UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
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Commission File No. 2-91762
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POLARIS AIRCRAFT INCOME FUND I
State of Organization: California
IRS Employer Identification No. 94-2938977
201 High Ridge Road, Stamford, Connecticut 06927
Telephone - (203) 357-3776
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
This document consists of 13 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND I
FORM 10-Q - For the Quarterly Period Ended September 30, 1999
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - September 30, 1999 and
December 31, 1998...........................................3
b) Statements of Operations - Three and Nine Months
Ended September 30, 1999 and 1998...........................4
c) Statements of Changes in Partners' Capital -
Year Ended December 31, 1998
and Nine Months Ended September 30, 1999....................5
d) Statements of Cash Flows - Nine Months
Ended September 30, 1999 and 1998...........................6
e) Notes to Financial Statements...............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........9
Part II. Other Information
Item 1. Legal Proceedings......................................12
Item 6. Exhibits and Reports on Form 8-K.......................12
Signature .......................................................13
2
<PAGE>
Part 1. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND I
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1999 1998
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $3,910,171 $6,418,582
RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $30,365 in 1999
and 1998 196,858 58,154
AIRCRAFT ENGINES, net of accumulated depreciation
of $86,250 in 1999 and $75,000 in 1998 873,750 885,000
---------- ----------
$4,980,779 $7,361,736
========== ==========
LIABILITIES AND PARTNERS' CAPITAL :
PAYABLE TO AFFILIATES $ 10,121 $ 10,538
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 355,161 371,742
LESSEE SECURITY DEPOSITS 45,000 45,000
DEFERRED INCOME 60,000 --
MAINTENANCE RESERVES 1,656,836 1,814,393
---------- ----------
Total Liabilities 2,127,118 2,241,673
---------- ----------
PARTNERS' CAPITAL :
General Partner 221,883 493,422
Limited Partners, 168,729 units
issued and outstanding 2,631,778 4,626,641
---------- ----------
Total Partners' Capital 2,853,661 5,120,063
---------- ----------
$4,980,779 $7,361,736
========== ==========
The accompanying notes are an integral part of these statements.
3
<PAGE>
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Rent from operating leases $ 90,000 $ 90,000 $270,000 $270,000
Gain on sale of aircraft inventory -- 98,145 196,858 162,454
Interest and other 47,935 78,682 144,145 455,191
-------- -------- -------- --------
Total Revenues 137,935 266,827 611,003 887,645
-------- -------- -------- --------
EXPENSES:
Depreciation 3,750 3,750 11,250 11,250
Management fees to general
partner 4,500 4,500 13,500 13,500
Operating -- -- -- 3,514
Administration and other 26,989 26,833 87,374 114,999
-------- -------- -------- --------
Total Expenses 35,239 35,083 112,124 143,263
-------- -------- -------- --------
NET INCOME $102,696 $231,744 $498,879 $744,382
======== ======== ======== ========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 1,027 $ 2,318 $ 4,989 $ 7,444
======== ======== ======== ========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $101,669 $229,426 $493,890 $736,938
======== ======== ======== ========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.60 $ 1.36 $ 2.93 $ 4.37
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
4
<PAGE>
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
Year Ended December 31, 1998 and
Nine Months Ended September 30, 1999
------------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1997 $ 392,302 $ 4,923,414 $ 5,315,716
Net income 251,101 1,053,059 1,304,160
Cash distributions to partners (149,981) (1,349,832) (1,499,813)
----------- ----------- -----------
Balance, December 31, 1998 493,422 4,626,641 5,120,063
Net income 4,989 493,890 498,879
Cash distributions to partners (276,528) (2,488,753) (2,765,281)
----------- ----------- -----------
Balance, September 30, 1999 $ 221,883 $ 2,631,778 $ 2,853,661
=========== =========== ===========
The accompanying notes are an integral part of these statements.
5
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POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 498,879 $ 744,382
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 11,250 11,250
Gain on sale of aircraft inventory (196,858) (162,454)
Changes in operating assets and liabilities:
(Decrease) increase in rent and other
receivables 58,154 (1,224)
Decrease in payable to affiliates (417) (12,221)
Increase in deferred income 60,000 --
Decrease in accounts payable and
accrued liabilities (16,581) (9,148)
(Decrease) increase in maintenance
reserves (157,557) 260,335
Decrease in security deposits -- (50,000)
----------- -----------
Net cash provided by operating
activities 256,870 780,920
----------- -----------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory -- 162,454
----------- -----------
Net cash provided by investing
activities -- 162,454
----------- -----------
FINANCING ACTIVITIES:
Cash distributions to partners (2,765,281) (1,499,813)
----------- -----------
Net cash used in financing
activities (2,765,281) (1,499,813)
----------- -----------
CHANGES IN CASH AND CASH
EQUIVALENTS (2,508,411) (556,439)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 6,418,582 6,466,511
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,910,171 $ 5,910,072
=========== ===========
The accompanying notes are an integral part of these statements.
6
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POLARIS AIRCRAFT INCOME FUND I
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Principles and Policies
In the opinion of management, the financial statements presented herein include
all adjustments, consisting only of normal recurring items, necessary to
summarize fairly Polaris Aircraft Income Fund I's (the Partnership's) financial
position and results of operations. The financial statements have been prepared
in accordance with the instructions of the Quarterly Report to the Securities
and Exchange Commission (SEC) Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles (GAAP). These statements should be read in conjunction with the
financial statements and notes thereto for the years ended December 31, 1998,
1997, and 1996 included in the Partnership's 1998 Annual Report to the SEC on
Form 10-K.
2. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
September 30, 1999 September 30, 1999
------------------ ------------------
Aircraft Management Fees $ 6,000 $ 3,018
Out-of-Pocket Administrative Expense
Reimbursement 57,869 7,103
------- -------
$63,869 $10,121
======= =======
3. Partners' Capital
The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the general partner and the limited partners.
Such allocations are made using income or loss calculated under GAAP for book
purposes, which varies from income or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the general partner and 90% to the limited
partners.
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.
7
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4. Sale of Aircraft Inventory to Soundair, Inc.
The Partnership recognized income of $196,858 during the first quarter of 1999
from the sale of aircraft inventory to Soundair, Inc.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
At September 30, 1999, Polaris Aircraft Income Fund I (the Partnership) owned
three JT8D-9A engines and certain inventoried aircraft parts, which includes one
engine, out of its original portfolio of eleven aircraft. The three JT8D-9A
engines are leased to Royal Aviation Inc. and Royal Cargo, Inc. (Royal
Aviation).
Partnership Operations
The Partnership recorded net income of $102,696, or $0.60 per limited
partnership unit for the three months ended September 30, 1999 compared to net
income of $231,744, or $1.36 per limited partnership unit, for the three months
ended September 30, 1998. The decline in operating results during the three
months ended September 30, 1999, as compared to the same period in 1998, was
primarily the result of the sale of the remaining inventory of aircraft parts
from the dissembled aircraft to Soundair in 1998. There were no such sales in
the three months ended September 30, 1999. The Partnership recorded net income
of $498,879, or $2.93 per limited partnership unit for the nine months ended
September 30, 1999, compared to net income of $744,382, or $4.37 per limited
partnership unit, for the nine months ended September 30, 1998. The decrease in
operating results during the nine months ended September 30, 1999, as compared
to the same periods in 1998, is primarily the result of income from bankruptcy
settlements in the 1998 periods, related to Braniff and Jetfleet. Also
contributing to the decrease in operating results during the three and nine
months ended September 30, 1999 was a decrease in interest revenue partially
offset by a decrease in certain administrative expenses.
Interest income decreased during the three and nine months ended September 30,
1999, as compared to the same period in 1998, primarily due to a decrease in the
cash reserves due to distributions over the same period.
Administration and other expenses decreased during the nine months ended
September 30, 1999, as compared to the same period in 1998, primarily due to
decreases in consulting fees and printing and postage costs.
There were no operating expenses during the three and nine months ended
September 30, 1999, as compared to the same periods in 1998. During the nine
months ended September 30, 1998, the Partnership recognized legal expenses of
$3,514 related to the Braniff bankruptcy.
Liquidity and Cash Distributions
Liquidity - The Partnership receives maintenance reserve payments from Royal
Aviation that may be reimbursed to the lessee or applied against certain costs
incurred by the Partnership for maintenance work performed on the Partnership's
aircraft or engines, as specified in the leases. Maintenance reserve balances
remaining at the termination of the lease, if any, may be used by the
Partnership to offset future maintenance expenses or recognized as revenue. The
net maintenance reserves balances aggregate $1,656,836 as of September 30, 1999.
One engine underwent a maintenance event which resulted in a reimbursement to
the lessee of $414,844 during the second quarter of 1999, and an additional
$26,577 during the third quarter of 1999.
Polaris Investment Management Corporation, the general partner, has determined
that cash reserves be maintained as a prudent measure to insure that the
Partnership has available funds in the event that the engines presently on lease
to Royal Aviation require remarketing, and for other contingencies, including
9
<PAGE>
expenses of the Partnership. The Partnership's cash reserves will be monitored
and may be revised from time to time as further information becomes available in
the future.
Cash Distributions - Cash distributions to limited partners during the nine
months ended September 30, 1999 were $2,488,753, or $14.75 per limited
partnership unit, compared to $1,349,832, or $8.00 per limited partnership unit
for the nine months ended September 30, 1998. The timing and amount of future
cash distributions to partners are not yet known and will depend upon the
Partnership's future cash requirements, including the receipt of rental payments
from Royal Aviation.
Impact of the Year 2000 Issue
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. As discussed in prior filings with the Securities
and Exchange Commission, the General Partner has engaged GE Capital Aviation
Services, Inc. ("GECAS") to provide certain management services to the
Partnership. Both the General Partner and GECAS are wholly-owned subsidiaries
(either direct or indirect) of General Electric Capital Corporation ("GECC").
All of the Partnership's operational functions are handled either by the General
Partner and GECAS or by third parties (as discussed in the following
paragraphs), and the Partnership has no information systems of its own.
As discussed in the Partnership's Annual Report on Form 10-K, GECC and GECAS are
applying a Six Sigma quality approach to identify and mitigate Year 2000 issues
in their information systems, products and services, facilities and suppliers as
well as to assess the extent to which Year 2000 issues will affect their
customers. Each business has a Year 2000 leader who oversees a multi-functional
remediation project team responsible for remediation and contingency planning,
applying a Six Sigma quality approach in four phases: (1) define/measure --
identify and inventory possible sources of Year 2000 issues; (2) analyze --
determine the nature and extent of Year 2000 issues and develop project plans to
address those issues; (3) improve -- execute project plans and perform a
majority of the testing; and (4) control -- complete testing, continue
monitoring readiness and complete necessary contingency plans. As of the end of
June 1999, virtually all significant information systems, products and services,
facilities and suppliers were in the control phase. As a final step in the
control phase, GECC has developed, tested and is prepared to implement
contingency plans to minimize disruption of critical business processes.
As noted elsewhere, the Partnership has sold all of its aircraft-related assets
other than three aircraft engines on lease and the spare parts inventory, which
includes one engine. Three of the remaining engines are on lease with Royal
Aviation, Inc. and Royal Cargo, Inc., and under the terms of the leases, the
lessees have the obligation to repair and maintain the engines. Royal Aviation
has advised GECAS that it has adopted procedures to identify and address Year
2000 issues and that it has developed a plan to fix any problems by the end of
this year. To the extent, however, that Royal Aviation suffers any material
disruption of its business and operations due to Year 2000 failure of equipment
or information systems, such disruption would likely have a material adverse
effect on the Partnership's operations and financial condition.
Aside from maintenance and other matters relating to the Partnership's
aircraft-related assets discussed above, the principal third-party vendors to
the Partnership are those providing the Partnership with services such as
accounting, auditing, banking and investor services. GECAS has applied the same
standards in determining the Year 2000 capabilities of the Partnership's
third-party vendors, as GECAS has applied with respect to its outside vendors
pursuant to its internal Year 2000 program.
The scope of the global Year 2000 effort encompasses many thousands of
applications and computer programs, products and services, facilities and
facilities-related equipment suppliers, and customers. The Partnership, like all
business operations, is also dependent on the Year 2000 readiness of
10
<PAGE>
infrastructure suppliers in areas such as utility, communications,
transportation and other services. In this environment, there will likely be
instances of failure that could cause disruptions in business processes or that
could affect customers' ability to repay amounts owed to the Partnership or
vendors' ability to provide services without interruption. The likelihood and
effects of failures in infrastructure systems, over which the Partnership has no
control, cannot be estimated. However, aside from the impact of any such
possible failures or the possibility of a disruption of Royal's business caused
by Year 2000 failures, the General Partner does not believe that occurrences of
Year 2000 failures will have a material adverse effect on the financial
position, results of operations or liquidity of the Partnership.
To date, the Partnership has not incurred any Year 2000 expenditures nor does it
expect to incur any material costs in the future. However, the activities
involved in the Year 2000 effort necessarily involve estimates and projections
of activities and resources that will be required in the future. These estimates
and projections could change as work progresses.
11
<PAGE>
Part II. Other Information
--------------------------
Item 1. Legal Proceedings
As discussed in Item 3 of Part I of Polaris Aircraft Income Fund I's (the
Partnership) 1998 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Reports to the SEC on Form 10-Q (Form 10-Q) for the periods ended March 31, 1999
and June 30,1999, there are several pending legal actions or proceedings
involving the Partnership. Except as described below, there have been no
material developments with respect to any such actions or proceedings during the
period covered by this report.
Kepford, et al. v. Prudential Securities, et al. - On September 6, 1999, the
Court entered an order granting a stay of this action pending the submission of
the remaining plaintiffs' claims to arbitration.
Other Proceedings - Item 10 in Part III of the Partnership's 1998 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the periods ended March 31,
1999 and June 30, 1999 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. The
Partnership is not a party to these actions. There have been no material
developments with respect to any of the actions described therein during the
period covered by this report.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedule (in electronic format only).
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter for
which this report is filed.
12
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SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND I
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
November 12, 1999 By: /S/Marc A. Meiches
- ---------------------------------- ---------------------------------
Marc A. Meiches
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
13
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