10-Q 1 if3_1q03.txt MARCH 31, 2003 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q ---------------- 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 ___ ---------------- Commission File No. 33-10122 ---------------- 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