UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
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, 1997
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. 33-21977
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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.
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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
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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.
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<TABLE>
POLARIS AIRCRAFT INCOME FUND V,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
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.
</TABLE>
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<TABLE>
POLARIS AIRCRAFT INCOME FUND V,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<CAPTION>
Year Ended December 31, 1996 and
Nine Months Ended September 30, 1997
------------------------------------
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
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.
</TABLE>
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<TABLE>
POLARIS AIRCRAFT INCOME FUND V,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
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.
</TABLE>
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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.
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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
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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.
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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.
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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
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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