10-K 1 if1_4q01.txt DECEMBER 31, 2001 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K -------------------- X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission File No. 2-91762 POLARIS AIRCRAFT INCOME FUND I ------------------------------ (Exact name of registrant as specified in its charter) California 94-2938977 ------------------------------- ----------------------- (State or other jurisdiction of (IRS Employer I.D. No.) incorporation or organization) 201 High Ridge Road, Stamford, Connecticut 06927 ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 357-3776 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- No formal market exists for the units of Limited Partnership interest and therefore there exists no aggregate market value at December 31, 2001. Documents incorporated by reference: None This document consists of 35 pages. PART I Item 1. Business Polaris Aircraft Income Fund I (PAIF-I or the Partnership) was formed primarily to purchase and lease used commercial jet aircraft in order to provide distributions of cash from operations, to maximize the residual values of aircraft upon sale and to protect Partnership capital through experienced management and diversification. PAIF-I was organized as a California Limited Partnership on June 27, 1984 and will terminate no later than December 2010. As of December 31, 2001, the only assets remaining were cash and spare parts in inventory, which includes one engine. PAIF-I has many competitors in the aircraft leasing market, including airlines, aircraft leasing companies, other Limited Partnerships, banks and several other types of financial institutions. This market is highly competitive and there is no single competitor who has a significant influence on the industry. In addition to other competitors, the General Partner, Polaris Investment Management Corporation (PIMC), and its affiliates, including GE Capital Aviation Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation (PALC), Polaris Holding Company (PHC) and General Electric Capital Corporation (GE Capital), acquire, lease, finance, sell and remarket aircraft for their own accounts and for existing aircraft and aircraft leasing programs managed by them. Further, GECAS provides a significant range of aircraft management services to third parties, including without limitation Airplanes Group, together with its subsidiaries (APG), which leases and sells aircraft. The Partnership leased three JT8D-9A engines to CanAir Cargo Ltd. (CanAir) for three years beginning in May 1994. In 1997, the lease with CanAir was extended for seven months. In August 1997, the engine lease was transferred to Royal Aviation Inc. and Royal Cargo, Inc. (Royal Aviation) pursuant to an Aircraft Lease Purchase Agreement. Under this agreement, the leases were extended to August 2000 at the same rental rate. The engines were returned on September 7, 2000 upon the expiration of the lease. On July 19, 2001 the Partnership sold these engines to Aeroturbine, Inc. on an as-is-where-is basis for $900,000. The remaining inventory of spare parts, including one engine, has been made available for sale such that the Partnership plans to liquidate all its assets in an orderly manner and make a final distribution thereafter. Item 2. Properties At December 31, 2001, the Partnership owned certain inventoried parts, which included one engine, out of its original portfolio of eleven aircraft. The three JT8D-9A engines previously leased to Royal Aviation were redelivered to the Partnership on September 7, 2000 upon the expiration of the lease. These engines were sold to Aeroturbine, Inc. on July 19, 2001, on an as-is-where-is basis for $900,000. The Partnership transferred four aircraft to aircraft inventory during 1992 and 1993. These aircraft were disassembled for sale of their component parts. The Partnership sold its remaining inventory of aircraft parts from the four disassembled aircraft, to Soundair, Inc., in 1998. Additionally, one of two engines held in inventory was sold to Quantum Aviation Limited during 1998. The Partnership has sold six aircraft and one airframe from its original aircraft portfolio: a Boeing 737-200 Convertible Freighter in 1990, a McDonnell Douglas DC-9-10 in 1992, a Boeing 737-200 in 1993, the airframe from a Boeing 737-200 aircraft in 1995 and three Boeing 737-200 aircraft in 1997. 2 Item 3. Legal Proceedings Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's 2000 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On June 11, 1992, the Partnership filed a proof of claim in the case to recover damages for past due rent and for Markair's failure to meet return conditions with respect to the Partnership's aircraft that were leased by Markair. In August 1993, the Bankruptcy Court approved a plan of reorganization for Markair and a stipulation allowing the Partnership to retain the security deposits and maintenance reserves previously posted by Markair, and an unsecured claim against Markair for $445,000. The unsecured claim was converted to subordinated debentures during 1994, and Markair defaulted on its payment obligations on such debentures. On April 14, 1995, Markair commenced new reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On October 25, 1995, Markair converted its Chapter 11 reorganization proceeding into a proceeding under Chapter 7 of the United States Bankruptcy Code in the same court. The trustee, Key Bank of Washington, took steps to protect the interests of the debenture holders, including the Partnership, by filing proofs of claim in this proceeding. The Partnership has not received any distribution from the bankrupt estate on the proofs of claim. There have been no material developments with respect to this proceeding during the period covered by this report. Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. The Partnership filed a proof of claim to recover unpaid rent and other damages, and a proof of administrative claim to recover damages for detention of aircraft, non-compliance with court orders, post-petition use of engines and liquidated damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor committees entered into a settlement which allowed the Partnership an administrative claim of approximately $2,076,923. The Bankruptcy Court made a final disposition of the Partnership's claim by permitting the Partnership to exchange a portion of its unsecured claim for Braniff's right (commonly referred to as a "Stage 2 Base Level right") under the FAA noise regulations to operate one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured claim of $769,231 in the proceedings. In May of 1998, Braniff's bankrupt estate made a $200,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $138,462 was allocated to the Partnership based on its pro rata share of the total claims. On January 20, 1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $58,154 was allocated to the Partnership based on its pro rata share of the total claims. On January 16, 2001, Braniff's bankrupt estate made a $110,890 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Management Corporation, of which $76,770 was allocated to the Partnership based on its pro rata share of the total claims. Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, this action was filed in the District Court of Harris County, Texas against Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Holding Company, Polaris Aircraft Leasing Corporation, the Partnership, Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, General Electric Capital Corporation, Prudential Securities, Inc., Prudential Insurance Company of America and James J. Darr. The complaint alleges violations of the Texas Securities Act, the Texas Deceptive Trade Practices Act, sections 11 and 12 of the Securities Act of 1933, common law fraud, fraud in the 3 inducement, negligent misrepresentation, negligence, breach of fiduciary duty and civil conspiracy arising from the defendants' alleged misrepresentation and failure to disclose material facts in connection with the sale of limited partnership units in the Partnership and the other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an award of compensatory damages in an unspecified amount plus interest, and double and treble damages under the Texas Deceptive Trade Practices Act. The trial date for this action was set and rescheduled by the trial court several times, and on September 2, 1999, the court granted a stay of this action pending the submission of the remaining plaintiffs' claims to arbitration. Subsequently, several of the plaintiffs filed a motion with the Court to dismiss their claims, which the court granted. On June 5, 2001, the remaining plaintiffs who did not ask the court to dismiss their claims, Gerald and Judy Beckman, made a motion to retain the case on the docket of the District Court of Harris County, Texas with respect to their purported claims against all defendants except Prudential Insurance Company of America and James J. Darr. On June 27, 2001, the Court entered a docket control order providing for a schedule for discovery and a trial date of December 3, 2001. On October 17, 2001, the remaining plaintiffs entered into a settlement agreement with Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Holding Company, Polaris Aircraft Leasing Corporation, the Partnership, Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, and General Electric Capital Corporation. The Partnership did not contribute to the settlement payments and has no further liability in respect of such matter. CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act of Canada - On July 28, 1997, CanAir obtained an order under the Companies' Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of Justice, General Division. The CCAA Order restrained CanAir's creditors, including lessors, from exercising any rights arising from CanAir's default or non-performance of its obligations until October 28, 1997 or further order of the court. CanAir leased three engines from the Partnership, and a total of five aircraft from Polaris Holding Company (Polaris) and General Electric Capital Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997 engine rent and maintenance reserve payment obligations to the Partnership. On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties), entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal Aviation Inc. At December 31, 1999, CanAir owed the GECAS Parties a total of approximately $1.5 million. Of this amount, approximately $30,365 was owed to the Partnership under the engine lease, exclusive of accrued interest and maintenance reserve payment obligations. The receiver appointed by the Ontario Court of Justice on behalf of CanAir's creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well as all of CanAir's other assets, including spare parts and accounts receivable. The proceeds of the sale are being distributed to CanAir's creditors, including the GECAS Parties. The receiver has distributed to the GECAS Parties a total of 1,076,116 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect of the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian Dollars (approximately $61,513 U.S. Dollars) have been allocated to the Partnership based on its pro rata share of the total claims. Of the sale proceeds, approximately 600,000 Canadian Dollars (approximately $384,608 U.S. Dollars) remain to be distributed to CanAir's creditors by the receiver, subject to a final court order as to the priorities of CanAir's creditors under the receivership order and Canada's Personal Property Security Act (Ontario). 4 On February 15, 2000, the Partnership received the settlement of $61,513 in connection with the CanAir Bankruptcy Settlement, which is comprised of amounts received for rents, maintenance reserve obligations and accrued interest. A portion of the proceeds was treated as a recovery of previously reserved rents receivable. The allowance for credit losses of $30,365 was reversed and is included in "Lessee Settlement" in the statement of operations. On March 29, 2001, the receiver issued a check for 620,116 Canadian Dollars (approximately $397,122 U.S. Dollars) to GECAS on behalf of the GECAS Parties. Including this latest amount, the receiver has distributed to the GECAS Parties a total amount in this liquidation of approximately $1,138,822 U.S. Dollars, of which the Partnership's pro rata share is approximately $95,874 U.S. Dollars. The Partnership's pro rata share of the latest distribution of $397,122 U.S. Dollars is approximately $34,361 U.S. Dollars. After deducting the legal fees related to this matter, out of the latest distribution, the Partnership received a net pro rata share of $8,897 U.S. Dollars on June 27, 2001. The receiver has advised that an amount of 9,473 Canadian Dollars (approximately $5,957 U.S. Dollars) still remains with the receiver. An amount to be determined will be paid to the Partnership prior to the end of the first quarter or shortly thereafter. Other Proceedings - Part III, Item 10 discusses certain other actions which have been filed against the general partner in connection with certain public offerings, including that of the Partnership. The Partnership is not a party to these actions. Item 4. Submission of Matters to a Vote of Security Holders None. 5 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters a) Polaris Aircraft Income Fund I's Limited Partnership interests (Units) are not publicly traded. Currently there is no formal market for PAIF-I's Units and it is unlikely that any market will develop. b) Number of Security Holders: Number of Record Holders Title of Class as of December 31, 2001 ------------------ ---------------------------------- Limited Partnership Interest: 6,100 General Partnership Interest: 1 c) Dividends: Distributions of cash from operations commenced in 1987. The Partnership made cash distributions to Limited Partners of $843,645 or $5.00 per Limited Partnership unit during both 2001 and 2000. 6 Item 6. Selected Financial Data
For the years ended December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenues $ 833,068 $ 475,931 $ 764,665 $1,464,953 $3,643,495 Net Income 686,041 272,372 600,019 1,304,160 3,188,131 Net Income allocated to Limited Partners 594,824 264,054 594,019 1,053,059 1,341,903 Net Income per Limited Partnership Unit 3.53 1.57 3.52 6.24 7.95 Cash Distributions per Limited Partnership Unit 5.00 5.00 14.75 8.00 44.25 Amount of Cash Distributions Included Above Representing a Return of Capital on a Generally Accepted Accounting Principle Basis per Limited Partnership Unit 5.00 5.00 14.75 8.00 44.25 Total Assets 2,445,482 3,334,081 5,090,421 7,361,736 7,366,511 Partners' Capital 2,038,447 2,289,790 2,954,801 5,120,063 5,315,716
7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we identified the most critical accounting principles upon which our financial status depends. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to lease revenue recognition, depreciation policies, and valuation of aircraft. We state these accounting policies in the notes to the financial statements and in relevant sections in this discussion and analysis. Business Overview At December 31, 2001, Polaris Aircraft Income Fund I (the Partnership) owned certain inventoried aircraft parts, which included one engine, out of its original portfolio of eleven aircraft. The three JT8D-9A engines that were leased to Royal Aviation and were redelivered to the Partnership on September 7, 2000 were sold on July 19, 2001 to Aeroturbine, Inc. on an as-is-where-is basis for $900,000. The Partnership transferred four aircraft to aircraft inventory during 1992 and 1993. These aircraft were disassembled for sale of their component parts. The Partnership sold its remaining inventory of aircraft parts from the four disassembled aircraft, to Soundair, Inc., in 1998. Additionally, one of two engines held in inventory was sold to Quantum Aviation Limited during 1998. Two engines formerly leased to Viscount, were returned to the Partnership in 1996 and were sold in March 1997. One additional engine was sold to Viscount during 1995. The Partnership has sold six aircraft and one airframe from its original aircraft portfolio: a Boeing 737-200 Convertible Freighter in 1990, a McDonnell Douglas DC-9-10 in 1992, a Boeing 737-200 in 1993, the airframe from a Boeing 737-200 aircraft in 1995 and three Boeing 737-200 aircraft in 1997. Remarketing Update Polaris Investment Management Corporation (the General Partner or PIMC) evaluates, from time to time, whether the investment objectives of the Partnership are better served by continuing to hold the Partnership's remaining portfolio of spare parts, including an engine, or marketing such portfolio for sale. This evaluation takes into account the current and potential earnings of the portfolio, the conditions in the markets for lease and sale and future outlook for such markets, and the tax consequences of selling such property rather than offering it for lease. The Partnership has made the engine along with the remaining inventory of spare parts available for sale, with the intention such that all the assets of the Partnership will be liquidated in an orderly manner and a final distribution made thereafter. Partnership Operations The Partnership reported net income of $686,041, $272,372, and $600,019, or $3.53, $1.57, and $3.52, per Limited Partnership unit for the years ended December 31, 2001, 2000, and 1999, respectively. Operating results increased in 2001 as compared to 2000 primarily due to the release of maintenance reserves to income, gain on the sale of three engines, and a decrease in depreciation, management fees and operating expenses, partially offset by a decrease in rental income and interest income. The decrease in 2000 as compared to 1999 was primarily due to a decrease in rent and interest revenues, an increase in administration and operating expenses, as well as a gain on the sale of aircraft 8 inventory recognized in 1999, partially offset by decreased management fees, decreased depreciation expense and a lessee settlement received in 2000. Rent from operating leases decreased in 2001 as compared to 2000 as well as in 2000 as compared to 1999 due to the expiration of the engine leases to Royal Aviation in August 2000. Interest income decreased in 2001 as compared to 2000, as well as in 2000 as compared to 1999 due to a decrease in the cash reserves due to distributions as well as lower rental income in connection with the expiration of the engine leases to Royal Aviation. Gain on sale of aircraft inventory increased in 2001 as compared to 2000 due to the sale of the three engines that were on lease to Royal Aviation. Gain on sale of aircraft inventory decreased in 2000 as compared to 1999 as a result of a $206,099 gain on the sale of aircraft inventory in 1999. There were no such sales in 2000. Lessee settlement and other increased in 2001 as compared to 2000 primarily due to a payment of $76,770 from Braniff's bankrupt estate. Lessee settlement and other increased in 2000 as compared to 1999 due to a settlement in the CanAir bankruptcy proceedings in February 2000, of which the Partnership received $61,513. Maintenance reserves increased in 2001 as a result of releasing of $631,316 of maintenance reserves to income. The Partnership's three engines were sold on July 19, 2001 on an as-is-where-is basis resulting in no further need to hold maintenance reserves. There was no such income in 2000 or 1999. Depreciation expense decreased to $-0- during 2001, as compared to $11,250 in 2000 and $15,000 in 1999, as a result of the engines coming off lease in August 2000. Management fees decreased to $-0- during 2001, as compared to $12,000 in 2000 and $18,000 in 1999, due to the expiration of the engine leases to Royal Aviation in August 2000. Operating expenses decreased in 2001 as compared to 2000 and increased in 2000 as compared to 1999 primarily as a result of shipping and inspection fees paid in connection with the return of the three JT8D-9A engines to the Partnership in 2000. Administration and other expenses increased in 2000 as compared to 1999 primarily due to an increase in printing and postage costs and consulting fees. Liquidity and Cash Distributions Liquidity - While the Partnership had aircraft and engines on lease, the Partnership received maintenance reserve payments from its lessee. During the terms of the lease, such maintenance reserves could be applied to reimburse the lessee or pay directly certain costs incurred by the Partnership for maintenance work performed on the Partnership's aircraft or engines, as specified in the leases. Maintenance reserve balances remaining at the termination of the lease were available to be used by the Partnership to offset future maintenance expenses or recognized as revenue. Due to the fact that the Partnership sold its three JT8D-9A engines in an as-is-where-is condition in July 2001 for $900,000, the net maintenance reserve balance of $631,316 from the lease to Royal Aviation was recognized as income during 2001. Two engines underwent a maintenance event which resulted in a reimbursements to the lessee totaling $1,341,702 during 9 2000. Additionally, as a result of the expiration of the engine lease to Royal Aviation, the Partnership returned a $45,000 security deposit during 2000. The Partnership received payment of $206,099 in 1999 from the sale of parts from the four disassembled aircraft. There was no such sale in 2000 or in 2001. PIMC has determined that the Partnership maintain cash reserves as a prudent measure to insure that the Partnership has available funds for winding up the affairs of the Partnership and for other contingencies. The Partnership's cash reserves will be monitored and may be revised from time to time as further information becomes available in the future. Cash Distributions - Cash distributions to Limited Partners during 2001, 2000 and 1999 were $843,646, $843,645 and $2,488,753, respectively. Cash distributions per Limited Partnership unit were $5.00, $5.00, and $14.75 during 2001, 2000 and 1999, respectively. The timing and amount of the final cash distribution to partners is not yet known and will depend upon the Partnership's future cash requirements and the timing of the sale and amount of proceeds from the sale of it's remaining inventory of spare parts including one engine. Claims Related to Lessee Defaults Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. The Partnership filed a proof of claim to recover unpaid rent and other damages, and a proof of administrative claim to recover damages for detention of aircraft, non-compliance with court orders, post-petition use of engines and liquidated damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor committees entered into a settlement which allowed the Partnership an administrative claim of approximately $2,076,923. The Bankruptcy Court made a final disposition of the Partnership's claim by permitting the Partnership to exchange a portion of its unsecured claim for Braniff's right (commonly referred to as a "Stage 2 Base Level right") under the FAA noise regulations to operate one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured claim of $769,231 in the proceedings. In May, 1998, Braniff's bankrupt estate made a $200,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $138,462 was allocated to the Partnership based on its pro rata share of the total claims. On January 20, 1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $58,154 was allocated to the Partnership based on its pro rata share of the total claims. On January 16, 2001, Braniff's bankrupt estate made a $110,890 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Management Corporation, of which $76,770 was allocated to the Partnership based on its pro rata share of the total claims. This amount is included in Lessee settlement and other on the Statement of Operations. CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act of Canada - On July 28, 1997, CanAir obtained an order under the Companies' Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of Justice, General Division. The CCAA Order restrained CanAir's creditors, including lessors, from exercising any rights arising from CanAir's default or non-performance of its obligations until October 28, 1997 or further order of the court. CanAir leased three engines from the Partnership, and a total of five aircraft from Polaris Holding Company (Polaris) and General Electric Capital 10 Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997 engine rent and maintenance reserve payment obligations to the Partnership. On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties), entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal Aviation Inc. At December 31, 1999, CanAir owed the GECAS Parties a total of approximately $1.5 million. Of this amount, approximately $30,365 was owed to the Partnership under the engine lease, exclusive of accrued interest and maintenance reserve payment obligations. The receiver appointed by the Ontario Court of Justice on behalf of CanAir's creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well as all of CanAir's other assets, including spare parts and accounts receivable. The proceeds of the sale are being distributed to CanAir's creditors, including the GECAS Parties. The receiver has distributed to the GECAS Parties a total of 1,076,116.04 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect of the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian Dollars ($61,513 U.S. Dollars) have been allocated to the Partnership based on its pro rata share of the total claims. Of the sale proceeds, approximately 600,000 Canadian Dollars (approximately $384,608 U.S. Dollars converted as of March 27, 2001) remain to be distributed to CanAir's creditors by the receiver, subject to a final court order as to the priorities of CanAir's creditors under the receivership order and Canada's Personal Property Security Act (Ontario). On February 15, 2000, the Partnership received the settlement of $61,513 in connection with the CanAir Bankruptcy Settlement, which is comprised of amounts received for rents, maintenance reserve obligations and accrued interest. A portion of the proceeds was treated as a recovery of previously reserved rents receivable. The allowance for credit losses of $30,365 was reversed and is included in "Lessee Settlement" in the statement of operations. On March 29, 2001, the receiver issued a check for 620,116 Canadian Dollars (approximately $397,122 U.S. Dollars) to GECAS on behalf of the GECAS Parties. Including this latest amount, the receiver has distributed to the GECAS Parties a total amount in this liquidation of approximately $1,138,822 U.S. Dollars, of which the Partnership's pro rata share is approximately $95,874 U.S. Dollars. The Partnership's pro rata share of the latest distribution of $397,122 U.S. Dollars is approximately $34,361 U.S. Dollars. After deducting the legal fees related to this matter, out of the latest distribution, the Partnership received a net pro rata share of $8,897 U.S. Dollars on June 27, 2001. The receiver has advised that an amount of 9,473 Canadian Dollars (approximately $5,957 U.S. Dollars) still remains with the receiver. An amount to be determined will be paid to the Partnership prior to the end of the first quarter or shortly thereafter. Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's 1999 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On June 11, 1992, the Partnership filed a proof of claim in the case to recover damages for past due rent and for Markair's failure to meet return conditions with respect to the Partnership's aircraft that were leased by Markair. In August 1993, the Bankruptcy Court approved a plan of reorganization for Markair and a stipulation allowing the Partnership to retain the security deposits and maintenance reserves previously posted by Markair, and an unsecured claim against Markair for $445,000. The unsecured claim was converted to subordinated debentures during 1994, and Markair defaulted on its payment obligations on such debentures. On April 14, 1995, Markair commenced new 11 reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On October 25, 1995, Markair converted its Chapter 11 reorganization proceeding into a proceeding under Chapter 7 of the United States Bankruptcy Code in the same court. The trustee, Key Bank of Washington, took steps to protect the interests of the debenture holders, including the Partnership, by filing proofs of claim in this proceeding. The Partnership has not received any distribution from the bankrupt estate on the proofs of claim. There have been no material developments with respect to this proceeding during the period covered by this report. Industry Update Demand for Aircraft - At year end 2001, there were approximately 16,445 passenger and freighter jet aircraft in the world fleet. As a result of a slowdown in travel during the year as well as the large shift in travel levels in the wake of the September 11th tragedy, 2,133 of those aircraft are currently stored or out of active service. Air travel as measured by global revenue passenger miles for 2001 is expected to be 5-6% less than the year 2000 when the final numbers are compiled. 2002 traffic levels are expected to remain relatively flat compared to 2001 due to the continued impact of September 11th. The unprecedented and worldwide demand shock has had profound implications to airlines as well as aircraft owners and manufacturers. Airlines are experiencing huge losses, and are struggling to match capacity to demand. Manufacturers have attempted to deliver the aircraft that were already in production and achieve some stability in their production lines in the face of numerous requests for deferrals from the airlines. Trading values and lease rates have declined, particularly on older aircraft as the demand shock took a cyclical downturn into a deep trough. As manufacturers reduced production, accelerated retirements of older aircraft, and recovering traffic begin to reduce the aircraft surplus, this cyclical downturn will reverse itself and the market will return to a stable condition. This will take some time as manufacturers cannot drop production overnight and owners will be reluctant to scrap aircraft that they own despite the lack of a current market for them. Maintenance of Aging Aircraft - The process of aircraft maintenance, including engines, begins at the aircraft design stage. For aircraft operating under Federal Aviation Administration (FAA) regulations, a review board consisting of representatives of the manufacturer, FAA representatives and operating airline representatives is responsible for specifying the aircraft's initial maintenance program. The General Partner understands that this program is constantly reviewed and modified throughout the aircraft's operational life. Since 1988, the FAA, working with the aircraft manufacturers and operators, has issued a series of Airworthiness Directives (Ads) which mandate that operators conduct more intensive inspections, primarily of the aircraft fuselages. The results of these mandatory inspections may result in the need for repairs or structural modifications that may not have been required under pre-existing maintenance programs. Aircraft Noise - Another issue which has affected the airline industry is that of aircraft noise levels. The FAA has categorized aircraft according to their noise levels. Stage 1 aircraft, which have the highest noise level, are no longer allowed to operate from civil airports in the United States. Stage 2 aircraft no longer meet FAA operational requirements, having been phased-out under the rules discussed below. Stage 3 aircraft are the most quiet and is the standard for all new aircraft. Other countries have also adopted noise policies. The European Union (EU) adopted a non-addition rule in 1989, which directed each member country to pass the necessary legislation to prohibit airlines from adding Stage 2 aircraft to their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the 12 year 2002. The International Civil Aviation Organization has also endorsed the phase-out of Stage 2 aircraft on a world-wide basis by the year 2002. Legislation has been drafted and has been under review by the EU for sometime to adopt anti-hushkitting regulations within member states. The legislation seeks to ban hushkitted aircraft from being added to member states registers and preclude all operation of hushkitted aircraft within the EU after certain specific dates. Due to criticism by the US Government, the enactment of this legislation has been deferred twice and it is now uncertain if it will ever be enacted at this point. However, the effect of this proposal has been to reduce the demand for hushkitted aircraft within the EU and its neighboring states, including the former Eastern Block states. 13 Item 8. Financial Statements and Supplementary Data POLARIS AIRCRAFT INCOME FUND I FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000 AND FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 TOGETHER WITH THE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Polaris Aircraft Income Fund I: We have audited the accompanying balance sheets of Polaris Aircraft Income Fund I (a California limited partnership) as of December 31, 2001 and 2000, and the related statements of operations, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the General Partner. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Polaris Aircraft Income Fund I as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP San Francisco, California, February 1, 2002 15 POLARIS AIRCRAFT INCOME FUND I BALANCE SHEETS DECEMBER 31, 2001 AND 2000 2001 2000 ---- ---- ASSETS: CASH AND CASH EQUIVALENTS $2,445,482 $2,469,034 AIRCRAFT ENGINES, net of accumulated depreciation of $101,250 in 2000 -- 858,750 OTHER ASSETS -- 6,297 ---------- ---------- Total Assets $2,445,482 $3,334,081 ========== ========== LIABILITIES AND PARTNERS' CAPITAL : PAYABLE TO AFFILIATES $ 38,214 $ 48,904 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 368,821 364,071 MAINTENANCE RESERVES -- 631,316 ---------- ---------- Total Liabilities 407,035 1,044,291 ---------- ---------- PARTNERS' CAPITAL : General Partner 134,953 137,474 Limited Partners, 168,729 units issued and outstanding 1,903,494 2,152,316 ---------- ---------- Total Partners' Capital 2,038,447 2,289,790 ---------- ---------- Total Liabilities and Partners' Capital $2,445,482 $3,334,081 ========== ========== The accompanying notes are an integral part of these statements. 16 POLARIS AIRCRAFT INCOME FUND I STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ---- ---- ---- REVENUES: Rent from operating leases $ -- $240,000 $360,000 Interest 74,835 174,418 198,566 Gain on sale of engines 41,250 -- -- Gain on sale of aircraft inventory -- -- 206,099 Lessee settlement and other 85,667 61,513 -- Maintenance reserves 631,316 -- -- -------- -------- -------- Total Revenues 833,068 475,931 764,665 -------- -------- -------- EXPENSES: Depreciation -- 11,250 15,000 Management fees to General Partner -- 12,000 18,000 Operating 5,900 36,238 -- Administration and other 141,127 144,071 131,646 -------- -------- -------- Total Expenses 147,027 203,559 164,646 -------- -------- -------- NET INCOME $686,041 $272,372 $600,019 ======== ======== ======== NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 91,217 $ 8,318 $ 6,000 ======== ======== ======== NET INCOME ALLOCATED TO THE LIMITED PARTNERS $594,824 $264,054 $594,019 ======== ======== ======== NET INCOME PER LIMITED PARTNERSHIP UNIT $ 3.53 $ 1.57 $ 3.52 ======== ======== ======== The accompanying notes are an integral part of these statements. 17 POLARIS AIRCRAFT INCOME FUND I STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 General Limited Partner Partner Total ------- ------- ----- Balance, December 31, 1998 $ 493,422 $ 4,626,641 $ 5,120,063 Net income 6,000 594,019 600,019 Cash distributions to partners (276,528) (2,488,753) (2,765,281) ----------- ----------- ----------- Balance, December 31, 1999 222,894 2,731,907 2,954,801 Net income 8,318 264,054 272,372 Cash distributions to partners (93,738) (843,645) (937,383) ----------- ----------- ----------- Balance, December 31, 2000 $ 137,474 $ 2,152,316 $ 2,289,790 Net income 91,217 594,824 686,041 Cash distribution to partners (93,738) (843,646) (937,384) ----------- ----------- ----------- Balance, December 31, 2001 $ 134,953 $ 1,903,494 $ 2,038,447 =========== =========== =========== The accompanying notes are an integral part of these statements. 18 POLARIS AIRCRAFT INCOME FUND I STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 686,041 $ 272,372 $ 600,019 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation -- 11,250 15,000 Gain on sale of engines (41,250) -- -- Gain on sale of aircraft inventory -- -- (206,099) Changes in operating assets and liabilities: Decrease in rent and other receivables -- 30,000 28,154 Decrease (increase) in other assets 6,297 (6,297) -- Increase (decrease) in payable to affiliates (10,690) 37,688 678 Increase (decrease) in accounts payable and accrued liabilities 4,750 (10,618) 2,947 Decrease in security deposits -- (45,000) -- Decrease in maintenance reserves (631,316) (1,073,399) (109,678) ----------- ----------- ----------- Net cash provided by (used in) operating activities 13,832 (784,004) 331,021 ----------- ----------- ----------- INVESTING ACTIVITIES: Net proceeds from sale of engines 900,000 -- -- Net proceeds from sale of aircraft inventory -- 206,099 ----------- ----------- ----------- Net cash provided by investing activities 900,000 -- 206,099 ----------- ----------- ----------- FINANCING ACTIVITIES: Cash distributions to partners (937,384) (937,383) (2,765,281) ----------- ----------- ----------- Net cash used in financing activities (937,384) (937,383) (2,765,281) ----------- ----------- ----------- CHANGES IN CASH AND CASH EQUIVALENTS (23,552) (1,721,387) (2,228,161) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,469,034 4,190,421 6,418,582 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,445,482 $ 2,469,034 $ 4,190,421 =========== =========== =========== The accompanying notes are an integral part of these statements. 19 POLARIS AIRCRAFT INCOME FUND I NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 1. Accounting Principles and Policies Accounting Method - Polaris Aircraft Income Fund I (PAIF-I or the Partnership), a California limited partnership, maintains its accounting records, and prepares its financial statements on the accrual basis of accounting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. The most significant estimates with regard to these financial statements are the residual values of the aircraft, the useful lives of the aircraft, and the estimated amount and timing of cash-flows associated with each aircraft, which are used to determine impairment, if any. Cash and Cash Equivalents - This includes deposits at banks and investments in money market funds. Cash and Cash Equivalents are stated at cost, which approximates fair value. Aircraft and Depreciation - Prior to disposition, aircraft were recorded at cost, which included acquisition costs. Depreciation to an estimated residual value was computed using the straight-line method over the estimated economic life of the aircraft which was originally estimated to be 12 years. Depreciation in the year of acquisition was calculated based upon the number of days that the aircraft were in service. The remaining aircraft engines were depreciated to an estimated residual value using the straight line method over their estimated economic life. The Partnership periodically reviewed the estimated realizability of the residual values at the projected end of each asset's economic life. For any downward adjustment in estimated residual value or decrease in the projected remaining economic life, the depreciation expense over the projected remaining economic life of the asset was increased. If the projected net cash flow for each aircraft or engine (projected rental revenue, net of management fees, less projected maintenance costs, if any, plus the estimated residual value) was less than the carrying value of the aircraft or engine, an impairment loss was recognized. On July 19, 2001 the Partnership sold three engines to Aeroturbine, Inc. on an as-is-where-is basis for $900,000. The only remaining non-cash asset is an inventory of spare parts that includes one engine, and that has been made available for sale such that the Partnership plans to liquidate all its assets and make a final distribution thereafter. These assets are carried at zero value as of December 31, 2001. Capitalized Costs - Modification and maintenance costs which are determined to increase the value or extend the useful life of the remaining assets are capitalized and amortized using the straight-line method over the estimated useful life of the improvement or the remaining lease life, if shorter. These costs are also subject to periodic evaluation for impairment as discussed above. Aircraft Inventory - Proceeds from sales had been applied against inventory until the book value was fully recovered. The remaining book value of the inventory was recovered in 1995. Proceeds in excess of the inventory net book value are recorded as revenue when received. 20 Operating Leases - While the Partnership had aircraft and engines on lease, the leases were accounted for as operating leases. Operating lease revenues were recognized in equal installments over the terms of the leases. Maintenance Reserves - The Partnership received maintenance reserve payments from certain of its lessees that may be reimbursed to the lessee or applied against certain costs incurred by the Partnership or lessee for maintenance work performed on the Partnership's aircraft or engines, as specified in the leases. Maintenance reserve payments are recognized when received and balances remaining at the termination of the lease, if any, may be used by the Partnership to offset required maintenance expenses or recognized as revenue. (See Note 3) Operating Expenses - Operating expenses include costs incurred to maintain, insure, lease and sell the Partnership's aircraft, including costs related to lessee defaults and costs of disassembling aircraft inventory. Net Income Per Limited Partnership Unit - Net income per Limited Partnership unit is based on the Limited Partners' share of net income, allocated in accordance with the Partnership Agreement, and the number of units outstanding for the years ended December 31, 2001, 2000 and 1999. Income Taxes - The Partnership files federal and state information income tax returns only. Taxable income or loss is reportable by the individual partners. Receivables - The Partnership had previously recorded an allowance for credit losses for certain impaired note and rents receivable as a result of uncertainties regarding their collection as discussed in Note 6. On February 15, 2000, the Partnership received an initial settlement of $61,513 in connection with the CanAir Bankruptcy Settlement, which is comprised of amounts received for rents, maintenance reserve obligations and accrued interest. A portion of the proceeds was treated as a recovery of previously reserved rents receivable. The allowance for credit losses of $30,365 was reversed and is included in "Lessee Settlement" in the statement of operations. 2001 2000 ---- ---- Allowance for credit losses, beginning of year $ -- $(30,365) Recovery of credit losses -- 30,365 Allowance for credit losses, end of year ---------- -------- $ -- $ -- ========== ======== New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that derivatives be recognized in the balance sheet at fair value and specifies the accounting for changes in fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," to defer the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - 21 an Amendment of FASB Statement No. 133." SFAS 138 amends the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. The Partnership adopted these pronouncements effective January 1, 2001. Due to the fact that the Partnership does not utilize any derivative instruments, these pronouncements did not have an impact on the Partnership's balance sheet or statement of operations. In June 2001, the FASB approved for issuance SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and that the associated asset retirement costs be capitalized as part of the carrying value of the related long-lived asset. SFAS No. 143 will be effective January 1, 2003 for the Partnership. Management does not expect this standard to have a material impact on the Partnership's balance sheet or statement of operations. In August 2001, the FASB approved for issuance SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 broadens the presentation of discontinued operations to include more transactions and eliminates the need to accrue for future operating losses. Additionally, SFAS No. 144 prohibits the retroactive classification of assets as held for sale and requires revisions to the depreciable lives of long-lived assets to be abandoned. SFAS No. 144 will be effective January 1, 2002 for the Partnership. Management does not expect this standard to have a material impact on the Partnership's balance sheet or statement of operations. 2. Organization and the Partnership The Partnership was formed on June 27, 1984 for the purpose of acquiring and leasing aircraft. It will terminate no later than December 2010. Upon organization, both the General Partner and the initial Limited Partner contributed $500. The offering of Limited Partnership units terminated on December 31, 1985, at which time the Partnership had sold 168,729 units of $500, representing $84,364,500. All unit holders were admitted to the Partnership on or before January 1, 1986. Polaris Investment Management Corporation (PIMC), the sole General Partner of the Partnership, supervises the day-to-day operations of the Partnership. PIMC is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC). Polaris Holding Company (PHC) is the parent company of PALC. General Electric Capital Corporation (GE Capital), an affiliate of General Electric Company, owns 100% of PHC's outstanding common stock. PIMC has entered into a services agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc. (GECAS). Allocations to related parties are described in Notes 7 & 8. 3. Maintenance Reserves While the Partnership had aircraft and engines on lease, the Partnership received maintenance reserve payments from its lessee. During the terms of the lease, such maintenance reserves could be applied to reimburse the lessee or pay directly certain costs incurred by the Partnership for maintenance work performed on the Partnership's aircraft or engines, as specified in the leases. Maintenance reserve balances remaining at the termination of the lease were available to be used by the Partnership to offset future maintenance expenses or recognized as revenue. Due to the fact that the Partnership sold its three JT8D-9A engines in an as-is-where-is condition in July 2001 for $900,000, the maintenance reserve balance of $631,316 from the lease to Royal Aviation was recognized as income during 2001. 22 4. Aircraft and Aircraft Engines At December 31, 2001, the Partnership owned certain inventoried aircraft parts, which includes one engine, out of its original portfolio of eleven used commercial jet aircraft. Three Aircraft Engines - In 2000, the Partnership leased two engines from an airframe previously sold and one engine previously leased to Viscount, to CanAir Cargo Ltd. (CanAir) beginning in May 1994 for 36 months. The rental rate was variable based on usage through August 1994. Beginning in September 1994 through the end of the lease term in May 1997, the rental rate was fixed at $10,000 per engine per month. In April 1997, the engine lease with CanAir was extended for seven months at the same lease rate. CanAir defaulted on its lease obligations to the Partnership in July 1997. In August 1997 the lease was transferred to Royal Aviation Inc. and Royal Air Cargo, Inc. (Royal Air) and the lease term was extended to August 2000 at the current lease rate. On August 31, 2000, the lease for the three JT8D-9A engines to Royal Aviation, Inc. and Royal Cargo, Inc. (Royal Aviation) expired. The engines were returned on September 7, 2000 and security deposit of $45,000 was refunded to Royal Aviation on November 21, 2000. The Partnership sold these three engines on July 19, 2001 (See Note 5) and has made available for sale the remaining inventory of spare parts such that all the assets of the Partnership will be liquidated and a final distribution made thereafter. These spare parts are carried at a value of zero as of December 31, 2001. 5. Sale of Aircraft Inventory and Engines Sale of Engines in Inventory - On July 19, 2001, the Partnership sold the three JT8D-9A engines to Aeroturbine, Inc. on an as-is-where-is basis for $900,000. The Partnership received the proceeds for these engines in the third quarter of 2001. This sale resulted in a gain of $41,250 which is reflected in the Statement of Operations. Sale of Aircraft Inventory - During 1999, the Partnership received $206,099 for the sale of consignment inventory. 6. Claims Related to Lessee Defaults Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's 2000 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On June 11, 1992, the Partnership filed a proof of claim in the case to recover damages for past due rent and for Markair's failure to meet return conditions with respect to the Partnership's aircraft that were leased by Markair. In August 1993, the Bankruptcy Court approved a plan of reorganization for Markair and a stipulation allowing the Partnership to retain the security deposits and maintenance reserves previously posted by Markair, and an unsecured claim against Markair for $445,000. The unsecured claim was converted to subordinated debentures during 1994, and Markair defaulted on its payment obligations on such debentures. On April 14, 1995, Markair commenced new reorganization proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Third District of Alaska. On October 25, 1995, Markair converted its Chapter 11 reorganization proceeding into a proceeding under Chapter 7 of the United States Bankruptcy Code in the same court. The trustee, Key Bank of Washington, took steps to protect the interests of the debenture holders, including the Partnership, by filing proofs of claim in this proceeding. The Partnership has not received any distribution 23 from the bankrupt estate on the proofs of claim. There have been no material developments with respect to this proceeding during the period covered by this report. Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. The Partnership filed a proof of claim to recover unpaid rent and other damages, and a proof of administrative claim to recover damages for detention of aircraft, non-compliance with court orders, post-petition use of engines and liquidated damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor committees entered into a settlement which allowed the Partnership an administrative claim of approximately $2,076,923. The Bankruptcy Court made a final disposition of the Partnership's claim by permitting the Partnership to exchange a portion of its unsecured claim for Braniff's right (commonly referred to as a "Stage 2 Base Level right") under the FAA noise regulations to operate one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured claim of $769,231 in the proceedings. In May of 1998, Braniff's bankrupt estate made a $200,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $138,462 was allocated to the Partnership based on its pro rata share of the total claims. On January 20, 1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Investment Management Corporation, of which $58,154 was allocated to the Partnership based on its pro rata share of the total claims. On January 16, 2001, Braniff's bankrupt estate made a $110,890 payment in respect of the unsecured claims of the Partnership and other affiliates of Polaris Management Corporation, of which $76,770 was allocated to the Partnership based on its pro rata share of the total claims. CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act of Canada - On July 28, 1997, CanAir obtained an order under the Companies' Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of Justice, General Division. The CCAA Order restrained CanAir's creditors, including lessors, from exercising any rights arising from CanAir's default or non-performance of its obligations until October 28, 1997 or further order of the court. CanAir leased three engines from the Partnership, and a total of five aircraft from Polaris Holding Company (Polaris) and General Electric Capital Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August 1997 engine rent and maintenance reserve payment obligations to the Partnership. On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties), entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal Aviation Inc. At December 31, 1999, CanAir owed the GECAS Parties a total of approximately $1.5 million. Of this amount, approximately $30,365 was owed to the Partnership under the engine lease, exclusive of accrued interest and maintenance reserve payment obligations. The receiver appointed by the Ontario Court of Justice on behalf of CanAir's creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well as all of CanAir's other assets, including spare parts and accounts receivable. The proceeds of the sale are being distributed to CanAir's creditors, including the GECAS Parties. The receiver has distributed to the GECAS Parties a total of 1,076,116 Canadian Dollars (approximately $741,700 U.S. Dollars) in respect of the GECAS Parties' claims against CanAir. Of this amount, 91,469 Canadian Dollars (approximately $61,513 U.S. Dollars) have been allocated to the Partnership based on its pro rata share of the total claims. Of the sale proceeds, approximately 600,000 Canadian Dollars (approximately $384,608 U.S. 24 Dollars) remain to be distributed to CanAir's creditors by the receiver, subject to a final court order as to the priorities of CanAir's creditors under the receivership order and Canada's Personal Property Security Act (Ontario). On February 15, 2000, the Partnership received the settlement of $61,513 in connection with the CanAir Bankruptcy Settlement, which is comprised of amounts received for rents, maintenance reserve obligations and accrued interest. A portion of the proceeds was treated as a recovery of previously reserved rents receivable. The allowance for credit losses of $30,365 was reversed and is included in "Lessee Settlement" in the statement of operations. On March 29, 2001, the receiver issued a check for 620,116 Canadian Dollars (approximately $397,122 U.S. Dollars) to GECAS on behalf of the GECAS Parties. Including this latest amount, the receiver has distributed to the GECAS Parties a total amount in this liquidation of approximately $1,138,822 U.S. Dollars, of which the Partnership's total cumulative pro rata share is approximately $95,874 U.S. Dollars. The Partnership's pro rata share of the latest distribution of $397,122 U.S. Dollars is approximately $34,361 U.S. Dollars. After deducting the legal fees related to this matter, out of the latest distribution, the Partnership received a net pro rata share of $8,897 U.S. Dollars on June 27, 2001. This amount was included in Lessee settlement and other on the Statement of Operations. The receiver has advised that an amount of 9,473 Canadian Dollars (approximately $5,957 U.S. Dollars) still remains with the receiver. An amount to be determined will be paid to the Partnership prior to the end of the first quarter of 2002 or shortly thereafter, and will be recognized as income when received. 7. Related Parties Under the Limited Partnership Agreement (Partnership Agreement), the Partnership paid or agreed to pay the following amounts to PIMC and/or its affiliates in connection with services rendered: a. An aircraft management fee equal to 5% of gross rental revenues with respect to operating leases of the Partnership, payable upon receipt of the rent. In 2001, 2000 and 1999, the Partnership paid management fees to PIMC of $-0-, $15,018, and $18,000, respectively. b. Reimbursement of certain out-of-pocket expenses incurred in connection with the management of the Partnership and its assets. In 2001, 2000 and 1999, $89,435 $158,083, and $155,970 were reimbursed by the Partnership to PIMC for administrative expenses. Administrative reimbursements of $35,942 and $12,667 were payable to PIMC at December 31, 2001 and 2000, respectively. Partnership reimbursements to PIMC for maintenance and remarketing costs of $9,592, $1,341,702, and $200 were paid in cash in 2001, 2000, and 1999, respectively. Maintenance and remarketing reimbursements of $2,272, and $36,237 were payable to PIMC at December 31, 2001 and 2000, respectively. c. A 10% interest to PIMC in all cash distributions and sales proceeds, gross income in an amount equal to 9.09% of distributed cash available from operations and 1% of net income or loss and taxable income or loss, as such terms are defined in the Partnership Agreement. After the Partnership has sold or disposed of aircraft representing 50% of the total aircraft cost, gains from the sale or other disposition of aircraft are generally allocated first to the General Partner until such time that the General Partner's capital account is equal to the amount to be distributed to the General Partner from the proceeds of such sale or disposition. The General Partner received $93,738, $93,738 and $276,528 in 2001, 2000, and 1999 respectively. 25 d. A subordinated sales commission to PIMC of 3% of the gross sales price of each aircraft for services performed upon disposition and reimbursement of out-of-pocket and other disposition expenses. Subordinated sales commissions will be paid only after Limited Partners have received distributions in an aggregate amount equal to their capital contributions plus a cumulative non-compounded 8% per annum return on their adjusted capital contributions, as defined in the Partnership Agreement. The Partnership did not pay or accrue a sales commission on any aircraft sales to date as the above subordination threshold has not been met. e. In the event that, immediately prior to the dissolution and termination of the Partnership, the General Partner shall have a deficit balance in its tax basis capital account, then the General Partner shall contribute in cash to the capital of the Partnership an amount which is equal to such deficit (see Note 8). 8. Partners' Capital The Partnership Agreement (the Agreement) stipulates different methods by which revenue, income and loss from operations and gain or loss on the sale of aircraft are to be allocated to the General Partner and the Limited Partners (see Note 7). Such allocations are made using income or loss calculated under GAAP for book purposes, which, as more fully described in Note 10, varies from income or loss calculated for tax purposes. Cash available for distributions, including the proceeds from the sale of aircraft, are distributed 10% to the General Partner and 90% to the Limited Partners. The different methods of allocating items of income, loss and cash available for distribution combined with the calculation of items of income and loss for book and tax purposes result in book basis capital accounts that may vary significantly from tax basis capital accounts. The ultimate liquidation and distribution of remaining cash will be based on the tax basis capital accounts following liquidation, in accordance with the Agreement. Had all the assets of the Partnership been liquidated at December 31, 2001 at the current carrying value, the tax basis capital (deficit) accounts of the General Partner and the Limited Partners is estimated to be $(1,329,811) and $14,904,046, respectively. 9. Income Taxes Federal and state income tax regulations provide that taxes on the income or loss of the Partnership are reportable by the partners in their individual income tax returns. Accordingly, no provision for such taxes has been made in the accompanying financial statements. The net differences between the tax basis and the reported amounts of the Partnership's assets and liabilities at December 31, 2001 and 2000 are as follows: 26 Reported Amounts Tax Basis Net Difference ---------------- --------- -------------- 2001: Assets $ 2,445,482 $ 13,981,270 $(11,535,788) Liabilities 407,035 407,035 - 2000: Assets $ 3,334,081 $ 15,949,326 $(12,615,245) Liabilities 1,044,291 412,975 631,316 10. Reconciliation of Book Net Income to Taxable Net Income (Loss) The following is a reconciliation between net income (loss) per Limited Partnership unit reflected in the financial statements and the information provided to Limited Partners for federal income tax purposes: For the years ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Book net income per Limited Partnership unit $ 3.53 $ 1.57 $ 3.52 Adjustments for tax purposes represent differences between book and tax revenue and expenses: Rental and maintenance reserve revenue recognition (3.70) 1.74 1.95 Depreciation (0.49) (0.58) (0.11) Gain or loss on sale of aircraft or inventory (5.85) (0.47) (1.48) Other revenue and expense items - (0.17) - ------- ------ ------ Taxable net income (loss) per Limited Partnership unit $(6.51) $ 2.09 $ 3.88 ====== ====== ====== The differences between net income and loss for book purposes and net income and loss for tax purposes result from the temporary differences of certain revenue and deductions. For book purposes, rental revenue is generally recorded as it is earned on a straight line basis for operating leases. For tax purposes, certain temporary differences exist in the recognition of revenue which is generally recognized when received. Increases in the Partnership's book maintenance reserve liability were recognized as rental revenue for tax purposes. Disbursements from the Partnership's book maintenance reserves are capitalized or expensed for tax purposes, as appropriate. The Partnership computes depreciation using the straight-line method for financial reporting purposes and generally an accelerated method for tax purposes. These differences in depreciation methods result in book to tax differences on the sale of aircraft. In addition, certain costs were capitalized for tax purposes and expensed for book purposes, which yields a different gain or loss on the sale of aircraft or inventory. 11. Subsequent Event Cash Distributions - The Partnership made a cash distribution of $1,054,556 or $6.25 per Limited Partnership unit, to Limited Partners, and $117,173 to the General Partner on January 15, 2002. 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 28 PART III Item 10. Directors and Executive Officers of the Registrant Polaris Aircraft Income Fund I, A California Limited Partnership (PAIF-I or the Partnership) has no directors or officers. Polaris Holding Company (PHC) and its subsidiaries, including Polaris Aircraft Leasing Corporation (PALC) and Polaris Investment Management Corporation (PIMC), the General Partner of the Partnership (collectively Polaris), restructured their operations and businesses (the Polaris Restructuring) in 1994. In connection therewith, PIMC entered into a services agreement dated as of July 1, 1994 (the Services Agreement) with GE Capital Aviation Services, Inc. (GECAS), a Delaware corporation which is a wholly owned subsidiary of General Electric Capital Corporation, a Delaware corporation (GE Capital). GE Capital has been PHC's parent company since 1986. As subsidiaries of GE Capital, GECAS and PIMC are affiliates. The officers and directors of PIMC are: Name PIMC Title --------------------------- ------------------------------------ William Carpenter President; Director Keith Helming Chief Financial Officer Melissa Hodes Vice President; Director Norman C. T. Liu Vice President; Director Ray Warman Secretary Robert W. Dillon Assistant Secretary Substantially all of these management personnel will devote only such portion of their time to the business and affairs of PIMC as deemed necessary or appropriate. Mr. Carpenter, 38, assumed the position of President and Director of PIMC effective October 1, 2001. Mr. Carpenter holds the position of Executive Vice President and Chief Risk Manager of GECAS, having previously held the position of Vice President - Chief Risk Manager of GECAS (Acting). Prior to joining GECAS seven years ago, Mr. Carpenter was an aerospace engineer specializing in aircraft handling qualities. Prior to that, Mr. Carpenter was a commissioned officer and pilot in the United States Armed Forces. Mr. Helming, 43, assumed the position of Chief Financial Officer of PIMC effective October 1, 2000. Mr. Helming presently holds the positions of Executive Vice President and Chief Financial Officer of GECAS. Mr. Helming has been with General Electric Company (GE) and its subsidiaries since 1981. Prior to joining GECAS, Mr. Helming served as the Senior Vice President of Finance at GE Capital Fleet Services for three years. Prior to that, Mr. Helming was Chief Financial Officer for GE Capital Global Consumer Finance U.K. Ms. Hodes, 36, assumed the position of Director of PIMC effective May 19, 2000. Ms. Hodes presently holds the position of Senior Vice President, Financial Planning and Analysis for GECAS. Ms. Hodes has been with the General Electric Company (GE) and its subsidiaries since 1987. Prior to joining GECAS, Ms. Hodes held various financial management positions with GE Capital Card Services, GE Audit Staff and GE Power Systems. Mr. Liu, 44, assumed the position of Vice President of PIMC effective May 1, 1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the position of Executive Vice President - Sales and Marketing of GECAS, having 29 previously held the position of Executive Vice President - Capital Funding and Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was with General Electric Capital Corporation for nine years. He has held management positions in corporate Business Development for General Electric Capital Corporation and in Syndications and Leasing for the Transportation & Industrial Funding division of General Electric Capital Corporation. Mr. Liu previously held the position of managing director of Kidder, Peabody & Co., Incorporated. Mr. Warman, 53, assumed the position of Secretary of PIMC effective March 23, 1998. Mr. Warman has served as a GECAS Senior Vice President and Associate General Counsel since March 1996 and for 13 years theretofore was a partner, with an air-finance and corporate practice of the national law firm of Morgan, Lewis & Bockius LLP. Mr. Dillon, 60, held the position of Vice President - Aviation Legal and Insurance Affairs, from April 1989 to October 1997. Previously, he served as General Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994, Mr. Dillon assumed the position of Assistant Secretary of PIMC. Mr. Dillon presently holds the position of Senior Vice President and Associate General Counsel of GECAS. Certain Legal Proceedings: On or around September 27, 1995, a complaint entitled Martha J. Harrison v. General Electric Company, et. al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and Prudential Securities Incorporated. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages, attorney's fees, interest, costs and general relief. On or around December 8, 1995, a complaint entitled Overby, et al. v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v. Prudential Securities Incorporated, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition adding as additional defendants General Electric Company, General Electric Capital Corporation and Smith Barney, Inc. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. 30 In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v. Prudential Securities. Incorporated, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities Incorporated and Stephen Derby Gisclair. On or about January 18, 1996, plaintiff filed a First Supplemental and Amending Petition adding defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v. General Electric Co., et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection with the public offering of Polaris Aircraft Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. In or around December 1994, a complaint entitled John J. Jones, Jr. v. Prudential Securities Incorporated, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition adding as additional defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of section of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v. General Electric Company, et al. was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint named as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary duty in tort, contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about May 7, 1996, a petition entitled Charles Rich. et al. v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiffs allege claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and general relief. On or about March 4, 1996, a petition entitled Richard J. McGiven v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital 31 Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric Company and General Electric Capital Corporation was filed in the Civil District Court for the Parish of Orleans, State of Louisiana. The complaint names as defendants General Electric Company and General Electric Capital Corporation. The Partnership is not named as a defendant in this action. Plaintiff alleges claims of tort concerning the inducement and solicitation of purchases arising out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and general relief. Sara J. Bishop, et al. v. Kidder, Peabody & Co., et al., Superior Court of California, County of Sacramento; Wilson et al. v. Polaris Holding Company et al., Superior Court of California, County of Sacramento, and ten other California Actions(1) - In the California actions filed in 1996, approximately 4000 plaintiffs who purchased limited partnership units in Polaris Aircraft Income Funds I through VI and other limited partnerships sold by Kidder, Peabody named Kidder, Peabody, KP Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Financial Services, Inc., General Electric Capital Corporation, and General Electric Credit Corporation and Does 1-100 as defendants. The Partnership was not named as a defendant in these actions. The complaints all allege violations of state common law, including fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the rules of the National Association of Securities Dealers. The complaints seek to recover compensatory damages and punitive damages in an unspecified amount, interest, and rescission with respect to Polaris Aircraft Income Funds III-VI and all other limited partnerships alleged to have been sold by Kidder Peabody to the plaintiffs. The California actions have been settled. An additional settlement was entered into with certain plaintiffs who had refused to participate in the first settlement. Plaintiffs' counsel advised the Court that they would withdraw from representing the remaining plaintiffs -- approximately 330 -- who refused to participate in either of the settlements. In July, 2000, plaintiffs' counsel submitted to the Court motions to withdraw as counsel of record for all of the actions. The Court indicated that it would grant such motions and thereafter would consider dismissing each of the actions if no plaintiff came forward to prosecute. On August 2, 2001, the Court conducted a series of status conferences in connection with each of the twelve California actions and at the conferences dismissed most of the remaining plaintiffs in those actions. On November 9, 2001, defendants moved for summary judgment against most of the remaining plaintiffs based upon a settlement and bar order entered in a multi-district litigation in 1997. Other Proceedings - Part I, Item 3 discusses certain other actions arising out of certain public offerings, including that of the Partnership, to which both the Partnership and its general partner are parties. ----------------------------------- 1 The ten other actions are Abrams, et al. v. Polaris Holding Company, et al., Elphick, et al. v. Kidder Peabody & Co., et al., Johnson, et al. v. Polaris Holding Company, et al., Kuntz, et al. v. Polaris Holding Company, et al., McDevitt, et al. v. Polaris Holding Company, et al., Ouellette, et al. v. Kidder Peabody & Co., et al., Rolph, et al. v. Polaris Holding Company, et al., Self, et al. v. Polaris Holding Company, et al., Tarrer, et al. v. Kidder Peabody & Co., et al., Zicos, et al. v. Polaris Holding Company, et al., all filed in Superior Court of California, County of Sacramento. 32 Item 11. Executive Compensation The Partnership has no directors or officers. The Partnership is managed by PIMC, the General Partner. In connection with management services provided, management and advisory fees of $-0- were paid to PIMC in 2001 in addition to a 10% interest in all cash distributions as described in Note 7 to the financial statements (Item 8). Item 12. Security Ownership of Certain Beneficial Owners and Management a) No person owns of record, or is known by the Partnership to own beneficially, more than five percent of any class of voting securities of the Partnership. b) The General Partner of the Partnership owns the equity securities of the Partnership as set forth in the following table: Title Name of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership of Class -------- ---------------- -------------------- -------- General Polaris Investment Represents a 10.0% interest of all cash 100% Partner Management distributions, gross income in an Interest Corporation amount equal to 9.09% of distributed cash available from operations, and a 1% interest in net income or loss c) There are no arrangements known to the Partnership, including any pledge by any person of securities of the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership. Item 13. Certain Relationships and Related Transactions None. 33 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 1. Financial Statements. The following are included in Part II of this report: Page No. -------- Report of Independent Public Accountants 15 Balance Sheets 16 Statements of Operations 17 Statements of Changes in Partners' Capital 18 Statements of Cash Flows 19 Notes to Financial Statements 20 2. Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 2001. 3. Exhibits required to be filed by Item 601 of Regulation S-K. 99. Letter from the Partnership to the SEC regarding Arthur Andersen LLP. 4. Financial Statement Schedules. All financial statement schedules are omitted because they are not applicable, not required or because the required information is included in the financial statements or notes thereto. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POLARIS AIRCRAFT INCOME FUND I (REGISTRANT) By: Polaris Investment Management Corporation General Partner March 28, 2002 By: /S/ William Carpenter ---------------------------- ---------------------------- Date William Carpenter, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/William Carpenter President and Director of Polaris March 28, 2002 -------------------- Investment Management Corporation, -------------- (William Carpenter) General Partner of the Registrant /S/Keith Helming Chief Financial Officer of Polaris March 28, 2002 ---------------- Investment Management Corporation, -------------- (Keith Helming) General Partner of the Registrant /S/Melissa Hodes Vice President and Director of Polaris March 28, 2002 ---------------- Investment Management Corporation, -------------- (Melissa Hodes) General Partner of the Registrant /S/Norman C. T. Liu Vice President and Director of Polaris March 28, 2002 ------------------- Investment Management Corporation, -------------- (Norman C. T. Liu) General Partner of the Registrant 35