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 June 30, 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
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This document consists of 12 pages.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 2003
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited)
a) Condensed Balance Sheets - June 30, 2003 and
December 31, 2002............................................3
b) Condensed Statements of Income - Three and Six Months
Ended June 30, 2003 and 2002.................................4
c) Condensed Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2002
and Six Months Ended June 30, 2003...........................5
d) Condensed Statements of Cash Flows - Six Months
Ended June 30, 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
2
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 1,952,034 $ 4,118,926
RENT AND OTHER RECEIVABLES 121,836 179,691
AIRCRAFT HELD FOR SALE 185,000 185,000
AIRCRAFT ON OPERATING LEASE,
net of accumulated depreciation
of $23,584,863 in 2003 and $22,922,026 in 2002 1,018,786 1,681,624
----------- -----------
Total Assets $ 3,277,656 $ 6,165,241
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 12,133 $ 31,637
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 138,608 147,054
DEFERRED INCOME 134,745 350,601
----------- -----------
Total Liabilities 285,486 529,292
----------- -----------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,860,510) (3,784,552)
Limited Partners, 499,746 units in 2003
and 499,824 units in 2002
issued and outstanding 6,852,680 9,420,501
----------- -----------
Total Partners' Capital 2,992,170 5,635,949
----------- -----------
Total Liabilities and Partners' Capital $ 3,277,656 $ 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
REVENUES:
Rent from operating leases $ 467,928 $ 640,218 $ 935,856 $ 1,280,436
Interest 5,637 14,253 12,069 27,163
Gain on sale of aircraft -- 115,000 -- 180,000
Lessee settlements 76,279 -- 76,279 --
----------- ----------- ----------- -----------
Total Revenues 549,844 769,471 1,024,204 1,487,599
----------- ----------- ----------- -----------
EXPENSES:
Depreciation 331,419 438,161 662,838 877,354
Management fees to general partner 13,062 17,406 26,124 34,044
Operating 17,397 3,722 29,132 8,198
Administration and other 109,676 100,822 173,089 178,805
----------- ----------- ----------- -----------
Total Expenses 471,554 560,111 891,183 1,098,401
----------- ----------- ----------- -----------
NET INCOME $ 78,290 $ 209,360 $ 133,021 $ 389,198
=========== =========== =========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 783 $ 115,943 $ 201,722 $ 231,927
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 77,507 $ 93,417 $ (68,701) $ 157,271
=========== =========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 0.15 $ 0.19 $ (0.14) $ 0.31
=========== =========== =========== ===========
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
Six Months Ended June 30, 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 distribution 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) 201,722 (68,701) 133,021
Cash distribution to partners (277,680) (2,499,120) (2,776,800)
------------ ------------ ------------
Balance, June 30, 2003 $ (3,860,510) $ 6,852,680 $ 2,992,170
============ ============ ============
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)
Six Months Ended June 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income $ 133,021 $ 389,198
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 662,838 877,354
Gain on sale of aircraft -- (180,000)
Changes in operating assets and liabilities:
(Increase) decrease in rent and other
receivables 57,855 (320)
Decrease in payable to affiliates (19,504) (384,345)
Decrease in accounts payable
and accrued liabilities (8,446) (37,458)
Decrease in deferred income (215,856) (320,435)
----------- -----------
Net cash provided by operating
activities 609,908 343,994
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft -- 550,000
----------- -----------
Net cash provided by investing
activities -- 550,000
----------- -----------
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 (2,166,892) (494,784)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,118,926 3,784,951
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,952,034 $ 3,290,167
=========== ===========
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, 1985 and 1986. 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 the three months ended
June 30, 2003, 48 Units were abandoned. At June 30, 2003, there were 499,746
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 June 30, 2003, the Partnership owned a portfolio of four 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 one remaining
aircraft was 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 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.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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 made during the
Three Months Ended Payable at
June 30, 2003 June 30, 2003
------------- -------------
Aircraft Management Fees $ 18,000 $ 12,133
Out-of-Pocket Operating
Expense Reimbursement 11,789 --
Out-of-Pocket Administrative
Expense Reimbursement 197,406 --
-------- --------
$227,195 $ 12,133
======== ========
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 on the sale of $65,000 in the three months ended March 31, 2002. On May 29,
2002 PIMC, on behalf of the Partnership, sold one DC-9-30 aircraft to American
Airlines for $300,000 in cash. The Partnership recognized a gain on the sale of
$115,000.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Overview
At June 30, 2003, Polaris Aircraft Income Fund III, A California Limited
Partnership (the Partnership), owned a portfolio of four 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 $78,290, or $0.15 per limited partnership
unit, for the three months ended June 30, 2003, as compared to net income of
$209,360, or $0.19 per limited partnership unit, for the three months ended June
30, 2002. The Partnership recorded net income of $133,021, which resulted in a
loss of $0.14 per limited partnership unit, for the six months ended June 30,
2003, compared to net income of $389,198, or $0.31 per limited partnership unit,
for the six months ended June 30, 2002. The decreases in net income are
primarily due to decreases in rental and interest income and a decrease in gain
on sale of aircraft, as well as increases in operating expenses, partially
offset by an increase in other income and a decrease in depreciation and
management fees to the General Partner, as discussed below.
Rent from operating leases decreased to $467,928 and $935,856 in the three and
six months ended June 30, 2003 respectively, as compared to $640,218 and
$1,280,436 for the respective periods 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 and $215,856 in the three
and six months ended June 30, 2003 respectively, as compared to $160,218 and
$320,435 in the same periods in 2002.
Interest income decreased during the three and six months ended June 30, 2003,
as compared to the same periods in 2002, primarily due to lower average cash
reserves and lower interest rates over the same periods.
Gain on sale of aircraft decreased during the three and six months ended June
30, 2003, as compared to the same periods in 2002, due to the sale of two of the
Partnership's aircraft during 2002, resulting in a gain of $180,000. There were
no aircraft sales in 2003.
Lessee settlements increased during the three and six months ended June 30,
2003, as compared to the same periods in 2002, primarily due to a payment
received during the three months ended June 30, 2003 from TWA's bankrupt estate
in respect of certain administrative rent claims in the amount of $76,279 of the
total claim of $465,277.
Depreciation expense decreased during the three and six months ended June 30,
2003, as compared to the same periods in 2002, primarily due to fewer aircraft
remaining on lease and subject to depreciation.
9
Management fees to general partner decreased for the three and six months ended
June 30, 2003 as compared to the same periods in 2002, primarily as a result of
fewer aircraft being on lease.
Operating expense increased during the three and six months ended June 30, 2003,
as compared to the same periods in 2002, primarily due to maintenance and
storage related costs associated with the aircraft as they came off lease and
were held for sale. At June 30, 2003, there was one aircraft remaining in
storage.
Administration and other expense increased during the three months ended June
30, 2003, as compared to the same period in 2002, primarily due to increased
audit fees. Administration and other expense decreased during the six months
ended June 30, 2003, as compared to the same period in 2002, primarily due a
decrease in legal fees. In the 2002 period, legal fees were incurred to comply
with an SEC prompted court order related to transfers of units to entities owned
by an investor. There were no such fees in the 2003 period.
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 six months ended
June 30, 2003.
PIMC, the General Partner, has determined that cash reserves 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 six months
ended June 30, 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
As required by Rule 13a-15(b), PIMC management, including the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation as of the end of
the period covered by this report, of the effectiveness of the Partnership's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Partnership's disclosure controls and procedures were
effective as of the end of the period covered by this report. As required by
Rule 13a-15(d), PIMC management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the Partnership's internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Partnership's internal control over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
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) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the period ended March 31, 2003,
there is one pending legal proceeding involving the Partnership. There have been
no material developments with respect to such proceeding during the period
covered by this report.
Other Proceedings - Item 10 in Part III of the Partnership's 2002 Form 10-K and
Item 1 of Part II of the Partnership's Quarterly Report to the SEC on Form 10-Q
for the period ended March 31, 2003 discuss certain actions which have been
filed against Polaris Investment Management Corporation and others in connection
with the sale of interests in the Partnership and the management of the
Partnership. The Partnership is not a party to these actions. There have been no
material developments with respect to any of the actions described therein
during the period covered by this report.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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
August 12, 2003 By: /S/Stephen E. Yost
- ------------------------- -------------------------------------
Stephen E. Yost, Chief Financial Officer
12