UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
--------------------
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File No. 2-91762
POLARIS AIRCRAFT INCOME FUND I
------------------------------
(Exact name of registrant as specified in its charter)
California 94-2938977
------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
201 High Ridge Road, Stamford, Connecticut 06927
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 357-3776
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
No formal market exists for the units of Limited Partnership interest and
therefore there exists no aggregate market value at December 31, 2002.
Documents incorporated by reference: None
This document consists of 38 pages.
PART I
Item 1. Business
Polaris Aircraft Income Fund I (PAIF-I or the Partnership) was formed primarily
to purchase and lease used commercial jet aircraft in order to provide
distributions of cash from operations, to maximize the residual values of
aircraft upon sale and to protect Partnership capital through experienced
management and diversification. PAIF-I was organized as a California Limited
Partnership on June 27, 1984 and will terminate no later than December 2010. As
of December 31, 2002, the only assets remaining were cash and spare parts in
inventory, which includes one engine. The Partnership plans to liquidate all its
assets in an orderly manner, make a final distribution, and terminate the
Partnership thereafter; however, it is uncertain when this liquidation will
occur because Polaris Investment Management Corporation (PIMC or the General
Partner) is unable to predict when all of the Partnership's remaining assets
will be sold. As discussed in Note 10 to the financial statements, as of March
21, 2003, a letter of intent has been signed to sell this inventory subject to
certain inspections. These spare parts are carried at a book value of zero as of
December 31, 2002.
PAIF-I has many competitors in the aircraft leasing market, including airlines,
aircraft leasing companies, other Limited Partnerships, banks and several other
types of financial institutions. This market is highly competitive and there is
no single competitor who has a significant influence on the industry. In
addition to other competitors, theGeneral Partner, and its affiliates, including
GE Capital Aviation Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation
(PALC), Polaris Holding Company (PHC) and General Electric Capital Corporation
(GE Capital), acquire, lease, finance, sell and remarket aircraft for their own
accounts and for existing aircraft and aircraft leasing programs managed by
them. Further, GECAS provides a significant range of aircraft management
services to third parties, including without limitation Airplanes Group,
together with its subsidiaries (APG), which leases and sells aircraft.
Item 2. Properties
At December 31, 2002, the Partnership owned certain inventoried parts, which
included one engine, out of its original portfolio of eleven aircraft. Three
JT8D-9A engines previously leased to Royal Aviation were redelivered to the
Partnership on September 7, 2000 upon the expiration of the lease. These engines
were sold to Aeroturbine, Inc. on July 19, 2001, on an as-is-where-is basis for
$900,000.
Item 3. Legal Proceedings
Markair, Inc. (Markair) Bankruptcy - As previously reported in the Partnership's
2001 Form 10-K, Markair commenced reorganization proceedings under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Third District of Alaska. On June 11, 1992, the Partnership filed a proof of
claim in the case to recover damages for past due rent and for Markair's failure
to meet return conditions with respect to the Partnership's aircraft that were
leased by Markair. In August 1993, the Bankruptcy Court approved a plan of
reorganization for Markair and a stipulation allowing the Partnership to retain
the security deposits and maintenance reserves previously posted by Markair, and
an unsecured claim against Markair for $445,000. The unsecured claim was
converted to subordinated debentures during 1994, and Markair subsequently
defaulted on its payment obligations on such debentures. On April 14, 1995,
Markair commenced new reorganization proceedings under Chapter 11 of the United
2
States Bankruptcy Code in the United States Bankruptcy Court for the Third
District of Alaska. On October 25, 1995, Markair converted its Chapter 11
reorganization proceeding into a proceeding under Chapter 7 of the United States
Bankruptcy Code in the same court. The trustee, Key Bank of Washington, took
steps to protect the interests of the debenture holders, including the
Partnership, by filing proofs of claim in this proceeding. The Partnership has
not received any distribution from the bankrupt estate on the proofs of claim.
There have been no material developments with respect to this proceeding during
the period covered by this report.
Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition
under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy
Court for the Middle District of Florida, Orlando Division. The Partnership
filed a proof of claim to recover unpaid rent and other damages, and a proof of
administrative claim to recover damages for detention of aircraft,
non-compliance with court orders, post-petition use of engines and liquidated
damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor
committees entered into a settlement which allowed the Partnership an
administrative claim of approximately $2,076,923. The Bankruptcy Court made a
final disposition of the Partnership's claim by permitting the Partnership to
exchange a portion of its unsecured claim for Braniff's right (commonly referred
to as a "Stage 2 Base Level right") under the FAA noise regulations to operate
one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured
claim of $769,231 in the proceedings.
In May of 1998, Braniff's bankrupt estate made a $200,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of PIMC, of which
$138,462 was allocated to the Partnership based on its pro rata share of the
total claims. On January 20, 1999, Braniff's bankrupt estate made an additional
$84,000 payment in respect of the unsecured claims of the Partnership and other
affiliates of PIMC, of which $58,154 was allocated to the Partnership based on
its pro rata share of the total claims. On January 16, 2001, Braniff's bankrupt
estate made a $110,890 payment in respect of the unsecured claims of the
Partnership and other affiliates of PIMC, of which $76,770 was allocated to the
Partnership based on its pro rata share of the total claims. Braniff's bankrupt
estate has made its final distribution and this matter is now closed.
Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, this
action was filed in the District Court of Harris County, Texas against PIMC,
Polaris Securities Corporation (PSC), PHC, PALC, the Partnership, Polaris
Aircraft Income Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI,
GE Capital, Prudential Securities, Inc., Prudential Insurance Company of America
and James J. Darr. The complaint alleges violations of the Texas Securities Act,
the Texas Deceptive Trade Practices Act, sections 11 and 12 of the Securities
Act of 1933, common law fraud, fraud in the inducement, negligent
misrepresentation, negligence, breach of fiduciary duty and civil conspiracy
arising from the defendants' alleged misrepresentation and failure to disclose
material facts in connection with the sale of limited partnership units in the
Partnership and the other Polaris Aircraft Income Funds. Plaintiffs seek, among
other things, an award of compensatory damages in an unspecified amount plus
interest, and double and treble damages under the Texas Deceptive Trade
Practices Act. The trial date for this action was set and rescheduled by the
trial court several times, and on September 2, 1999, the court granted a stay of
this action pending the submission of the remaining plaintiffs' claims to
arbitration. Subsequently, several of the plaintiffs filed a motion with the
Court to dismiss their claims, which the court granted.
On June 5, 2001, the remaining plaintiffs who did not ask the court to dismiss
their claims, Gerald and Judy Beckman, made a motion to retain the case on the
docket of the District Court of Harris County, Texas with respect to their
purported claims against all defendants except Prudential Insurance Company of
America and James J. Darr. On June 27, 2001, the Court entered a docket control
3
order providing for a schedule for discovery and a trial date of December 3,
2001. On October 17, 2001, the remaining plaintiffs entered into a settlement
agreement with PIMC, PSC, PHC, PALC, the Partnership, Polaris Aircraft Income
Fund II, Polaris Aircraft Income Fund III, Polaris Aircraft Income Fund IV,
Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, and GE Capital.
The Partnership did not contribute to the settlement payments and has no further
liability in respect of such matter. On December 11, 2002 the court entered an
order non-suiting this action as to the remaining plaintiffs and accordingly the
case has been finally disposed.
CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act
of Canada - On July 28, 1997, CanAir obtained an order under the Companies'
Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of
Justice, General Division. The CCAA Order restrained CanAir's creditors,
including lessors, from exercising any rights arising from CanAir's default or
non-performance of its obligations until October 28, 1997 or further order of
the court. CanAir leased three engines from the Partnership, and a total of five
aircraft from PHC and General Electric Capital Leasing Canada, Inc. (GECL
Canada). CanAir had defaulted on its July and August 1997 engine rent and
maintenance reserve payment obligations to the Partnership. On August 22, 1997,
GECAS, as agent for PHC, GECL Canada and the Partnership (collectively, the
GECAS Parties), entered into an Aircraft Lease Purchase Agreement with Royal
Aviation Inc. and Royal Cargo Inc. for the transfer of CanAir's future lease
obligations to Royal Aviation Inc.
At December 31, 1999, CanAir owed the GECAS Parties a total of approximately
$1.5 million. Of this amount, approximately $30,365 was owed to the Partnership
under the engine lease, exclusive of accrued interest and maintenance reserve
payment obligations.
The receiver appointed by the Ontario Court of Justice on behalf of CanAir's
creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well
as all of CanAir's other assets, including spare parts and accounts receivable.
A portion of the sale proceeds have been distributed to CanAir's creditors,
including the GECAS Parties. The Partnership received settlement in connection
with its pro rata share of the CanAir bankruptcy in four separate payments from
GECAS, subsequent to GECAS' receipt of payments from the receiver. Of the
amounts received by the GECAS parties, the Partnership was allocated an
aggregate amount of $70,863.
On February 15, 2000, the Partnership received the settlement of $61,513 in
connection with the CanAir Bankruptcy Settlement, which is comprised of amounts
received for rents, maintenance reserve obligations and accrued interest. A
portion of the proceeds was treated as a recovery of previously reserved rents
receivable. The allowance for credit losses of $30,365 was reversed and is
included in "Lessee settlement and other" in the statement of operations.
On March 29, 2001, the receiver issued a check for 620,116 Canadian Dollars
(approximately $397,122 U.S. Dollars) to GECAS on behalf of the GECAS Parties.
The Partnership's pro rata share of this distribution is approximately $34,361
U.S. Dollars. After deducting the legal fees related to this matter, out of the
latest distribution, the Partnership received a net pro rata share of $8,897
U.S. Dollars on June 27, 2001. This amount is included in "Lessee settlement and
other" in the statement of operations.
On March 20, 2002, the receiver issued a check for 3,250 Canadian Dollars
(approximately $2,053 U.S. Dollars) to the GECAS Parties, and of this amount,
277 Canadian Dollars (approximately $174 U.S. Dollars) was paid to the
Partnership on September 26, 2002. Additionally, the GECAS Parties received a
final payment from the receiver on May 7, 2002 in the amount of 5,188 Canadian
4
Dollars (approximately $3,278 U.S. Dollars), and of this amount, 442 Canadian
Dollars (approximately $279 U.S. Dollars) was also paid to the Partnership on
September 26, 2002. These amounts are included in "Lessee settlement and other"
in the statement of operations.
Other Proceedings - Part III, Item 10 discusses certain other actions which have
been filed against the general partner in connection with certain public
offerings, including that of the Partnership. The Partnership is not a party to
these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
5
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
a) Polaris Aircraft Income Fund I's Limited Partnership interests (Units)
are not publicly traded. Currently there is no formal market for
PAIF-I's Units and it is unlikely that any market will develop.
b) Number of Security Holders:
Number of Record Holders
Title of Class as of December 31, 2002
------------------ -----------------------------------
Limited Partnership Interest: 6,098
General Partnership Interest: 1
c) Dividends:
Distributions of cash from operations commenced in 1987. The
Partnership made cash distributions to Limited Partners of $1,054,556
and $843,646 or $6.25 and $5.00 per Limited Partnership unit during
2002 and 2001, respectively.
6
Item 6. Selected Financial Data
For the years ended December 31,
--------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues $ 21,224 $ 833,068 $ 475,931 $ 764,665 $1,464,953
Net Income (Loss) $ (131,582) $ 686,041 $ 272,372 $ 600,019 $1,304,160
Net Income (Loss)
allocated to Limited
Partners $ (151,278) $ 594,824 $ 264,054 $ 594,019 $1,053,059
Net Income (Loss) per
Limited Partnership Unit $ (0.90) $ 3.53 $ 1.57 $ 3.52 $ 6.24
Cash Distributions per
Limited Partnership
Unit $ 6.25 $ 5.00 $ 5.00 $ 14.75 $ 8.00
Limited Partnership Units 168,697 168,729 168,729 168,729 168,729
Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit* $ 6.25 $ 5.00 $ 5.00 $ 14.75 $ 8.00
Total Assets $1,112,318 $2,445,482 $3,334,081 $5,090,421 $7,361,736
Partners' Capital $ 735,136 $2,038,447 $2,289,790 $2,954,801 $5,120,063
* Total cumulative distributions of cash per Limited Partnership Unit has not
yet reached $500, hence all Cash Distributions thus far have been considered to
be a return of capital.
7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we identified the most critical
accounting principles upon which our financial reporting depend. We determined
the critical principles by considering accounting policies that involve the most
complex or subjective decisions or assessments. Since the Partnership is in its
liquidation stage, there are no accounting policies that the General Partner
considers to be critical.
Business Overview
At December 31, 2002, Polaris Aircraft Income Fund I (the Partnership) owned
certain inventoried aircraft parts, which included one engine with a book value
of $-0-, out of its original portfolio of eleven aircraft. The three JT8D-9A
engines that were leased to Royal Aviation and were redelivered to the
Partnership on September 7, 2000 were sold on July 19, 2001 to Aeroturbine, Inc.
on an as-is-where-is basis for $900,000.
Industry Update
Demand for Aircraft - At year end 2002, there were approximately 17,500 western
built passenger and freighter jet aircraft in the world fleet. As a result of a
slowdown in travel that began in the spring of 2001 as well as the large shift
in travel levels in the wake of the September 11th tragedy, 2,100 of those
aircraft are currently stored or out of active service. Air travel as measured
by global revenue passenger miles for 2002 is expected to be 1-2% less than the
poor results from the year 2001 when the final numbers are compiled. 2003
traffic levels are expected to show growth from this low base, but many
uncertainties remain. The war with Iraq and continued threat of global terrorism
continue to impact traffic levels as does the sluggish economy. While production
rates for new aircraft are coming down and retirements of older aircraft are
increasing, the number of surplus aircraft is still at record levels.
The unprecedented and worldwide decrease in demand has had profound implications
to airlines as well as aircraft owners and manufacturers. Airlines are still
experiencing huge losses, and are struggling to match capacity and pricing to
demand. Manufacturers have attempted to deliver the aircraft that were in the
backlog and the modest orders in 2002 and achieve some stability in their
production lines. Trading values and lease rates have declined further,
particularly on older aircraft as the demand shock took a cyclical downturn into
a deep trough. The bankruptcy of two of the largest carriers in the world,
subsequent aircraft availability and renegotiation of terms has just added to an
already bad situation. As manufacturers reduce production, airlines accelerate
retirements of older aircraft, and a recovering air travel market begins to
reduce the aircraft surplus, this cyclical downturn is expected to reverse
itself and the market is expected to return to a stable condition. This will
take more time as manufacturers cannot drop production overnight and owners will
be reluctant to scrap aircraft that they own despite the lack of a current
market for them.
Low cost carriers are the only ones able to prosper in this environment of
commoditized airfare pricing. The bulk of the orders that were actually placed
during 2002 came from those carriers like Easyjet. Asia is another bright spot
8
where the traffic levels have been least impacted by the terrorism in the US and
the economic downturn.
Maintenance of Aging Aircraft - The process of aircraft maintenance, including
engines, begins at the aircraft design stage. For aircraft operating under
Federal Aviation Administration (FAA) regulations, a review board consisting of
representatives of the manufacturer, FAA representatives and operating airline
representatives is responsible for specifying the aircraft's initial maintenance
program. The General Partner understands that this program is constantly
reviewed and modified throughout the aircraft's operational life.
Since 1988, the FAA, working with the aircraft manufacturers and operators, has
issued a series of Airworthiness Directives (ADs) which mandate that operators
conduct more intensive inspections, primarily of the aircraft fuselages. The
results of these mandatory inspections may result in the need for repairs or
structural modifications that may not have been required under pre-existing
maintenance programs.
Aircraft Noise - Another issue which has affected the airline industry is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are no
longer allowed to operate from civil airports in the United States. Stage 2
aircraft no longer meet FAA operational requirements, having been phased-out
under the rules discussed below. Stage 3 aircraft are the most quiet and are the
standard for all new aircraft.
Other countries have also adopted noise policies. The European Union (EU)
adopted a non-addition rule in 1989, which directed each member country to pass
the necessary legislation to prohibit airlines from adding Stage 2 aircraft to
their fleets after November 1, 1990, with all Stage 2 aircraft phased-out by the
year 2002. The International Civil Aviation Organization has also endorsed the
phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.
Legislation had been drafted and was under review by the EU for sometime to
adopt anti-hushkitting regulations within member states. The legislation sought
to ban hushkitted aircraft from being added to member states registers and
precluded all operation of hushkitted aircraft within the EU after certain
specific dates. Due to criticism by the US Government, the enactment of this
legislation has been deferred twice and it is now uncertain if it will ever be
enacted. However, the effect of this proposal has been to reduce the demand for
hushkitted aircraft within the EU and its neighboring states, including the
former Eastern Block states.
Remarketing Update
The Partnership has made the engine along with the remaining inventory of spare
parts available for sale, and intends to liquidate in an orderly manner all
assets and then make a final distribution; however, it is uncertain when this
liquidation will occur because the General Partner is unable to predict when all
of the Partnership's remaining assets will be sold. As discussed in Note 10 to
the financial statements, as of March 21, 2003, a letter of intent has been
signed to sell this inventory subject to certain inspections.
Partnership Operations
The Partnership reported net loss of $131,582 or $0.90 per Limited Partnership
unit for the year ended December 31, 2002 as compared to net income of $686,041
and $272,372 or $3.53 and $1.57, per Limited Partnership unit for the years
9
ended December 31, 2001, and 2000, respectively. Operating results decreased in
2002 as compared to 2001 primarily due to the recognition of maintenance reserve
income and a gain from the sale of engines in 2001, as well as decreases in
lessee settlements and interest income, and higher administrative expenses,
partially offset by a decrease in operating expenses. Operating results
increased in 2001 as compared to 2000 primarily due to the release of
maintenance reserves to income, gain on the sale of three engines, and a
decrease in depreciation, management fees and operating expenses, partially
offset by a decrease in rental income and interest income.
There was no rent from operating leases received during in 2002 and 2001 as the
last remaining assets on operating lease, three engines leased to Royal
Aviation, were returned upon lease expiration in August 2000. The rent from
operating leases for 2000 is due to the engine leases.
Interest income decreased in 2002 as compared to 2001, as well as in 2001 as
compared to 2000 primarily due to a decrease in the cash reserves as a result of
distributions of excess cash reserves to the partners.
Gain on sale of engines during 2001 was due to the sale of the three engines
that were on lease to Royal Aviation. There were no such sales in 2002 or in
2000.
Lessee settlement and other consisted of the final payments relating to claims
associated with CanAir Cargo Ltd (CanAir) defaults in 2002; payments of $76,770
in connection with Braniff's bankruptcy and $8,897 associated with CanAir in
2001; and payment of $61,513 associated with CanAir in 2000.
During 2001, $631,316 of maintenance reserves were released to income. The
Partnership's three engines were sold on July 19, 2001 on an as-is-where-is
basis resulting in no further need to hold maintenance reserves. There was no
such income in 2002 or 2000.
Depreciation expense decreased to $-0- during 2002 and 2001, as compared to
$11,250 in 2000, as a result of the expiration of the final engine leases in
August 2000. At the expiration of the leases, the engines were redelivered to
the Partnership and subsequently sold.
Management fees decreased to $-0- during 2002 and 2001, as compared to $12,000
in 2000, primarily due to the expiration of the engine leases to Royal Aviation
in August 2000.
Operating expenses decreased in 2002 as compared to 2001 primarily as a result
of expenses in 2001 related to preparing the three JT8D-9A engines for sale.
Operating expenses decreased in 2001 as compared to 2000 primarily as a result
of shipping and inspection fees paid in connection with the return of the three
engines to the Partnership in 2000.
Administration and other expense increased in 2002 as compared to 2001 and 2000
primarily due to an increase in legal fees incurred to comply with an SEC
prompted court order related to transfers of units to entities owned by an
investor. There were expenses incurred during 2001 associated with the TWA
Bankruptcy, which partially offset the increase in legal fees in 2002 on a
comparative basis.
10
Liquidity and Cash Distributions
Liquidity - PIMC has determined that the Partnership maintain cash reserves as a
prudent measure to ensure that the Partnership has available funds for winding
up the affairs of the Partnership and for other contingencies. The Partnership's
cash reserves will be monitored and may be revised from time to time as further
information becomes available in the future.
Cash Distributions - Cash distributions to Limited Partners during 2002, 2001
and 2000 were $1,054,556, $843,646, and $843,645, respectively. Cash
distributions per Limited Partnership unit were $6.25, $5.00, and $5.00 during
2002, 2001 and 2000, respectively. The timing and amount of the final cash
distribution to partners is not yet known and will depend upon the Partnership's
future cash requirements and the timing of the sale and amount of proceeds from
the sale of its remaining inventory of spare parts including one engine.
The Partnership does not have any material off balance sheet commitments or
obligations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about market risk disclosures involves forward-looking
statements. Market risks may include exposure to changes in equity prices,
interest rates and foreign currency exchange rates. Actual results could differ
materially from those projected in the forward-looking statements. The
Partnership does not use derivative financial instruments for speculative,
trading or any other purpose.
Equity Price Risk - The potential for changes in the market value of marketable
securities is referred to as "market risk". The Partnership does not own any
marketable securities.
Interest Rate Risk - Exposure to market risk resulting from changes in interest
rates relates primarily to the Partnership's lease portfolio. Income and cash
flows would not be impacted by changes in the general level of U.S. interest
rates since the Partnership's leases are fixed rate. The General Partner would
not expect an immediate 10% increase or decrease in current interest rates to
have a material effect on the fair market value of the Partnership's lease
portfolio.
Foreign Currency Risk - The Partnership does not have any foreign currency
denominated assets or liabilities or purchase commitments and has not entered
into any foreign currency contracts. Accordingly, the Partnership is not exposed
to fluctuations in foreign currency exchange rates.
11
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND I
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001
AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
TOGETHER WITH THE
REPORT OF INDEPENDENT AUDITORS
12
REPORT OF INDEPENDENT AUDITORS
The Partners
Polaris Aircraft Income Fund I
We have audited the accompanying balance sheet of Polaris Aircraft Income Fund I
(a California limited partnership) as of December 31, 2002, and the related
statements of operations, changes in partners' capital and cash flows for year
then ended. These financial statements are the responsibility of the General
Partner. Our responsibility is to express an opinion on these financial
statements based on our audit. The 2001 and 2000 financial statements were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report dated
February 1, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the General Partner, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of Polaris Aircraft Income Fund
I as of December 31, 2002, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California,
February 5, 2003
13
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with the Polaris Aircraft Income Fund I's filing on Form 10-K for the
year ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Polaris Aircraft Income Fund I:
We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
I (a California limited partnership) as of December 31, 2001 and 2000, and the
related statements of operations, changes in partners' capital and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the General Partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the General Partner, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Polaris Aircraft Income Fund I
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Francisco, California,
February 1, 2002
14
POLARIS AIRCRAFT INCOME FUND I
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $1,112,318 $2,445,482
---------- ----------
Total Assets $1,112,318 $2,445,482
========== ==========
LIABILITIES AND PARTNERS' CAPITAL :
PAYABLE TO AFFILIATES $ 9,253 $ 38,214
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 367,929 368,821
---------- ----------
Total Liabilities 377,182 407,035
---------- ----------
PARTNERS' CAPITAL :
General Partner 37,476 134,953
Limited Partners, 168,697 units (168,729 in 2001)
issued and outstanding 697,660 1,903,494
---------- ----------
Total Partners' Capital 735,136 2,038,447
---------- ----------
Total Liabilities and Partners' Capital $1,112,318 $2,445,482
========== ==========
The accompanying notes are an integral part of these statements.
15
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
REVENUES:
Rent from operating leases $ -- $ -- $ 240,000
Interest 20,771 74,835 174,418
Gain on sale of engines -- 41,250 --
Lessee settlement and other 453 85,667 61,513
Maintenance reserves -- 631,316 --
--------- --------- ---------
Total Revenues 21,224 833,068 475,931
--------- --------- ---------
EXPENSES:
Depreciation -- -- 11,250
Management fees to General Partner -- -- 12,000
Operating -- 5,900 36,238
Administration and other 152,806 141,127 144,071
--------- --------- ---------
Total Expenses 152,806 147,027 203,559
--------- --------- ---------
NET INCOME (LOSS) $(131,582) $ 686,041 $ 272,372
========= ========= =========
NET INCOME ALLOCATED
TO THE GENERAL PARTNER $ 19,696 $ 91,217 $ 8,318
========= ========= =========
NET INCOME (LOSS) ALLOCATED
TO THE LIMITED PARTNERS $(151,278) $ 594,824 $ 264,054
========= ========= =========
NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT $ (0.90) $ 3.53 $ 1.57
========= ========= =========
UNITS USED TO CALCULATE
NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT 168,697 168,729 168,729
The accompanying notes are an integral part of these statements.
16
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1999 $ 222,894 $ 2,731,907 $ 2,954,801
Net income 8,318 264,054 272,372
Cash distributions to partners (93,738) (843,645) (937,383)
----------- ----------- -----------
Balance, December 31, 2000 137,474 2,152,316 2,289,790
Net income 91,217 594,824 686,041
Cash distribution to partners (93,738) (843,646) (937,384)
----------- ----------- -----------
Balance, December 31, 2001 134,953 1,903,494 2,038,447
Net income (loss) 19,696 (151,278) (131,582)
Cash distribution to partners (117,173) (1,054,556) (1,171,729)
----------- ----------- -----------
Balance, December 31, 2002 $ 37,476 $ 697,660 $ 735,136
=========== =========== ===========
The accompanying notes are an integral part of these statements.
17
POLARIS AIRCRAFT INCOME FUND I
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (131,582) $ 686,041 $ 272,372
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Depreciation -- -- 11,250
Gain on sale of engines -- (41,250) --
Changes in operating assets and
liabilities:
Decrease in rent and other receivables -- -- 30,000
Decrease (increase) in other assets -- 6,297 (6,297)
Increase (decrease) in payable to
affiliates (28,961) (10,690) 37,688
Increase (decrease) in accounts payable
and accrued liabilities (892) 4,750 (10,618)
Decrease in security deposits -- -- (45,000)
Decrease in maintenance reserves -- (631,316) (1,073,399)
----------- ----------- -----------
Net cash (used in) provided by
operating activities (161,435) 13,832 (784,004)
----------- ----------- -----------
INVESTING ACTIVITIES:
Net proceeds from sale of engines -- 900,000 --
----------- ----------- -----------
Net cash provided by investing
activities -- 900,000 --
----------- ----------- -----------
FINANCING ACTIVITIES:
Cash distributions to partners (1,171,729) (937,384) (937,383)
----------- ----------- -----------
Net cash used in financing
activities (1,171,729) (937,384) (937,383)
----------- ----------- -----------
CHANGES IN CASH AND CASH
EQUIVALENTS (1,333,164) (23,552) (1,721,387)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,445,482 2,469,034 4,190,421
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 1,112,318 $ 2,445,482 $ 2,469,034
=========== =========== ===========
The accompanying notes are an integral part of these statements.
18
POLARIS AIRCRAFT INCOME FUND I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. Organization and the Partnership
Polaris Aircraft Income Fund I (PAIF-I or the Partnership) was formed on June
27, 1984 as a California limited partnership for the purpose of acquiring and
leasing aircraft. It will terminate no later than December 2010. Upon
organization, both the General Partner and the initial Limited Partner
contributed $500. The offering of Limited Partnership units terminated on
December 31, 1985, at which time the Partnership had sold 168,729 units of $500,
representing $84,364,500. All unit holders were admitted to the Partnership on
or before January 1, 1986. During 2002, 32 units were abandoned. There were no
units abandoned during 2001. At December 31, 2002, there were 168,697 units
outstanding.
Polaris Investment Management Corporation (PIMC), the sole General Partner of
the Partnership, supervises the day-to-day operations of the Partnership. PIMC
is a wholly-owned subsidiary of Polaris Aircraft Leasing Corporation (PALC).
Polaris Holding Company (PHC) is the parent company of PALC. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company, owns
100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to related parties are described in Notes 6 and 7.
2. Accounting Principles and Policies
Accounting Method - The Partnership maintains its accounting records, and
prepares its financial statements on the accrual basis of accounting. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds. Cash and cash equivalents are stated at cost, which
approximates fair value.
Aircraft and Depreciation - On July 19, 2001 the Partnership sold three engines
to Aeroturbine, Inc. on an as-is-where-is basis for $900,000. The only remaining
non-cash asset is an inventory of spare parts that includes one engine, which
has been made available for sale. These assets are carried at book value of zero
as of December 31, 2002 and 2001. The Partnership plans to liquidate all its
assets and make a final distribution thereafter.
Maintenance Reserves - The Partnership received maintenance reserve payments
from certain of its lessees that were either reimbursed to the lessee or applied
against certain costs incurred by the Partnership or lessee for maintenance work
performed on the Partnership's aircraft or engines, as specified in the leases.
Maintenance reserve payments are recognized when received and balances remaining
19
at the termination of the lease, if any, were used by the Partnership to offset
required maintenance expenses or recognized as revenue. (See Note 3)
Operating Expenses - Operating expenses include costs incurred to maintain,
insure, lease and sell the Partnership's aircraft, including costs related to
lessee defaults and costs of disassembling aircraft inventory.
Net Income Per Limited Partnership Unit - Net income per Limited Partnership
unit is based on the Limited Partners' share of net income, allocated in
accordance with the Partnership Agreement, and the number of units outstanding
for the years ended December 31, 2002, 2001 and 2000.
Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
3. Maintenance Reserves
While the Partnership had aircraft and engines on lease, the Partnership
received maintenance reserve payments from its lessee. During the terms of the
lease, such maintenance reserves could be applied to reimburse the lessee or pay
directly certain costs incurred by the Partnership for maintenance work
performed on the Partnership's aircraft or engines, as specified in the leases.
Maintenance reserve balances remaining at the termination of the lease were
available to be used by the Partnership to offset future maintenance expenses or
recognized as revenue. Due to the fact that the Partnership sold its three
JT8D-9A engines in an as-is-where-is condition in July 2001 for $900,000, the
maintenance reserve balance of $631,316 from the lease to Royal Aviation was
recognized as income during 2001.
4. Aircraft and Aircraft Engines
At December 31, 2002, the Partnership owned certain inventoried aircraft parts,
which includes one engine, out of its original portfolio of eleven used
commercial jet aircraft. These assets have been fully depreciated. As discussed
in Note 10 to the financial statements, as of March 21, 2003, a letter of intent
has been signed to sell this inventory subject to certain inspections.
Three Aircraft Engines - On August 31, 2000, a lease for the three JT8D-9A
engines to Royal Aviation expired. The engines were returned on September 7,
2000 and a security deposit of $45,000 was refunded to Royal Aviation on
November 21, 2000. The Partnership sold these three engines on July 19, 2001 on
an as-is-where-is basis for $900,000. The Partnership received the proceeds for
these engines in the third quarter of 2001. This sale resulted in a gain of
$41,250 that is reflected in the statement of operations.
5. Claims Related to Lessee Defaults
Braniff, Inc. (Braniff) Bankruptcy - In September 1989, Braniff filed a petition
under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy
Court for the Middle District of Florida, Orlando Division. The Partnership
filed a proof of claim to recover unpaid rent and other damages, and a proof of
administrative claim to recover damages for detention of aircraft,
non-compliance with court orders, post-petition use of engines and liquidated
20
damages. On July 27, 1992, the Partnership, Braniff and the Braniff creditor
committees entered into a settlement which allowed the Partnership an
administrative claim of approximately $2,076,923. The Bankruptcy Court made a
final disposition of the Partnership's claim by permitting the Partnership to
exchange a portion of its unsecured claim for Braniff's right (commonly referred
to as a "Stage 2 Base Level right") under the FAA noise regulations to operate
one Stage 2 aircraft and by allowing the Partnership a net remaining unsecured
claim of $769,231 in the proceedings.
In May of 1998, Braniff's bankrupt estate made a $200,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation, of which $138,462 was allocated to the
Partnership based on its pro rata share of the total claims. On January 20,
1999, Braniff's bankrupt estate made an additional $84,000 payment in respect of
the unsecured claims of the Partnership and other affiliates of Polaris
Investment Management Corporation, of which $58,154 was allocated to the
Partnership based on its pro rata share of the total claims. On January 16,
2001, Braniff's bankrupt estate made a $110,890 payment in respect of the
unsecured claims of the Partnership and other affiliates of Polaris Investment
Management Corporation, of which $76,770 was allocated to the Partnership based
on its pro rata share of the total claims. Braniff's bankrupt estate has made
its final distribution and this matter is now closed.
CanAir Cargo Ltd. (CanAir) Order under the Companies' Creditors Arrangement Act
of Canada - On July 28, 1997, CanAir obtained an order under the Companies'
Creditors Arrangement Act of Canada (the CCAA Order) from the Ontario Court of
Justice, General Division. The CCAA Order restrained CanAir's creditors,
including lessors, from exercising any rights arising from CanAir's default or
non-performance of its obligations until October 28, 1997 or further order of
the court. CanAir leased three engines from the Partnership, and a total of five
aircraft from Polaris Holding Company (Polaris) and General Electric Capital
Leasing Canada, Inc. (GECL Canada). CanAir had defaulted on its July and August
1997 engine rent and maintenance reserve payment obligations to the Partnership.
On August 22, 1997, GE Capital Aviation Services, Inc. (GECAS), as agent for
Polaris, GECL Canada and the Partnership (collectively, the GECAS Parties),
entered into an Aircraft Lease Purchase Agreement with Royal Aviation Inc. and
Royal Cargo Inc. for the transfer of CanAir's future lease obligations to Royal
Aviation Inc.
At December 31, 1999, CanAir owed the GECAS Parties a total of approximately
$1.5 million. Of this amount, approximately $30,365 was owed to the Partnership
under the engine lease, exclusive of accrued interest and maintenance reserve
payment obligations.
The receiver appointed by the Ontario Court of Justice on behalf of CanAir's
creditors sold the remaining five Convair 280 aircraft owned by CanAir, as well
as all of CanAir's other assets, including spare parts and accounts receivable.
A portion of the sale proceeds have been distributed to CanAir's creditors,
including the GECAS Parties. The Partnership received settlement in connection
with its pro rata share of the CanAir bankruptcy in four separate payments from
GECAS, subsequent to GECAS' receipt of payments from the receiver. Of the
amounts received by the GECAS parties, the Partnership was allocated an
aggregate amount of $70,863.
On February 15, 2000, the Partnership received the settlement of $61,513 in
connection with the CanAir Bankruptcy Settlement, which is comprised of amounts
received for rents, maintenance reserve obligations and accrued interest. A
portion of the proceeds was treated as a recovery of previously reserved rents
21
receivable. The allowance for credit losses of $30,365 was reversed and is
included in "Lessee settlement and other" in the statement of operations.
On March 29, 2001, the receiver issued a check for 620,116 Canadian Dollars
(approximately $397,122 U.S. Dollars) to GECAS on behalf of the GECAS Parties.
The Partnership's pro rata share of this distribution is approximately $34,361
U.S. Dollars. After deducting the legal fees related to this matter, out of the
latest distribution, the Partnership received a net pro rata share of $8,897
U.S. Dollars on June 27, 2001. This amount is included in "Lessee settlement and
other" in the statement of operations.
On March 20, 2002, the receiver issued a check for 3,250 Canadian Dollars
(approximately $2,053 U.S. Dollars) to the GECAS Parties, and of this amount,
277 Canadian Dollars (approximately $174 U.S. Dollars) was paid to the
Partnership on September 26, 2002. Additionally, the GECAS Parties received a
final payment from the receiver on May 7, 2002 in the amount of 5,188 Canadian
Dollars (approximately $3,278 U.S. Dollars), and of this amount, 442 Canadian
Dollars (approximately $279 U.S. Dollars) was also paid to the Partnership on
September 26, 2002. These amounts are included in "Lessee settlement and other"
in the statement of operations.
6. Related Parties
Under the Limited Partnership Agreement (Partnership Agreement), the Partnership
paid or agreed to pay the following amounts to PIMC and/or its affiliates in
connection with services rendered:
a. An aircraft management fee equal to 5% of gross rental revenues with
respect to operating leases of the Partnership, payable upon receipt of
the rent. In 2002, 2001 and 2000, the Partnership paid management fees
to PIMC of $-0-, $-0-, and $15,018, respectively.
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and its assets. In 2002, 2001
and 2000, $174,353, $89,435, and $158,083 were reimbursed by the
Partnership to PIMC for administrative expenses. Administrative
reimbursements of $9,253 and $35,942 were payable to PIMC at December
31, 2002 and 2001, respectively. Partnership reimbursements to PIMC for
maintenance and remarketing costs of $-0-, $9,592, and $1,341,702 were
paid in 2002, 2001, and 2000, respectively. Maintenance and remarketing
reimbursements of $-0- and $2,272 were payable to PIMC at December 31,
2002 and 2001, respectively.
c. A 10% interest to PIMC in all cash distributions and sales proceeds,
gross income in an amount equal to 9.09% of distributed cash available
from operations and 1% of net income or loss and taxable income or
loss, as such terms are defined in the Partnership Agreement. After the
Partnership has sold or disposed of aircraft representing 50% of the
original aircraft cost, gains from additional sales or disposals must
be allocated to the General Partner's capital account until the General
Partner's capital account is no longer in a deficit position. The
General Partner received $117,173, $93,738, and $93,738 in 2002, 2001,
and 2000 respectively.
d. A subordinated sales commission to PIMC of 3% of the gross sales price
of each aircraft for services performed upon disposition and
reimbursement of out-of-pocket and other disposition expenses.
Subordinated sales commissions will be paid only after Limited Partners
have received distributions in an aggregate amount equal to their
capital contributions plus a cumulative non-compounded 8% per annum
22
return on their adjusted capital contributions, as defined in the
Partnership Agreement. The Partnership did not pay or accrue a sales
commission on any aircraft sales to date as the above subordination
threshold has not been met.
e. In the event that, immediately prior to the dissolution and termination
of the Partnership, the General Partner shall have a deficit balance in
its tax basis capital account, then the General Partner shall
contribute cash to the capital of the Partnership equal to such deficit
(see Note 8).
7. Partners' Capital
The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the General Partner and the Limited Partners
(see Note 6). Such allocations are made using income or loss calculated under
GAAP for book purposes, which, as more fully described in Note 8, varies from
income or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, are distributed 10% to the General Partner and 90% to the Limited
Partners.
The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.
Had all the assets of the Partnership been liquidated at December 31, 2002 at
the current carrying value, the tax basis capital (deficit) accounts of the
General Partner and the Limited Partners is estimated to be $(1,435,818) and
$13,706,741, respectively.
8. Income Taxes
Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the accompanying financial statements.
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 2002 and 2001 are as
follows:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
2002: Assets $1,112,318 $12,648,106 $(11,535,788)
Liabilities 377,182 377,182 -
2001: Assets $2,445,482 $13,981,270 $(11,535,788)
Liabilities 407,035 407,035 -
23
The following is a reconciliation between net income (loss) per Limited
Partnership unit reflected in the financial statements and the information
provided to Limited Partners for federal income tax purposes:
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Book net income (loss) per Limited Partnership
unit $(0.90) $ 3.53 $ 1.57
Adjustments for tax purposes represent
differences between book and tax revenue
and expenses:
Rental and maintenance reserve revenue
recognition -- (3.70) 1.74
Depreciation -- (0.49) (0.58)
Loss on sale of aircraft or inventory -- (5.85) (0.47)
Other revenue and expense items -- -- (0.17)
------ ------ ------
Taxable net income (loss) per Limited
Partnership unit $(0.90) $(6.51) $ 2.09
====== ====== ======
The differences between net income and loss for book purposes and net income and
loss for tax purposes result from the temporary differences of certain revenue
and deductions.
For book purposes, rental revenue is generally recorded as it is earned on a
straight line basis for operating leases. For tax purposes, certain temporary
differences exist in the recognition of revenue which is generally recognized
when received. Increases in the Partnership's book maintenance reserve liability
were recognized as rental revenue for tax purposes. Disbursements from the
Partnership's book maintenance reserves are capitalized or expensed for tax
purposes, as appropriate.
The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
purposes. These differences in depreciation methods result in book to tax
differences on the sale of aircraft. In addition, certain costs were capitalized
for tax purposes and expensed for book purposes, which yields a different gain
or loss on the sale of aircraft or inventory.
9. Selected Quarterly Financial Data (unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001:
24
2002 March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
Total Revenues $ 6,372 $ 5,380 $ 5,364 $ 4,108
Net Loss $ (26,993) $ (45,489) $ (23,571) $ (35,529)
Net Income - General Partner $ 6,040 $ 4,869 $ 5,075 $ 3,712
Net Loss - Limited Partners $ (33,033) $ (50,358) $ (28,646) $ (39,241)
Net Loss Per Limited
Partnership Unit $ (0.20) $ (0.30) $ (0.17) $ (0.23)
2001 March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
Total Revenues $ 99,821 $ 657,781 $ 60,639 $ 14,827
Net Income (Loss) $ 68,945 $ 618,235 $ 23,024 $ (24,163)
Net Income (Loss) - General
Partner $ 85,046 $ 6,183 $ 230 $ (242)
Net Income (Loss) - Limited
Partners $ (16,101) $ 612,052 $ 22,794 $ (23,921)
Net Income (Loss) Per Limited
Partnership Unit $ (0.10) $ 3.63 $ 0.14 $ (0.14)
10. Event Subsequent to the Date of Auditors Report (unaudited)
On March 21, 2003, the Partnership signed a letter of intent to sell the spare
parts in inventory, including the engine, to Amtec Corporation for $52,500
subject to the purchaser inspecting the inventory.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On August 1, 2002, the Board of Directors of the general partner of Polaris
Aircraft Income Fund I, a California limited partnership (the Partnership), on
behalf of the Partnership, adopted a resolution dismissing Arthur Andersen LLP
(Andersen) as the Partnership's auditors and appointed Ernst & Young LLP (E&Y)
to replace Andersen.
Andersen's reports on the Partnership's financial statements as of and for each
of the years ended December 31, 2001 and 2000 did not contain an adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the years ended December 31, 2001 and 2000 and through the date hereof,
there were no disagreements with Andersen on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to Andersen's satisfaction, would have caused Andersen to
make reference to the subject matter in connection with its report on the
Partnership's financial statements for such years; and there were no reportable
events as described in Item 304(a)(1)(v) of Regulation S-K.
During the years ended December 31, 2001 and 2000 and through the date hereof,
the Partnership did not consult E&Y with respect to the application of
25
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Partnership's
financial statements, or any other matters or reportable events as set forth in
Items 304(a)(2)(i) and (ii) of Regulation S-K.
The Partnership has provided Andersen with a copy of the foregoing statements.
Because the Partnership has been informed by Andersen that as of July 1, 2002 it
would not be providing the letter stating that it was in agreement with the
statements contained herein, no such letter is attached to this filing as an
Exhibit. The inability to obtain such letter from Andersen and not attaching a
letter to this filing is permitted by Item 304T(b)(2) of Regulation S-K.
26
PART III
Item 10. Directors and Executive Officers of the Registrant
Polaris Aircraft Income Fund I (PAIF-I or the Partnership) has no directors or
officers. Polaris Holding Company (PHC) and its subsidiaries, including Polaris
Aircraft Leasing Corporation (PALC) and Polaris Investment Management
Corporation (PIMC), the General Partner of the Partnership (collectively
Polaris), restructured their operations and businesses (the Polaris
Restructuring) in 1994. In connection therewith, PIMC entered into a services
agreement dated as of July 1, 1994 (the Services Agreement) with GE Capital
Aviation Services, Inc. (GECAS), a Delaware corporation which is a wholly owned
subsidiary of General Electric Capital Corporation, a Delaware corporation (GE
Capital). GE Capital has been PHC's parent company since 1986. As subsidiaries
of GE Capital, GECAS and PIMC are affiliates.
The officers and directors of PIMC are:
Name PIMC Title
--------------------------- ------------------------------------
William Carpenter President; Director
Stephen E. Yost Chief Financial Officer
Melissa Hodes Vice President; Director
Norman C. T. Liu Vice President; Director
Ray Warman Secretary
Robert W. Dillon Assistant Secretary
Substantially all of these management personnel will devote only such portion of
their time to the business and affairs of PIMC as deemed necessary or
appropriate.
Mr. Carpenter, 39, assumed the position of President and Director of PIMC
effective October 1, 2001. Mr. Carpenter holds the position of Executive Vice
President and Chief Risk Manager of GECAS, having previously held the position
of Vice President - Chief Risk Manager of GECAS (Acting). Prior to joining GECAS
eight years ago, Mr. Carpenter was an aerospace engineer specializing in
aircraft handling qualities. Prior to that, Mr. Carpenter was a commissioned
officer and pilot in the United States Armed Forces.
Mr. Yost 41, assumed the position of Chief Financial Officer of PIMC effective
April 17, 2002. Mr. Yost presently holds the position of Senior Vice President
and Manager Transaction Advisory for GECAS. Mr Yost has been with the General
Electric Company (GE) and its subsidiaries since 1994. Prior to joining GECAS,
Mr. Yost held the position of European Controller for GE Capital Fleet Services
and prior to that Controller of GE Capital Commercial Finance. Mr. Yost is a
Certified Public Accountant and prior to joining GE was an audit manager with
Coopers & Lybrand.
Ms. Hodes, 37, assumed the position of Director of PIMC effective May 19, 2000.
Ms. Hodes presently holds the position of Senior Vice President, Financial
Planning and Analysis for GECAS. Ms. Hodes has been with the General Electric
Company (GE) and its subsidiaries since 1987. Prior to joining GECAS, Ms. Hodes
held various financial management positions with GE Capital Card Services, GE
Audit Staff and GE Power Systems.
27
Mr. Liu, 45, assumed the position of Vice President of PIMC effective May 1,
1995 and Director of PIMC effective July 31, 1995. Mr. Liu presently holds the
position of Executive Vice President - Sales and Marketing of GECAS, having
previously held the position of Executive Vice President - Capital Funding and
Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was with General
Electric Capital Corporation for nine years. He has held management positions in
corporate Business Development for General Electric Capital Corporation and in
Syndications and Leasing for the Transportation & Industrial Funding division of
General Electric Capital Corporation. Mr. Liu previously held the position of
managing director of Kidder, Peabody & Co., Incorporated.
Mr. Warman, 54, assumed the position of Secretary of PIMC effective March 23,
1998. Mr. Warman has served as a GECAS Senior Vice President and Associate
General Counsel since March 1996, and for 13 years theretofore was a partner,
with an air-finance and corporate practice, of the national law firm of Morgan,
Lewis & Bockius LLP.
Mr. Dillon, 61, held the position of Vice President - Aviation Legal and
Insurance Affairs, from April 1989 to October 1997. Previously, he served as
General Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994,
Mr. Dillon assumed the position of Assistant Secretary of PIMC. Mr. Dillon
presently holds the position of Senior Vice President and Associate General
Counsel of GECAS.
Certain Legal Proceedings:
On or around September 27, 1995, a complaint entitled Martha J. Harrison v.
General Electric Company, et. al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and Prudential Securities Incorporated. The Partnership is not
named as a defendant in this action. Plaintiff alleges claims of tort, breach of
fiduciary duty in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning
the inducement and solicitation of purchases arising out of the public offering
of Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages,
attorney's fees, interest, costs and general relief.
On or around December 8, 1995, a complaint entitled Overby, et al. v. General
Electric Company, et al. was filed in the Civil District Court for the Parish of
Orleans, State of Louisiana. The complaint names as defendants General Electric
Company and General Electric Capital Corporation. The Partnership is not named
as a defendant in this action. Plaintiffs allege claims of tort, breach of
fiduciary duty, in tort, contract and quasi-contract, violation of sections of
the Louisiana Blue Sky Law and violation of the Louisiana Civil Code in
connection with the public offering of Polaris Aircraft Income Funds III and IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.
In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated, et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. The Partnership is not named as a
defendant in this action. Plaintiffs allege claims of tort, breach of fiduciary
duty, in tort, contract and quasi-contract, violation of sections of the
28
Louisiana Blue Sky Law and violation of the Louisiana Civil Code in connection
with the public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs
seek compensatory damages, attorneys' fees, interest, costs and general relief.
In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v.
Prudential Securities. Incorporated, et al. was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint named as
defendants Prudential Securities Incorporated and Stephen Derby Gisclair. On or
about January 18, 1996, plaintiff filed a First Supplemental and Amending
Petition adding defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of sections of the Louisiana Blue Sky Law and
violation of the Louisiana Civil Code in connection with the public offering of
Polaris Aircraft Income Funds III and IV. Plaintiffs seek compensatory damages,
attorneys' fees, interest, costs and general relief.
On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v.
General Electric Co., et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
in connection with the public offering of Polaris Aircraft Income Fund IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief.
In or around December 1994, a complaint entitled John J. Jones, Jr. v.
Prudential Securities Incorporated, et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company and General Electric
Capital Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort, breach of fiduciary duty in tort, contract and
quasi-contract, violation of section of the Louisiana Blue Sky Law and violation
of the Louisiana Civil Code concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund
III. Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.
On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint named as defendants General
Electric Company and General Electric Capital Corporation. The Partnership is
not named as a defendant in this action. Plaintiffs allege claims of tort,
breach of fiduciary duty in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
concerning the inducement and solicitation of purchases arising out of the
public offering of Polaris Aircraft Income Funds III and IV. Plaintiffs seek
compensatory damages, attorneys' fees, interest, costs and general relief.
On or about May 7, 1996, a petition entitled Charles Rich. et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiffs allege claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Funds
29
III and IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief.
On or about March 4, 1996, a petition entitled Richard J. McGiven v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. The Partnership is not named as a defendant in this action.
Plaintiff alleges claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund V.
Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief.
On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric
Company and General Electric Capital Corporation was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint names as
defendants General Electric Company and General Electric Capital Corporation.
The Partnership is not named as a defendant in this action. Plaintiff alleges
claims of tort concerning the inducement and solicitation of purchases arising
out of the public offering of Polaris Aircraft Income Fund V. Plaintiff seeks
compensatory damages, attorneys' fees, interest, costs and general relief.
Sara J. Bishop, et al. v. Kidder, Peabody & Co., et al., Superior Court of
California, County of Sacramento; Wilson et al. v. Polaris Holding Company et
al., Superior Court of California, County of Sacramento, and ten other
California Actions(1) - In the California actions filed in 1996, approximately
4000 plaintiffs who purchased limited partnership units in Polaris Aircraft
Income Funds I through VI and other limited partnerships sold by Kidder, Peabody
named Kidder, Peabody, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, and General Electric Credit
Corporation and Does 1-100 as defendants. The Partnership was not named as a
defendant in these actions. The complaints all allege violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaints seek to recover compensatory damages and punitive damages in an
unspecified amount, interest, and rescission with respect to Polaris Aircraft
Income Funds III-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The California actions have been settled.
An additional settlement was entered into with certain plaintiffs who had
refused to participate in the first settlement. Plaintiffs' counsel advised the
Court that they would withdraw from representing the remaining plaintiffs --
approximately 330 -- who refused to participate in either of the settlements. In
July, 2000, plaintiffs' counsel submitted to the Court motions to withdraw as
counsel of record for all of the actions. The Court indicated that it would
grant such motions and thereafter would consider dismissing each of the actions
if no plaintiff came forward to prosecute. On August 2, 2001, the Court
conducted a series of status conferences in connection with each of the twelve
California actions and at the conferences dismissed most of the remaining
plaintiffs in those actions. On November 9, 2001, defendants moved for summary
- --------
1 The ten other actions are Abrams, et al. v. Polaris Holding Company, et al.,
Elphick, et al. v. Kidder Peabody & Co., et al., Johnson, et al. v. Polaris
Holding Company, et al., Kuntz, et al. v. Polaris Holding Company, et al.,
McDevitt, et al. v. Polaris Holding Company, et al., Ouellette, et al. v. Kidder
Peabody & Co., et al., Rolph, et al. v. Polaris Holding Company, et al., Self,
et al. v. Polaris Holding Company, et al., Tarrer, et al. v. Kidder Peabody &
Co., et al., Zicos, et al. v. Polaris Holding Company, et al., all filed in
Superior Court of California, County of Sacramento.
30
judgment against most of the remaining plaintiffs based upon a settlement and
bar order entered in a multi-district litigation in 1997. On March 1, 2002 the
judge granted the defendants' summary judgment motions and on August 15, 2002,
the judge entered a judgment of dismissal in each of the California actions.
Other Proceedings - Part I, Item 3 discusses certain other actions arising out
of certain public offerings, including that of the Partnership, to which both
the Partnership and its general partner are parties.
Item 11. Executive Compensation
The Partnership has no directors or officers. The Partnership is managed by
PIMC, the General Partner. In connection with management services provided, no
management and advisory fees were paid to PIMC in 2002; however, a 10% interest
in all cash distributions as described in Note 6 to the financial statements
(Item 8) was paid to PIMC.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) No person owns of record, or is known by the Partnership to own
beneficially, more than five percent of any class of voting
securities of the Partnership.
b) The General Partner of the Partnership owns the equity securities
of the Partnership as set forth in the following table:
Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
- -------- ---------------- -------------------- --------
General Polaris Investment Represents a 10.0% interest of all cash 100%
Partner Management distributions, gross income in an
Interest Corporation amount equal to 9.09% of distributed
cash available from operations, and a
1% interest in net income or loss
c) There are no arrangements known to the Partnership, including any
pledge by any person of securities of the Partnership, the
operation of which may at a subsequent date result in a change in
control of the Partnership.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Controls and Procedures
PIMC management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
31
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this annual report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
32
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Financial Statements.
The following are included in Part II of this report:
Page No.
--------
Report of Independent Auditors 13
Balance Sheets 15
Statements of Operations 16
Statements of Changes in Partners' Capital 17
Statements of Cash Flows 18
Notes to Financial Statements 19
2. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
2002.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
99.1 Certification of President.
99.2 Certification of Chief Financial Officer.
4. Financial Statement Schedules.
All financial statement schedules are omitted because they are not
applicable, not required or because the required information is
included in the financial statements or notes thereto.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND I
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner
March 31, 2003 By: /S/ William Carpenter
----------------------------- ---------------------
Date William Carpenter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/S/William Carpenter President and Director of Polaris March 31, 2003
- -------------------- Investment Management Corporation, --------------
(William Carpenter) General Partner of the Registrant
/S/Stephen E. Yost Chief Financial Officer of Polaris March 31, 2003
- ------------------ Investment Management Corporation, --------------
(Stephen E. Yost) General Partner of the Registrant
/S/Melissa Hodes Vice President and Director of March 31, 2003
- ---------------- Polaris Investment Management --------------
(Melissa Hodes) Corporation, General Partner of
the Registrant
/S/Norman C. T. Liu Vice President and Director of March 31, 2003
- ------------------- Polaris Investment Management --------------
(Norman C. T. Liu) Corporation, General Partner of
the Registrant
34
POLARIS AIRCRAFT INCOME FUND I
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, William R. Carpenter, certify that:
1. I have reviewed this annual report on Form 10-K of Polaris Aircraft Income
Fund I;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to
us by others, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
35
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By: Polaris Investment Management Corporation,
General Partner
/s/ William R. Carpenter
- ------------------------
William R. Carpenter
President
36
CERTIFICATION
- -------------
I, Stephen E. Yost, certify that:
1. I have reviewed this annual report on Form 10-K of Polaris Aircraft Income
Fund I;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to
us by others, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
37
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By: Polaris Investment Management Corporation,
General Partner
/s/ Stephen E. Yost
- -------------------
Stephen E. Yost
Chief Financial Officer
38