-----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, Lr9kO3AcTiHvHyAf6oYwoCPTqatLZ10/JwPlD8UV2wI1DlbY1SawomUSf2a8aLCk 57xrsX1Fpb2aaNlCV28Ltg== 0000948524-97-000136.txt : 19971115 0000948524-97-000136.hdr.sgml : 19971115 ACCESSION NUMBER: 0000948524-97-000136 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS AIRCRAFT INCOME FUND V CENTRAL INDEX KEY: 0000832923 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 943068259 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-21977 FILM NUMBER: 97717324 BUSINESS ADDRESS: STREET 1: 201 MISSION ST 27TH FLR CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4152847400 MAIL ADDRESS: STREET 1: 201 MISSION STREET 27TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94105 10-Q 1 SEPTEMBER 30, 1997 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM 10-Q --------------------------- _X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 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. 33-21977 ---------------------------- POLARIS AIRCRAFT INCOME FUND V, A California Limited Partnership State of Organization: California IRS Employer Identification No. 94-3068259 201 Mission Street, 27th Floor, San Francisco, California 94105 Telephone - (415) 284-7400 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No___ This document consists of 18 pages. 1 POLARIS AIRCRAFT INCOME FUND V, A California Limited Partnership FORM 10-Q - For the Quarterly Period Ended September 30, 1997 INDEX Part I. Financial Information Page Item 1. Financial Statements a) Balance Sheets - September 30, 1997 and December 31, 1996..........................................3 b) Statements of Operations - Three and Nine Months Ended September 30, 1997 and 1996..........................4 c) Statements of Changes in Partners' Capital (Deficit) -Year Ended December 31, 1996 and Nine Months Ended September 30, 1997...................5 d) Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996..........................6 e) Notes to Financial Statements..............................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............11 Part II. Other Information Item 1. Legal Proceedings.........................................16 Item 6. Exhibits and Reports on Form 8-K..........................17 Signature ......................................................18 2 Part I. Financial Information ----------------------------- Item 1. Financial Statements POLARIS AIRCRAFT INCOME FUND V, A California Limited Partnership BALANCE SHEETS (Unaudited) September 30, December 31, 1997 1996 ---- ---- ASSETS: CASH AND CASH EQUIVALENTS $ 13,770,688 $ 23,252,136 RENT AND OTHER RECEIVABLES 178,372 1,371,941 NOTES RECEIVABLE 41,110,955 12,118,157 AIRCRAFT, net of accumulated depreciation of $146,813,332 in 1996 -- 35,852,034 ------------ ------------ $ 55,060,015 $ 72,594,268 ============ ============ LIABILITIES AND PARTNERS' CAPITAL (DEFICIT): PAYABLE TO AFFILIATES $ 223,473 $ 231,741 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 115,144 73,093 SECURITY DEPOSITS -- 475,000 MAINTENANCE RESERVES -- 1,306,018 ------------ ------------ Total Liabilities 338,617 2,085,852 ------------ ------------ PARTNERS' CAPITAL (DEFICIT): General Partner (1,663,726) (1,505,679) Limited Partners, 500,000 units issued and outstanding 56,385,124 72,014,095 ------------ ------------ Total Partners' Capital 54,721,398 70,508,416 ------------ ------------ $ 55,060,015 $ 72,594,268 ============ ============ The accompanying notes are an integral part of these statements. 3 POLARIS AIRCRAFT INCOME FUND V, A California Limited Partnership STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- REVENUES: Rent from operating leases $ -- $ 3,134,289 $3,911,355 $ 9,978,917 Interest 1,384,951 623,105 2,833,059 1,169,961 Gain on sale of aircraft -- 43,565 -- 376,905 Other -- 3,880 -- 3,880 ---------- ----------- ---------- ----------- Total Revenues 1,384,951 3,804,839 6,744,414 11,529,663 ---------- ----------- ---------- ----------- EXPENSES: Depreciation and amortization -- 10,761,803 2,297,427 22,957,024 Management fees to general partner -- 156,715 120,495 498,946 Operating 5,632 463,613 139,508 469,459 Administration and other 83,086 72,488 268,447 235,106 ---------- ----------- ---------- ----------- Total Expenses 88,718 11,454,619 2,825,877 24,160,535 ---------- ----------- ---------- ----------- NET INCOME (LOSS) $1,296,233 $(7,649,780) $3,918,537 $(12,630,872) ========== =========== ========== ============ NET INCOME ALLOCATED TO THE GENERAL PARTNER $1,161,347 $ 173,477 $1,812,508 $ 623,616 ========== =========== ========== ============ NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS $ 134,886 $(7,823,257) $2,106,029 $(13,254,488) ========== =========== ========== ============ NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ 0.27 $ (15.65) $ 4.21 $ (26.51) ========== =========== ========== ============ The accompanying notes are an integral part of these statements.
4 POLARIS AIRCRAFT INCOME FUND V, A California Limited Partnership STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (Unaudited)
Year Ended December 31, 1996 and Nine Months Ended September 30, 1997 ------------------------------------ General Limited Partner Partners Total ------- -------- ----- Balance, December 31, 1995 $ (866,147) $ 135,317,754 $ 134,451,607 Net income (loss) 471,579 (53,303,659) (52,832,080) Cash distributions to partners (1,111,111) (10,000,000) (11,111,111) ----------- ------------- ------------- Balance, December 31, 1996 (1,505,679) 72,014,095 70,508,416 Net income 1,812,508 2,106,029 3,918,537 Cash distributions to partners (1,970,555) (17,735,000) (19,705,555) ----------- ------------- ------------- Balance, September 30, 1997 $(1,663,726) $ 56,385,124 $ 54,721,398 =========== ============= ============= The accompanying notes are an integral part of these statements.
5 POLARIS AIRCRAFT INCOME FUND V, A California Limited Partnership STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ------------------------------- 1997 1996 ---- ---- OPERATING ACTIVITIES: Net income (loss) $ 3,918,537 $(12,630,872) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 2,297,427 22,957,024 Gain on sale of aircraft -- (376,905) Changes in operating assets and liabilities, net of effect of sale of aircraft: Decrease in rent and other receivables 144,891 1,111,625 Increase (decrease) in payable to affiliates 44,162 (268,199) Decrease in accounts payable and accrued liabilities (173,849) (123,369) Decrease in security deposits (225,000) (44,000) Decrease in maintenance reserves (909,642) (2,560,483) ------------ ------------ Net cash provided by operating activities 5,096,526 8,064,821 ------------ ------------ INVESTING ACTIVITIES: Increase in notes receivable (30,155) (146,646) Proceeds from sale of aircraft 5,722,173 1,748,776 Payments to Purchaser related to sale of aircraft (2,290,443) -- Principal payments on notes receivable 1,192,236 386,457 Principal payments on finance sale of aircraft 533,770 714,060 Increase in aircraft capitalized costs -- (2,750,000) ------------ ------------ Net cash provided by (used in) investing activities 5,127,581 (47,353) ------------ ------------ FINANCING ACTIVITIES: Cash distributions to partners (19,705,555) (8,333,333) ------------ ------------ Net cash used in financing activities (19,705,555) (8,333,333) ------------ ------------ CHANGES IN CASH AND CASH EQUIVALENTS (9,481,448) (315,865) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,252,136 20,842,611 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,770,688 $ 20,526,746 ============ ============ The accompanying notes are an integral part of these statements.
6 POLARIS AIRCRAFT INCOME FUND V, A California Limited Partnership NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Accounting Principles and Policies In the opinion of management, the financial statements presented herein include all adjustments, consisting only of normal recurring items, necessary to summarize fairly Polaris Aircraft Income Fund V's (the Partnership's) financial position and results of operations. The financial statements have been prepared in accordance with the instructions of the Quarterly Report to the Securities and Exchange Commission (SEC) Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the financial statements and notes thereto for the years ended December 31, 1996, 1995, and 1994 included in the Partnership's 1996 Annual Report to the SEC on Form 10-K (Form 10-K). 2. Sale of One Boeing 737-200 to Westjet In February 1997, the Partnership sold one Boeing 737-200 Advanced aircraft formerly on lease to Southwest Airlines Co. (Southwest), to Westjet Airlines, Ltd. (Westjet). The Partnership received $1,150,000 in February 1997, and applied the $250,000 security deposit held in 1996 for a total sales price to Westjet of $1,400,000. In October 1996, Southwest had paid to the Partnership $155,694, which was recorded as an increase in maintenance reserves, in lieu of meeting certain return conditions specified in the lease. Upon the sale of the aircraft in February 1997, this amount was reported as additional sales revenue. The combined sales revenue of $1,555,694 approximated the net carrying value of the aircraft. 3. Sale of Aircraft to Triton On May 28, 1997, Polaris Investment Management Corporation (the "General Partner" or "PIMC"), on behalf of the Partnership, executed definitive documentation for the purchase of all 12 of the Partnership's remaining aircraft (the "Aircraft") and a note receivable by Triton Aviation Services V LLC, a special purpose company (the "Purchaser"). The closings for the purchase of all 12 of the Aircraft occurred from May 28, 1997 to June 30, 1997. The Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the "Manager"), a privately held aircraft leasing company which was formed in 1996 by Triton Investments, Ltd., a company which has been in the marine cargo container leasing business for 17 years and is diversifying its portfolio by leasing commercial aircraft. Each Aircraft was sold subject to the existing leases, if any. The Terms of the Transaction - The total contract purchase price (the "Purchase Price") to the Purchaser is $34,750,259 which is allocable to the Aircraft, a note and other receivables. The Purchaser paid into an escrow account $3,914,964 of the Purchase Price in cash upon the closing of the first aircraft and delivered a promissory note (the "Promissory Note") for the balance of $30,835,295. The Partnership received $3,914,964 from the escrow account on June 24, 1997. The Promissory Note is due in 28 quarterly installments of principal and interest commencing June 30, 1997 in the amount of $1,512,367 over a period of seven years bearing interest at a rate of 12% per annum with a balloon principal payment in the amount of $5,621,617 due on March 31, 2004. The Purchaser has the right to voluntarily prepay the Promissory Note in whole or in part at any time without penalty. In addition, the Promissory Note is subject to mandatory partial prepayment in certain specified instances. The Purchaser is current on its Promissory Note obligation. 7 Under the terms of the transaction, the Purchaser's assets, which are limited to the Aircraft, including any income or proceeds therefrom, and any funds made available to Purchaser under the working capital line described below constitute the sole source of payments under the Promissory Note. Although no security interest over the Aircraft or the leases is granted in favor of the Partnership, the equity interests in the Purchaser have been pledged to the Partnership. In connection with that pledge, the Purchaser is prohibited from incurring indebtedness other than (i) the Promissory Note; (ii) deferred taxes not yet due and payable; (iii) indebtedness incurred to hushkit Aircraft owned by the Purchaser; (iv) demand loans to another SPC (defined below) at a market rate of interest; and (v) debt to trade creditors incurred in the ordinary course of business. In addition, the Purchaser undertakes to keep the Aircraft and leases free of any lien, security interest or other encumbrance other than (i) inchoate taxes and materialmen's liens and the like; (ii) in the event that the Purchaser elects to install hushkits on any Aircraft, secured debt to the extent of the full cost of such hushkit and other hushkits acquired with proceeds from the same loan facility; and (iii) liens lessees are customarily permitted to incur that are required to be removed. The Purchaser has the right to sell any of the Aircraft without the consent of the Partnership, except that the Partnership's consent would be required in the event that the sale price is less than the portion of the outstanding balance of the Promissory Note which is allocable to the Aircraft in question and the Purchaser does not have sufficient funds to make up the difference. In the event that any of the Aircraft are sold by the Purchaser, the Promissory Note is subject to a mandatory prepayment of the portion of the Promissory Note which is allocable to the Aircraft sold. Under the terms of the transaction, the Purchaser's Manager has undertaken to make available a working capital line to the Purchaser of up to approximately $4,034,000 to fund operating obligations of the Purchaser. This working capital line is guaranteed by Triton Investments, Ltd., the parent of the Purchaser's Manager and such guarantor provided the Partnership with a copy of its most recent balance sheet showing a consolidated net worth (net of minority interests) of at least $150-million at December 31, 1996. Provided that the Purchaser is not in default in making payments due under the Promissory Note to the Partnership, the Purchaser is permitted to dividend to its equity owners an amount not to exceed approximately $108,000 per month. The Purchaser may distribute additional dividends to the equity owners to the extent of the working capital advances made by the Purchaser's Manager provided that the working capital line available to the Purchaser will be deemed increased to the extent of such dividends. Under the purchase agreement, the Purchaser purchased the Aircraft effective as of April 1, 1997 notwithstanding the actual closing dates. The utilization of an effective date facilitated the economic determination of rent and other allocations between the parties. The Purchaser has the right to receive all income and proceeds, including rents and receivables, from the Aircraft accruing from and after April 1, 1997, and the Promissory Note commenced bearing interest as of April 1, 1997 subject to the closing of the aircraft. Each Aircraft was sold subject to the existing leases, if any, and as part of the transaction the Purchaser assumed all obligations relating to maintenance reserves and security deposits relating to such leases. Subsequent to the Aircraft closings, cash balances related to maintenance reserves and security deposits of approximately $1,741,000 and $225,000, respectively were transferred to the Purchaser. Neither PIMC nor GE Capital Aviation Services, Inc. (GECAS) will receive a sales commission in connection with the transaction. In addition, PIMC will not be paid a management fee with respect to the collection of the Promissory Note or on any rents accruing from or after April 1, 1997. Neither PIMC nor GECAS or any of its affiliates holds any interest in Triton Aviation or any of Triton Aviation's affiliates. John Flynn, the current President of Triton Aviation, was a Polaris executive until May 1996, and has over 15 years experience in the commercial aviation industry. At the time Mr. Flynn was employed at PIMC he had no affiliation with Triton Aviation or its affiliates. The Partnership continues to own the note receivable (the "AIA Receivable") from American International Airways Limited ("AIA") with a current principal balance of $11,467,896, which had initially been included in the assets which were to be transferred to the Purchaser. After the date that the Partnership and the 8 Purchaser entered into the definitive documentation for the sale transaction, but prior to the date that the AIA Receivable was transferred to the Purchaser, AIA failed to make a scheduled principal payment under the AIA Receivable and asked the Partnership to modify and restructure the AIA Receivable. As a result, the Partnership and the Purchaser agreed to modify and reform the definitive documentation for the sale transaction to exclude the AIA Receivable. The AIA Receivable is secured by a mortgage on a Boeing 747-100 Special Freighter aircraft. The AIA Receivable was amended, as discussed in Note 4 to the financial statements. Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV and Polaris Aircraft Income Fund VI have also sold certain aircraft assets to separate special purpose companies under common management with the Purchaser (collectively, together with the Purchaser, the "SPC's") on terms similar to those set forth above, with the exception of the Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis. The Accounting Treatment of the Transaction - In accordance with generally accepted accounting principles (GAAP), the Partnership recognized rental income up until the closing date for each aircraft which occurred from May 28, 1997 to June 30, 1997. However, under the terms of the transaction, the Purchaser was entitled to receive any payments of rents accruing from April 1, 1997 to the closing dates. As a result, the Partnership made payments to the Purchaser for the amounts due and received effective April 1, 1997. Payments during this period totaling $1,501,456 are included in rent from operating leases and interest income. For financial reporting purposes, the cash down payment portion of the sales proceeds of $3,914,964 have been adjusted by the following: income and proceeds, including rents and receivables from the effective date of April 1, 1997 to the closing date, interest due on the cash portion of the purchase price, interest on the Promissory Note from the effective date of April 1, 1997 to the closing date, estimated selling costs, adjustments to the aircraft maintenance reserves due the Purchaser and aircraft return conditions payments that the Partnership was entitled to retain. As a result of these GAAP adjustments, the net adjusted sales price recorded by the Partnership, including the Promissory Note, was $33,141,808. The Aircraft sold pursuant to the definitive documentation executed on May 28, 1997 had been classified as aircraft held for sale from that date until the closing date. Under GAAP, aircraft held for sale are carried at their fair market value less estimated costs to sell. The adjustment to the sales proceeds described above and revisions to estimated costs to sell the aircraft required the Partnership to record an adjustment to the net carrying value of the Aircraft held for sale of approximately $1,318,620 during the three months ended June 30, 1997. This adjustment to the net carrying value of the aircraft held for sale is included in depreciation and amortization expense on the statement of operations for the three and six months ended June 30, 1997. 4. AIA Note Restructuring American International Airways Inc. (AIA) delivered an "Amended and Restated Purchase Money Promissory Note" dated September 9, 1997 to the Partnership. Under the terms of the amendment, AIA is required to pay the originally scheduled interest portion of the payments, but will defer the principal payments due in April 1997 through October 1997 (the Deferred Principal). The Deferred Principal is to be paid back during a seven month extension of the loan term, accruing interest at a rate of 13% per annum from the date of the deferral through the date the deferred amount is paid. As a result, this note has been classified as impaired. At this time, management believes the note receivable balance of $11,467,896 is fully recoverable and a loss provision has not been recorded. As of September 30, 1997, AIA has paid to the Partnership the scheduled interest portion of the note through July 1997. The combined August and September 1997 interest payments of $176,859 were received in October 1997. 9 5. Related Parties Under the Limited Partnership Agreement, the Partnership paid or agreed to pay the following amounts for the current quarter to the general partner, Polaris Investment Management Corporation, in connection with services rendered or payments made on behalf of the Partnership: Payments for the Three Months Ended Payable at September 30, 1997 September 30, 1997 ------------------ ------------------ Aircraft Management Fees $ - $ 13,968 Out-of-Pocket Administrative Expense Reimbursement 90,456 42,673 Out-of-Pocket Operating and Remarketing Expense Reimbursement 5,632 166,832 --------- ------------ $ 96,088 $ 223,473 ========= ============ 6. Subsequent Event On October 20, 1997, the Partnership received a mandatory prepayment of principal of $2,540,834 on the outstanding Promissory Note from Triton. This prepayment will result in a reduction to future quarterly note payments and the balloon payment due March 31, 2004 from Triton. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations During the quarter ended June 30, 1997, the Partnership sold its remaining portfolio of 12 used aircraft to Triton Aviation Services V LLC. The aircraft sold during the quarter ended June 30, 1997 consisted of 11 Boeing 737-200 Advanced aircraft and one Boeing 747-100 Special Freighter aircraft. The Partnership sold one Boeing 737-200 to Westjet Airlines, Ltd. (Westjet) in February 1997. The Partnership sold two Boeing 727-100 aircraft that ATA transferred to the Partnership as part of the ATA lease transaction in April 1993, to Empresa de Transporte Aereo del Peru S.A. (Aeroperu). Aeroperu completed its payment obligations to the Partnership in July 1996. As discussed below, the Partnership sold one Boeing 747-100 Special Freighter aircraft to its former lessee American International Airways Limited (AIA) in June 1996. Remarketing Update Sale of One Boeing 737-200 to Westjet In February 1997, the Partnership sold one Boeing 737-200 Advanced aircraft formerly on lease to Southwest Airlines Co. (Southwest), to Westjet Airlines, Ltd. (Westjet). The Partnership received $1,150,000 in February 1997, and applied the $250,000 security deposit held in 1996 for a total sales price to Westjet of $1,400,000. In October 1996, Southwest had paid to the Partnership $155,694, which was recorded as an increase in maintenance reserves, in lieu of meeting certain return conditions specified in the lease. Upon the sale of the aircraft in February 1997, this amount was reported as additional sales revenue. The combined sales revenue of $1,555,694 approximated the net carrying value of the aircraft. Sale of Aircraft to Triton On May 28, 1997, Polaris Investment Management Corporation (the "General Partner" or "PIMC"), on behalf of the Partnership, executed definitive documentation for the purchase of all 12 of the Partnership's remaining aircraft (the "Aircraft") and a note receivable by Triton Aviation Services V LLC, a special purpose company (the "Purchaser" or "Triton"). The closings for the purchase of all 12 of the Aircraft occurred from May 28, 1997 to June 30, 1997. The Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the "Manager"), a privately held aircraft leasing company which was formed in 1996 by Triton Investments, Ltd., a company which has been in the marine cargo container leasing business for 17 years and is diversifying its portfolio by leasing commercial aircraft. Each Aircraft was sold subject to the existing leases, if any. The General Partners Decision to Approve the Transaction - In determining whether the transaction was in the best interests of the Partnership and its unitholders, the General Partner evaluated, among other things, the risks and significant expenses associated with continuing to own and remarket the Aircraft (many of which were subject to leases that were nearing expiration). The General Partner determined that such a strategy could require the Partnership to expend a significant portion of its cash reserves for remarketing and that there was a substantial risk that this strategy could result in the Partnership having to reduce or even suspend future cash distributions to limited partners. The General Partner concluded that the opportunity to sell the Aircraft at an attractive price would be beneficial in the present market where demand for Stage II aircraft is relatively strong rather than attempting to sell the aircraft "one-by-one" over the coming years when the demand for such Aircraft might be weaker. GE Capital Aviation Services, Inc. ("GECAS"), which provides aircraft marketing and management services to the General Partner, sought to obtain the best price and terms available for these Stage II aircraft given the aircraft market and the conditions and types of planes owned by the Partnership. Both the General Partner and GECAS approved the sale terms of the Aircraft (as described below) as being in the best interest of the Partnership and its unitholders because both believe that this transaction will optimize the 11 potential cash distributions to be paid to limited partners. To ensure that no better offer could be obtained, the terms of the transaction negotiated by GECAS included a "market-out" provision that permitted the Partnership to elect to accept an offer for all (but no less than all) of the assets to be sold by it to the Purchaser on terms which it deemed more favorable, with the ability of the Purchaser to match the offer or decline to match the offer and be entitled to be compensated in an amount equal to 1 1/2% of the Purchaser's proposed purchase price. On May 9, 1997, the General Partner received a competing offer (the "Competing Offer") from a third party to purchase the Partnership's twelve aircraft and certain notes receivable, subject to a number of contingencies, as disclosed in the Partnerships Quarterly Report to the Securities and Exchange Commission Form 10-Q at March 31, 1997. The Competing Offer included a higher purchase price than the offer made by the Purchaser (the "Original Offer"). Both the Competing Offer and the Original Offer contained similar financing structures, but the net worth of the company submitting the Competing Offer was approximately $11 million, as compared to the approximately $150 million net worth of Triton Investments, Ltd., the parent of the Purchaser's Manager. On May 14, 1997, upon review and comparison of the Competing Offer with the Original Offer, the General Partner determined that it would be in the best interests of the Partnership to reject the Competing Offer due to the significant difference in the net worth and the execution risks both at closing and thereafter, as well as the payment of the 1 1/2% fee that would be due to the Purchaser under the Original Offer representing approximately half of the premium represented by the Competing Offer over the Original Offer. The Terms of the Transaction - The total contract purchase price (the "Purchase Price") to the Purchaser is $34,750,259 which is allocable to the Aircraft, a note and other receivables. The Purchaser paid into an escrow account $3,914,964 of the Purchase Price in cash upon the closing of the first aircraft and delivered a promissory note (the "Promissory Note") for the balance of $30,835,295. The Partnership received $3,914,964 from the escrow account on June 24, 1997. The Promissory Note is due in 28 quarterly installments of principal and interest commencing June 30, 1997 in the amount of $1,512,367 over a period of seven years bearing interest at a rate of 12% per annum with a balloon principal payment in the amount of $5,621,617 due on March 31, 2004. The Purchaser has the right to voluntarily prepay the Promissory Note in whole or in part at any time without penalty. In addition, the Promissory Note is subject to mandatory partial prepayment in certain specified instances. The Purchaser is current on its Promissory Note obligation. Under the terms of the transaction, the Purchaser's assets, which are limited to the Aircraft, including any income or proceeds therefrom, and any funds made available to Purchaser under the working capital line described below constitute the sole source of payments under the Promissory Note. Although no security interest over the Aircraft or the leases is granted in favor of the Partnership, the equity interests in the Purchaser have been pledged to the Partnership. In connection with that pledge, the Purchaser is prohibited from incurring indebtedness other than (i) the Promissory Note; (ii) deferred taxes not yet due and payable; (iii) indebtedness incurred to hushkit Aircraft owned by the Purchaser; (iv) demand loans to another SPC (defined below) at a market rate of interest; and (v) debt to trade creditors incurred in the ordinary course of business. In addition, the Purchaser undertakes to keep the Aircraft and leases free of any lien, security interest or other encumbrance other than (i) inchoate taxes and materialmen's liens and the like; (ii) in the event that the Purchaser elects to install hushkits on any Aircraft, secured debt to the extent of the full cost of such hushkit and other hushkits acquired with proceeds from the same loan facility; and (iii) liens lessees are customarily permitted to incur that are required to be removed. The Purchaser has the right to sell any of the Aircraft without the consent of the Partnership, except that the Partnership's consent would be required in the event that the sale price is less than the portion of the outstanding balance of the Promissory Note which is allocable to the Aircraft in question and the Purchaser does not have sufficient funds to make up the difference. In the event that any of the Aircraft are sold by the Purchaser, the Promissory Note is subject to a mandatory prepayment of the portion of the Promissory Note which is allocable to the Aircraft sold. 12 Under the terms of the transaction, the Purchaser's Manager has undertaken to make available a working capital line to the Purchaser of up to approximately $4,034,000 to fund operating obligations of the Purchaser. This working capital line is guaranteed by Triton Investments, Ltd., the parent of the Purchaser's Manager and such guarantor provided the Partnership with a copy of its most recent balance sheet showing a consolidated net worth (net of minority interests) of at least $150-million at December 31, 1996. Provided that the Purchaser is not in default in making payments due under the Promissory Note to the Partnership, the Purchaser is permitted to dividend to its equity owners an amount not to exceed approximately $108,000 per month. The Purchaser may distribute additional dividends to the equity owners to the extent of the working capital advances made by the Purchaser's Manager provided that the working capital line available to the Purchaser will be deemed increased to the extent of such dividends. Under the purchase agreement, the Purchaser purchased the Aircraft effective as of April 1, 1997 notwithstanding the actual closing dates. The utilization of an effective date facilitated the economic determination of rent and other allocations between the parties. The Purchaser has the right to receive all income and proceeds, including rents and receivables, from the Aircraft accruing from and after April 1, 1997, and the Promissory Note commenced bearing interest as of April 1, 1997 subject to the closing of the aircraft. Each Aircraft was sold subject to the existing leases, if any, and as part of the transaction the Purchaser assumed all obligations relating to maintenance reserves and security deposits relating to such leases. Subsequent to the Aircraft closings, cash balances related to maintenance reserves and security deposits of approximately $1,741,000 and $225,000, respectively, were transferred to the Purchaser. Neither PIMC nor GECAS will receive a sales commission in connection with the transaction. In addition, PIMC will not be paid a management fee with respect to the collection of the Promissory Note or on any rents accruing from or after April 1, 1997. Neither PIMC nor GECAS or any of its affiliates holds any interest in Triton Aviation or any of Triton Aviation's affiliates. John Flynn, the current President of Triton Aviation, was a Polaris executive until May 1996, and has over 15 years experience in the commercial aviation industry. At the time Mr. Flynn was employed at PIMC he had no affiliation with Triton Aviation or its affiliates. The Partnership continues to own the note receivable (the "AIA Receivable") from American International Airways Limited ("AIA") with a current principal balance of $11,467,896, which had initially been included in the assets which were to be transferred to the Purchaser. After the date that the Partnership and the Purchaser entered into the definitive documentation for the sale transaction, but prior to the date that the AIA Receivable was transferred to the Purchaser, AIA failed to make a scheduled principal payment under the AIA Receivable and asked the Partnership to modify and restructure the AIA Receivable. As a result, the Partnership and the Purchaser agreed to modify and reform the definitive documentation for the sale transaction to exclude the AIA Receivable. The AIA Receivable is secured by a mortgage on a Boeing 747-100 Special Freighter aircraft. The AIA Receivable was amended, as discussed under "AIA Note Restructuring" below. Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV and Polaris Aircraft Income Fund VI have also sold certain aircraft assets to separate special purpose companies under common management with the Purchaser (collectively, together with the Purchaser, the "SPC's") on terms similar to those set forth above, with the exception of the Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis. The Accounting Treatment of the Transaction - In accordance with generally accepted accounting principles (GAAP), the Partnership recognized rental income up until the closing date for each aircraft which occurred from May 28, 1997 to June 30, 1997. However, under the terms of the transaction, the Purchaser was entitled to receive any payments of rents accruing from April 1, 1997 to the closing dates. As a result, the Partnership made payments to the Purchaser for the amounts due and received effective April 1, 1997. Payments during this period totaling $1,501,456 are included in rent from operating leases and 13 interest income. For financial reporting purposes, the cash down payment portion of the sales proceeds of $3,914,964 has been adjusted by the following: income and proceeds, including rents and receivables from the effective date of April 1, 1997 to the closing date, interest due on the cash portion of the purchase price, interest on the Promissory Note from the effective date of April 1, 1997 to the closing date, estimated selling costs, adjustments to the aircraft maintenance reserves due the Purchaser and aircraft return conditions payments that the Partnership was entitled to retain. As a result of these GAAP adjustments, the net adjusted sales price recorded by the Partnership, including the Promissory Note, was $33,141,808. The Aircraft sold pursuant to the definitive documentation executed on May 28, 1997 had been classified as aircraft held for sale from that date until the actual closing date. Under GAAP, aircraft held for sale are carried at their fair market value less estimated costs to sell. The adjustment to the sales proceeds described above and revisions to estimated costs to sell the Aircraft required the Partnership to record an adjustment to the net carrying value of the aircraft held for sale of approximately $1,318,620 during the three months ended June 30, 1997. This adjustment to the net carrying value of the aircraft held for sale is included in depreciation and amortization expense on the statement of operations. Partnership Operations The Partnership recorded net income of $1,296,233, or $0.27 per limited partnership unit, for the three months ended September 30, 1997, compared to a net loss of $7,649,780, or $15.65 per limited partnership unit, for the same period in 1996. The Partnership recorded net income of $3,918,537, or $4.21 per limited partnership unit, for the nine months ended September 30, 1997, compared to a net loss of $12,630,872, or $26.51 per limited partnership unit, for the same period in 1996. The significant improvement in operating results for the three and nine months ended September 30, 1997, compared to the same periods in 1996, is due primarily to decreased depreciation expense recognized during 1997. In June 1996, the Partnership sold one Boeing 747-100 Special Freighter aircraft to AIA upon expiration of its lease. The Partnership recognized no additional rental revenue on this aircraft subsequent to June 1996. The Partnership recognized an impairment loss of approximately $5,836,000 on this aircraft which was recorded as additional depreciation expense during the second quarter of 1996. The Partnership recognized additional depreciation expense aggregating approximately $8.2 million during the third quarter of 1996 on three aircraft formerly leased to Southwest. In October 1996, one of three aircraft leased to Southwest, with expiration dates of October and December 1996, was returned to the Partnership. Upon review of the condition of this aircraft, it was determined that certain maintenance and modification work would be required to remarket this aircraft for re-lease. As a result, the Partnership determined that a sale of these aircraft on an "as is/where is" basis would maximize the projected economic return on the three aircraft to the Partnership. The Partnership reviewed the three aircraft for impairment based on the projected discounted cash flows from a sale of the aircraft on an "as is/where is" basis and recognized an impairment loss. Rental revenues, net of related management fees, decreased during the three and nine months ended September 30, 1997, as compared to the same period in 1996, due to the sale of the Partnership's 12 Aircraft during the second quarter of 1997. Interest income increased during the three and nine months ended September 30, 1997, compared to the same periods in 1996, due to interest income recognized on a note receivable from Triton as part of the sale of the 12 aircraft during the second quarter of 1997. Other factors contributing to the improved operations during the three and nine months ended September 30, 1997, were a decrease in management fees to the general partner and a decrease in operating expense. Management fees decreased due to the decrease in rental revenues and the decrease in operating expense is attributable to a decrease in maintenance and repair expense. 14 Liquidity and Cash Distributions Liquidity - The Partnership received all payments on a current basis from Triton. At September 30, 1997, the Partnership had not received note payments from AIA for August and September 1997. The Partnership subsequently received the August and September 1997 payments of $176,859 in October 1997, which was included in rent and other receivables on the balance sheet at September 30, 1997. On October 20, 1997, the Partnership received a mandatory prepayment of principal of $2,540,834 on the outstanding Promissory Note from Triton. This prepayment will result in a reduction to future quarterly note payments and the balloon payment due March 31, 2004 from Triton. PIMC has determined that the Partnership maintain cash reserves as a prudent measure to insure that the Partnership has available funds in the event the Purchaser defaults under the Promissory Note 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. AIA Note Restructuring - AIA delivered an "Amended and Restated Purchase Money Promissory Note", dated September 9, 1997 to the Partnership. Under the terms of the amendment, AIA is required to pay the originally scheduled interest portion of the payments, but will defer the principal payments due in April 1997 through October 1997 (the Deferred Principal). The Deferred Principal is to be paid back during a seven month extension of the loan term, accruing interest at a rate of 13% per annum from the date of the deferral through the date the deferred amount is paid. As a result, this note has been classified as impaired. At this time, management believes the note receivable balance of $11,467,896 is fully recoverable and a loss provision has not been recorded. AIA has paid the scheduled interest portion of the note through July 1997. The combined August and September 1997 interest payments of $176,859 were received in October 1997. Cash Distributions - Cash distributions to limited partners during the three months ended September 30, 1997 were $11,485,000, or $22.97 per limited partnership unit, compared to $2,500,000, or $5.00 per limited partnership unit, for the same period in 1996. Cash distributions to limited partners during the nine months ended September 30, 1997 were $17,735,000, or $35.47 per limited partnership unit, compared to $7,500,000, or $15.00 per limited partnership unit for the same period in 1996. The timing and amount of future cash distributions are not yet known and will depend on the Partnership's future cash requirements (including expenses of the Partnership) and need to retain cash reserves, as previously discussed in the Liquidity section, and the receipt of note payments from AIA and Triton. 15 Part II. Other Information -------------------------- Item 1. Legal Proceedings As discussed in Item 3 of Part I of Polaris Aircraft Income Fund V's (the Partnership) 1996 Annual Report to the Securities and Exchange Commission (SEC) on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly Report to the SEC on Form 10-Q (Form 10-Q) for the periods ended March 31, 1997 and June 30, 1997, there are a number of pending legal actions or proceedings involving the Partnership. Except as discussed below, there have been no material developments with respect to any such actions or proceedings during the period covered by this report. Equity Resources, Inc., et al. v. Polaris Investment Management Corporation, et al. - As previously disclosed, on May 23, 1997, the defendants filed a motion to dismiss this action. Subsequently, plaintiffs voluntarily sought dismissal of their suit without prejudice. On September 16, 1997, the court dismissed plaintiffs' complaint without prejudice. Ron Wallace v. Polaris Investment Management Corporation, et al. - On September 2, 1997, an amended complaint was filed adding additional plaintiffs. On September 16, 1997, the Polaris defendants filed a demurrer seeking to dismiss the amended complaint. Simultaneously with the filing of the demurrer, the Polaris defendants sought a stay of discovery. The hearing on the demurrer occurred on November 4, 1997. On November 5, 1997, the court granted the Polaris defendants' demurrer and ordered that plaintiffs be given 10 days leave to amend their complaint to plead demand futility. On or about October 14, 1997, the plaintiffs in this action filed a separate Petition for Writ of Mandate in the San Francisco Superior Court entitled Ron Wallace, et al. v. Polaris Investment Management Corp., et al., seeking to obtain access to all the Partnership's books, records and documents. Subsequently, pursuant to an agreement between the parties, plaintiffs agreed to dismiss their Petition for Writ of Mandate with prejudice and the Polaris defendants agreed to withdraw its motion seeking a stay of discovery. "Accelerated" High Yield Income Fund II, Ltd., L.P. v. Polaris Investment Management Corporation, et al. - On August 14, 1997, defendants filed a demurrer seeking to dismiss the complaint. Simultaneously with the filing of the demurrer, defendants sought a stay of discovery. A hearing on the demurrer was held on October 7, 1997. On October 24, 1997, the court overruled defendants' demurrer. On November 5, 1997, defendants filed a mandamus petition seeking to have the court's decision on the demurrer overturned. Other Proceedings - Item 10 in Part III of the Partnership's 1996 Form 10-K and Item 1 of Part II of the Partnership's Form 10-Q for the periods ended March 31, 1997 and June 30, 1997 discuss certain actions which have been filed against Polaris Investment Management Corporation and others in connection with the sale of interests in the Partnership and the management of the Partnership. With the exception of Novak, et al v. Polaris Holding Company, et al, (which has been dismissed, as discussed in the 1996 Form 10-K) where the Partnership was named as a defendant for procedural purposes, the Partnership is not a party to these actions. There have been no material developments with respect to any of the actions described therein during the period covered by this report. 16 Item 6. Exhibits and Reports on Form 8-K a) Exhibits (numbered in accordance with Item 601 of Regulation S-K) 27. Financial Data Schedule. b) Reports on Form 8-K A Current Report on Form 8-K/A, dated May 28, 1997, amending certain exhibits listed in Item 7, was filed on August 18, 1997. 17 SIGNATURE Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POLARIS AIRCRAFT INCOME FUND V, A California Limited Partnership (Registrant) By: Polaris Investment Management Corporation, General Partner November 12, 1997 By: /S/Marc A. Meiches - ---------------------------------- -------------------------------- Marc A. Meiches Chief Financial Officer (principal financial officer and principal accounting officer of Polaris Investment Management Corporation, General Partner of the Registrant) 18 EX-27 2
5 9-MOS DEC-31-1997 SEP-30-1997 13770688 0 41289327 0 0 0 0 0 55060015 0 0 0 0 0 54721398 55060015 0 6744414 0 0 2825877 0 0 3918537 0 3918537 0 0 0 3918537 4.21 0
-----END PRIVACY-ENHANCED MESSAGE-----