UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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. 33-10122
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
State of Organization: California
IRS Employer Identification No. 94-3023671
201 High Ridge Road, Stamford, Connecticut 06927
Telephone - (203) 357-3776
Securities registered pursuant to Section 12(b) and 12(g) of the Act: None
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes No X
--- ---
Number of units outstanding on March 31, 2003 was 499,794.
This document consists of 16 pages.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 2003
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a) Condensed Balance Sheets - March 31, 2003 and
December 31, 2002...........................................3
b) Condensed Statements of Operations - Three Months
Ended March 31, 2003 and 2002...............................4
c) Condensed Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2002
and Three Months Ended March 31, 2003.......................5
d) Condensed Statements of Cash Flows - Three Months
Ended March 31, 2003 and 2002...............................6
e) Notes to Condensed Financial Statements.....................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........9
Item 4. Controls and Procedures................................10
Part II. Other Information
Item 1. Legal Proceedings......................................11
Item 6. Exhibits and Reports on Form 8-K.......................11
Signature .......................................................12
Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.........................................................13
2
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 1,738,830 $ 4,118,926
RENT AND OTHER RECEIVABLES 121,836 179,691
AIRCRAFT HELD FOR SALE 185,000 185,000
AIRCRAFT, net of accumulated depreciation
of $23,253,445 in 2003 and $22,922,026 in 2002 1,350,205 1,681,624
----------- -----------
Total Assets $ 3,395,871 $ 6,165,241
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 108,801 $ 31,637
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 130,517 147,054
DEFERRED INCOME 242,673 350,601
----------- -----------
Total Liabilities 481,991 529,292
----------- -----------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,861,293) (3,784,552)
Limited Partners, 499,794 units in 2003
and 499,824 units in 2002
issued and outstanding 6,775,173 9,420,501
----------- -----------
Total Partners' Capital 2,913,880 5,635,949
----------- -----------
Total Liabilities and Partners' Capital $ 3,395,871 $ 6,165,241
=========== ===========
The accompanying notes are an integral part of these condensed statements.
3
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31
---------------------------
2003 2002
---- ----
REVENUES:
Rent from operating leases $ 467,928 $ 640,218
Interest 6,432 12,910
Gain on sale of aircraft -- 65,000
--------- ---------
Total Revenues 474,360 718,128
--------- ---------
EXPENSES:
Depreciation 331,419 439,193
Management fees to the general partner 13,062 16,638
Operating 11,735 4,476
Administration and other 63,413 77,983
--------- ---------
Total Expenses 419,629 538,290
--------- ---------
NET INCOME $ 54,731 $ 179,838
========= =========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 200,939 $ 115,984
========= =========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $(146,208) $ 63,854
========= =========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (0.29) $ 0.13
========= =========
The accompanying notes are an integral part of these condensed statements.
4
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
CONDENSED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 2002 and
Three Months Ended March 31, 2003
---------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 2001 $ (3,880,841) $ 10,192,419 $ 6,311,578
Net income 235,167 477,982 713,149
Cash distributions to partners (138,878) (1,249,900) (1,388,778)
------------ ------------ ------------
Balance, December 31, 2002 (3,784,552) 9,420,501 5,635,949
Net income (loss) 200,939 (146,208) 54,731
Cash distributions to partners (277,680) (2,499,120) (2,776,800)
------------ ------------ ------------
Balance, March 31, 2003 $ (3,861,293) $ 6,775,173 $ 2,913,880
============ ============ ============
The accompanying notes are an integral part of these condensed statements.
5
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
---------------------------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income $ 54,731 $ 179,838
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 331,419 439,193
Gain on sale of aircraft -- (65,000)
Changes in operating assets and liabilities:
Decrease in rent and other receivables 57,855 172
Increase (decrease) in payable to
affiliates 77,164 (139,581)
Decrease in accounts payable
and accrued liabilities (16,537) (3,028)
Decrease in deferred income (107,928) (160,217)
----------- -----------
Net cash provided by operating
activities 396,704 251,377
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 250,000
----------- -----------
Net cash provided by investing
activities -- 250,000
----------- -----------
FINANCING ACTIVITIES:
Cash distributions to partners (2,776,800) (1,388,778)
----------- -----------
Net cash used in financing
activities (2,776,800) (1,388,778)
----------- -----------
CHANGES IN CASH AND CASH
EQUIVALENTS (2,380,096) (887,401)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,118,926 3,784,951
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,738,830 $ 2,897,550
=========== ===========
The accompanying notes are an integral part of these condensed statements.
6
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and the Partnership
Polaris Aircraft Income Fund III, A California Limited Partnership (the
Partnership), was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. The Partnership will terminate no later than December 2020.
Upon organization, both the General Partner and the initial Limited Partner
contributed $500 to capital. The Partnership recognized no profits and losses
during the periods ended December 31, 1984 and 1985. The offering of depositary
units (Units), representing assignments of Limited Partnership interest,
terminated on September 30, 1987 at which time the Partnership had sold 500,000
Units of $500, representing $250,000,000. All Unit holders were admitted to the
Partnership on or before September 30, 1987. During January 1998, 40 Units were
redeemed by the Partnership in accordance with section 18 of the Limited
Partnership Agreement (the Agreement). During 2002, 136 Units were abandoned.
During the three months ended March 31, 2003, 30 Units were abandoned. At March
31, 2003, there were 499,794 Units outstanding, net of redemptions.
Polaris Investment Management Corporation (PIMC), the sole General Partner of
the Partnership (the General Partner), supervises the day-to-day operations of
the Partnership. Polaris Depository Company III (PDC) serves as the depositary.
PIMC and PDC are wholly-owned subsidiaries 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). Amounts paid and allocations to affiliates are described
in Notes 3 and 4.
At March 31, 2003, the Partnership owned a portfolio of 4 used McDonnell Douglas
DC-9-30 commercial jet aircraft out of its original portfolio of 38 aircraft.
Three of these aircraft were on lease to TWA Airlines LLC (TWA LLC), a wholly
owned subsidiary of American Airlines, Inc. (American). The remaining aircraft
was being stored in New Mexico and was being remarketed for sale.
2. Accounting Principles and Policies
In the opinion of management, the condensed financial statements presented
herein include all adjustments, consisting only of normal recurring items,
necessary to summarize fairly 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. The condensed consolidated balance sheet at December
31, 2002 has been derived from the audited financial statements at that date but
does not include all of the information and note disclosures required by
accounting principles generally accepted in the United States (GAAP). These
statements should be read in conjunction with the financial statements and notes
thereto for the years ended December 31, 2002, 2001, and 2000 included in the
Partnership's 2002 Annual Report to the SEC on Form 10-K.
7
3. Related Parties
Under the Agreement, the Partnership paid or agreed to pay the following amounts
for the current quarter to the general partner, Polaris Investment Management
Corporation, in connection with services rendered or payments made on behalf of
the Partnership:
Payments for
Three Months Ended Payable at
March 31, 2003 March 31, 2003
-------------- --------------
Aircraft Management Fees $ 19,467 $ 17,071
Out-of-Pocket Operating
Expense Reimbursement 8,162 8,013
Out-of-Pocket Administrative
Expense Reimbursement -- 83,717
-------- --------
$ 27,629 $108,801
======== ========
4. Partners' Capital
The Agreement stipulates different methods by which revenue, income and loss
from operations and gain or loss on the sale of aircraft are to be allocated to
the general partner and the limited partners. Such allocations are made using
income or loss calculated under GAAP for book purposes, which varies from income
or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the general partner and 90% to the limited
partners.
The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.
5. Sale of Aircraft
On February 13, 2002 PIMC, on behalf of the Partnership, sold one DC-9-30
aircraft to Amtec Corporation for $250,000 in cash. The Partnership recognized a
gain of $65,000 in the three months ended March 31, 2002.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Overview
At March 31, 2003, Polaris Aircraft Income Fund III, A California Limited
Partnership (the Partnership), owned a portfolio of 4 used McDonnell Douglas
DC-9-30 commercial jet aircraft out of its original portfolio of 38 aircraft.
Three of these aircraft were on lease to TWA Airlines LLC (TWA LLC), a wholly
owned subsidiary of American Airlines, Inc. (American). All remaining leases
will expire by December 31, 2003, after which these aircraft will be remarketed
for sale. The remaining aircraft was being stored in New Mexico and was being
remarketed for sale.
Partnership Operations
The Partnership recorded net income of $54,731, which resulted in a net loss of
$0.29 per limited partnership unit, for the three months ended March 31, 2003,
as compared to net income of $179,838, or $0.13 per limited partnership unit,
for the three months ended March 31, 2002.
The decrease in net income in 2003 is primarily due to decreases in rental, and
interest income, a decrease in gain on sale of aircraft, and an increase in
operating expenses, partially offset by decreases in depreciation, management
fees to the general partner, and administration and other expenses, as discussed
below.
Rent from operating leases decreased to $467,928 in the three months ended March
31, 2003, as compared to $640,218 in the same period in 2002, primarily due to
fewer aircraft on lease. Additionally, the decrease in rent from operating
leases was also caused by lower recognition of deferred revenue of $107,928 in
the three months ended March 31, 2003 as compared to $160,217 in the same period
in 2002.
Interest income decreased during the three months ended March 31, 2003, as
compared to the same period in 2002, primarily due to lower average cash
reserves and lower average interest rates over the same period.
Gain on sale of aircraft decreased during the three months ended March 31, 2003,
as compared to the same period in 2002, due to the sale of one of the
Partnership's aircraft on February 13, 2002 for $250,000 cash resulting in a
gain of $65,000. There were no aircraft sales in 2003.
Depreciation expense decreased during the three months ended March 31, 2003, as
compared to the same period in 2002, primarily due to fewer aircraft remaining
on lease and subject to depreciation.
Management fees to the general partner decreased for the three months ended
March 31, 2003, as compared to the same period in 2002, primarily as a result of
fewer aircraft being on lease.
Operating expenses increased during the three months ended March 31, 2003, as
compared to the same period in 2002, primarily due to the costs incurred to
inspect one of the Partnership's aircraft when it was returned at the end of its
lease.
9
Administration and other expenses decreased during the three months ended March
31, 2003, as compared to the same period in 2002, primarily due to a decrease in
printing and postage costs.
Liquidity and Cash Distributions
Liquidity - The Partnership received all payments due from its sole lessee, TWA
Airlines LLC, for the aircraft remaining on lease during the three months ended
March 31, 2003.
PIMC, the General Partner, has decided that cash reserves should be maintained
as a prudent measure to ensure that the Partnership has available funds in the
event that the aircraft presently on lease to TWA LLC require remarketing, 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.
Cash Distributions - Cash distributions to Limited Partners during the three
months ended March 31, 2003 and 2002 were $2,499,120, or $5.00 per limited
partnership unit, and $1,249,900, or $2.50 per unit, respectively. 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),
the need to retain cash reserves as previously discussed in the Liquidity
section, the receipt of rental payments from TWA LLC, and payments generated
from aircraft sales proceeds.
Item 4. 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
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 quarterly 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.
10
Part II. Other Information
--------------------------
Item 1. Legal Proceedings
As discussed in Item 3 of Part I of Polaris Aircraft Income Fund III's (the
Partnership) 2002 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K), there are several pending legal actions or proceedings
involving the Partnership. Except as described below, there have been no
material developments with respect to any such actions or proceedings during the
period covered by this report.
Midway Airlines, Inc. (Midway) Bankruptcy - Pursuant to an order of the
Bankruptcy Court, the Partnership's allowable claim in the matter was
substantially reduced. The General Partner does not expect the Partnership to
recover a material amount in this proceeding.
Other Proceedings - Item 10 in Part III of the Partnership's 2002 Form 10-K
discusses certain actions which have been filed against Polaris Investment
Management Corporation and others in connection with the sale of interests in
the Partnership and the management of the Partnership. The Partnership is not a
party to these actions. There have been no material developments with respect to
any of the actions described therein during the period covered by this report.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
99.1 Certification of President
99.2 Certification of Chief Financial Officer.
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
for which this report is filed.
11
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 III,
A California Limited Partnership
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
May 14, 2003 By: /S/Stephen E. Yost
---------------------- -------------------
Stephen E. Yost, Chief Financial Officer
12
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, William R. Carpenter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Polaris Aircraft Income
Fund III (A California Limited Partnership);
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the Evaluation Date); and
c) presented in this quarterly 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
13
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not 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: May 14, 2003
By: Polaris Investment Management Corporation,
General Partner
/s/ William R. Carpenter
- ------------------------
William R. Carpenter
President
14
CERTIFICATION
- -------------
I, Stephen E. Yost, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Polaris Aircraft Income
Fund III (A California Limited Partnership);
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the Evaluation Date); and
c) presented in this quarterly 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
15
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not 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: May 14, 2003
By: Polaris Investment Management Corporation,
General Partner
/s/ Stephen E. Yost
- -------------------
Stephen E. Yost
Chief Financial Officer
16