-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J1LwUTQfuqW5HrODDLlT/ua8rPgvoVVkRB3cYrBJ1U9ZVQxBkfW8+tMlCayLs5ym y7iFhtlkQOufJqjZJ6acpg== 0000948524-00-000015.txt : 20000411 0000948524-00-000015.hdr.sgml : 20000411 ACCESSION NUMBER: 0000948524-00-000015 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS AIRCRAFT INCOME FUND I CENTRAL INDEX KEY: 0000748218 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 942938977 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 002-91762 FILM NUMBER: 581736 BUSINESS ADDRESS: STREET 1: 201 HIGH RIDGE ROAD STREET 2: 27TH FL CITY: STAMFORD STATE: CT ZIP: 06927 BUSINESS PHONE: (203) 357- MAIL ADDRESS: STREET 1: 201 HIGH RIDGE ROAD STREET 2: 27TH FL CITY: STAMFORD STATE: CT ZIP: 06927 10-K405 1 DECEMBER 31, 1999 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K -------------------- X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission File No. 2-91762 POLARIS AIRCRAFT INCOME FUND I ------------------------------ (Exact name of registrant as specified in its charter) California 94-2938977 ------------------------------- ----------------------- (State or other jurisdiction of (IRS Employer I.D. No.) incorporation or organization) 201 High Ridge Road, Stamford, Connecticut 06927 ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 357-3776 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- No formal market exists for the units of Limited Partnership interest and therefore there exists no aggregate market value at December 31, 1999. Documents incorporated by reference: None This document consists of 37 pages. PART I Item 1. Business Polaris Aircraft Income Fund I (PAIF-I or the Partnership) was formed primarily to purchase and lease used commercial jet aircraft in order to provide distributions of cash from operations, to maximize the residual values of aircraft upon sale and to protect Partnership capital through experienced management and diversification. PAIF-I was organized as a California Limited Partnership on June 27, 1984 and will terminate no later than December 2010. As of December 31, 1999, the only assets remaining were cash, three aircraft engines on lease and spare parts in inventory (as discussed in Note 8), which includes one engine. PAIF-I has many competitors in the aircraft leasing market, including airlines, aircraft leasing companies, other Limited Partnerships, banks and several other types of financial institutions. This market is highly competitive and there is no single competitor who has a significant influence on the industry. In addition to other competitors, the General Partner, Polaris Investment Management Corporation (PIMC), and its affiliates, including GE Capital Aviation Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris Holding Company (PHC) and General Electric Capital Corporation (GE Capital), acquire, lease, finance, sell and remarket aircraft for their own accounts and for existing aircraft and aircraft leasing programs managed by them. Further, GECAS provides a significant range of aircraft management services to third parties, including without limitation AerFi Group plc (formerly GPA Group plc), a public limited company organized in Ireland, together with its consolidated subsidiaries (AerFi), and Airplanes Group, together with its subsidiaries (APG), each of which two groups leases and sells aircraft. Accordingly, in seeking to re-lease and sell its engines, the Partnership may be in competition with the General Partner, its affiliates, AerFi, APG, and other third parties to whom GECAS provides aircraft management services from time to time. The Partnership leased three JT8D-9A engines to CanAir Cargo Ltd. (CanAir) for three years beginning in May 1994. In 1997, the lease with CanAir was extended for seven months. In August 1997, the engine lease was transferred to Royal Aviation Inc. and Royal Cargo, Inc. (Royal Aviation) pursuant to an Aircraft Lease Purchase Agreement. Under this agreement, the leases were extended to August 2000 at the same rental rate. The following table describes certain material terms of the Partnership's engine leases as of December 31, 1999. For further information on the industry, see Demand for Aircraft in the Industry Update section of Item 7. Number Lease Lessee Engine Type of Engines Expiration Renewal Options ------ ----------- ---------- ---------- --------------- Royal Aviation JT8D-9A 3 8/2000 None Item 2. Properties At December 31, 1999, the Partnership owned three JT8D-9A engines and certain inventoried parts (as discussed in Note 8), which includes one engine, out of its original portfolio of eleven aircraft. None of the engines are Stage 3 compliant (see Item 7 "Industry Update - Aircraft Noise"). The three JT8D-9A engines are leased to Royal Aviation. In addition, the Partnership transferred four aircraft to aircraft inventory during 1992 and 1993. These aircraft were disassembled for sale of their component parts. The Partnership sold its remaining inventory of aircraft parts from the four disassembled aircraft, to Soundair, Inc., in 1998. Additionally, one of two engines held in inventory was sold to Quantum Aviation Limited during 1998. Two engines formerly leased to Viscount, were returned to the Partnership in 1996 and were sold in March 1997. One additional engine was sold to Viscount during 1995. The Partnership has sold six aircraft and one airframe from its original aircraft portfolio: a Boeing 2 737-200 Convertible Freighter in 1990, a McDonnell Douglas DC-9-10 in 1992, a Boeing 737-200 in 1993, the airframe from a Boeing 737-200 aircraft in 1995 and three Boeing 737-200 aircraft in 1997. Item 3. Legal Proceedings Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's 1998 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On June 11, 1992, the Partnership filed a proof of claim in the case to recover damages for past due rent and for Markair's failure to meet return conditions with respect to the Partnership's aircraft that were leased by Markair. In August 1993, the Bankruptcy Court approved a plan of reorganization for Markair and a stipulation allowing the Partnership to retain the security deposits and maintenance reserves previously posted by Markair, and an unsecured claim against Markair for $445,000. The unsecured claim was converted to subordinated debentures during 1994, and Markair defaulted on its payment obligations on such debentures. On April 14, 1995, Markair commenced new reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On October 25, 1995, Markair converted its Chapter 11 reorganization proceeding into a proceeding under Chapter 7 of the United States Bankruptcy Code in the same court. The trustee, Key Bank of Washington, took steps to protect the interests of the debenture holders, including the Partnership, by filing proofs of claim in this proceeding. The Partnership has not received any distribution from the bankrupt estate on the proofs of claim. Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. The Partnership filed a proof of claim to recover unpaid rent and other damages, and a proof of administrative claim to recover damages for detention of aircraft, non-compliance with court orders, post-petition use of engines and liquidated damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor committees entered into a settlement which allowed the Partnership an administrative claim of approximately $2,076,923. The Bankruptcy Court made a final disposition of the Partnership's claim by permitting the Partnership to exchange a portion of its unsecured claim for Braniff's right (commonly referred to as a "Stage 2 Base Level right") under the FAA noise regulations to operate one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured claim of $769,231 in the proceedings. Braniff's bankrupt estate made a $200,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $138,462 was allocated to the Partnership based on its pro rata share of the total claims. On January 20, 1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $58,154 was allocated to the Partnership based on its pro rata share of the total claims. No further payments have been made in respect of the Partnership's unsecured claim in the bankruptcy proceeding. Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, this action was filed in the District Court of Harris County, Texas against Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Holding Company, Polaris Aircraft Leasing Corporation, the Partnership, Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, General Electric Capital Corporation, Prudential Securities, Inc., Prudential Insurance Company of America and James J. Darr. The complaint alleges violations of the Texas Securities Act, the Texas Deceptive Trade Practices Act, sections 3 11 and 12 of the Securities Act of 1933, common law fraud, fraud in the inducement, negligent misrepresentation, negligence, breach of fiduciary duty and civil conspiracy arising from the defendants' alleged misrepresentation and failure to disclose material facts in connection with the sale of limited partnership units in the Partnership and the other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an award of compensatory damages in an unspecified amount plus interest, and double and treble damages under the Texas Deceptive Trade Practices Act. The trial date for this action was set and rescheduled by the trial court several times, and on September 2, 1999, the court granted a stay of this action pending the submission of the remaining plaintiffs' claims to arbitration. CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act of Canada - On July 28, 1997, CanAir obtained an order under the Companies' Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of Justice, General Division. The CCAA Order restrained CanAir's creditors, including lessors, from exercising any rights arising from CanAir's default or non-performance of its obligations until October 28, 1997 or further order of the court. CanAir leased three engines from the Partnership, and a total of five aircraft from Polaris Holding Company (Polaris) and General Electric Capital Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997 engine rent and maintenance reserve payment obligations to the Partnership. On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties), entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal Aviation Inc. At December 31, 1999, CanAir owed the GECAS Parties a total of approximately $1.5 million. Of this amount, approximately $30,365 was owed to the Partnership under the engine lease, exclusive of accrued interest and maintenance reserve payment obligations. The receiver appointed by the Ontario Court of Justice on behalf of CanAir's creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well as all of CanAir's other assets, including spare parts and accounts receivable. The proceeds of the sale are being distributed to CanAir's creditors, including the GECAS Parties. The receiver has distributed to the GECAS Parties a total of 1,076,116.04 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect of the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian Dollars ($61,513 U.S. Dollars) have been allocated to the Partnership based on its pro rata share of the total claims. Of the sale proceeds, approximately 600,000 Canadian Dollars (approximately $413,500 U.S. Dollars) remain to be distributed to CanAir's creditors by the receiver, subject to a final court order as to the priorities of CanAir's creditors under the receivership order and Canada's Personal Property Security Act (Ontario). Other Proceedings - Part III, Item 10 discusses certain other actions which have been filed against the general partner in connection with certain public offerings, including that of the Partnership. The Partnership is not a party to these actions. Item 4. Submission of Matters to a Vote of Security Holders None. 4 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, 1999 ------------------ ---------------------------- Limited Partnership Interest: 6,102 General Partnership Interest: 1 c) Dividends: Distributions of cash from operations commenced in 1987. The Partnership made cash distributions to Limited Partners of $2,488,753 and $1,349,832, or $14.75 and $8.00 per Limited Partnership unit during 1999 and 1998, respectively. 5 Item 6. Selected Financial Data
For the years ended December 31, -------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenues $ 764,665 $ 1,464,953 $ 3,643,495 $ 2,781,212 $ 3,196,035 Net Income (Loss) 600,019 1,304,160 3,188,131 (591,415) 446,293 Net Income (Loss) allocated to Limited Partners 594,019 1,053,059 1,341,903 (838,569) 298,425 Net Income (Loss) per Limited Partnership Unit 3.52 6.24 7.95 (4.97) 1.77 Cash Distributions per Limited Partnership Unit 14.75 8.00 44.25 15.00 8.50 Amount of Cash Distributions Included Above Representing a Return of Capital on a Generally Accepted Accounting Principle Basis per Limited Partnership Unit 14.75 8.00 44.25 15.00 8.50 Total Assets 5,090,421 7,361,736 7,366,511 14,254,000 16,288,799 Partners' Capital 2,954,801 5,120,063 5,315,716 10,423,428 13,826,993
6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations At December 31, 1999, Polaris Aircraft Income Fund I (the Partnership) owned three JT8D-9A engines and certain inventoried aircraft parts (as discussed in Note 8), which includes one engine, out of its original portfolio of eleven aircraft. None of the engines are Stage 3 compliant (see Item 7 "Industry Update - - Aircraft Noise"). The three JT8D-9A engines are leased to Royal Aviation. In addition, the Partnership transferred four aircraft to aircraft inventory during 1992 and 1993. These aircraft were disassembled for sale of their component parts. The Partnership sold its remaining inventory of aircraft parts from the four disassembled aircraft, to Soundair, Inc., in 1998. Additionally, one of two engines held in inventory was sold to Quantum Aviation Limited during 1998. Two engines formerly leased to Viscount, were returned to the Partnership in 1996 and were sold in March 1997. One additional engine was sold to Viscount during 1995. The Partnership has sold six aircraft and one airframe from its original aircraft portfolio: a Boeing 737-200 Convertible Freighter in 1990, a McDonnell Douglas DC-9-10 in 1992, a Boeing 737-200 in 1993, the airframe from a Boeing 737-200 aircraft in 1995 and three Boeing 737-200 aircraft in 1997. Remarketing Update General - Polaris Investment Management Corporation (the General Partner or PIMC) evaluates, from time to time, whether the investment objectives of the Partnership are better served by continuing to hold the Partnership's remaining portfolio of engines or marketing such engines for sale. This evaluation takes into account the current and potential earnings of the engines, the conditions in the markets for lease and sale and future outlook for such markets, and the tax consequences of selling rather than continuing to lease the engines. Partnership Operations The Partnership reported net income of $600,019, $1,304,160, and $3,188,131 or $3.52, $6.24, and $7.95 per Limited Partnership unit for the years ended December 31, 1999, 1998, and 1997, respectively. Operating results decreased in 1999 as compared to 1998 primarily due to decrease in additional interest, sales of aircraft inventory and lessee settlement and other income, related to the JetFleet and Braniff Bankruptcies. The decrease in operating results in 1998, as compared to 1997, was primarily the result of gains on the sale of aircraft of $1,832,673 as well as the receipt, by the Partnership, of a settlement from Nations Air in the amount of $690,946 in 1997. These amounts were partially offset by decreased operating expenses in 1998, primarily due to a decrease in legal expenses related to Viscount. During 1997, the Partnership recorded an allowance for credit losses of $30,365 for outstanding receivables from CanAir. Administration and other expenses decreased in 1998 as compared to 1997 primarily as a result of reduced consulting fees. Liquidity and Cash Distributions Liquidity - The Partnership receives maintenance reserve payments from its lessee that may be reimbursed to the lessee or applied against certain costs incurred by the Partnership for maintenance work performed on the Partnership's engines, as specified in the leases. Maintenance reserve balances remaining at the termination of the lease, if any, may be used by the Partnership to offset future maintenance expenses or recognized as revenue. The net maintenance reserves balances aggregate $1,704,715 as of December 31, 1999. One engine underwent a maintenance event which resulted in a reimbursements to the lessee totaling $441,421 during 1999. 7 The Partnership received payments of $-0-, $162,454 and $252,112, in 1999, 1998 and 1997, respectively, from the sale of parts from the four disassembled aircraft. This includes the sale of remaining inventory of aircraft parts from the four disassembled aircraft to Soundair in 1998 for $100,000. PIMC has determined that the Partnership maintain cash reserves as a prudent measure to insure that the Partnership has available funds in the event that the engines presently on lease to Royal Aviation require remarketing and for other contingencies, including expenses of the Partnership. The Partnership's cash reserves will be monitored and may be revised from time to time as further information becomes available in the future. Cash Distributions - Cash distributions to Limited Partners during 1999, 1998 and 1997 were $2,488,753, $1,349,832 and $7,466,258, respectively. Cash distributions per Limited Partnership unit were $14.75, $8.00 and $44.25 during 1999, 1998 and 1997, respectively. The timing and amount of future cash distributions to partners are not yet known and will depend upon the Partnership's future cash requirements, including the receipt of rental payments from Royal Aviation. Impact of the Year 2000 Issue To date, the Partnership has not incurred any expenditures related to the year 2000 issue nor does it expect to incur any material costs in the future. Sale of Inventory Sale of engines in inventory - In November 1998, the Partnership sold one of two engines held in inventory for net proceeds of $290,000 to Quantum Aviation Limited (Quantum). It was anticipated that the second engine would be sold to Quantum. However, that sale did not occur, and the Partnership continues to re-market the remaining JT8D-9A engine. The two engines had a net book value of $-0-. 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 1996 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 8 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 October 1, 1996, Viscount had returned (or surrendered possession of) all of the Partnership's airframes and engines. One of 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 were in the possession of certain maintenance facilities and required 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. These three airframes and six of the engines were sold in 1997. One of the engines was sold to Quantum in November 1998. A consignment agreement has been entered into with a sales agent for the disposal of the spare parts inventory recovered from Viscount. Given that many of the parts require repair/overhaul, the cost of which is not accurately determinable in advance, and the inherent uncertainty of sales prices for used spare parts, there remains uncertainty as to whether the Partnership will derive further proceeds from the sale of this inventory. The Partnership received $206,099 in 1999 for the sale of consignment inventory. 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 Notes 4 and 8, 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. The Partnership considers all receivables from Viscount to be uncollectible and had written-off, 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. These aircraft were subsequently sold in 1997. As a result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership had accrued legal costs of approximately $180,000, which is reflected in operating expense in the Partnership's 1997 statement of operations. In 1998, the Partnership revised its estimate of legal costs and reduced the accrual for legal costs by $60,071. Claims Related to Lessee Defaults Receipt of Nations Air Settlement - First Security Bank, National Association (FSB), as owner trustee for the Partnership, filed an action against Nations Air Express, Inc. (Nations Air) to recover damages arising from Nations Air's 9 possession and use of the Partnership's aircraft. On March 31, 1997, Nations Air entered into a comprehensive Settlement Agreement with FSB, Polaris Holding Company (PHC), the Partnership, Polaris Aircraft Income Fund II, Polaris Investment Management Corporation (General Partner) and GE Capital Aviation Services (GECAS) (collectively, the "GECAS Parties"). Pursuant to the Settlement Agreement, Nations Air filed a Stipulated Judgment whereby Nations Air agreed, among other things, to purchase PHC's aircraft (the "PHC Aircraft") for $3.3 million payable no later than May 30, 1997. Subsequent to March 31, 1997, GECAS, on behalf of FSB, and Nations Air agreed to extend the date by which Nations Air or its designee must purchase the PHC Aircraft to July 14, 1997. On that date FSB, as owner trustee for PHC, sold the PHC Aircraft to Nations Air's designee and received the purchase price of $3.3 million. On September 29, 1997 the Partnership received $690,946 as its share of the settlement payment before legal expenses. Jet Fleet Bankruptcy - As previously reported, in September 1992, Jet Fleet, former 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. 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. Jet Fleet's bankruptcy proceeding was closed on August 6, 1997, and the bankruptcy proceeding of Jet Fleet International Airlines, Inc. was closed on February 10, 1998. Distributions from the bankrupt estate have not been made to the unsecured creditors, and the Partnership is not likely to receive any distributions on its Proof of Claim. The Partnership had been holding deposits and maintenance reserves pending the outcome of the Jet Fleet bankruptcy proceedings. Consequently, the Partnership recognized, during the first quarter of 1998, revenue of $92,610 that had been held as deposits and maintenance reserves, which is included in lessee settlement and other income. Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. The Partnership filed a proof of claim to recover unpaid rent and other damages, and a proof of administrative claim to recover damages for detention of aircraft, non-compliance with court orders, post-petition use of engines and liquidated damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor committees entered into a settlement which allowed the Partnership an administrative claim of approximately $2,076,923. The Bankruptcy Court made a final disposition of the Partnership's claim by permitting the Partnership to exchange a portion of its unsecured claim for Braniff's right (commonly referred to as a "Stage 2 Base Level right") under the FAA noise regulations to operate one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured claim of $769,231 in the proceedings. Braniff's bankrupt estate made a $200,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $138,462 was allocated to the Partnership based on its pro rata share of the total claims. On January 20, 1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $58,154 was allocated to the Partnership based on its pro rata share of the total claims. No further payments have been made in respect of the Partnership's unsecured claim in the bankruptcy proceeding. CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act of Canada - On July 28, 1997, CanAir obtained an order under the Companies' Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of 10 Justice, General Division. The CCAA Order restrained CanAir's creditors, including lessors, from exercising any rights arising from CanAir's default or non-performance of its obligations until October 28, 1997 or further order of the court. CanAir leased three engines from the Partnership, and a total of five aircraft from Polaris Holding Company (Polaris) and General Electric Capital Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997 engine rent and maintenance reserve payment obligations to the Partnership. On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties), entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal Aviation Inc. At December 31, 1999, CanAir owed the GECAS Parties a total of approximately $1.5 million. Of this amount, approximately $30,365 was owed to the Partnership under the engine lease, exclusive of accrued interest and maintenance reserve payment obligations. The receiver appointed by the Ontario Court of Justice on behalf of CanAir's creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well as all of CanAir's other assets, including spare parts and accounts receivable. The proceeds of the sale are being distributed to CanAir's creditors, including the GECAS Parties. The receiver has distributed to the GECAS Parties a total of 1,076,116.04 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect of the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian Dollars ($61,513 U.S. Dollars) have been allocated to the Partnership based on its pro rata share of the total claims. Of the sale proceeds, approximately 600,000 Canadian Dollars (approximately $413,500 U.S. Dollars) remain to be distributed to CanAir's creditors by the receiver, subject to a final court order as to the priorities of CanAir's creditors under the receivership order and Canada's Personal Property Security Act (Ontario). 11 Industry Update Maintenance of Aging Aircraft - The process of aircraft maintenance, including engines, begins at the aircraft design stage. For aircraft operating under Federal Aviation Administration (FAA) regulations, a review board consisting of representatives of the manufacturer, FAA representatives and operating airline representatives is responsible for specifying the aircraft's initial maintenance program. The General Partner understands that this program is constantly reviewed and modified throughout the aircraft's operational life. The Partnership's three JT8D-9A engines are on lease to a Canadian operator pursuant to a lease that requires the lessee to maintain such engines during the lease term in accordance with a maintenance program that satisfies the requirements of the Canadian airworthiness authority. 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. 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, 1999, the Partnership's portfolio consisted of three Stage 2 engines. Hushkit modifications, which allow Stage 2 engines to meet Stage 3 requirements, are available for the Partnership's aircraft engines. However, while technically feasible, hushkits may not be cost effective due to the age and maintenance condition of the engines and the time required to fully amortize the additional investment. Currently, legislation has been drafted and is under review by the EU to adopt anti-hushkitting regulations within member states. The legislation seeks to ban hushkitted aircraft from being added to member states registers after May 1, 2000 (deferred from an April 1, 1999 deadline) and will preclude all operation of hushkitted aircraft within the EU by April 1, 2002. The effect of this proposal has been to reduce the demand for hushkitted aircraft within the EU and its neighboring states, including the former Eastern Block states. 12 Demand for Aircraft - At year end 1999, there were approximately 13,550 jet aircraft in the world fleet. Approximately 1,800 aircraft were leased or sold during 1999, an increase of 9% over 1998. Air travel continued to be strong in 1999 with traffic growth around the 5% level. In 2000 traffic is projected to drop off slightly to an estimated growth rate of 4.5%. Surging fuel prices in 1999 hit the Gulf War levels as airlines added a $20 surcharge to their tickets. The increase in fuel prices cost the industry an approximate $350 million in the fourth quarter of 1999. Alliances continued to evolve in 1999 as airlines aligned themselves with code sharing, joint pricing, schedule integration and corporate agreements. The stage II fleet was projected to drop to 5% at year end 1999 and to 2% in 2002. During 1999 Airbus captured 55% of the orders placed as they outpaced Boeing by 10%. Manufacturers continue to produce at high levels compared to what demand will require in the future years. Asia has improved over 1998, however South America continues its economic turmoil. Timing of when the down cycle ends or how severe it will be is still in question, however it should be less severe than anticipated in 1998. 13 Item 8. Financial Statements and Supplementary Data POLARIS AIRCRAFT INCOME FUND I FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 TOGETHER WITH THE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Polaris Aircraft Income Fund I: We have audited the accompanying balance sheets of Polaris Aircraft Income Fund I (a California limited partnership) as of December 31, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Francisco, California, January 21, 2000 15 POLARIS AIRCRAFT INCOME FUND I BALANCE SHEETS DECEMBER 31, 1999 AND 1998 1999 1998 ---- ---- ASSETS: CASH AND CASH EQUIVALENTS $4,190,421 $6,418,582 RENT AND OTHER RECEIVABLES, net of allowance for credit losses of $30,365 in 1999 and 1998 30,000 58,154 AIRCRAFT ENGINES, net of accumulated depreciation of $90,000 in 1999 and $75,000 in 1998 870,000 885,000 ---------- ---------- Total Assets $5,090,421 $7,361,736 ========== ========== LIABILITIES AND PARTNERS' CAPITAL : PAYABLE TO AFFILIATES $ 11,216 $ 10,538 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 374,689 371,742 SECURITY DEPOSITS 45,000 45,000 MAINTENANCE RESERVES 1,704,715 1,814,393 ---------- ---------- Total Liabilities 2,135,620 2,241,673 ---------- ---------- PARTNERS' CAPITAL : General Partner 222,894 493,422 Limited Partners, 168,729 units issued and outstanding 2,731,907 4,626,641 ---------- ---------- Total Partners' Capital 2,954,801 5,120,063 ---------- ---------- Total Liabilities and Partners' Capital $5,090,421 $7,361,736 ========== ========== The accompanying notes are an integral part of these statements. 16 POLARIS AIRCRAFT INCOME FUND I STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1999 1998 1997 ---- ---- ---- REVENUES: Rent from operating leases $ 360,000 $ 360,000 $ 360,000 Interest 198,566 303,203 506,984 Gain on sale of aircraft and equipment -- -- 1,832,673 Gain on sale of aircraft inventory 206,099 452,454 252,112 Lessee settlement and other -- 349,296 691,726 ---------- ---------- ---------- Total Revenues 764,665 1,464,953 3,643,495 ---------- ---------- ---------- EXPENSES: Depreciation 15,000 15,000 15,000 Management fees to General Partner 18,000 18,000 18,000 Provision for credit losses -- -- 30,365 Operating -- 3,960 215,384 Administration and other 131,646 123,833 176,615 ---------- ---------- ---------- Total Expenses 164,646 160,793 455,364 ---------- ---------- ---------- NET INCOME $ 600,019 $1,304,160 $3,188,131 ========== ========== ========== NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 6,000 $ 251,101 $1,846,228 ========== ========== ========== NET INCOME ALLOCATED TO THE LIMITED PARTNERS $ 594,019 $1,053,059 $1,341,903 ========== ========== ========== NET INCOME PER LIMITED PARTNERSHIP UNIT $ 3.52 $ 6.24 $ 7.95 ========== ========== ========== The accompanying notes are an integral part of these statements. 17 POLARIS AIRCRAFT INCOME FUND I STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 General Limited Partner Partner Total ------- ------- ----- Balance, December 31, 1996 $ (624,341) $ 11,047,769 $ 10,423,428 Net income 1,846,228 1,341,903 3,188,131 Cash distributions to partners (829,585) (7,466,258) (8,295,843) ------------ ------------ ------------ Balance, December 31, 1997 392,302 4,923,414 5,315,716 Net income 251,101 1,053,059 1,304,160 Cash distributions to partners (149,981) (1,349,832) (1,499,813) ------------ ------------ ------------ Balance, December 31, 1998 493,422 4,626,641 5,120,063 Net income 6,000 594,019 600,019 Cash distributions to partners (276,528) (2,488,753) (2,765,281) ------------ ------------ ------------ Balance, December 31, 1999 $ 222,894 $ 2,731,907 $ 2,954,801 ============ ============ ============ The accompanying notes are an integral part of these statements. 18 POLARIS AIRCRAFT INCOME FUND I STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 600,019 $ 1,304,160 $ 3,188,131 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,000 15,000 15,000 Gain on sale of aircraft inventory (206,099) (452,454) (252,112) Gain on sale of aircraft -- -- (1,832,673) Provision for credit losses -- -- 30,365 Changes in operating assets and liabilities: Decrease (increase) in rent and other receivables 28,154 (58,154) (11,549) Increase (decrease) in payable to affiliates 678 (31,748) (35,390) Increase (decrease) in accounts payable and accrued liabilities 2,947 (75,080) (17,781) Increase (decrease) in security deposits -- (50,000) 24,075 Increase (decrease) in maintenance reserves (109,678) 347,706 298,379 ------------ ------------ ------------ Net cash provided by operating activities 331,021 999,430 1,406,445 ------------ ------------ ------------ INVESTING ACTIVITIES: Proceeds from sale of aircraft -- -- 2,620,000 Principal payments on notes receivable -- -- 418,145 Net proceeds from sale of aircraft inventory 206,099 452,454 252,112 ------------ ------------ ------------ Net cash provided by investing activities 206,099 452,454 3,290,257 ------------ ------------ ------------ FINANCING ACTIVITIES: Cash distributions to partners (2,765,281) (1,499,813) (8,295,843) ------------ ------------ ------------ Net cash used in financing activities (2,765,281) (1,499,813) (8,295,843) ------------ ------------ ------------ CHANGES IN CASH AND CASH EQUIVALENTS (2,228,161) (47,929) (3,599,141) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,418,582 6,466,511 10,065,652 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,190,421 $ 6,418,582 $ 6,466,511 ============ ============ ============
The accompanying notes are an integral part of these statements. 19 POLARIS AIRCRAFT INCOME FUND I NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 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 (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The most significant estimates with regard to these financial statements are 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 - Prior to disposition, aircraft were recorded at cost, which included acquisition costs. Depreciation to an estimated residual value was computed using the straight-line method over the estimated economic life of the aircraft which was originally estimated to be 12 years. Depreciation in the year of acquisition was calculated based upon the number of days that the aircraft were in service. The remaining aircraft engines are being depreciated to an estimated residual value using the straight line method over their estimated economic life. The Partnership periodically reviews the estimated realizability of the residual values at the projected end of each asset's economic life. For any downward adjustment in estimated residual value or decrease in the projected remaining economic life, the depreciation expense over the projected remaining economic life of the asset will be increased. If the projected net cash flow for each aircraft or engine (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) is less than the carrying value of the aircraft or engine, an impairment loss is recognized. Capitalized Costs - Modification and maintenance costs which are determined to increase the value or extend the useful life of the remaining assets are capitalized and amortized using the straight-line method over the estimated useful life of the improvement. These costs are also subject to periodic evaluation for impairment as discussed above. Aircraft Inventory - Proceeds from sales had been applied against inventory until the book value was fully recovered. The remaining book value of the inventory was recovered in 1995. Proceeds in excess of the inventory net book value are recorded as revenue when received. Operating Leases - The remaining leases are accounted for as operating leases. Operating lease revenues are recognized in equal installments over the terms of the leases. 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. 20 Operating Expenses - Operating expenses include costs incurred to maintain, insure, lease and sell the Partnership's aircraft, including costs related to lessee defaults and costs of disassembling aircraft inventory. Net Income Per Limited Partnership Unit - Net income per Limited Partnership unit is based on the Limited Partners' share of net income, allocated in accordance with the Partnership Agreement, and the number of units outstanding for the years ended December 31, 1999, 1998 and 1997. 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 rents receivable as a result of uncertainties regarding their collection as discussed in Note 6 and Note 8. The Partnership recognizes revenue on impaired notes and receivables only as payments are received. 1999 1998 ---- ---- Allowance for credit losses, beginning of year $(30,365) $(30,365) Allowance for credit losses, -------- -------- end of year $(30,365) $(30,365) ======== ======== 2. Organization and the Partnership The Partnership was formed on June 27, 1984 for the purpose of acquiring and leasing aircraft. It will terminate no later than December 2010. Upon organization, both the General Partner and the initial Limited Partner contributed $500. The offering of Limited Partnership units terminated on December 31, 1985, at which time the Partnership had sold 168,729 units of $500, representing $84,364,500. All unit holders were admitted to the Partnership on or before January 1, 1986. Polaris Investment Management Corporation (PIMC), the sole General Partner of the Partnership, supervises the day-to-day operations of the Partnership. PIMC is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC). Polaris Holding Company (PHC) is the parent company of PALC. General Electric Capital Corporation (GE Capital), an affiliate of General Electric Company, owns 100% of PHC's outstanding common stock. PIMC has entered into a services agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc. (GECAS). Allocations to related parties are described in Notes 9 & 10. 3. Aircraft and Aircraft Engines At December 31, 1999, the Partnership owned three JT8D-9A engines and certain inventoried aircraft parts (as discussed in Note 8), which includes one engine, out of its original portfolio of eleven used commercial jet aircraft. The remaining leases are net operating leases, requiring the lessees to pay all operating expenses associated with the engines during the lease term. In addition, the leases require the lessees to comply with Airworthiness Directives which have been or may be issued by the Federal Aviation Administration 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. 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. Three Aircraft Engines - The Partnership leased two engines from an airframe previously sold and one engine previously leased to Viscount, to CanAir Cargo Ltd. (CanAir) beginning in May 1994 for 36 months. The rental rate was variable based on usage through August 1994. Beginning in September 1994 through the end 21 of the lease term in May 1997, the rental rate was fixed at $10,000 per engine per month. In April 1997, the engine lease with CanAir was extended for seven months at the same lease rate. CanAir defaulted on its lease obligations to the Partnership in July 1997. In August 1997 the lease was transferred to Royal Aviation Inc. and Royal Air Cargo, Inc. (Royal Air) and the lease term was extended to August 2000 at the current lease rate (see Note 6). The following is a schedule by year of future minimum rental revenue under the existing leases: Year Amount ---- ------ 2000 $240,000 The Partnership periodically reviews the estimated realizability of the residual values at the projected end of each engine's economic life based on estimated residual values obtained from independent parties. The Partnership's future earnings are impacted by the net effect of the adjustments to the carrying value of the engines (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). 4. Sale of Aircraft and Engines Sale of Aircraft Inventory - The Partnership sold its remaining inventory of aircraft parts from the four disassembled aircraft, to Soundair, Inc, in 1998. The total proceeds received from Soundair during 1998, including the proceeds for the sale of the remaining inventory, was $162,454. During 1999, the Partnership received $206,099 for the sale of consignment inventory, as discussed in Note 8. Sale of Engine in Inventory - In November, 1998, the Partnership sold one of two engines held in inventory for net proceeds of $290,000 to Quantum Aviation Limited (Quantum). The Partnership continues to remarket the remaining engine. The two engines had a net book value of $-0- . Sale of Engine - In 1995, the Partnership sold an engine to Viscount for a sales price of $461,849 and recorded a gain on sale of $17,849. The Partnership recorded a note receivable for the sales price and agreed to accept payment in installments. As discussed in Note 8, 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 8. In April 1997, the Partnership received $408,496, as a prepayment in full, of the outstanding engine finance sale note receivable, including accrued interest, due from Rock-It Cargo USA, Inc. and Riverhorse Investments, Inc. Sale of two Boeing 737-200s - In March 1997, the Partnership sold two Boeing 737-200s and two spare engines formerly leased to Viscount Air Services, Inc. (Viscount) for total consideration of $1,620,000. In addition, the Partnership retained certain maintenance reserves and deposits received from the former lessee of these aircraft aggregating approximately $968,000 that had been held by the Partnership to offset potential future maintenance expenses for these aircraft. As a result, the Partnership recognized a net gain of $781,504 on the sale of these aircraft during the first quarter of 1997. Sale of one Boeing 737-200 - In May 1997, the Partnership sold one Boeing 737-200 formerly leased to Viscount and subleased to Nations Air Express, Inc. for total consideration of $1,000,000. The Partnership received the remaining $750,000 in May 1997. In addition, the Partnership retained certain maintenance reserves and deposits received from the former lessee of this aircraft, aggregating approximately $1,081,000, that had been held by the Partnership to offset potential future maintenance expenses for this aircraft. As a result, the 22 Partnership recognized a net gain of $1,051,169 on the sale of this aircraft during the second quarter of 1997. 5. 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 incurred the cost of disassembly and received the proceeds from the sale of such parts, net of overhaul expenses, and commissions paid to Soundair. The Partnership sold its remaining inventory of aircraft parts from the four disassembled aircraft, to Soundair, Inc., in 1998. The remaining inventory, with a net carrying value of $-0-, was sold effective February 1, 1998 for $100,000, less amounts previously received for sales as of that date. The net purchase price of $98,145 was paid in September 1998. The Partnership received net proceeds from the sale of aircraft inventory of $206,099, $452,454 and $252,112, during 1999, 1998 and 1997, respectively. The net book value of the aircraft inventory was recovered during 1995. As a result, the excess proceeds from the sale of aircraft inventory have been recorded as gain on sale of aircraft inventory in the corresponding years' statement of operations. 6. CanAir Default and Transfer of Engine Lease to Royal Aviation In April 1997, the Partnership and CanAir agreed to extend the existing engine leases for seven months beyond the original lease expiration date of May 1997. On July 28, 1997, CanAir obtained an order under the Companies' Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of Justice, General Division, in order to obtain protection from its creditors while it attempted to develop a plan of reorganization and compromise with its creditors. The CCAA Order restrained CanAir's creditors, including lessors, from exercising any rights arising from CanAir's default or non-performance of its obligations until October 28, 1997 or further order of the court. CanAir leased three engines from the Partnership, and a total of five aircraft from Polaris Holding Company (PHC) and General Electric Capital Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997 engine rent and maintenance reserve payment obligations to the Partnership. On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS) as agent for PHC, GECL Canada and the Partnership (together, the GECAS Parties), entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal Aviation Inc. (Royal Aviation). Pursuant to this agreement, the leases were extended to August 2000 at the current lease rate and the Partnership received a security deposit of $45,000 from Royal Aviation. At December 31, 1999, CanAir owed the GECAS Parties a total of approximately $1.5 million. Of this amount, approximately $30,365 was owed to the Partnership under the engine lease, exclusive of accrued interest and maintenance reserve payment obligations. During 1997, the Partnership recorded an allowance for credit losses of $30,365 for the outstanding receivables from CanAir through August 21, 1997, after applying CanAir's security deposit of $20,925 towards the outstanding receivables due. As discussed in Note 13, on February 15, 2000, the Partnership received $61,513 in connection with the CanAir Bankruptcy Settlement, which is comprised of amounts received for rents, maintenance reserve obligations and accrued interest. 23 7. Claims Related to Lessee Defaults Nations Air - First Security Bank, National Association (FSB), as owner trustee for the Partnership, filed an action against Nations Air Express, Inc. (Nations Air) to recover damages arising from Nations Air's possession and use of the Partnership's aircraft. On March 31, 1997, Nations Air entered into a comprehensive Settlement Agreement with FSB, Polaris Holding Company (PHC), the Partnership, Polaris Aircraft Income Fund II, Polaris Investment Management Corporation (General Partner) and GE Capital Aviation Services (GECAS) (collectively, the "GECAS Parties"). Pursuant to the Settlement Agreement, Nations Air filed a Stipulated Judgment whereby Nations Air agreed, among other things, to purchase PHC's aircraft (the "PHC Aircraft") for $3.3 million payable no later than May 30, 1997. Subsequent to March 31, 1997, GECAS, on behalf of FSB, and Nations Air agreed to extend the date by which Nations Air or its designee must purchase the PHC Aircraft to July 14, 1997. On that date FSB, as owner trustee for PHC, sold the PHC Aircraft to Nations Air's designee and received the purchase price of $3.3 million. On September 29, 1997 the Partnership received $690,946 as its share of the settlement payment before legal expenses. Jet Fleet Bankruptcy - As previously reported, in September 1992, Jet Fleet, former 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. 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. The bankruptcy proceeding of Jet Fleet Corporation was closed on August 6, 1997, and the bankruptcy proceeding of Jet Fleet International Airlines, Inc. was closed on February 10, 1998. Distributions from the bankrupt estate have not been made to the unsecured creditors, and the Partnership is not likely to receive any distributions on its Proof of Claim. The Partnership had been holding deposits and maintenance reserves pending the outcome of the Jet Fleet bankruptcy proceedings. Consequently, the Partnership recognized, during the first quarter of 1998, revenue of $92,610 that had been held as deposits and maintenance reserves, which is included in lessee settlement and other income. Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. The Partnership filed a proof of claim to recover unpaid rent and other damages, and a proof of administrative claim to recover damages for detention of aircraft, non-compliance with court orders, post-petition use of engines and liquidated damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor committees entered into a settlement which allowed the Partnership an administrative claim of approximately $2,076,923. The Bankruptcy Court made a final disposition of the Partnership's claim by permitting the Partnership to exchange a portion of its unsecured claim for Braniff's right (commonly referred to as a "Stage 2 Base Level right") under the FAA noise regulations to operate one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured claim of $769,231 in the proceedings. Braniff's bankrupt estate made a $200,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $138,462 was allocated to the Partnership based on its pro rata share of the total claims. On January 20, 1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $58,154 was allocated to the Partnership based on its pro rata share of 24 the total claims. No further payments have been made in respect of the Partnership's unsecured claim in the bankruptcy proceeding. CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act of Canada - On July 28, 1997, CanAir obtained an order under the Companies' Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of Justice, General Division. The CCAA Order restrained CanAir's creditors, including lessors, from exercising any rights arising from CanAir's default or non-performance of its obligations until October 28, 1997 or further order of the court. CanAir leased three engines from the Partnership, and a total of five aircraft from Polaris Holding Company (Polaris) and General Electric Capital Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997 engine rent and maintenance reserve payment obligations to the Partnership. On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties), entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal Aviation Inc. At December 31, 1999, CanAir owed the GECAS Parties a total of approximately $1.5 million. Of this amount, approximately $30,365 was owed to the Partnership under the engine lease, exclusive of accrued interest and maintenance reserve payment obligations. The receiver appointed by the Ontario Court of Justice on behalf of CanAir's creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well as all of CanAir's other assets, including spare parts and accounts receivable. The proceeds of the sale are being distributed to CanAir's creditors, including the GECAS Parties. The receiver has distributed to the GECAS Parties a total of 1,076,116.04 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect of the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian Dollars ($61,513 U.S. Dollars) have been allocated to the Partnership based on its pro rata share of the total claims. Of the sale proceeds, approximately 600,000 Canadian Dollars (approximately $413,500 U.S. Dollars) remain to be distributed to CanAir's creditors by the receiver, subject to a final court order as to the priorities of CanAir's creditors under the receivership order and Canada's Personal Property Security Act (Ontario). 8. 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 1996 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 25 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 October 1, 1996, Viscount had returned (or surrendered possession of) all of the Partnership's airframes and 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 were in the possession of certain maintenance facilities and required 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. These three airframes and six of the engines were sold in 1997. One of the engines was sold to Quantum in November 1998. A consignment agreement has been entered into with a sales agent for the disposal of the spare parts inventory recovered from Viscount. Given that many of the parts require repair/overhaul, the cost of which is not accurately determinable in advance, and the inherent uncertainty of sales prices for used spare parts, there remains uncertainty as to whether the Partnership will derive further proceeds from the sale of this inventory. The Partnership received $206,099 in 1999 for the sale of consignment inventory. 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. The Partnership considers all receivables from Viscount to be uncollectible and had written-off, 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. These aircraft were subsequently sold in 1997, as discussed in Note 4. As a result of Viscount's defaults and Chapter 11 bankruptcy filing, the Partnership had accrued legal costs of approximately $180,000, which is reflected in operating expense in the Partnership's 1997 statement of operations. In 1998, the Partnership revised its estimate of legal costs and reduced the accrual for legal costs by $60,071. 26 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 1999, 1998 and 1997, the Partnership paid management fees to PIMC of $18,000, $16,935, and $16,987, respectively. Management fees payable to PIMC at December 31, 1999 and 1998 were $3,018. b. Reimbursement of certain out-of-pocket expenses incurred in connection with the management of the Partnership and its assets. In 1999, 1998 and 1997, $155,970, $171,930, and $201,731 were reimbursed by the Partnership to PIMC for administrative expenses. Administrative reimbursements of $8,198 and $7,320 were payable to PIMC at December 31, 1999 and 1998, respectively. Partnership reimbursements to PIMC for maintenance and remarketing costs of $200, $3,590, and $104,066 were paid in 1999, 1998, and 1997, respectively. Maintenance and remarketing reimbursements of $-0- and $200 were payable to PIMC at December 31, 1999 and 1998, respectively. c. A 10% interest to PIMC in all cash distributions and sales proceeds, gross income in an amount equal to 9.09% of distributed cash available from operations and 1% of net income or loss and taxable income or loss, as such terms are defined in the Partnership Agreement. After the Partnership has sold or disposed of aircraft representing 50% of the total aircraft cost, gains from the sale or other disposition of aircraft are generally allocated first to the General Partner until such time that the General Partner's capital account is equal to the amount to be distributed to the General Partner from the proceeds of such sale or disposition. d. A subordinated sales commission to PIMC of 3% of the gross sales price of each aircraft for services performed upon disposition and reimbursement of out-of-pocket and other disposition expenses. Subordinated sales commissions will be paid only after Limited Partners have received distributions in an aggregate amount equal to their capital contributions plus a cumulative non-compounded 8% per annum return on their adjusted capital contributions, as defined in the Partnership Agreement. The Partnership did not pay or accrue a sales commission on any aircraft sales to date as the above subordination threshold has not been met. e. In the event that, immediately prior to the dissolution and termination of the Partnership, the General Partner shall have a deficit balance in its tax basis capital account, then the General Partner shall contribute in cash to the capital of the Partnership an amount which is equal to such deficit (see Note 10). 10. Partners' Capital The Partnership Agreement (the Agreement) stipulates different methods by which revenue, income and loss from operations and gain or loss on the sale of aircraft are to be allocated to the General Partner and the Limited Partners (see Note 9). Such allocations are made using income or loss calculated under GAAP for book purposes, which, as more fully described in Note 12, varies from income or loss calculated for tax purposes. Cash available for distributions, including the proceeds from the sale of aircraft, are distributed 10% to the General Partner and 90% to the Limited Partners. The different methods of allocating items of income, loss and cash available for distribution combined with the calculation of items of income and loss for book and tax purposes result in book basis capital accounts that may vary 27 significantly from tax basis capital accounts. The ultimate liquidation and distribution of remaining cash will be based on the tax basis capital accounts following liquidation, in accordance with the Agreement. Had all the assets of the Partnership been liquidated at December 31, 1999 at the current carrying value, the tax basis capital (deficit) accounts of the General Partner and the Limited Partners is estimated to be ($1,120,274) and $5,810,154, respectively. 11. 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, 1999 and 1998 are as follows: Reported Amounts Tax Basis Net Difference ---------------- --------- -------------- 1999: Assets $ 5,090,421 $ 16,463,103 $(11,372,682) Liabilities 2,135,620 2,126,476 9,144 1998: Assets $ 7,361,736 $ 18,311,389 $(10,949,653) Liabilities 2,241,673 427,281 1,814,392 12. Reconciliation of Book Net Income to Taxable Net Income (Loss) The following is a reconciliation between net income (loss) per Limited Partnership unit reflected in the financial statements and the information provided to Limited Partners for federal income tax purposes: For the years ended December 31, 1999 1998 1997 ---- ---- ---- Book net income per Limited Partnership unit $ 3.52 $ 6.24 $ 7.95 Adjustments for tax purposes represent differences between book and tax revenue and expenses: Rental and maintenance reserve revenue recognition 1.95 2.04 1.34 Depreciation (0.11) - (1.18) Gain or loss on sale of aircraft or inventory (1.48) (0.29) (18.26) Basis in inventory - - (0.73) Other revenue and expense items - - (0.16) -------- ------- ------- Taxable net income (loss) per Limited Partnership unit $ 3.88 $ 7.99 $(11.04) ======== ======= ======= 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 28 Partnership's book maintenance reserves are capitalized or expensed for tax purposes, as appropriate. The Partnership computes depreciation using the straight-line method for financial reporting purposes and generally an accelerated method for tax purposes. 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. 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. 13. Subsequent Events Cash Distributions - The Partnership made a cash distribution of $843,645 or $5.00 per Limited Partnership unit, to Limited Partners, and $93,738 to the General Partner on January 14, 2000. CanAir Bankruptcy Settlement - As a result of a settlement in the CanAir bankruptcy proceedings, as discussed in Notes 6 and 7, on February 15, 2000, the Partnership received $61,513 which is comprised of amounts received for rents, maintenance reserve payment obligations and accrued interest. 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 30 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, GECAS and PIMC are affiliates. The officers and directors of PIMC are: Name PIMC Title ------------- ------------------- Eric M. Dull President; Director Marc A. Meiches Chief Financial Officer Barbara Macholl Director Norman C. T. Liu Vice President; Director Ray Warman Secretary Robert W. Dillon Assistant Secretary Substantially all of these management personnel will devote only such portion of their time to the business and affairs of PIMC as deemed necessary or appropriate. Mr. Dull, 39, 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 - Risk and Portfolio Management of GECAS, having previously held the positions of Executive Vice President - Portfolio Management and 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, 47, assumed the position of Chief Financial Officer of PIMC effective October 9, 1995. Previously, he held the position of Vice President of PIMC from October 1995 to October 1997. Mr. Meiches presently holds the positions of Executive Vice President and Chief Financial and Operating 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. Ms. Macholl, 46, assumed the position of Director of PIMC effective February 27, 1999. Ms. Macholl presently holds the position of Senior Vice President, Marketing Finance for GECAS. Prior to joining GECAS, Ms. Macholl has been with the General Electric Company (GE) and its subsidiaries since 1977. Ms. Macholl previously held the position of Vice President Finance for CBSI Inc., a wholly owned subsidiary of the General Electric Company. Ms. Macholl has also held various financial management positions for the GE Lighting business. 31 Mr. Liu, 42, assumed the position of Vice President of PIMC effective May 1, 1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the position of Executive Vice President - Marketing and Structured Finance of GECAS, having previously held the position of Executive Vice President - Capital Funding and Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was with General Electric Capital Corporation for nine years. He has held management positions in corporate Business Development and in Syndications and Leasing for TIFC. Mr. Liu previously held the position of managing director of Kidder, Peabody & Co., Incorporated. Mr. Warman, 51, assumed the position of Secretary of PIMC effective March 23, 1998. Mr. Warman has served as a GECAS Senior Vice President and Associate General Counsel since March 1996, and for 13 years theretofore was a partner, with an air-finance and corporate practice of the national law firm of Morgan, Lewis & Bockius LLP. Mr. Dillon, 58, held the position of Vice President - Aviation Legal and Insurance Affairs, from April 1989 to October 1997. Previously, he served as General Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994, Mr. Dillon assumed the position of Assistant Secretary of PIMC. Mr. Dillon presently holds the position of Senior Vice President and Associate General Counsel of GECAS. Certain Legal Proceedings: On or around September 27, 1995, a complaint entitled Martha J. Harrison v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and Prudential Securities Incorporated. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages, attorney's fees, interest, costs and general relief. On or around December 8, 1995, a complaint entitled Overby, et al. v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v. Prudential Securities Incorporated et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition adding as additional defendants General Electric Company, General Electric Capital Corporation and Smith Barney, Inc. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. 32 In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v. Prudential Securities, Incorporated et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities Incorporated and Stephen Derby Gisclair. On or about January 18, 1996, plaintiff filed a First Supplemental and Amending Petition adding defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v. General Electric Co., et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. In or around December 1994, a complaint entitled John J. Jones, Jr. v. Prudential Securities Incorporated et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition adding as additional defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of section of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about May 7, 1996, a petition entitled Charles Rich, et al. v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about March 4, 1996, a petition entitled Richard J. McGiven v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital 33 Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. 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. 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 $18,000 were paid to PIMC in 1999 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 100% Partner Management all cash distributions, gross Interest Corporation income in an amount equal to 9.09% of distributed cash available from operations, and a 1% interest in net income or loss c) There are no arrangements known to PAIF-I, including any pledge by any person of securities of PAIF-I, the operation of which may at a subsequent date result in a change in control of PAIF-I. Item 13. Certain Relationships and Related Transactions None. 34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 1. Financial Statements. The following are included in Part II of this report: Page No. -------- Report of Independent Public Accountants 15 Balance Sheets 16 Statements of Operations 17 Statements of Changes in Partners' Capital (Deficit) 18 Statements of Cash Flows 19 Notes to Financial Statements 20 2. Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1999. 3. Exhibits required to be filed by Item 601 of Regulation S-K. 27. Financial Data Schedule (in electronic format only). 4. Financial Statement Schedules. All financial statement schedules are omitted because they are not applicable, not required or because the required information is included in the financial statements or notes thereto. 35 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 24, 2000 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 March 24, 2000 --------------- Investment Management Corporation, -------------- (Eric M. Dull) General Partner of the Registrant /S/Marc A. Meiches Chief Financial Officer of Polaris March 24, 2000 ------------------ Investment Management Corporation, -------------- (Marc A. Meiches) General Partner of the Registrant /S/Barbara Macholl Director of Polaris Investment March 24, 2000 ------------------- Management Corporation, General -------------- (Barbara Macholl) Partner of the Registrant /S/Norman C. T. Liu Vice President and Director of March 24, 2000 ------------------- Polaris Investment Management -------------- (Norman C. T. Liu) Corporation, General Partner of the Registrant 36 EX-27 2
5 YEAR DEC-31-1999 DEC-31-1999 4190421 0 30000 0 0 0 960000 90000 5090421 0 0 0 0 0 2954801 5090421 0 764665 0 0 164646 0 0 600019 0 600019 0 0 0 600019 3.52 0
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