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 June 30, 2004
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
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 June 30, 2004
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a) Condensed Balance Sheets - June 30, 2004 and
December 31, 2003...........................................3
b) Condensed Statements of Operations - Three and Six Months
Ended June 30, 2004 and 2003................................4
c) Condensed Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 2003
and Six Months Ended June 30, 2004..........................5
d) Condensed Statements of Cash Flows - Six Months
Ended June 30, 2004 and 2003................................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)
June 30, December 31,
2004 2003
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 1,859,430 $ 2,524,997
OTHER RECEIVABLES 1,836 1,836
AIRCRAFT HELD FOR SALE 468,200 400,000
PREPAID EXPENSE 8,326 --
----------- -----------
Total Assets $ 2,337,792 $ 2,926,833
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 141,767 $ 96,353
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 88,426 54,420
----------- -----------
Total Liabilities 230,193 150,773
----------- -----------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,869,360) (3,862,671)
Limited Partners, 499,571 units in 2004
and 499,683 units in 2003
issued and outstanding 5,976,959 6,638,731
----------- -----------
Total Partners' Capital 2,107,599 2,776,060
----------- -----------
Total Liabilities and Partners' Capital $ 2,337,792 $ 2,926,833
=========== ===========
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,
2004 2003 2004 2003
---- ---- ---- ----
REVENUES:
Rent from operating leases $ -- $ 467,928 $ -- $ 935,856
Interest 4,621 5,637 9,984 12,069
Lessee settlements 82,524 76,279 82,524 76,279
----------- ----------- ----------- -----------
Total Revenues 87,145 549,844 92,508 1,024,204
----------- ----------- ----------- -----------
EXPENSES:
Depreciation -- 331,419 -- 662,838
Write-up of aircraft held for sale (16,200) -- (68,200) --
Management fees to general partner -- 13,062 -- 26,124
Operating 40,490 17,397 83,728 29,132
Administration and other 114,229 109,676 190,238 173,089
----------- ----------- ----------- -----------
Total Expenses 138,519 471,554 205,766 891,183
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (51,374) $ 78,290 $ (113,258) $ 133,021
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO THE GENERAL PARTNER $ (513) $ 783 $ 48,831 $ 201,722
=========== =========== =========== ===========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ (50,861) $ 77,507 $ (162,089) $ (68,701)
=========== =========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (0.10) $ 0.15 $ (0.32) $ (0.14)
=========== =========== =========== ===========
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, 2003 and
Six Months Ended June 30, 2004
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 2002 $(3,784,552) $ 9,420,501 $ 5,635,949
Net income (loss) 199,561 (282,650) (83,089)
Cash distribution to partners
($5.00 per Limited
Partnership Unit) (277,680) (2,499,120) (2,776,800)
----------- ----------- -----------
Balance, December 31, 2003 (3,862,671) 6,638,731 2,776,060
Net income (loss) 48,831 (162,089) (113,258)
Cash distribution to partners
($1.00 per Limited
Partnership Unit) (55,520) (499,683) (555,203)
----------- ----------- -----------
Balance, June 30, 2004 $(3,869,360) $ 5,976,959 $ 2,107,599
=========== =========== ===========
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,
2004 2003
---- ----
OPERATING ACTIVITIES:
Net (loss) income $ (113,258) $ 133,021
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Depreciation -- 662,838
Write-up of aircraft held for sale (68,200) --
Changes in operating assets and liabilities:
Decrease in rent and other receivables -- 57,855
Increase (decrease) in payable to
affiliates 45,414 (19,504)
Increase (decrease) in accounts
payable and accrued liabilities 34,006 (8,446)
Decrease in deferred income -- (215,856)
Increase in other assets (8,326) --
----------- -----------
Net cash (used in) provided by
operating activities (110,364) 609,908
----------- -----------
FINANCING ACTIVITIES:
Cash distributions to partners (555,203) (2,776,800)
----------- -----------
Net cash used in financing activities (555,203) (2,776,800)
----------- -----------
CHANGES IN CASH AND CASH EQUIVALENTS (665,567) (2,166,892)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,524,997 4,118,926
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,859,430 $ 1,952,034
=========== ===========
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 (PAIF-III or
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 and are referred to
collectively as the Limited Partners. During January 1998, 40 units were
redeemed by the Partnership in accordance with section 18 of the Limited
Partnership Agreement. During the six months ended June 30, 2004, 112 units were
abandoned. At June 30, 2004, there were 499,571 units outstanding, net of
redemptions.
As of June 30, 2004, the Partnership owned four aircraft, which are being
marketed for sale. Upon completion of such sales, 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. The General Partner is actively seeking buyers for the
aircraft; however the actual timing for completing such sales and the prices
obtained will depend upon a number of factors outside the control of the General
Partner, including market conditions. Thus, there can be no assurance as to
either the timing of such sales or whether such sales may be completed on terms
deemed favorable to the Partnership. However, the General Partner intends to
seek to complete such sales during calendar year 2004.
Polaris Investment Management Corporation (PIMC), the sole General Partner of
the Partnership, 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.
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, 2003,
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
7
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, 2003, 2002, and 2001 included in the
Partnership's 2003 Annual Report to the SEC on Form 10-K.
Note 3. Related Parties
Under the Limited Partnership Agreement (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
June 30, 2004 June 30, 2004
------------- -------------
Out-of-Pocket Operating
Expense Reimbursement $ 42,476 $ 37,128
Out-of-Pocket Administrative
Expense Reimbursement 64,133 104,639
-------- -------
$106,609 $141,767
======== ========
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.
Aircraft on lease were carried at cost unless deemed impaired, in which case the
asset was recorded at fair value. Aircraft on lease were deemed impaired, 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
8
residual value) was less than the carrying value of the aircraft. An impairment
loss was recognized equal to the difference between the net carrying value of
the asset and its fair value.
Aircraft held for sale are carried at the lower of cost or fair value less cost
to sell. During the three and six months ended June 30, 2004, the Partnership
recognized a write-up of $16,200 and $68,200, respectively, in the carrying
value of aircraft held for sale due to changes in estimated fair market values
based on the current selling price of similar aircraft. The adjustments to
increase the net carrying value does not result in a net carrying value in
excess of the original net carrying value of the assets when they were initially
designated as held for sale. Management believes the assumptions related to the
fair value of impaired assets represent the best estimates based on reasonable
and supportable assumptions and projections.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
Certain portions of this Quarterly Report on Form 10-Q contain forward-looking
statements that are based on management's expectations, estimates, projections
and assumptions. Words such as "expects", "anticipates", "plans", "believes",
"scheduled", "estimates" and variations of these words and similar expressions
are intended to identify forward-looking statements, which include but are not
limited to projections of revenues, earnings, cash flows, aircraft disposition
and the like. Forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, as amended.
These statements are not guarantees of future performance and involve certain
risks and uncertainties, which are difficult to predict. Therefore, actual
future results and trends may differ materially from what is forecast in
forward-looking statements due to a variety of factors, including, without
limitation:
--General U.S. and international political and economic conditions;
--Changing demand preferences for business aircraft, including the
effects of economic conditions on the business-aircraft market;
All forward-looking statements speak only as of the date of this report, or, in
the case of any document incorporated by reference, the date of that document.
All subsequent written and oral forward-looking statements attributable to the
Partnership or any person acting on its behalf are qualified by the cautionary
statements in this section. The Partnership does not undertake any obligation to
update or publicly release any revisions to forward-looking statements to
reflect events, circumstances or changes in expectations after the date of this
report.
Business Overview
At June 30, 2004, Polaris Aircraft Income Fund III (PAIF-III or the Partnership)
owned a portfolio of four used McDonnell Douglas DC-9-30 commercial jet aircraft
(DC-9-30) out of its original portfolio of 38 aircraft. These DC-9-30 aircraft
were being stored in New Mexico and were being marketed 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. The General Partner is actively seeking buyers
for the aircraft; however the actual timing for completing such sales and the
prices obtained will depend upon a number of factors outside the control of the
General Partner, including market conditions. Thus, there can be no assurance as
to either the timing of such sales or whether such sales may be completed on
terms deemed favorable to the Partnership. However, the General Partner intends
to seek to complete such sales during calendar year 2004.
Partnership Operations
The Partnership recorded a net loss of $51,374, or $0.10 per Limited Partnership
Unit, for the three months ended June 30, 2004, compared to net income of
$78,290, or $0.15 per Limited Partnership Unit, for the three months ended June
30, 2003. The Partnership recorded a net loss of $113,258, or $0.32 per Limited
Partnership Unit, for the six months ended June 30, 2004, compared to 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. Variances in net income may not correspond
to variances in net income per Limited Partnership Unit due to the allocation of
components of income and loss in accordance with the Partnership Agreement.
10
The decrease in net income is primarily due to an absence of rental income, a
decrease in interest income along with an increase in operating expenses,
partially offset by a write-up of the carrying value of aircraft held for sale
and an absence of depreciation expense and management fees to the General
Partner, as discussed below.
The absence of rental income from operating leases during the three and six
months ended June 30, 2004, as compared to $467,928 and $935,856 in the same
periods in 2003, is due to all lease terms having expired during 2003.
Interest income decreased slightly during the three and six months ended June
30, 2004, as compared to the same periods in 2003, primarily due to lower
interest rates and lower average cash balances.
Lessee settlement income increased slightly during the three and six months
ended June 30, 2004, as compared to the same periods in 2003, due to a payment
received during the three and six months ended June 30, 2004 in the amount of
$82,524, as compared to $76,279 received during the three and six months ended
June 30, 2003. The payment received during the 2004 and 2003 periods resulted
from distributions by TWA's bankrupt estate representing a portion of the
$465,277 administrative rent claims initially filed by the Partnership pursuant
to the bankruptcy.
Aircraft held for sale are carried at the lower of cost or fair value less cost
to sell. During the three and six months ended June 30, 2004, the Partnership
recognized income of $16,200 and $68,200, or $0.03 and $0.14, respectively, per
Limited Partnership Unit, on the write-up of the carrying value of two of its
aircraft, which previously had been reduced through additional depreciation
expense as the result of past reviews of estimated market values. The estimated
fair market value of the aircraft held for sale at June 30, 2004 was based the
current selling price of similar aircraft. The carrying value of the
Partnership's two other aircraft was not adjusted at June 30, 2004 because their
cost basis determined at lease expiration was less than the current estimated
fair market value. No adjustments to the market value of aircraft held for sale
were made during the same periods in 2003.
The absence of depreciation expense and management fees to the General Partner
during the three and six months ended June 30, 2004, as compared to the same
periods in 2003, was due to all lease terms having expired during 2003.
Operating expenses increased during the three and six months ended June 30,
2004, as compared to the same periods in 2003, primarily due to maintenance and
storage related costs associated with the aircraft while they are being held for
sale. During the three and six months ended June 30, 2004, four aircraft were
held in storage, as compared to the same periods in 2003, when one aircraft was
kept in storage.
Administration and other expense increased slightly during the three months and
six months ended June 30, 2004, as compared to the same periods in 2003,
primarily due to higher legal fees related to various SEC and investor reporting
matters.
11
Liquidity and Cash Distributions
Liquidity - No further rent payments were due during the six months ended June
30, 2004 since all lease terms expired during 2003. 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 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. The General Partner is actively seeking buyers
for the aircraft; however the actual timing for completing such sales and the
prices obtained will depend upon a number of factors outside the control of the
General Partner, including market conditions. Thus, there can be no assurance as
to either the timing of such sales or whether such sales may be completed on
terms deemed favorable to the Partnership. However, the General Partner intends
to seek to complete such sales during calendar year 2004. 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, 2004 and 2003 were $499,683, or $1.00 per Limited
Partnership Unit, and $2,499,120, or $5.00 per Unit, respectively. The General
Partner has determined that it is in the best interests of the Partnership to
suspend any further cash distributions until the Partnership is in a position to
dissolve, wind up and terminate, and make a final distribution of its remaining
cash. In reaching this conclusion, the General Partner considered the
anticipated costs of storing and insuring the aircraft pending sale, the
anticipated costs of marketing and preparing the aircraft for sale, the
anticipated costs of winding up the Partnership's business, the uncertainty as
to the period of time required to sell the aircraft and wind up the Partnership,
the uncertainty as to the terms on which the Partnership's aircraft may be sold
and the desirability of maintaining a prudent level of cash reserves for
Partnership needs and contingencies.
The Partnership does not have any material off balance sheet commitments or
obligations.
12
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
PIMC management reviewed the Partnership's internal controls and procedures and
the effectiveness of these controls. As of June 30, 2004, PIMC management,
including its Chief Executive Officer and Chief Financial Officer, carried out
an evaluation of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures pursuant to Rules 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Partnership's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Partnership required to be
included in its periodic SEC filings.
(b) Change to internal controls
There was no change in the Partnership's internal controls over financial
reporting or in other factors during the Partnership's last quarter that
materially affected, or are reasonably likely to materially affect, the
Partnership's internal controls over financial reporting. There were no
significant deficiencies or material weaknesses, and therefore no corrective
actions taken.
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) 2003 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, 2004,
there are several pending legal proceedings involving the Partnership. There
have been no material developments with respect to such proceedings during the
period covered by this report.
Other Proceedings - Item 10 in Part III of the Partnership's 2003 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, 2004 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
August 13, 2004 By: /s/Stephen E. Yost
- --------------- ----------------------------------------
Stephen E. Yost, Chief Financial Officer
15