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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 September 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 ---------
----------------------------
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes [ ] No [X]
This document consists of 15 pages.
POLARIS AIRCRAFT INCOME FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
FORM 10-Q - FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Condensed Balance Sheets - September 30, 2003 and
December 31, 2002............................................................. 3
b) Condensed Statements of Operations - Three and Nine Months
Ended September 30, 2003 and 2002............................................. 4
c) Condensed Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2002
and Nine Months Ended September 30, 2003...................................... 5
d) Condensed Statements of Cash Flows - Nine Months
Ended September 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............................. 10
Item 4. Controls and Procedures................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 14
Item 6. Exhibits and Reports on Form 8-K.......................................... 14
Signature .......................................................................... 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLARIS AIRCRAFT INCOME FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 2,239,272 $ 4,118,926
RENT AND OTHER RECEIVABLES 81,836 179,691
AIRCRAFT HELD FOR SALE 200,000 185,000
AIRCRAFT ON OPERATING LEASE,
net of accumulated depreciation
of $16,146,776 in 2003 and $22,922,026 in 2002 200,000 1,681,624
OTHER ASSETS 4,126 -
------------- -------------
Total Assets $ 2,725,234 $ 6,165,241
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 36,254 $ 31,637
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 87,573 147,054
DEFERRED INCOME 33,635 350,601
------------- ------------
Total Liabilities 157,462 529,292
------------- -------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,864,754) (3,784,552)
Limited Partners, 499,733 units in 2003
and 499,824 units in 2002
issued and outstanding 6,432,526 9,420,501
------------- -------------
Total Partners' Capital 2,567,772 5,635,949
------------- -------------
Total Liabilities and Partners' Capital $ 2,725,234 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
REVENUES:
Rent from operating leases $ 441,109 $ 640,218 $ 1,376,965 $ 1,920,654
Interest 5,555 15,113 17,624 42,276
Gain on sale of aircraft - - - 180,000
Lessee return condition settlement 44,270 - 44,270 -
Lessee settlements - 47,861 76,279 47,861
----------- ------------- ----------- ------------
Total Revenues 490,934 703,192 1,515,138 2,190,791
----------- ------------- ----------- ------------
EXPENSES:
Depreciation 803,786 438,161 1,466,624 1,315,515
Management fees to general partner 12,386 16,638 38,510 50,682
Operating 13,472 19,557 42,604 27,755
Legal fees 16,654 4,704 18,677 25,862
Administration and other 69,034 47,359 240,100 205,006
----------- ------------- ----------- ------------
Total Expenses 915,332 526,419 1,806,515 1,624,820
----------- ------------- ----------- ------------
NET INCOME (LOSS) $ (424,398) $ 176,773 $ (291,377) $ 565,971
=========== ============= =========== ============
NET INCOME (LOSS) ALLOCATED
TO THE GENERAL PARTNER $ (4,244) $ 1,768 $ 197,478 $ 233,695
=========== ============= =========== ============
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ (420,154) $ 175,005 $ (488,855) $ 332,276
=========== ============= =========== ============
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (0.84) $ 0.35 $ (0.98) $ 0.66
=========== ============= =========== ============
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
NINE MONTHS ENDED SEPTEMBER 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) 197,478 (488,855) (291,377)
Cash distribution to partners (277,680) (2,499,120) (2,776,800)
----------- ------------- ------------
Balance, September 30, 2003 $(3,864,754) $ 6,432,526 $ 2,567,772
=========== ============= ============
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)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (291,377) $ 565,971
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,466,624 1,315,515
Gain on sale of aircraft - (180,000)
Changes in operating assets and liabilities:
Decrease (increase) in rent and other receivables 97,855 (320)
Increase (decrease) in payable to affiliates 4,617 (388,111)
Decrease in accounts payable and accrued liabilities (59,481) (65,927)
Decrease in deferred income (316,966) (480,653)
Increase in other assets (4,126) -
------------ -------------
Net cash provided by operating activities 897,146 766,475
------------ -------------
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 (1,879,654) (72,303)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,118,926 3,784,951
------------ -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,239,272 $ 3,712,648
============ =============
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Transfer of operating lease assets to assets held for sale $ 100,000 $ -
============ =============
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)
NOTE 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
September 30, 2003, 13 units were abandoned. At September 30, 2003, there were
499,733 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 September 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. Two of these aircraft are on lease to TWA Airlines LLC (TWA LLC), a
wholly owned subsidiary of American Airlines, Inc. (American). The two remaining
aircraft are stored in New Mexico and are being remarketed for sale.
NOTE 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
NOTE 3. RELATED PARTIES
Under the 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
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------ ------------------
Aircraft Management Fees $ 18,000 $ 6,519
Out-of-Pocket Operating
Expense Reimbursement 45,922 24,805
Out-of-Pocket Administrative
Expense Reimbursement 78,665 4,930
------------ -----------
$ 142,587 $ 36,254
============ ============
NOTE 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.
NOTE 5. AIRCRAFT AND DEPRECIATION
The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life. For any downward
adjustment in estimated residual value or decrease in the projected remaining
economic life, the depreciation expense over the projected remaining economic
life of the aircraft will be increased.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, an impairment
loss is recognized. Pursuant to Statement of Financial Accounting Standards 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
measurement of
8
an impairment loss will be based on the "fair value" of the asset as defined in
the statement. During the nine months ended September 30, 2003, the Partnership
recognized additional depreciation expense of $316,999 as a result of
determining that future net cash flows were less than the carrying value of
aircraft on operating lease. Aircraft held for sale are carried at the lower of
cost or fair value less cost to sell. During the nine months ended September 30,
2003, the Partnership also recognized additional depreciation expense of
$170,000 on aircraft held for sale due to changes in estimated fair market
values. Management believes the assumptions related to the fair value of
impaired assets represents the best estimates based on reasonable and
supportable assumptions and projections.
NOTE 6. SALE OF AIRCRAFT
On February 13, 2002, the General Partner, 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
At September 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.
Two of these aircraft are 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 two remaining aircraft are being stored in New Mexico and are being
remarketed for sale. 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
the General Partner is unable to predict when all of the Partnership's remaining
assets will be sold. This discussion should be read in conjunction with the
management's discussion included in the Partnership's 2002 Annual Report to the
SEC on Form 10-K.
PARTNERSHIP OPERATIONS
The Partnership recorded a net loss of $424,398, or $0.84 per limited
partnership unit, for the three months ended September 30, 2003, as compared to
net income of $176,773, or $0.35 per limited partnership unit, for the three
months ended September 30, 2002. The Partnership recorded a net loss of
$291,377, which resulted in a loss of $0.98 per limited partnership unit, for
the nine months ended September 30, 2003, compared to net income of $565,971, or
$0.66 per limited partnership unit, for the nine months ended September 30,
2002. The decreases in net income are primarily due to an increase in write
downs on aircraft on operating leases and held for sale, decreases in rental and
interest income and no recognized gains on sale of aircraft, as well as
increases in operating expenses, partially offset by an increase in revenues
from lessee return condition settlement and decreases in depreciation and
management fees to the General Partner, as discussed below.
Rent from operating leases decreased to $441,109 and $1,376,965 in the three and
nine months ended September 30, 2003, respectively, as compared to $640,218 and
$1,920,654 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 $101,110 and $316,966 in the three
and nine months ended September 30, 2003, respectively, as compared to $160,218
and $480,653 in the same periods in 2002.
Interest income decreased during the three and nine months ended September 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.
There was no recognized gain on sale of aircraft during the nine months ended
September 30, 2003, as compared to the same period 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 nine months ended September 30, 2003, as
compared to the same periods in 2002. The increase for the nine months ended
September 30, 2003, was due to a payment of $76,279 received in the second
quarter of 2003, from TWA's bankrupt estate which represents a portion of the
$465,277 administrative rent claims.
10
Lessee return condition settlement increased during the three and nine months
ended September 30, 2003, as compared to the same periods in 2002. The increase
for both periods ended September 30, 2003, was due to a payment received based
on the returned condition of an aircraft that went off lease on September 15,
2003.
Depreciation expense increased during the three and nine months ended September
30, 2003, as compared to the same periods in 2002, primarily because the General
Partner determined that the carrying value of the aircraft on lease and held for
sale exceeded current fair market value based on recent purchase offers on the
aircraft held for sale and therefore recognized additional depreciation expense.
No such adjustments to market value through additional depreciation expense were
made during the 2002 period.
Management fees to the General Partner decreased for the three and nine months
ended September 30, 2003, as compared to the same periods in 2002, primarily as
a result of fewer aircraft being on lease.
Operating expense decreased during the three months ended September 30, 2003, as
compared to the same period in 2002, primarily due to insurance. This was offset
by increased maintenance and storage costs associated with the aircraft as they
came off lease and were held for sale.
Operating expense increased during the nine months ended September 30, 2003, as
compared to the same period 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 September 30, 2003, there were two aircraft remaining in storage.
Administration and other expense increased during the three and nine months
ended September 30, 2003, as compared to the same periods in 2002, primarily due
to increased audit fees and printing and postage.
Legal fees increased for the three months ended September 30, 2003; however they
decreased for the nine months ended September 30, 2003. The increase for the
three months ended September 30, 2003 is due to an increase in various SEC and
investor report matters. Legal fees were higher for the nine months ended
September 30, 2002, due to legal fees 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 nine months ended
September 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 for winding
up the affairs of the Partnership and for other contingencies. 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 the General Partner is unable to
predict when all of the Partnership's remaining assets will be sold. The
Partnership's cash reserves will be monitored and may be revised from time to
time as further information becomes available in the future.
11
CASH DISTRIBUTIONS - Cash distributions to limited partners during the nine
months ended September 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.
12
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.
13
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 June 30, 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 June 30, 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.
14
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
November 14, 2003 By: /s/ Stephen E. Yost
-------------------------------
Stephen E. Yost, Chief Financial
Officer
15