forced to file for bankruptcy protection.
Following three years of good traffic growth accompanied by rising yields, this
trend is reversing with many airlines reporting record profits. As a result of
this improving trend, just over 1200 new jet aircraft were ordered in 1996,
making this the second highest ever order year in the history of the industry.
To date, this strong recovery has mainly benefited Stage 3 narrow-bodies and
younger Stage 2 narrow-bodies, many of which are now being upgraded with
hushkits, whereas older Stage 2 narrow-bodies have shown only marginal signs of
recovery since the 1991 to 1994 period.
The general partner believes that, in addition to the factors cited above, the
deteriorated market for the Partnership's aircraft reflects the airline
industry's reaction to the significant expenditures potentially necessary to
bring these aircraft into compliance with certain ADs issued by the FAA relating
to aging aircraft, corrosion prevention and control and structural inspection
and modification as previously discussed.
Effects on the Partnership's Aircraft - The Partnership periodically reviews the
estimated realizability of the residual values at the projected end of each
aircraft's economic life based on estimated residual values obtained from
independent parties which provide current and future estimated aircraft values
by aircraft type. For any downward adjustment in estimated residual value or
decrease in the projected remaining economic life, the depreciation expense over
the projected remaining economic life of the aircraft is increased.
In 1996, the Partnership concluded that a sale of the returned aircraft and
spare engines on an "as is, where is" basis would maximize the economic return
on this equipment to the Partnership. Previously, the aircraft were considered
to be held and used by the Partnership, pursuant to SFAS 121. In determining the
impairment loss, the Partnership estimated the fair value of the aircraft and
equipment based on the estimated sale price less cost to sell, and then deducted
this amount from the carrying value of the aircraft.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, the Partnership
recognizes the deficiency currently as increased depreciation expense. The
Partnership recognized downward adjustments of $400,000, $115,000 and $260,000,
17
or $2.35, $0.67 and $1.53 per limited Partnership unit, in 1996, 1995 and 1994,
respectively, to the book value for certain of its aircraft and aircraft
inventory, as a result of declining estimates in their residual values.
Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability,
the statement provides that the Partnership should estimate the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the projected net undiscounted cash flow for each
aircraft (projected rental revenue, net of management fees, less projected
maintenance costs, if any, plus the estimated residual value) is less than the
carrying value of the aircraft, an impairment loss is recognized. Pursuant to
the statement, measurement of an impairment loss for long-lived assets will be
based on the "fair value" of the asset as defined in the statement.
SFAS No. 121 states that the fair value of an asset is the amount at which the
asset could be bought or sold in a current transaction between willing parties,
i.e., other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and will be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value will be based on the best information available in the
circumstances. Pursuant to the statement, the estimate of fair value will
consider prices for similar assets and the results of valuation techniques to
the extent available in the circumstances. Examples of valuation techniques
include the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved, option-pricing models,
matrix pricing, option-adjusted spread models, and fundamental analysis.
The Partnership periodically reviews its aircraft for impairment in accordance
with SFAS No. 121. Using an estimate of the fair value of the Partnership's
aircraft to measure impairment may result in greater write-downs than would be
recognized under the accounting method previously applied by the Partnership.
The Partnership uses information obtained from third party valuation services in
arriving at its estimate of fair value for purposes of determining residual
values. The Partnership will use similar information, plus available information
and estimates related to the Partnership's aircraft, to determine an estimate of
fair value to measure impairment as required by the statement. The estimates of
fair value can vary dramatically depending on the condition of the specific
aircraft and the actual marketplace conditions at the time of the actual
disposition of the asset. If assets are deemed impaired, there could be
substantial write-downs in the future.
18
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND I
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH
AUDITORS' REPORT
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Polaris Aircraft Income Fund I:
We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
I (a California limited partnership) as of December 31, 1996 and 1995, and the
related statements of operations, changes in partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the general partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
general partner, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Polaris Aircraft Income Fund I
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
January 31, 1997
20
POLARIS AIRCRAFT INCOME FUND I
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 10,065,652 $ 9,807,315
RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $233,913 in 1996
and $811,131 in 1995 18,816 32,863
NOTES RECEIVABLE, net of allowance for credit
losses of $177,537 in 1996 and $144,884 in 1995 418,145 1,040,505
AIRCRAFT, net of accumulated depreciation of
$20,823,462 in 1996 and $19,166,733 in 1995 3,751,387 5,408,116
------------ ------------
$ 14,254,000 $ 16,288,799
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 77,676 $ 51,757
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 464,603 98,410
SECURITY DEPOSITS 70,925 145,925
MAINTENANCE RESERVES 3,217,368 2,165,714
------------ ------------
Total Liabilities 3,830,572 2,461,806
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (624,341) (590,280)
Limited Partners, 168,729 units
issued and outstanding 11,047,769 14,417,273
------------ ------------
Total Partners' Capital 10,423,428 13,826,993
------------ ------------
$ 14,254,000 $ 16,288,799
============ ============
The accompanying notes are an integral part of these statements.
21
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
REVENUES:
Rent from operating leases $ 1,763,400 $ 2,073,250 $ 1,765,947
Gain on sale of aircraft inventory 477,832 558 --
Claims related to lessee defaults -- 409,698 815,888
Gain on sale of equipment -- 17,849 --
Interest and other 539,980 694,680 499,380
----------- ----------- -----------
Total Revenues 2,781,212 3,196,035 3,081,215
----------- ----------- -----------
EXPENSES:
Depreciation 1,656,729 896,176 1,837,584
Management fees to general partner 63,337 63,294 84,066
Provision for credit losses 1,055,050 956,015 --
Operating 425,146 650,685 164,557
Administration and other 172,365 183,572 165,048
----------- ----------- -----------
Total Expenses 3,372,627 2,749,742 2,251,255
----------- ----------- -----------
NET INCOME (LOSS) $ (591,415) $ 446,293 $ 829,960
=========== =========== ===========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 247,154 $ 147,868 $ 143,269
=========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ (838,569) $ 298,425 $ 686,691
=========== =========== ===========
NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT $ (4.97) $ 1.77 $ 4.07
=========== =========== ===========
The accompanying notes are an integral part of these statements.
22
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1993 $ (572,081) $ 16,216,185 $ 15,644,104
Net income 143,269 686,691 829,960
Cash distributions to partners (149,981) (1,349,832) (1,499,813)
------------ ------------ ------------
Balance, December 31, 1994 (578,793) 15,553,044 14,974,251
Net income 147,868 298,425 446,293
Cash distributions to partners (159,355) (1,434,196) (1,593,551)
------------ ------------ ------------
Balance, December 31, 1995 (590,280) 14,417,273 13,826,993
Net income (loss) 247,154 (838,569) (591,415)
Cash distributions to partners (281,215) (2,530,935) (2,812,150)
------------ ------------ ------------
Balance, December 31, 1996 $ (624,341) $ 11,047,769 $ 10,423,428
============ ============ ============
The accompanying notes are an integral part of these statements.
23
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (591,415) $ 446,293 $ 829,960
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,656,729 896,176 1,837,584
Gain on sale of aircraft inventory (477,832) (558) --
Gain on sale of equipment -- (17,849) --
Provision for credit losses 1,055,050 956,015 --
Changes in operating assets and liabilities:
Decrease (increase) in rent and other
receivables (524,243) 261,849 (872,189)
Increase (decrease) in payable to affiliates 25,919 (50,531) (40,195)
Increase in accounts payable and
accrued liabilities 366,193 52,453 31,957
Increase (decrease) in lessee security deposits (75,000) 20,925 (99,075)
Increase in maintenance reserves 1,051,654 926,119 433,144
------------ ------------ ------------
Net cash provided by operating activities 2,487,055 3,490,892 2,121,186
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of airframe -- 300,000 --
Increase in capitalized costs -- (244,000) --
Increase in notes receivable -- (418,216) (486,000)
Principal payments on notes receivable 105,600 180,676 1,597,385
Net proceeds from sale of aircraft inventory 477,832 604,562 912,263
Inventory disassembly costs -- -- (18,120)
------------ ------------ ------------
Net cash provided by investing activities 583,432 423,022 2,005,528
------------ ------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (2,812,150) (1,593,551) (1,499,813)
------------ ------------ ------------
Net cash used in financing activities (2,812,150) (1,593,551) (1,499,813)
------------ ------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS 258,337 2,320,363 2,626,901
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 9,807,315 7,486,952 4,860,051
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 10,065,652 $ 9,807,315 $ 7,486,952
============ ============ ============
The accompanying notes are an integral part of these statements.
24
POLARIS AIRCRAFT INCOME FUND I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Accounting Principles and Policies
Accounting Method - Polaris Aircraft Income Fund I (PAIF-I or the Partnership),
a California limited partnership, maintains its accounting records, prepares its
financial statements and files its tax returns on the accrual basis of
accounting. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates with regard to these financial statements are related to
the projected cash flows analysis in determining the fair value of assets.
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds. Cash and Cash Equivalents are stated at cost, which
approximates fair value.
Aircraft and Depreciation - The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual value is computed using
the straight-line method over the estimated economic life of the aircraft which
was originally estimated to be 12 years. Depreciation in the year of acquisition
was calculated based upon the number of days that the aircraft were in service.
The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life based on estimated
residual values obtained from independent parties which provide current and
future estimated aircraft values by aircraft type. For any downward adjustment
in estimated residual value or decrease in the projected remaining economic
life, the depreciation expense over the projected remaining economic life of the
aircraft is increased.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, an impairment
loss is recognized. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 121, as discussed in Note 3, measurement of an impairment loss will
be based on the "fair value" of the asset as defined in the statement.
Capitalized Costs - Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement. These costs are also subject to periodic
evaluation as discussed above.
Aircraft Inventory - Proceeds from sales had been applied against inventory
until the book value was fully recovered. The remaining book value of the
inventory was recovered in 1995. Proceeds in excess of the inventory net book
value are recorded as revenue when received.
Operating Leases - Certain of the aircraft leases are accounted for as operating
leases. Operating lease revenues are recognized in equal installments over the
terms of the leases.
25
Maintenance Reserves - The Partnership receives maintenance reserve payments
from certain of its lessees that may be reimbursed to the lessee or applied
against certain costs incurred by the Partnership or lessee for maintenance work
performed on the Partnership's aircraft or engines, as specified in the leases.
Maintenance reserve payments are recognized when received and balances remaining
at the termination of the lease, if any, may be used by the Partnership to
offset future maintenance expenses or recognized as revenue.
Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft, including costs related to
lessee defaults and costs of disassembling aircraft inventory.
Net Income (Loss) Per Limited Partnership Unit - Net income (loss) per limited
partnership unit is based on the limited partners' share of net income (loss),
and the number of units outstanding for the years ended December 31, 1996, 1995
and 1994.
Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
Receivables - The Partnership has recorded an allowance for credit losses for
certain impaired note and rent receivables as a result of uncertainties
regarding their collection as discussed in Note 7. The Partnership recognizes
revenue on impaired notes and receivables only as payments are received.
1996 1995
---- ----
Allowance for credit losses,
beginning of year $ (956,015) $ --
Provision for credit losses (1,055,050) (956,015)
Write-downs 1,585,362 --
Collections 14,253 --
----------- -----------
Allowance for credit losses,
end of year $ (411,450) $ (956,015)
=========== ===========
The fair value of the notes receivable is estimated by discounting future
estimated cash flows using current interest rates at which similar loans would
be made to borrowers with similar credit ratings and remaining maturities.
2. Organization and the Partnership
The Partnership was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. It will terminate no later than December 2010. Upon
organization, both the general partner and the initial limited partner
contributed $500. The Partnership recognized no profits or losses during the
period ended December 31, 1984. The offering of limited partnership units
terminated on December 31, 1985, at which time the Partnership had sold 168,729
units of $500, representing $84,364,500. All unit holders were admitted to the
Partnership on or before January 1, 1986.
Polaris Investment Management Corporation (PIMC), the sole general partner of
the Partnership, supervises the day-to-day operations of the Partnership. PIMC
is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC).
Polaris Holding Company (PHC) is the parent company of PALC. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company, owns
100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to related parties are described in Note 9.
26
3. Aircraft
At December 31, 1996, the Partnership owned three aircraft, five spare engines
and certain inventoried aircraft parts from its original portfolio of eleven
used commercial jet aircraft, which were acquired and leased or sold as
discussed below. All aircraft acquired from an affiliate were purchased within
one year of the affiliate's acquisition at the affiliate's original price paid.
The aircraft leases are net operating leases, requiring the lessees to pay all
operating expenses associated with the aircraft during the lease term. In
addition, the leases require the lessees to comply with Airworthiness Directives
(ADs) which have been or may be issued by the Federal Aviation Administration
(FAA) and require compliance during the lease term. In addition to basic rent,
the lessees are generally required to pay supplemental amounts based on flight
hours or cycles into a maintenance reserve account, to be used for heavy
maintenance of the engines or airframe. The leases generally state a minimum
acceptable return condition for which the lessee is liable under the terms of
the lease agreement. In the event of a lessee default, these return conditions
are not likely to be met.
The following table describes the Partnership's aircraft portfolio at December
31, 1996 in greater detail:
Year of
Aircraft Type Serial Number Manufacture
- ------------- ------------- -----------
Boeing 737-200 19606 1968
Boeing 737-200 19617 1969
Boeing 737-200 20125 1969
One Boeing 737-200 Convertible Freighter - This aircraft was acquired for
$7,613,333 in 1985 and leased to Aloha Airlines, Inc. through October 1990. The
aircraft was then sold to Transport Aerien Transregional S.A. in 1990.
One McDonnell Douglas DC-9-10 - This aircraft was purchased for $4,400,000 in
1986 and leased to Hawaiian Airlines, Inc. (Hawaiian) until Hawaiian defaulted
on its lease in November 1990. In 1992, the Partnership entered into an
agreement with American International Airways, Inc. (American International) for
the installment sale of this aircraft. American International paid to the
Partnership the remaining balance of the note in November 1994.
Nine Boeing 737-200 - These aircraft were purchased for $60,367,500 in 1986 and
leased to Western Airlines, Inc. (Western). In 1987, Delta Airlines, Inc.
acquired Western and assumed all obligations of Western through the expiration
of the aircraft leases with the Partnership. The aircraft were then leased to
Braniff, Inc. (Braniff) until 1989, when Braniff filed a petition under Chapter
11 of the United States Bankruptcy Code and returned the aircraft to the
Partnership (Note 5).
In 1992, three of the aircraft were transferred to aircraft inventory and have
been disassembled for sale of their component parts (Note 6). One engine from
these aircraft was leased to Viscount through a joint venture with Polaris
Aircraft Income Fund II from April 1993 through November 1997. This engine was
returned to the Partnership in September 1996 as discussed in Note 7. Two
additional engines from these aircraft were subsequently transferred from
aircraft inventory in 1994. The Partnership leased these two engines to Viscount
for 52 days. Rental revenue of $27,260 was recognized during 1994. One of these
engines was subsequently leased to CanAir Cargo Ltd. (CanAir) as discussed
below. The other engine was subsequently re-leased to Viscount for five months
beginning in December 1994 at a rental rate of $7,500 per month. The Partnership
re-leased this engine to Viscount for one year beginning in June 1995 at the
same rental rate.
27
One aircraft was leased to American Air Lease, Inc. (American Air Lease) from
February 1990 until the lessee's default in June 1991 (Note 5). The aircraft was
transferred to aircraft inventory in 1993 and has been disassembled for sale of
its component parts (Note 6).
One aircraft was leased to America West Airlines, Inc. from August 1990 until
June 1991. The aircraft was then leased to Viscount at 56% of the prior rate
from February 1992 until September 1997. The aircraft was returned to the
Partnership in September 1996 as discussed in Note 7.
One aircraft was leased to Viscount from April 1992 through September 1997. This
aircraft was returned to the Partnership in September 1996 as discussed in Note
7.
Two aircraft were leased to Markair, Inc. (Markair) from May 1991 until the
lessee's default in June 1992 (Note 5). One of the Markair aircraft was then
leased to Aviateca, S.A. (Aviateca) from July 1992 until December 1992. In
October 1993, this aircraft was leased to Viscount through December 1996. The
Partnership recognized this transaction as a sale in 1993 as a result of the
nominal purchase price option provided in the lease upon expiration of the lease
in December 1996. The Partnership recorded a note receivable in 1993 for the
sales price, which was reduced by payments received from Viscount less interest.
In December 1994, Viscount exercised its option to purchase the aircraft. As
specified in the lease agreement, the Partnership applied to the note balance a
security deposit of $25,000 and maintenance reserves of $237,978, which were
previously paid to the Partnership by Viscount. Viscount paid the remaining
balance of the note of $437,022 to the Partnership and the Partnership
transferred title to the aircraft to Viscount.
The second aircraft formerly leased to Markair was leased to Cambodia
International Airlines Company, Ltd. (Cambodia International) from November 1992
through September 1993. In April 1995, the Partnership sold the airframe to
Pinnacle Aircraft Leasing, Inc. for $300,000. No gain or loss was recorded on
the sale as the sales price of the airframe equaled its net book value. The
Partnership leased the two engines from this aircraft and one engine previously
leased to Viscount, as previously discussed, to CanAir beginning in May 1994 for
36 months. The rental rate was variable based on usage through August 1994.
Beginning in September 1994 through the end of the lease term in May 1997, the
rental rate is fixed at $10,000 per engine per month.
One aircraft was leased to Jet Fleet Corporation from May 1992 until the
lessee's default in September 1992. The aircraft was then leased to Viscount
from November 1992 until August 1994. The Partnership entered into a new lease
with Viscount for a five-year term which commenced in September 1994. Viscount
subsequently entered into a sub-lease agreement for the aircraft with Nations
Air for a term of one year through February 1996. The sublease was extended
through February 1998. Rent and maintenance reserve payments due to Viscount
from Nations Air were paid directly to the Partnership and were applied against
payments due the Partnership from Viscount. This aircraft was returned to the
Partnership in February 1997 as discussed in Note 7 and Note 8.
The Partnership, Viscount and Nations Air agreed to share in the cost of certain
heavy maintenance work performed on the aircraft sub-leased to Nations Air. The
agreement stipulates that the Partnership loan Nations Air its portion of the
maintenance cost of $264,108 to be repaid by Nations Air in twelve monthly
installments, with interest at a variable rate, beginning in November 1995. The
Partnership also loaned Viscount its portion of the maintenance cost of $154,108
to be repaid by Viscount in monthly installments of $10,000, with interest at a
variable rate, beginning in November 1995. As discussed in Note 7 Viscount
defaulted on this note receivable. Nations Air also defaulted on their note
payments and the Partnership has provided an allowance for credit losses at
December 31, 1996 for the outstanding balance. The Partnership's share of the
maintenance cost was approximately $903,000, of which approximately $329,000 was
paid from maintenance reserves previously paid to the Partnership by Viscount
28
and Nations Air. The Partnership recognized approximately $574,000 of this heavy
maintenance work as operating expense in the 1995 statement of operations.
The following is a schedule by year of future minimum rental revenue under the
existing leases:
Year Amount
---- ------
1997 $150,000
1998 --
1999 --
2000 --
2001 and thereafter --
--------
Total $150,000
========
Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability,
the statement provides that the Partnership should estimate the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the projected net undiscounted cash flow for each
aircraft (projected rental revenue, net of management fees, less projected
maintenance costs, if any, plus the estimated residual value) is less than the
carrying value of the aircraft, an impairment loss is recognized. Pursuant to
the statement, measurement of an impairment loss for long-lived assets will be
based on the "fair value" of the asset as defined in the statement.
SFAS No. 121 states that the fair value of an asset is the amount at which the
asset could be bought or sold in a current transaction between willing parties,
i.e., other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and will be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value will be based on the best information available in the
circumstances. Pursuant to the statement, the estimate of fair value will
consider prices for similar assets and the results of valuation techniques to
the extent available in the circumstances. Examples of valuation techniques
include the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved, option-pricing models,
matrix pricing, option-adjusted spread models, and fundamental analysis.
The Partnership recognized impairment losses aggregating approximately $400,000,
$115,000 and approximately $260,000, or $2.37, $0.67 and $1.53 per limited
Partnership unit, as increased depreciation expense in 1996, 1995 and 1994,
respectively. In 1996, the Partnership concluded that a sale of the returned
aircraft and spare engines on an "as is, where is" basis would maximize the
economic return on this equipment to the Partnership. In determining the
impairment loss, the Partnership estimated the fair value of the aircraft and
equipment based on the estimated sale price less cost to sell, and then deducted
this amount from the carrying value of the aircraft.
The Partnership's future earnings are impacted by the net effect of the
adjustments to the carrying values of the aircraft (which has the effect of
decreasing future depreciation expense) and the downward adjustments to the
estimated residual values (which has the effect of increasing future
depreciation expense).
As discussed above, the Partnership uses information obtained from third party
valuation services in arriving at its estimate of fair value for purposes of
determining residual values. The Partnership will use similar information, plus
available information and estimates related to the Partnership's aircraft, to
determine an estimate of fair value to measure impairment as required by the
29
statement. The estimates of fair value can vary dramatically depending on the
condition of the specific aircraft and the actual marketplace conditions at the
time of the actual disposition of the asset. If assets are deemed impaired,
there could be substantial write-downs in the future.
4. Sale of Equipment
Sale of Engine - One engine was transferred from aircraft inventory to aircraft
at an estimated fair value of $200,000 during 1995. The Partnership incurred
certain maintenance and refurbishment costs on this engine aggregating $244,000,
which were capitalized in 1995. The Partnership leased this engine to Viscount
for one year beginning in July 1995 at a rental rate of $10,500 per month with
an early termination option. The Partnership subsequently sold this engine to
Viscount for a sales price of $461,849 and recorded a gain on sale of $17,849 in
1995. The Partnership recorded a note receivable for the sales price and agreed
to accept payment in 57 installments of $10,500, with interest at a rate of
11.265% per annum. As discussed in Note 7, Viscount defaulted on certain
payments due the Partnership, including payments on this note receivable. In
October 1996, Viscount's affiliates, Rock-It Cargo USA, Inc. and Riverhorse
Investments, Inc., assumed Viscount's engine finance sale note to the
Partnership as discussed in Note 7. The note balance was $418,145 at December
31, 1996 and $455,685 at December 31, 1995.
5. Claims Related to Lessee Defaults
Receipt of Braniff Bankruptcy Claim - In July 1992, the Bankruptcy Court
approved a stipulation embodying a settlement among PIMC, on behalf of the
Partnership, the Braniff Creditor committees and Braniff in which it was agreed
that First Security Bank of Utah, National Association, acting as trustee for
the Partnership, would be allowed an administrative claim in the bankruptcy
proceeding of approximately $2,076,923. In 1992, the Partnership received full
payment of the claim, subject, however, to the requirement that 25% of total
proceeds be held by PIMC in a separate, interest-bearing account pending
notification by Braniff that all of the allowed administrative claims have been
satisfied. During 1994, the Partnership was advised that the 25% portion of the
administrative claim proceeds with interest could be released by PIMC to the
Partnership. As a result, the Partnership recognized $611,618 as revenue in
claims related to lessee defaults in the 1994 statement of operations.
American Air Lease - The Partnership filed suit in 1991 seeking damages for
unpaid rent and other defaults against lessee American Air Lease and guarantor
Americom Leasing Group, Inc. (Americom). American Air Lease and the Partnership
reached a settlement consisting of certain cash payments, return of the aircraft
and participation in any recovery proceeds of American Air Lease's default
judgment against its lessee, Pan African Airways. Concurrent with the
court-approved settlement agreement, in December 1992, the lease was terminated
and the Partnership took possession of the aircraft. The Partnership proceeded
to recover under the judgment through collection of insurance claim proceeds
from insurers and judicial enforcement in New York against American Air Lease.
The aircraft was transferred to aircraft inventory in 1993 and has been
disassembled for sale of its component parts (Note 6). In November 1994, the
Partnership received $91,452 representing settlement of Americom's and American
Air Lease's obligation to pay the original settlement judgement. The Partnership
was also entitled to retain security deposits in the amount of $74,075. Both
amounts were recognized as revenue in claims related to lessee defaults in the
1994 statement of operations. The Partnership settled its claim against the
insurers of American Air Lease for payment of insurance proceeds of $400,000.
The Partnership received the $400,000 in July 1995 and recognized the full
amount as revenue in claims related to lessee defaults in the 1995 statement of
operations.
Markair - The Partnership terminated the leases and repossessed the two aircraft
in June 1992, and Markair filed a petition for reorganization under Chapter 11
30
of the United States Bankruptcy Code. The Partnership filed a proof of claim in
the case to recover damages for past-due rent and for Markair's failure to meet
return conditions with respect to the Partnership's aircraft. In August 1993,
the Bankruptcy Court approved a plan of reorganization for Markair and a
stipulation allowed the Partnership an unsecured claim against Markair for
$445,000 which was converted to 10% subordinated debentures during 1994. During
1994 and 1995, the Partnership received a nominal principal and interest
payments on the debentures. Markair defaulted on its payment obligations on the
debentures, and the trustee, Key Bank of Washington, is taking steps to protect
the interests of the debenture holders, including the Partnership.
6. Disassembly of Aircraft
In an attempt to maximize the economic return from its off-lease aircraft, the
Partnership entered into an agreement with Soundair, Inc. (Soundair) on October
31, 1992, for the disassembly of certain of the Partnership's aircraft and the
sale of their component parts. The Partnership recognized the estimated cost of
disassembly of approximately $250,000 for the four aircraft during 1993 and is
receiving the proceeds from the sale of such parts, net of overhaul expenses if
necessary, and commissions paid to Soundair.
During 1995 and 1994, the Partnership recorded downward adjustments to the
inventory value of $115,000 and $261,170, respectively, to reflect the current
estimate of net realizable aircraft inventory value. These adjustments are
reflected as increased depreciation expense in the corresponding years'
statement of operations. During 1994, two engines were removed from the
disassembly program at an aggregate value of $360,000 and leased as discussed in
Note 3. During 1995, one additional engine was removed from the disassembly
program at an aggregate value of $200,000 and subsequently sold as discussed in
Note 4.
Proceeds from sales are applied against inventory until book value was fully
recovered. During 1995 and 1994, the Partnership applied net proceeds from the
sale of aircraft inventory of $604,003 and $912,263, respectively against
aircraft inventory, reducing the net book value of the Partnership's aircraft
inventory to zero. Payments received by the Partnership of $477,832 and $558 in
excess of the net book value during 1996 and 1995, respectively were recorded as
gain on sale of aircraft inventory in the corresponding years' statement of
operations.
7. Viscount Restructuring Agreement and Default
On January 24, 1996, Viscount filed a petition for protection under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court in
Tucson, Arizona. In April 1996, GECAS, on behalf of the Partnership, First
Security Bank, National Association (formerly known as First Security Bank of
Utah, National Association) (FSB), the owner/trustee under the Partnership's
leases with Viscount (the Leases), Viscount, certain guarantors of Viscount's
indebtedness and others executed in April 1996 a Compromise of Claims and
Stipulation under Section 1110 of the Bankruptcy Code (the Compromise and
Stipulation), which was subsequently approved by the Bankruptcy Court. The
Compromise and Stipulation provided that in the event that Viscount failed to
promptly and timely perform its monetary obligations under the Leases and the
Compromise and Stipulation, without further order of the Bankruptcy Court, GECAS
would be entitled to immediate possession of the aircraft for which Viscount
failed to perform and Viscount would deliver such aircraft and all records
related thereto to GECAS.
Viscount defaulted on and was unable to cure its September rent obligations.
However, Viscount took the position that it was entitled to certain offsets and
asserted defenses to the September rent obligations. On September 18, 1996,
GECAS (on behalf of the Partnership and other entities) and Viscount entered
into a Stipulation and Agreement by which Viscount agreed to voluntarily return
all of the Partnership's aircraft and engines, turn over possession of the
31
majority of its aircraft parts inventory, and cooperate with GECAS in the
transition of aircraft equipment and maintenance, in exchange for which, upon
Bankruptcy Court approval of the Stipulation and Agreement, the Partnership
would waive its right to pre- and post-petition claims against Viscount for
amounts due and unpaid.
The Stipulation and Agreement provided that upon the return and surrender of
possession of the Partnership's three airframes and eight engines (two of which
were spare engines), Viscount's rights and interests therein would terminate. As
of September 18, 1996, Viscount had returned (or surrendered possession of) two
of the Partnership's airframes and seven of the Partnership's engines. One of
the returned airframes (together with one installed engine) was in the
possession of and operated by Nations Air. Six of the seven returned engines are
in the possession of certain maintenance facilities and will require maintenance
work in order to be made operable. Viscount returned the Partnership's remaining
airframe and one installed engine on October 1, 1996. Nations Air returned this
airframe and one installed engine to the Partnership in February 1997.
GECAS, on behalf of the Polaris Entities, is evaluating the spare parts
inventory to which Viscount relinquished possession in order to determine its
condition and value, the portion allocable to the Partnership, and the
Partnership's alternatives for the use and/or disposition of such parts. A
significant portion of the spare parts inventory is currently in the possession
of third party maintenance and repair facilities with whom GECAS anticipates
that it will need to negotiate for the repair and/or return of these parts.
The Stipulation and Agreement also provides that the Polaris Entities, GECAS and
FSB shall release any and all claims against Viscount, Viscount's bankruptcy
estate, and the property of Viscount's bankruptcy estate, effective upon entry
of a final non-appealable court order approving the Stipulation and Agreement.
The Bankruptcy Court entered such an order approving the Stipulation and
Agreement on October 23, 1996.
As discussed in Note 4, in October 1996, Viscount's affiliates, Rock-It Cargo
USA, Inc. and Riverhorse Investments, Inc., assumed Viscount's engine finance
sale note to the Partnership as provided under the Compromise and Stipulation.
During 1996 and 1995, the Partnership recorded allowances for credit losses of
and $1,055,050 and $956,015, respectively for outstanding receivables from
Viscount and Nations Air. The Stipulation and Agreement provides that, upon
entry of a final non-appealable court order approving it, the Partnership would
waive its pre- and post-petition claims against Viscount for all amounts due and
unpaid. As a result, the Partnership considers all receivables from Viscount to
be uncollectible and has written-off, during the third quarter of 1996, all
notes, rents and interest receivable balances from Viscount. Payments received
by the Partnership from the sale of the spare aircraft parts (as discussed
above), if any, will be recorded as revenue when received.
The Partnership evaluated the condition of the returned equipment and estimated
that very substantial maintenance and refurbishment costs aggregating
approximately $3.2 million would be required if the Partnership decided to
re-lease the returned aircraft and spare engines. Alternatively, if the
Partnership decided to sell the returned aircraft and spare engines, such sale
could be made on an "as is, where is" basis, without the Partnership incurring
substantial maintenance costs.. Based on its evaluation, the Partnership
concluded that a sale of the remaining aircraft and spare engines on an "as is,
where is" basis would maximize the economic return on this equipment to the
Partnership.
Viscount's failure to perform its financial obligations to the Partnership has
had a material adverse effect on the Partnership's financial position. As a
result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership
has incurred legal costs of approximately $414,000, which are reflected in
operating expense in the Partnership's 1996 statement of operations.
32
8. Nations Air Default and Litigation
On or about December 20, 1996, First Security Bank, National Association (FSB),
as trustee for the Partnership, filed an action against Nations Air Express,
Inc. (Nations Air) in the United States District Court for the Northern District
of California. This action involves aircraft owned by FSB, as trustee for the
Partnership which were leased to Viscount Air Services, Inc. (Viscount), and
subleased by Viscount to Nations Air. The claims arise out of the possession and
use of the aircraft by Nations Air following the commencement of Viscount's
bankruptcy proceedings. As discussed in connection with Viscount's bankruptcy in
Note 7, the Partnership's aircraft was returned in February 1997. In this action
FSB is seeking to recover damages for unpaid rent and maintenance, and interest
on such unpaid amounts, in the amount of approximately $1,248,000.
9. Related Parties
Under the Limited Partnership Agreement (Partnership Agreement), the Partnership
paid or agreed to pay the following amounts to PIMC and/or its affiliates in
connection with services rendered:
a. An aircraft management fee equal to 5% of gross rental revenues with
respect to operating leases of the Partnership, payable upon receipt of
the rent. In 1996, 1995 and 1994, the Partnership paid management fees
to PIMC of $64,396, $98,922 and $80,346, respectively. Management fees
payable to PIMC at December 31, 1996 and 1995 were $941 and $2,000,
respectively.
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and its assets. In 1996, 1995
and 1994, $203,253 $146,375 and $201,083 were reimbursed to PIMC by the
Partnership for administrative expenses. Administrative reimbursements
of $47,052 and $36,472 were payable to PIMC at December 31, 1996 and
1995, respectively. Partnership reimbursements to PIMC for maintenance
and remarketing costs of $200,032, $302,657 and $264,295 were paid in
1996, 1995, and 1994, respectively. Maintenance and remarketing
reimbursements of $29,683 and $13,285 were payable to PIMC at December
31, 1996 and 1995, respectively.
c. A 10% interest to PIMC in all cash distributions and sales proceeds,
gross income in an amount equal to 9.09% of distributed cash available
from operations and 1% of net income or loss and taxable income or
loss, as such terms are defined in the Partnership Agreement.
d. A subordinated sales commission to PIMC of 3% of the gross sales price
of each aircraft for services performed upon disposition and
reimbursement of out-of-pocket and other disposition expenses.
Subordinated sales commissions will be paid only after limited partners
have received distributions in an aggregate amount equal to their
capital contributions plus a cumulative non-compounded 8% per annum
return on their adjusted capital contributions, as defined in the
Partnership Agreement. The Partnership did not pay or accrue a sales
commission on any aircraft sales to date as the above subordination
threshold has not been met.
e. One engine from the Partnership's aircraft was leased to Viscount
through a joint venture agreement with Polaris Aircraft Income Fund II
from April 1993 through March 1996 at a fair market rental rate. The
Partnership recognized rental revenue on this engine of $46,400,
$146,000 and $146,000 in 1996, 1995 and 1994, respectively.
33
10. Income Taxes
Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the accompanying financial statements.
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1996 and 1995 are as
follows:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
1996: Assets $ 14,254,000 $ 28,676,857 $(14,422,857)
Liabilities 3,830,572 766,709 3,063,863
1995: Assets $ 16,288,799 $ 29,774,131 $(13,485,332)
Liabilities 2,461,806 492,567 1,969,239
11. Reconciliation of Book Net Income (Loss) to Taxable Net Income (Loss)
The following is a reconciliation between net income (loss) per limited
partnership unit reflected in the financial statements and the information
provided to limited partners for federal income tax purposes:
For the years ended December 31,
1996 1995 1994
---- ---- ----
Book net income (loss) per limited partnership unit $ (4.97) $ 1.77 $ 4.07
Adjustments for tax purposes represent differences
between book and tax revenue and expenses:
Rental and maintenance reserve revenue recognition 8.91 6.10 2.54
Depreciation 6.71 2.85 9.37
Gain or loss on sale of aircraft -- (6.83) --
Capitalized costs -- 4.24 0.53
Basis in inventory (2.86) 0.90 (5.98)
Other revenue and expense items (0.84) (2.44) 2.58
-------- -------- ---------
Taxable net income (loss) per limited partnership unit $ 6.95 $ 6.59 $ 13.11
======== ======== =========
The differences between net income and loss for book purposes and net income and
loss for tax purposes result from the temporary differences of certain revenue
and deductions.
For book purposes, rental revenue is generally recorded as it is earned. For tax
purposes, certain temporary differences exist in the recognition of revenue.
Increases in the Partnership's book maintenance reserve liability were
recognized as rental revenue for tax purposes. Disbursements from the
Partnership's book maintenance reserves are capitalized or expensed for tax
purposes, as appropriate.
The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
34
purposes. The Partnership also periodically evaluates the ultimate
recoverability of the carrying values and the economic lives of its aircraft for
book purposes and, accordingly recognized adjustments which increased book
depreciation expense. As a result, the current year book depreciation expense is
greater than the tax depreciation expense computed under the accelerated method.
These differences in depreciation methods result in book to tax differences on
the sale of aircraft. In addition, certain costs were capitalized for tax
purposes and expensed for book purposes.
12. Subsequent Event
Sale of two Boeing 737-200s - In January, 1997, the Partnership received a
deposit of $162,000 toward the sales price of $1,620,000 for the sale of two
Boeing 737-200s formerly leased to Viscount. These aircraft were returned to the
Partnership in September and October 1996 pursuant to the Stipulation and
Agreement as further discussed in Note 7. The Partnership received the remaining
$1,458,000 in March 1997.
35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
36
PART III
Item 10. Directors and Executive Officers of the Registrant
Polaris Aircraft Income Fund I (PAIF-I or the Partnership) has no directors or
officers. Polaris Holding Company (PHC) and its subsidiaries, including Polaris
Aircraft Leasing Corporation (PALC) and Polaris Investment Management
Corporation (PIMC), the general partner of the Partnership (collectively
Polaris), restructured their operations and businesses (the Polaris
Restructuring) in 1994. In connection therewith, PIMC entered into a services
agreement dated as of July 1, 1994 (the Services Agreement) with GE Capital
Aviation Services, Inc. (GECAS), a Delaware corporation which is a wholly owned
subsidiary of General Electric Capital Corporation, a New York corporation (GE
Capital). GE Capital has been PHC's parent company since 1986. As subsidiaries
of GE Capital, the Servicer and PIMC are affiliates.
The officers and directors of PIMC are:
Name PIMC Title
---------------- ---------------------------------------
Eric M. Dull President; Director
Marc A. Meiches Vice President; Chief Financial Officer
Richard J. Adams Vice President; Director
Norman C. T. Liu Vice President; Director
Edward Sun Vice President
Richard L. Blume Vice President; Secretary
Robert W. Dillon Vice President; Assistant Secretary
Substantially all of these management personnel will devote only such portion of
their time to the business and affairs of PIMC as deemed necessary or
appropriate.
Mr. Dull, 36, assumed the position of President and Director of PIMC effective
January 1, 1997. Mr. Dull previously was a Director of PIMC from March 31, 1995
to July 31, 1995. Mr. Dull holds the position of Executive Vice President -
Portfolio Management of GECAS, having previously held the position of Senior
Vice President - Underwriting Risk Management of GECAS. Prior to joining GECAS,
Mr. Dull held various positions with Transportation and Industrial Funding
Corporation (TIFC).
Mr. Meiches, 44, assumed the position of Vice President and Chief Financial
Officer of PIMC effective October 9, 1995. Mr. Meiches presently holds the
positions of Executive Vice President and Chief Financial Officer of GECAS.
Prior to joining GECAS, Mr. Meiches has been with General Electric Company (GE)
and its subsidiaries since 1978. Since 1992, Mr. Meiches held the position of
Vice President of the General Electric Capital Corporation Audit Staff. Between
1987 and 1992, Mr. Meiches held Manager of Finance positions for GE Re-entry
Systems, GE Government Communications Systems and the GE Astro-Space Division.
Mr. Adams, 63, assumed the position of Senior Vice President - Aircraft Sales
and Leasing of PIMC and PALC effective August 1992, having previously served as
Vice President - Aircraft Sales & Leasing - Vice President, North America, and
Vice President - Corporate Aircraft since he joined PALC in August 1986. Mr.
Adams presently holds the position of Senior Vice President - Aircraft
Marketing, North America, of GECAS. Effective July 1, 1994, Mr. Adams held the
positions of Vice President and Director of PIMC.
Mr. Liu, 39, assumed the position of Vice President of PIMC effective May 1,
1995 and has assumed the position of Director of PIMC effective July 31, 1995.
Mr. Liu presently holds the position of Executive Vice President - Marketing and
Structured Finance of GECAS, having previously held the position of Executive
Vice President - Capital Funding and Portfolio Management of GECAS. Prior to
37
joining GECAS, Mr. Liu was with General Electric Capital Corporation for nine
years. He has held management positions in corporate Business Development and in
Syndications and Leasing for TIFC. Mr. Liu previously held the position of
managing director of Kidder, Peabody & Co., Incorporated.
Mr. Sun, 47, assumed the position of Vice President of PIMC effective May 1,
1995. Mr. Sun presently holds the position of Senior Vice President - Structured
Finance of GECAS. Prior to joining GECAS, Mr. Sun held various positions with
TIFC since 1990.
Mr. Blume, 55, assumed the position of Secretary of PIMC effective May 1, 1995
and Vice President of PIMC effective October 9, 1995. Mr. Blume presently holds
the position of Executive Vice President and General Counsel of GECAS. Prior to
joining GECAS, Mr. Blume was counsel at GE Aircraft Engines since 1987.
Mr. Dillon, 55, assumed the position of Vice President - Aviation Legal and
Insurance Affairs, effective April 1989. Previously, he served as General
Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994, Mr.
Dillon held the positions of Vice President and Assistant Secretary of PIMC. Mr.
Dillon presently holds the position of Senior Vice President and Managing
Counsel of GECAS.
Certain Legal Proceedings:
On October 27, 1992, a class action complaint entitled Weisl, Jr. et al. v.
Polaris Holding Company, et al. was filed in the Supreme Court of the State of
New York for the County of New York. The complaint sets forth various causes of
action which include allegations against certain or all of the defendants (i)
for alleged fraud in connection with certain public offerings, including that of
the Partnership, on the basis of alleged misrepresentation and alleged omissions
contained in the written offering materials and all presentations allegedly made
to investors; (ii) for alleged negligent misrepresentation in connection with
such offerings; (iii) for alleged breach of fiduciary duties; (iv) for alleged
breach of third party beneficiary contracts; (v) for alleged violations of the
NASD Rules of Fair Practice by certain registered broker dealers; and (vi) for
alleged breach of implied covenants in the customer agreements by certain
registered brokers. The complaint seeks an award of compensatory and other
damages and remedies. On January 19, 1993, plaintiffs filed a motion for class
certification. On March 1, 1993, defendants filed motions to dismiss the
complaint on numerous grounds, including failure to state a cause of action and
statute of limitations. On July 20, 1994, the court entered an order dismissing
almost all of the claims in the complaint and amended complaint. Certain claims,
however, remain pending. Plaintiffs filed a notice of appeal on September 2,
1994. On April 25, 1996, the Appellate Division for the First Department
affirmed the trial court's order which had dismissed most of plaintiffs' claims.
The Partnership is not named as a defendant in this action.
On or around February 17, 1993, a civil action entitled Einhorn, et al. v.
Polaris Public Income Funds, et al. was filed in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida against, among others, Polaris
Investment Management Corporation and Polaris Depositary Company. Plaintiffs
seek class action certification on behalf of a class of investors in Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI who purchased their interests while residing in Florida.
Plaintiffs allege the violation of Section 517.301, Florida Statutes, in
connection with the offering and sale of units in such Polaris Aircraft Income
Funds. Among other things, plaintiffs assert that the defendants sold interests
in such Polaris Aircraft Income Funds while "omitting and failing to disclose
the material facts questioning the economic efficacy of" such Polaris Aircraft
Income Funds. Plaintiffs seek rescission or damages, in addition to interest,
costs, and attorneys' fees. On April 5, 1993, defendants filed a motion to stay
this action pending the final determination of a prior filed action in the
Supreme Court for the State of New York entitled Weisl v. Polaris Holding
Company. On that date, defendants also filed a motion to dismiss the complaint
on the grounds of failure to attach necessary documents, failure to plead fraud
with particularity and failure to plead reasonable reliance. On April 13, 1993,
38
the court denied the defendants' motion to stay. On May 7, 1993, the court
stayed the action pending an appeal of the denial of the motion to stay.
Defendants subsequently filed with the Third District Court of Appeal a petition
for writ of certiorari to review the lower court's order denying the motion to
stay. On October 19, 1993, the Court of Appeal granted the writ of certiorari,
quashed the order, and remanded the action with instruction to grant the stay.
The Partnership is not named as a defendant in this action.
On or around May 14, 1993, a purported class action entitled Moross, et al. v.
Polaris Holding Company, et al. was filed in the United States District Court
for the District of Arizona. This purported class action was filed on behalf of
investors in Polaris Aircraft Income Funds I - VI by nine investors in such
Polaris Aircraft Income Funds. The complaint alleges that defendants violated
Arizona state securities statutes and committed negligent misrepresentation and
breach of fiduciary duty by misrepresenting and failing to disclose material
facts in connection with the sale of limited partnership units in the
above-named funds. An amended complaint was filed on September 17, 1993, but has
not been served upon defendants. On or around October 4, 1993, defendants filed
a notice of removal to the United States District Court for the District of
Arizona. Defendants also filed a motion to stay the action pending the final
determination of a prior filed action in the Supreme Court for the State of New
York entitled Weisl v. Polaris Holding Company ("Weisl") and to defendants' time
to respond to the complaint until 20 days after disposition of the motion to
action pending resolution of the motions for class certification and motions to
dismiss pending in Weisl. On January 20, 1994, the court stayed the action and
required defendants to file status reports every sixty days setting forth the
status of the motions in Weisl. On April 18, 1995, this action was transferred
to the Multi-District Litigation described below. The Partnership is not named
as a defendant in this action.
On September 21, 1993, a purported derivative action entitled Novak, et al. v.
Polaris Holding Company, et al. was filed in the Supreme Court of the State of
New York, County of New York. This action was brought on behalf of the
Partnership, Polaris Aircraft Income Fund II and Polaris Aircraft Income Fund
III. The complaint names as defendants Polaris Holding Company, its affiliates
and others. Each of the Partnership, Polaris Aircraft Income Fund II and Polaris
Aircraft Income Fund III is named as a nominal defendant. The complaint alleges,
among other things, that defendants mismanaged the Partnership and the other
Polaris Aircraft Income Funds, engaged in self-dealing transactions that were
detrimental to the Partnership and the other Polaris Aircraft Income Funds and
failed to make required disclosure in connection with the sale of the units in
the Partnership and the other Polaris Aircraft Income Funds. The complaint
alleges claims of breach of fiduciary duty and constructive fraud and seeks,
among other things an award of compensatory and punitive damages in an
unspecified amount, re-judgment interest, and attorneys' fees and costs. On
January 13, 1994, certain of the defendants, including Polaris Holding Company,
filed motions to dismiss the complaint on the grounds of, among others, failure
to state a cause of action and failure to plead the alleged wrong in detail. On
August 11, 1994, the court denied in part and granted in part defendants'
motions to dismiss. Specifically, the court denied the motions as to the claims
for breach of fiduciary duty, but dismissed plaintiffs' claim for constructive
fraud with leave to replead. On October 7, 1994, defendants filed a notice of
appeal. On November 15, 1994, defendants submitted an answer to the remaining
causes of action. On July 7, 1995, defendants filed briefs in support of their
appeal from that portion of the trial court's order denying the motion to
dismiss. On March 14, 1996, the appellate court reversed the trial court's order
denying the motion to dismiss, and dismissed the complaint.
On June 8, 1994, a consolidated complaint captioned In re Prudential Securities
Inc. Limited Partnerships Litigation was filed in the United States District
Court for the Southern District of New York, purportedly consolidating cases
that had been transferred from other federal courts by the Judicial Panel on
Multi- District Litigation. The consolidated complaint names as defendants
Prudential entities and various other sponsors of limited partnerships sold by
Prudential, including Polaris Holding Company, one of its former officers,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation
and Polaris Securities Corporation. The complaint alleges that the Prudential
defendants created a scheme for the sale of approximately $8-billion of limited
39
partnership interests in 700 assertedly high-risk limited partnerships,
including the Partnership, to approximately 350,000 investors by means of false
and misleading offering materials; that the sponsoring organizations (including
the Polaris entities) participated with the Prudential defendants with respect
to, among other things, the partnerships that each sponsored; and that all of
the defendants conspired to engage in a nationwide pattern of fraudulent conduct
in the marketing of all limited partnerships sold by Prudential. The complaint
alleges violations of the federal Racketeer Influenced and Corrupt Organizations
Act and the New Jersey counterpart thereof, fraud, negligent misrepresentation,
breach of fiduciary duty and breach of contract. The complaint seeks rescission,
unspecified compensatory damages, treble damages, disgorgement of profits
derived from the alleged acts, costs and attorneys fees. On October 31, 1994,
Polaris Investment Management Corporation and other Polaris entities filed a
motion to dismiss the consolidated complaint on the grounds of, inter alia,
statute of limitations and failure to state a claim. The Partnership is not
named as a defendant in this action. Prudential Securities, Inc., on behalf of
itself and its affiliates has made an Offer of Settlement. A class has been
certified for purposes of the Prudential Settlement and notice to the class has
been sent. Any questions concerning Prudential's Offer of Settlement should be
directed to 1-800-327-3664, or write to the Claims Administrator at:
Prudential Securities Limited Partnerships
Litigation Claims Administrator
P.O. Box 9388
Garden City, New York 11530-9388
On June 5, 1996, the Court certified a class with respect to claims against
Polaris Holding Company, one of its former officers, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, and Polaris Securities
Corporation. The class is comprised of all investors who purchased securities in
any of Polaris Aircraft Income Funds I through VI during the period from January
1985 until January 29, 1991, regardless of which brokerage firm the investor
purchased from. Excepted from the class are those investors who settled in the
SEC/Prudential settlement or otherwise opted for arbitration pursuant to the
settlement and any investor who has previously released the Polaris defendants
through any other settlement. On June 10, 1996, the Court issued an opinion
denying summary judgment to Polaris on plaintiffs' Section 1964(c) and (d) RICO
claims and state causes of action, and granting summary judgment to Polaris on
plaintiffs' Section 1964(a) RICO claims and the New Jersey State RICO claims. On
August 5, 1996, the Court signed an order providing for notice to be given to
the class members. The trial, which was scheduled for November 11, 1996, has not
proceeded, and no new trial date has been set.
A further litigation captioned Romano v. Ball et. al, an action by Prudential
Insurance Company policyholders against many of the same defendants (including
Polaris Investment Management Corporation and Polaris Aircraft Leasing
Corporation), has also been commenced by policy holders of the Prudential
Insurance Company as a purported derivative action on behalf of the Prudential
Insurance Company. The complaint alleges claims under the federal Racketeer
Influenced and Corrupt Organizations Act, as well as claims for waste,
mismanagement and intentional and negligent misrepresentation, and seeks
unspecified compensatory, treble and punitive damages. The case, which was being
coordinated with In re Prudential, has been settled and the action dismissed
pursuant to a court order dated December 18, 1996.
On or about January 12, 1995, a class action complaint entitled Cohen, et al. v.
Kidder Peabody & Company, Inc., et al. was filed in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida, and on March
31, 1995 the case was removed to the United States District Court for the
Southern District of Florida. An amended class action complaint (the "amended
complaint"), which renamed this action Bashein, et al. v. Kidder, Peabody &
Company Inc., et al. was filed on June 13, 1995. The amended complaint names
Kidder Peabody & Company, Inc., General Electric Capital Corporation, General
Electric Financial Services, Inc., and General Electric Company as defendants.
The action purports to be on behalf of "approximately 20,000 persons throughout
the United States" who purchased units in Polaris Aircraft Income Funds III
through VI. The amended complaint sets forth various causes of action
purportedly arising in connection with the public offerings of Polaris Aircraft
40
Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund
V, and Polaris Aircraft Income Fund VI. Specifically, plaintiffs assert claims
for violation of Sections 12(2) and 15 of the Securities Act of 1933, fraud,
negligent misrepresentation, breach of fiduciary duty, breach of third party
beneficiary contract, violation of NASD Rules of Fair Practice, breach of
implied covenant, and breach of contract. Plaintiffs seek compensatory damages,
interest, punitive damages, costs and attorneys' fees, as well as any other
relief the court deems just and proper. Defendants moved to dismiss the amended
complaint on June 26, 1995. On October 2, 1995, the court denied the defendants'
motion to dismiss. While the motion to dismiss was pending, plaintiffs filed a
motion for leave to file a second amended complaint, which was granted on
October 3, 1995. Defendants thereafter filed a motion to dismiss the second
amended complaint, and defendants' motion was denied by Court Order dated
December 26, 1995. On February 12, 1996, defendants answered. This case was
reassigned (from Hurley, J. To Lenard, J.) on February 18, 1996, and on March
18, 1996, plaintiffs moved for class certification. On the eve of class
discovery, April 26, 1996, plaintiffs moved for a voluntary dismissal of Counts
I and II (claims brought pursuant to the Securities Act of 1933) of the Second
Amended Complaint and simultaneously filed a motion to remand this action to
state court for lack of federal jurisdiction. Plaintiff's motion for voluntary
dismissal of the federal securities law claims and motion for remand were
granted on July 10, 1996. The Partnership is not named as a defendant in this
action.
On or around April 13, 1995, a class action complaint entitled B & L Industries,
Inc., et al. v. Polaris Holding Company, et al. was filed in the Supreme Court
of the State of New York. The complaint names as defendants Polaris Holding
Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management
Corporation, Polaris Securities Corporation, Peter G. Pfendler, Marc P.
Desautels, General Electric Capital Corporation, General Electric Financial
Services, Inc., General Electric Company, Prudential Securities Inc., and Kidder
Peabody & Company Incorporated. The complaint sets forth various causes of
action purportedly arising out of the public offerings of Polaris Aircraft
Income Fund III and Polaris Aircraft Income Fund IV. Plaintiffs allege claims of
fraud, negligent misrepresentation, breach of fiduciary duty, knowingly inducing
or participating in breach of fiduciary duty, breach of third party beneficiary
contract, violation of NASD Rules of Fair Practice, breach of implied covenant,
and unjust enrichment. Plaintiffs seek compensatory damages, interest, general,
consequential and incidental damages, exemplary and punitive damages,
disgorgement, rescission, costs, attorneys' fees, accountants' and experts'
fees, and other legal and equitable relief as the court deems just and proper.
On October 2, 1995, defendants moved to dismiss the complaint. On August 16,
1996, defendants filed a motion to dismiss plaintiffs' amended complaint. The
motion is returnable on July 17, 1997. The Partnership is not named as a
defendant in this action.
On or around August 15, 1995, a complaint entitled Mary C. Scott v. Prudential
Securities Inc. et al. was filed in the Court of Common Pleas, County of Summit,
Ohio. The complaint names as defendants Prudential Securities Inc., Polaris
Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund VI, P-Bache/A.G. Spanos Genesis
Income Partners LP 1, Prudential-Bache Properties, Inc., A.G. Spanos Residential
Partners - 86, Polaris Securities Corporation and Robert Bryan Fitzpatrick.
Plaintiff alleges claims of fraud and violation of Ohio securities law arising
out of the public offerings of Polaris Aircraft Income Fund II, Polaris Aircraft
Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund
VI, and P-Bache/A.G. Spanos Genesis Income Partners LP 1. Plaintiff seeks
compensatory damages, general, consequential and incidental damages, punitive
damages, rescission, costs, attorneys' fees and other and further relief as the
Court deems just and proper. The Partnership is not named as a defendant in this
action. On September 15, 1995, defendants removed this action to the United
States District Court, Eastern District of Ohio. On September 18, 1995,
defendants sought the transfer of this action to the Multi-District Litigation
and sought a stay of all proceedings by the district court, which stay was
granted on September 25, 1995. The Judicial Panel transferred this action to the
Multi-District Litigation on or about February 7, 1996.
41
On or around September 27, 1995, a complaint entitled Martha J. Harrison v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and Prudential Securities Incorporated. Plaintiff alleges
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code concerning the inducement and solicitation of purchases
arising out of the public offering of Polaris Aircraft Income Fund IV. Plaintiff
seeks compensatory damages, attorney's fees, interest, costs and general relief.
The Partnership is not named as a defendant in this action.
On or around December 8, 1995, a complaint entitled Overby, et al. v. General
Electric Company, et al. was filed in the Civil District Court for the Parish of
Orleans, State of Louisiana. The complaint names as defendants General Electric
Company and General Electric Capital Corporation. Plaintiffs allege claim of
tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation
of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil
Code in connection with the public offering of Polaris Aircraft Income Funds III
and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs
and general relief. The Partnership is not named as a defendant in this action.
In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. Plaintiffs allege claims of tort,
breach of fiduciary duty, in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
in connection with the public offering of Polaris Aircraft Income Funds III and
IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief. The Partnership is not named as a defendant in this action.
In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v.
Prudential Securities, Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities Incorporated and Stephen Derby Gisclair. On or about
January 18, 1996, plaintiff filed a First Supplemental and Amending Petition
adding defendants General Electric Company and General Electric Capital
Corporation. Plaintiff alleges claims of tort, breach of fiduciary duty in tort,
contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law
and violation of the Louisiana Civil Code in connection with the public offering
of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory
damages, attorneys' fees, interest, costs and general relief. The Partnership is
not named as a defendant in this action.
On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v.
General Electric Co., et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and General Electric Capital Corporation. Plaintiffs allege
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code in connection with the public offering of Polaris Aircraft
Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief. The Partnership is not named as a defendant in this
action.
On October 1, 1996, a complaint entitled Wilson et al. v. Polaris Holding
Company et al. was filed in the Superior Court of the State of California for
the County of Sacramento by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I through VI.
The complaint names Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Capital Services, Inc., General
Electric Capital Corporation, GE Capital Aviation Services, Inc. and DOES 1-100
42
as defendants. The Partnership has not been named as a defendant. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, negligence, breach of contract, and breach of fiduciary duty.
The complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest and rescission with respect to the Polaris Aircraft
Income Funds sold to plaintiffs. Defendants have filed an answer.
In or around December 1994, a complaint entitled John J. Jones, Jr. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company and General Electric
Capital Corporation. Plaintiff alleges claims of tort, breach of fiduciary duty
in tort, contract and quasi-contract, violation of section of the Louisiana Blue
Sky Law and violation of the Louisiana Civil Code concerning the inducement and
solicitation of purchases arising out of the public offering of Polaris Aircraft
Income Fund III. Plaintiff seeks compensatory damages, attorneys' fees,
interest, costs and general relief. The Partnership is not named as a defendant
in this action.
On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint named as defendants General
Electric Company and General Electric Capital Corporation. Plaintiffs allege
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code concerning the inducement and solicitation of purchases
arising out of the public offering of Polaris Aircraft Income Funds III and IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief. The Partnership is not named as a defendant in this action.
On or about April 9, 1996, a summons and First Amended Complaint entitled Sara
J. Bishop, et al. v. Kidder Peabody & Co., et al. was filed in the Superior
Court of the State of California, County of Sacramento, by over one hundred
individual plaintiffs who purchased limited partnership units in Polaris
Aircraft Income Funds III, IV, V and VI and other limited partnerships sold by
Kidder Peabody. The complaint names Kidder, Peabody & Co. Incorporated, KP
Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Financial Services, Inc., General
Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100
as defendants. The complaint alleges violations of state common law, including
fraud, negligent misrepresentation, breach of fiduciary duty, and violations of
the rules of the National Association of Securities Dealers. The complaint seeks
to recover compensatory damages and punitive damages in an unspecified amount,
interest, and recission with respect to Polaris Aircraft Income Funds III-VI and
all other limited partnerships alleged to have been sold by Kidder Peabody to
the plaintiffs. The Partnership is not named as a defendant in this action. On
June 18, 1996, defendants filed a motion to transfer venue from Sacramento
County to San Francisco County. The Court subsequently denied the motion.
Defendants filed an answer in the action on August 30, 1996.
On or about May 7, 1996, a petition entitled Charles Rich, et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. Plaintiffs allege claims of tort concerning the inducement and
solicitation of purchases arising out of the public offering of Polaris Aircraft
Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees,
interest, costs and general relief. The Partnership is not named as a defendant
in this action.
On or about March 4, 1996, a petition entitled Richard J. McGiven v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
43
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. Plaintiff alleges claims of tort concerning the inducement and
solicitation of purchases arising out of the public offering of Polaris Aircraft
Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest,
costs and general relief. The Partnership is not named as a defendant in this
action.
On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric
Company and General Electric Capital Corporation was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint names as
defendants General Electric Company and General Electric Capital Corporation.
Plaintiff alleges claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund V.
Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief. The Partnership is not named as a defendant in this action.
On or about October 15, 1996, a complaint entitled Joyce H. McDevitt, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about October 16, 1996, a complaint entitled Mary Grant Tarrer, et al.
v.Kidder Peabody & Co.,et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI and other limited
partnerships allegedly sold by Kidder Peabody. The complaint names Kidder,
Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, General Electric Credit Corporation
and DOES 1-100 as defendants. The complaint alleges violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest, and recission with respect to Polaris Aircraft
Income Funds I-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The Partnership is not named as a defendant
in this action.
On or about November 6, 1996, a complaint entitled Janet K. Johnson, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
44
On or about November 13, 1996, a complaint entitled Wayne W. Kuntz, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about November 26, 1996, a complaint entitled Thelma Abrams, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about January 16, 1997, a complaint entitled Enita Elphick, et al. v.
Kidder Peabody & Co.,et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI and other limited
partnerships allegedly sold by Kidder Peabody. The complaint names Kidder,
Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, General Electric Credit Corporation
and DOES 1-100 as defendants. The complaint alleges violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest, and recission with respect to Polaris Aircraft
Income Funds I-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The Partnership is not named as a defendant
in this action.
On or about February 14, 1997, a complaint entitled George Zicos, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
Other Proceedings - Part I, Item 3 discusses certain other actions arising out
of certain public offerings, including that of the Partnership, to which both
the Partnership and its general partner are parties.
45
Disclosure pursuant to Section 16, Item 405 of Regulation S-K:
Based solely on its review of the copies of such forms received or written
representations from certain reporting persons that no Forms 3, 4, or 5 were
required for those persons, the Partnership believes that, during 1995 all
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were met.
Item 11. Executive Compensation
PAIF-I has no directors or officers. PAIF-I is managed by PIMC, the General
Partner. In connection with management services provided, management and
advisory fees of $64,396 were paid to PIMC in 1996 in addition to a 10% interest
in all cash distributions as described in Note 9 to the financial statements
(Item 8).
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) No person owns of record, or is known by PAIF-I to own beneficially,
more than five percent of any class of voting securities of PAIF-I.
b) The General Partner of PAIF-I owns the equity securities of PAIF-I as
set forth in the following table:
Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
- -------- ---------------- -------------------- --------
General Polaris Investment Represents a 10.0% interest of all cash 100%
Partner Management distributions, gross income in an
Interest Corporation amount equal to 9.09% of distributed
cash available from operations, and a
1% interest in net income or loss
c) There are no arrangements known to PAIF-I, including any pledge by any
person of securities of PAIF-I, the operation of which may at a
subsequent date result in a change in control of PAIF-I.
Item 13. Certain Relationships and Related Transactions
None.
46
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 20
Balance Sheets 21
Statements of Operations 22
Statements of Changes in Partners' Capital (Deficit) 23
Statements of Cash Flows 24
Notes to Financial Statements 25
2. Reports on Form 8-K.
A Current Report on Form 8-K dated September 18, 1996 was filed
during the fourth quarter of 1996 reporting, under Item 5, the
status of a significant lessee default.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
27. Financial Data Schedule.
4. Financial Statement Schedules.
All financial statement schedules are omitted because they are not
applicable, not required or because the required information is
included in the financial statements or notes thereto.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND I
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner
March 28, 1997 By: /S/ Eric M. Dull
- -------------------- -----------------------
Date Eric M. Dull, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/S/Eric M. Dull President and Director of Polaris Investment March 28, 1997
- ----------------- Management Corporation, General Partner --------------
(Eric M. Dull) of the Registrant
/S/Marc A. Meiches Chief Financial Officer of Polaris Investment March 28, 1997
- ------------------ Management Corporation, General Partner --------------
(Marc A. Meiches) of the Registrant
/S/Richard J. Adams Vice President and Director of Polaris March 28, 1997
- ------------------- Investment Management Corporation, --------------
(Richard J. Adams) General Partner of the Registrant
48