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, 2002
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
Indicate by check mark whether the registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
This document consists of 16 pages.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 2002
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a) Special Notice Regarding Financial Statements................3
b) Balance Sheets - June 30, 2002 and
December 31, 2001............................................4
c) Statements of Income - Three and Six Months
Ended June 30, 2002 and 2001.................................5
d) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2001
and Six Months Ended June 30, 2002...........................6
e) Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001.................................7
f) Notes to Financial Statements................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........12
Part II. Other Information
Item 1. Legal Proceedings.......................................15
Item 6. Exhibits and Reports on Form 8-K........................15
Signature ........................................................16
2
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
SPECIAL NOTICE REGARDING FINANCIAL STATEMENTS
The Polaris Aircraft Income Fund III's (the "Partnership") Quarterly Report on
Form 10-Q ("Form 10-Q") for the period ended June 30, 2002 is being filed on an
incomplete basis as the Partnership has been unable to obtain access to
documents in the possession of Arthur Andersen, the previous Certifying
Accountant, in order to provide such documents to Ernst & Young LLP, the
Partnership's new Certifying Accountant. As a result, Ernst & Young LLP is
unable to complete their timely quarterly review in accordance with Statements
of Auditing Standards No. 71. Once Ernst & Young LLP has completed their
quarterly review of the financial statements contained in the Form 10-Q for the
period ended June 30, 2002, the Partnership will file an amended Form 10-Q.
The accompanying notes are an integral part of these statements.
3
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 3,290,167 $ 3,784,951
RENT AND OTHER RECEIVABLES, net of
allowance for credit losses of $255,000 and
$255,000 in 2002 and 2001 161,836 161,516
AIRCRAFT HELD FOR SALE -- 370,000
AIRCRAFT ON OPERATING LEASES,
net of accumulated depreciation
of $30,221,521 in 2002 and $29,344,167
in 2001 2,733,740 3,611,094
------------ ------------
Total Assets $ 6,185,743 $ 7,927,561
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 82,987 $ 467,332
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 125,178 162,636
DEFERRED INCOME 665,580 986,015
------------ ------------
Total Liabilities 873,745 1,615,983
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,787,792) (3,880,841)
Limited Partners, 499,950 units (499,960
in 2001) issued and outstanding 9,099,790 10,192,419
------------ ------------
Total Partners' Capital (Deficit) 5,311,998 6,311,578
------------ ------------
Total Liabilities and Partners' Capital
(Deficit) $ 6,185,743 $ 7,927,561
============ ============
The accompanying notes are an integral part of these statements.
4
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Rent from operating
leases $ 640,218 $ 1,666,428 $ 1,280,436 $ 4,551,589
Interest 14,253 137,385 27,163 297,211
Gain on sale of aircraft 115,000 -- 180,000 --
Other -- -- -- 20,998
----------- ----------- ----------- -----------
Total Revenues 769,471 1,803,813 1,487,599 4,869,798
----------- ----------- ----------- -----------
EXPENSES:
Depreciation 438,161 747,877 877,354 1,506,801
Management fees to
general partner 17,406 2,890 34,044 (8,444)
Interest -- 3,269 -- 4,960
Operating 3,722 49,440 8,198 53,162
Legal fees 18,963 91,556 21,158 92,931
Administration and other 81,859 113,190 157,647 188,903
----------- ----------- ----------- -----------
Total Expenses 560,111 1,008,222 1,098,401 1,838,313
----------- ----------- ----------- -----------
NET INCOME $ 209,360 $ 795,591 $ 389,198 $ 3,031,485
=========== =========== =========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 115,943 $ 132,933 $ 231,927 $ 305,265
=========== =========== =========== ===========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 93,417 $ 662,658 $ 157,271 $ 2,726,220
=========== =========== =========== ===========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.19 $ 1.33 $ 0.31 $ 5.45
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
5
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 2001 and
Six Months Ended June 30, 2002
------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 2000 $ (3,778,433) $ 20,319,377 $ 16,540,944
Net income 1,171,934 1,342,125 2,514,059
Cash distribution to partners (1,274,342) (11,469,083) (12,743,425)
------------ ------------ ------------
Balance, December 31, 2001 (3,880,841) 10,192,419 6,311,578
Net income 231,927 157,271 389,198
Cash distribution to partners (138,878) (1,249,900) (1,388,778)
------------ ------------ ------------
Balance, June 30, 2002 $ (3,787,792) $ 9,099,790 $ 5,311,998
============ ============ ============
The accopmanying notes are an integral part of these statements.
6
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income $ 389,198 $ 3,031,485
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 877,354 1,506,801
Gain on sale of aircraft (180,000) --
Changes in operating assets and
liabilities:
Decrease in other assets -- 14,291
(Increase) decrease in rent and other
receivables (320) 365,726
Increase (decrease) in payable to
affiliates (384,345) 169,432
Increase (decrease) in accounts payable
and accrued liabilities (37,458) 29,070
Increase (decrease) in deferred income (320,435) (2,655,089)
------------ ------------
Net cash provided by operating
activities 343,994 2,461,716
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of aircraft 550,000 --
------------ ------------
Net cash provided by investing
activities 550,000 --
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable -- (204,871)
Cash distributions to partners (1,388,778) (3,055,311)
------------ ------------
Net cash used in financing
activities (1,388,778) (3,260,182)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (494,784) (798,466)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,784,951 12,523,907
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,290,167 $ 11,725,441
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ -- $ 4,960
============ ============
The accompanying notes are an integral part of these statements.
7
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
NOTES TO 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. During June 2002, 10 Units were abandoned. At June 30,
2002, there were 499,950 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 4 and 5.
At June 30, 2002, the Partnership owned a portfolio of four used McDonnell
Douglas DC-9-30 commercial jet aircraft out of its original portfolio of 38
aircraft. All of these aircraft are on lease to TWA Airlines LLC.
2. Accounting Principles and Policies
In the opinion of management, the financial statements presented herein include
all adjustments, consisting only of normal recurring items, necessary to
summarize fairly the Partnership's financial position, results of operations,
and cash flows. The financial statements have been prepared in accordance with
the instructions of the Quarterly Report to the Securities and Exchange
Commission ("SEC") Form 10-Q and do not include all of the information and note
disclosures required by 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, 2001,
2000, and 1999 included in the Partnership's 2001 Annual Report to the SEC on
Form 10-K.
3. TWA Bankruptcy Filing and Transaction with American Airlines
TWA filed a voluntary petition in the United States Bankruptcy Court of the
District of Delaware (the "Bankruptcy Court") for reorganization relief under
Chapter 11 of the Bankruptcy Code on January 10, 2001. One day prior to filing
8
its bankruptcy petition, TWA entered into an Asset Purchase Agreement with
American Airlines, Inc. ("American") that provided for the sale to American of
substantially all of TWA's assets and permitted American to exclude certain TWA
contracts (including aircraft leases) from the assets of TWA to be acquired by
American. On February 28, 2001, American presented the General Partner with a
written proposal to assume, on modified terms and conditions, seven of the ten
then existing leases (collectively the "Previous Leases"). The General Partner
decided to accept American's proposal, although consummation of the transactions
with American remained subject to a number of contingencies, including the
approval of the Bankruptcy Court and other regulatory approvals.
On April 9, 2001, the American acquisition of the selected TWA assets was
consummated. As a result of this closing, TWA Airlines LLC, a wholly owned
subsidiary of American ("TWA LLC"), assumed the Previous Leases applicable to
seven of the ten Aircraft, and simultaneously, such Previous Leases were amended
to incorporate modified terms (as so assumed and amended, the "Assumed Leases").
The Assumed Leases are substantially less favorable to the Partnership than the
Previous Leases. In particular, the monthly rental rate for each Aircraft was
reduced from $85,000 to $40,000, and the reduced rate was made effective as of
March 12, 2001 by a rent credit granted to TWA LLC for the amount of rent above
$40,000 previously paid by TWA in respect of the period from and after March 12,
2001. In addition, the term of each Assumed Lease is scheduled to expire at the
time of the next scheduled heavy maintenance check of the applicable Aircraft,
compared to the scheduled expiry date of November 27, 2004 under the Previous
Leases, provided that the aggregate average number of months for which all seven
Aircraft are on lease to TWA LLC were not less than 22 months from and after
March 12, 2001. Finally, the maintenance condition of the aircraft to be met at
lease expiry was eased in favor of TWA LLC, as compared to the corresponding
conditions required under the Previous Leases.
With respect to the three Aircraft that TWA LLC did not elect to acquire, TWA
officially rejected the Previous Leases applicable to these Aircraft
(collectively, the "Rejected Leases") as of April 20, 2001. All three Aircraft
have been returned to the Partnership. As aircraft were returned to the
Partnership they were parked in storage in Arizona while the General Partner
remarketed them for sale. The three aircraft were sold on October 19, 2001, for
$535,000, resulting in neither a gain nor a loss for the Partnership. In
addition, the General Partner has filed administrative rent claims in the amount
of $465,277 in the TWA bankruptcy proceeding in an effort to recover the fair
value of TWA's actual use, if any, of these three Aircraft under the Rejected
Leases during the 60-day period following TWA's filing of its bankruptcy
petition. These administrative rent claims have been approved by the estate with
the plan of reorganization on June 25, 2002 (the "Plan") and will be paid to the
Partnership through periodic distributions over the next one to two years. The
General Partner also filed administrative claims in the amount of $64,254 in the
TWA bankruptcy proceeding in connection with certain legal expenses incurred by
the Partnership in connection with the bankruptcy proceeding which were settled
for $47,861 with the estate under the Plan. Furthermore, the General Partner has
filed general unsecured claims for damages arising from TWA's breach of the
Rejected Leases. However, there can be no assurances as to whether, or when, the
General Partner will be successful in asserting the value of the general
unsecured claims or be able to collect any amounts out of the TWA bankruptcy
estate.
The Accounting Treatment of the TWA Transaction
In accordance with GAAP, the Partnership recognized rental income and management
fees on a straight line basis over the original lease terms of the Previous
Leases. As a result, deferred revenue and accrued management fees were recorded
each month since the inception of each Previous Lease, resulting in balances of
deferred rental income and accrued management fees of $3,899,131 and $180,107,
respectively, as of March 12, 2001. Since the Previous Leases were effectively
modified on March 12, 2001, the Partnership recognized the balances of deferred
revenue and accrued management fees over the new lease terms, from the date the
leases were modified. For the three Rejected Leases, the deferred revenue and
9
accrued management fees amounting to $1,275,431 and $59,691 were recognized as
rental revenue and a reduction of management fee, respectively, in March 2001.
For the Assumed Leases, the deferred revenue and accrued management fees
associated with each Aircraft were recognized over the new lease terms, ranging
from 2 months to 33 months as of March 31, 2001. As of June 30, 2002, the
Partnership had deferred revenue balance of $665,580, and deferred management
fee balance of $30,463 included in Payable to Affiliates on the Balance Sheet,
which will be recognized over the remaining life of the aircraft leases, varying
between 6 and 18 months.
4. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the General Partner, PIMC, in
connection with services rendered or payments made on behalf of the Partnership:
Payments made during the
Three Months Ended Payable at
June 30, 2002 June 30, 2002
------------- -------------
Aircraft Management Fees $217,205 $ 38,463
Out-of-Pocket Operating
Expense Reimbursement 47,365 -
Out-of-Pocket Administrative
Expense Reimbursement 136,722 44,524
-------- -------
$401,292 $ 82,987
======== ========
5. Partners' Capital (Deficit)
The Partnership Agreement (the "Agreement") stipulates different methods by
which revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the General Partner and the limited partners.
Such allocations are made using income or loss calculated under GAAP for book
purposes, which varies from income or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the General Partner and 90% to the limited
partners.
The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.
10
6. 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 over its book value. 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 of $115,000 over its book value.
7. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB") approved for
issuance Statement of Financial Accounting Standard ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred and that the associated asset retirement
costs be capitalized as part of the carrying value of the related long-lived
asset. SFAS No. 143 will be effective January 1, 2003 for the Partnership.
Management does not expect this standard to have a material impact on the
Partnership's balance sheet or statement of operations.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Overview
At June 30, 2002, 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.
All of these aircraft are on lease to TWA Airlines LLC.
TWA Bankruptcy Filing and Transaction with American Airlines
TWA filed a voluntary petition in the United States Bankruptcy Court of the
District of Delaware (the "Bankruptcy Court") for reorganization relief under
Chapter 11 of the Bankruptcy Code on January 10, 2001. One day prior to filing
its bankruptcy petition, TWA entered into an Asset Purchase Agreement with
American that provided for the sale to American of substantially all of TWA's
assets and permitted American to exclude certain TWA contracts (including
aircraft leases) from the assets of TWA to be acquired by American. On February
28, 2001, American presented the General Partner of the Partnership (the
"General Partner") with a written proposal to assume, on modified terms and
conditions, seven of the ten then existing leases (collectively the "Previous
Leases"). The General Partner decided to accept American's proposal, although
consummation of the transactions with American remained subject to a number of
contingencies, including the approval of the Bankruptcy Court and other
regulatory approvals.
On April 9, 2001, the American acquisition of the selected TWA assets was
consummated. As a result of this closing, TWA Airlines LLC, a wholly owned
subsidiary of American ("TWA LLC"), assumed the Previous Leases applicable to
seven of the ten Aircraft, and simultaneously, such Previous Leases were amended
to incorporate modified terms (as so assumed and amended, the "Assumed Leases").
The Assumed Leases are substantially less favorable to the Partnership than the
Previous Leases. In particular, the monthly rental rate for each Aircraft was
reduced from $85,000 to $40,000, and the reduced rate was made effective as of
March 12, 2001 by a rent credit granted to TWA LLC for the amount of rent above
$40,000 previously paid by TWA in respect of the period from and after March 12,
2001. In addition, the term of each Assumed Lease is scheduled to expire at the
time of the next scheduled heavy maintenance check of the applicable Aircraft,
compared to the scheduled expiry date of November 27, 2004 under the Previous
Leases, provided that the aggregate average number of months for which all seven
Aircraft are on lease to TWA LLC were not less than 22 months from and after
March 12, 2001. Finally, the maintenance condition of the aircraft to be met at
lease expiry was eased in favor of TWA LLC, as compared to the corresponding
conditions required under the Previous Leases.
With respect to the three Aircraft that TWA LLC did not elect to acquire, TWA
officially rejected the Previous Leases applicable to these Aircraft
(collectively, the "Rejected Leases") as of April 20, 2001. All three Aircraft
have been returned to the Partnership. As aircraft were returned to the
Partnership they were parked in storage in Arizona while the General Partner
remarketed them for sale. The three aircraft were sold on October 19, 2001, for
$535,000, resulting in neither a gain nor a loss for the Partnership. In
addition, the General Partner has filed administrative rent claims in the amount
of $465,277 in the TWA bankruptcy proceeding in an effort to recover the fair
value of TWA's actual use, if any, of these three Aircraft under the Rejected
Leases during the 60-day period following TWA's filing of its bankruptcy
petition. These administrative rent claims have been approved by the estate with
the plan of reorganization on June 25, 2002 (the "Plan") and will be paid to the
Partnership through periodic distributions over the next one to two years. The
12
General Partner also filed administrative claims in the amount of $64,254 in the
TWA bankruptcy proceeding in connection with certain legal expenses incurred by
the Partnership in connection with the bankruptcy proceeding which were settled
for $47,861 with the estate under the Plan. Furthermore, the General Partner has
filed general unsecured claims for damages arising from TWA's breach of the
Rejected Leases. However, there can be no assurances as to whether, or when, the
General Partner will be successful in asserting the value of the general
unsecured claims or be able to collect any amounts out of the TWA bankruptcy
estate.
The Accounting Treatment of the TWA Transaction
In accordance with GAAP, the Partnership recognized rental income and management
fees on a straight line basis over the original lease terms of the Previous
Leases. As a result, deferred revenue and accrued management fees were recorded
each month since the inception of each Previous Lease, resulting in balances of
deferred rental income and accrued management fees of $3,899,131 and $180,107,
respectively, as of March 12, 2001. Since the Previous Leases were effectively
modified on March 12, 2001, the Partnership recognized the balances of deferred
revenue and accrued management fees over the new lease terms, from the date the
leases were modified. For the three Rejected Leases, the deferred revenue and
accrued management fees amounting to $1,275,431 and $59,691 were recognized as
rental revenue and a reduction of management fee, respectively, in March 2001.
For the Assumed Leases, the deferred revenue and accrued management fees
associated with each Aircraft were recognized over the new lease terms, ranging
from 2 months to 33 months as of March 31, 2001. As of June 30, 2002, the
Partnership had deferred revenue balance of $665,580, and deferred management
fee balance of $30,463 included in Payable to Affiliates on the Balance Sheet,
which will be recognized over the remaining life of the aircraft leases, varying
between 6 and 18 months.
Partnership Operations
The Partnership recorded net income of $209,360, or $0.19 per limited
partnership unit, for the three months ended June 30, 2002, as compared to net
income of $795,591, or $1.33 per limited partnership unit, for the three months
ended June 30, 2001. The Partnership recorded net income of $389,198, or $0.31
per limited partnership unit, for the six months ended June 30, 2002 compared to
net income of $3,031,485 or $5.45 per limited partnership unit, for the six
months ended June 30, 2001. The decreases in net income are primarily due to
decreases in rental and interest income and increased management fees to the
general partner partially offset by an increase in gain on sale of aircraft and
a decrease in depreciation, operating and legal fee expense, as discussed below.
Rent from operating leases decreased to $640,218 and $1,280,436 in the three and
six months ended June 30, 2002, as compared to $1,666,428 and $4,551,589 for the
respective periods in 2001. This was primarily due to lower lease rates and
fewer aircraft on lease as a result of the TWA bankruptcy and the recognition of
less deferred revenue of $160,218 and $320,435 in the three and six months ended
June 30, 2002 as compared to $839,760 and $1,731,328 of deferred revenue being
recognized in the respective periods in 2001. As discussed in Note 3, the
deferred revenue existing at the time of the lease revisions in March 2001 is
being recognized over the new lease terms for the Accepted Aircraft, while it
was recognized upon lease rejection for the three Rejected Aircraft.
Interest income decreased during the three and six months ended June 30, 2002,
as compared to the same periods in 2001, primarily due to lower average cash
balances and a lower rate of return on those cash balances.
13
Gain on sale of aircraft increased during the three and six months ended June
30, 2002, as compared to the same periods in 2001, due to the sale of two of the
Partnership's aircraft during 2002, resulting in a gain of $180,000.
Depreciation expense decreased during the six months ended June 30, 2002, as
compared to the same period in 2001, primarily due to fewer aircraft remaining
on lease.
Management fees to general partner increased during the three and six months
ended June 30, 2002 as compared to the same periods in 2001, primarily as a
result of the deferred management fees being recognized for the three Rejected
Leases and leases expiring during the three months ended June 30, 2001 due to
the TWA bankruptcy.
Operating expense decreased during the three and six months ended June 30, 2002,
as compared to the same periods in 2001, primarily due to maintenance and
storage related costs in the 2001 periods associated with the aircraft as they
came off lease and were held for sale. At present there are no aircraft
remaining in storage.
Legal expenses decreased during the three and six months ended June 30, 2002, as
compared to the same periods in 2001, primarily due to the high costs incurred
in the 2001 periods in connection with the TWA Bankruptcy and partially offset
in 2002 by fees incurred to comply with an SEC prompted court order related to
transfers of units to entities owned by George Hoffman.
Administration and other expense decreased during the three and six months ended
June 30, 2002, as compared to the same periods in 2001, primarily due to extra
printing and postage expenses incurred in 2001 due to the issuance of an 8-K
related to the TWA bankruptcy.
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, 2002.
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 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 - There were no cash distributions to limited partners during
the three months ended June 30, 2002 compared to cash distributions of
$1,240,900, or $2.50 per limited partnership unit, during the three months ended
June 30, 2001. Cash distributions to limited partners during the six months
ended June 30, 2002 and 2001 were $1,249,900, or $2.50 per limited partnership
unit, and $2,749,780, or $5.50 per limited partnership 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.
14
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") 2001 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, 2002, there are several pending legal actions or proceedings involving
the Partnership. There have been no material developments with respect to any
such actions or proceedings during the period covered by this report.
Other Proceedings - Item 10 of Part III of the Partnership's 2001 Form 10-K and
Item 1 of Part II of the Partnership's Quarterly Reports to the SEC on Form 10-Q
for the period ended March 31, 2002 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)
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. As described in greater detail in Item
4 of the Current Report on Form 8-K dated August 1, 2002 and first
filed by the Partnership on or about August 2, 2002, the Partnership
adopted a resolution dismissing Arthur Andersen LLP ("Andersen") as the
Partnership's auditors and appointed Ernst & Young LLP to replace
Andersen.
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SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
August 19, 2002 By: /S/Stephen E. Yost
- -------------------------- ----------------------------------------
Stephen E. Yost, Chief Financial Officer
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