-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AMqeLsSEv2oeKXCqVflIx9i49FiweGY01RhKsDFvXmAbRUKLcYoKOMJ94SVu9+O2 SvPc+kmHavhXppJdOZT8fA== 0000806031-96-000003.txt : 19960813 0000806031-96-000003.hdr.sgml : 19960813 ACCESSION NUMBER: 0000806031-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS AIRCRAFT INCOME FUND III CENTRAL INDEX KEY: 0000806031 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 943023671 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-10122 FILM NUMBER: 96609024 BUSINESS ADDRESS: STREET 1: 201 MISSION ST STREET 2: 27TH FL CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4152947440 MAIL ADDRESS: STREET 1: 201 MISSION ST STREET 2: 27TH FL CITY: SAN FRANCISCO STATE: CA ZIP: 94105 10-Q 1 JUNE 30, 1996 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 June 30, 1996 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 Mission Street, 27th Floor, San Francisco, California 94105 Telephone - (415) 284-7400 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 15 pages. POLARIS AIRCRAFT INCOME FUND III, A California Limited Partnership FORM 10-Q - For the Quarterly Period Ended June 30, 1996 INDEX Part I. Financial Information Page Item 1. Financial Statements a) Balance Sheets - June 30, 1996 and December 31, 1995..............................................3 b) Statements of Income - Three and Six Months Ended June 30, 1996 and 1995...................................4 c) Statements of Changes in Partners' Capital (Deficit) - Year Ended December 31, 1995 and Six Months Ended June 30, 1996.............................5 d) Statements of Cash Flows - Six Months Ended June 30, 1996 and 1995...................................6 e) Notes to Financial Statements..................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............11 Part II. Other Information Item 1. Legal Proceedings..........................................13 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 BALANCE SHEETS (Unaudited) June 30, December 31, 1996 1995 ---- ---- ASSETS: CASH AND CASH EQUIVALENTS $ 25,244,058 $ 25,014,205 MARKETABLE SECURITIES, trading -- 1,659,160 RENT AND OTHER RECEIVABLES 463,482 8,171 NOTES RECEIVABLE, net of allowance for credit losses of $975,569 in 1996 and $1,993,095 in 1995 566,575 1,546,407 AIRCRAFT, net of accumulated depreciation of $80,212,873 in 1996 and $75,198,827 in 1995 48,046,616 53,060,662 AIRCRAFT INVENTORY 113,220 686,670 OTHER ASSETS 26,089 26,089 ------------ ------------ $ 74,460,040 $ 82,001,364 ============ ============ LIABILITIES AND PARTNERS' CAPITAL (DEFICIT): PAYABLE TO AFFILIATES $ 100,192 $ 130,584 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 68,644 84,084 DEFERRED INCOME 521,781 521,781 ------------ ------------ Total Liabilities 690,617 736,449 ------------ ------------ PARTNERS' CAPITAL (DEFICIT): General Partner (1,467,766) (1,392,716) Limited Partners, 500,000 units issued and outstanding 75,237,189 82,657,631 ------------ ------------ Total Partners' Capital 73,769,423 81,264,915 ------------ ------------ $ 74,460,040 $ 82,001,364 ============ ============ The accompanying notes are an integral part of these statements. 3 POLARIS AIRCRAFT INCOME FUND III, A California Limited Partnership STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES: Rent from operating leases $3,829,753 $4,442,594 $7,639,323 $6,715,190 Interest 381,628 580,345 801,936 1,013,505 Lessee settlement -- 216,667 144,444 672,222 Other -- -- 38,898 157,609 ---------- ---------- ---------- ---------- Total Revenues 4,211,381 5,239,606 8,624,601 8,558,526 ---------- ---------- ---------- ---------- EXPENSES: Depreciation 2,507,023 2,565,244 5,014,046 5,130,488 Management fees to general partner 191,488 222,130 381,966 335,760 Operating 5,857 13,869 9,661 21,762 Administration and other 96,004 77,692 158,864 145,196 ---------- ---------- ---------- ---------- Total Expenses 2,800,372 2,878,935 5,564,537 5,633,206 ---------- ---------- ---------- ---------- NET INCOME $1,411,009 $2,360,671 $3,060,064 $2,925,320 ========== ========== ========== ========== NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 489,063 $ 273,581 $ 980,506 $ 529,203 ========== ========== ========== ========== NET INCOME ALLOCATED TO LIMITED PARTNERS $ 921,946 $2,087,090 $2,079,558 $2,396,117 ========== ========== ========== ========== NET INCOME PER LIMITED PARTNERSHIP UNIT $ 1.84 $ 4.17 $ 4.16 $ 4.79 ========== ========== ========== ========== The accompanying notes are an integral part of these statements. 4 POLARIS AIRCRAFT INCOME FUND III, A California Limited Partnership STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (Unaudited) Year Ended December 31, 1995 and Six Months Ended June 30, 1996 ------------------------------ General Limited Partner Partners Total ------- -------- ----- Balance, December 31, 1994 $ (1,346,583) $ 87,213,552 $ 85,866,969 Net income 1,203,867 6,694,079 7,897,946 Cash distributions to partners (1,250,000) (11,250,000) (12,500,000) ------------ ------------ ------------ Balance, December 31, 1995 (1,392,716) 82,657,631 81,264,915 Net income 980,506 2,079,558 3,060,064 Cash distributions to partners (1,055,556) (9,500,000) (10,555,556) ------------ ------------ ------------ Balance, June 30, 1996 $ (1,467,766) $ 75,237,189 $ 73,769,423 ============ ============ ============ The accompanying notes are an integral part of these statements. 5 POLARIS AIRCRAFT INCOME FUND III, A California Limited Partnership STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 3,060,064 $ 2,925,320 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,014,046 5,130,488 Changes in operating assets and liabilities: Decrease in marketable securities, trading 1,659,160 -- Decrease (increase) in rent and other receivables (455,311) 25,551 Decrease in payable to affiliates (30,392) (11,307) Increase (decrease) in accounts payable and accrued liabilities (15,440) 63,554 Increase in deferred income -- 460,000 ------------ ------------ Net cash provided by operating activities 9,232,127 8,593,606 ------------ ------------ INVESTING ACTIVITIES: Net proceeds from sale of aircraft inventory 582,732 752,626 Inventory disassembly costs (9,282) (122,693) Increase in notes receivable -- (499,868) Principal payments on notes receivable 979,832 875,211 ------------ ------------ Net cash provided by investing activities 1,553,282 1,005,276 ------------ ------------ FINANCING ACTIVITIES: Cash distributions to partners (10,555,556) (5,555,555) ------------ ------------ Net cash used in financing activities (10,555,556) (5,555,555) ------------ ------------ CHANGES IN CASH AND CASH EQUIVALENTS 229,853 4,043,327 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,014,205 15,810,799 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,244,058 $ 19,854,126 ============ ============ The accompanying notes are an integral part of these statements. 6 POLARIS AIRCRAFT INCOME FUND III, A California Limited Partnership NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. 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 Polaris Aircraft Income Fund III's (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 and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the financial statements and notes thereto for the years ended December 31, 1995, 1994, and 1993 included in the Partnership's 1995 Annual Report to the SEC on Form 10-K (Form 10-K). Aircraft and Depreciation - The aircraft are recorded at cost, which includes acquisition costs. Depreciation to an estimated residual value is computed using the straight-line method over the estimated economic life of the aircraft which was originally estimated to be 30 years from the date of manufacture. Depreciation in the year of acquisition was calculated based upon the number of days that the aircraft were in service. The Partnership periodically reviews the estimated realizability of the residual values at the projected end of each aircraft's economic life based on estimated residual values obtained from independent parties which provide current and future estimated aircraft values by aircraft type. 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 is 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 (SFAS) No. 121, as discussed below, measurement of an impairment loss will be based on the "fair value" of the asset as defined in the statement. Capitalized Costs - Aircraft modification and maintenance costs which are determined to increase the value or extend the useful life of the aircraft are capitalized and amortized using the straight-line method over the estimated useful life of the improvement. These costs are also subject to periodic evaluation as discussed above. Financial Accounting Pronouncements - SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires the Partnership to disclose the fair value of financial instruments. Cash and cash equivalents is stated at cost, which approximates fair value. Marketable Securities, trading (Note 2) were carried at fair value, which was determined based on quoted market prices. The fair value of the Partnership's notes receivable is estimated by discounting future estimated cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As discussed in Note 3, the carrying value of the notes receivable from Continental Airlines, Inc. (Continental) for deferred rents is zero due to a recorded allowance for credit losses equal to the balance of the notes. As of June 30, 1996, the aggregate fair value of the Continental deferred rent notes 7 receivable was estimated to be approximately $0.9 million. The carrying value of the Partnership's remaining notes receivable discussed in Notes 2 and 4 approximate their estimated fair value. The Partnership adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Partnership estimates that this pronouncement will not have a material impact on the Partnership's financial position or results of operations unless events or circumstances change that would cause projected net cash flows to be adjusted. No impairment loss was recognized by the Partnership during the first two quarters of 1996. 2. Trans World Airlines, Inc. (TWA) Reorganization As discussed in the Form 10-K, the Partnership renegotiated the TWA leases after TWA defaulted under its leases with the Partnership during 1991. The renegotiated agreement stipulated that the Partnership share in the cost of certain Airworthiness Directives after TWA successfully reorganized. Pursuant to this cost-sharing agreement, since TWA emerged from its reorganization proceedings in 1993, expenses totaling $4.55 million ($1.95 million in 1993 and $2.6 million in 1994) have been offset against rental payments. Under the terms of this agreement, TWA may offset up to an additional $1.95 million against rental payments, subject to annual limitations, over the remaining lease terms. In October 1994, TWA notified its creditors, including the Partnership, of another proposed restructuring of its debt. Subsequently, GE Capital Aviation Services, Inc. (GECAS) negotiated a standstill arrangement, as set forth in a letter agreement dated December 16, 1994 (the Deferral Agreement), with TWA for the 46 aircraft that are managed by GECAS, 13 of which are owned by the Partnership. As required by its terms, the Deferral Agreement (which has since been amended as discussed below) was approved by Polaris Investment Management Corporation (PIMC) on behalf of the Partnership with respect to the Partnership's aircraft. The Deferral Agreement provided for (i) a moratorium on the rents due to the Partnership in November 1994 and on 75% of the rents due to the Partnership from December 1994 through March 1995, and (ii) all of the deferred rents, together with interest thereon, to be repaid in monthly installments beginning in May 1995 and ending in December 1995. The repayment schedule was subsequently accelerated upon confirmation of TWA's bankruptcy plan. The Partnership did not recognize either the $1,137,500 rental amount deferred in 1994 or the $1,462,500 rental amount deferred during the first quarter of 1995 as rental revenue until the deferred rents were received. The deferred rents were paid in full by October 1995. In consideration for the partial rent moratorium described above, TWA agreed to make a lump sum payment of $1,000,000 to GECAS for the TWA lessors for whom GECAS provides management services and who agreed to the Deferral Agreement. The Partnership received $157,568 in January 1995 as its pro-rata share of such payment by TWA. This amount was recognized as other revenue in the accompanying statement of operations for the six months ended June 30, 1995. In addition, TWA agreed to issue warrants to the Partnership for TWA Common Stock. In order to resolve certain issues that arose after the execution of the Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27, 1995, pursuant to which they agreed to amend certain provisions of the Deferral Agreement (as so amended, the Amended Deferral Agreement). The effect of the Amended Deferral Agreement, which was approved by PIMC with respect to the 8 Partnership's aircraft, is that TWA, in addition to agreeing to repay the deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable in warrants, the number of which was determined by formula) in consideration for the aircraft owners' agreement to defer rent under the Deferral Agreement, and, (ii) to the extent the market value of the warrants is less than the payment amount, to supply maintenance services to the aircraft owners having a value equal to such deficiency. The payment amount was determined by subtracting certain maintenance reimbursements owed to TWA by certain aircraft owners, including the Partnership, from the aggregate amount of deferred rents. The amount of such maintenance reimbursement has not been finally determined. The Partnership received warrants to purchase 159,919 shares of TWA Common Stock from TWA in November 1995. The Partnership exercised the warrants on December 29, 1995 for the strike price of $0.01 per share. The fair market value of the TWA stock at December 31, 1995 of $1,659,160 is reflected in the accompanying December 31, 1995 balance sheet. The Partnership sold the TWA Common Stock by February 1996, net of broker commissions, for $1,698,057 and recognized a gain on trading securities of $38,898 in the first quarter of 1996. 3. Continental Lease Modification As discussed in the Form 10-K, the leases with Continental were modified after Continental filed for Chapter 11 bankruptcy protection in December 1990. The modified agreement stipulates that the Partnership pay certain aircraft maintenance, modification and refurbishment costs, not to exceed approximately $3.2 million, a portion of which will be recovered with interest through payments from Continental over the extended lease terms. The Partnership's share of such costs may be capitalized and depreciated over the remaining lease terms, subject to the capitalized cost policy as described in Note 1. The Partnership has approved invoices aggregating $1,698,106 for interior modifications on the Partnership's aircraft. The Partnership financed the aggregate amount of these invoices to Continental from 1992 through 1995 to be repaid by Continental with interest over the remaining lease terms of the aircraft. The Partnership's balance sheets reflect the net reimbursable costs incurred of $225,578 and $547,549 as of June 30, 1996 and December 31, 1995, respectively, as notes receivable. The agreement with Continental included an extended deferral of the dates when Continental will remit its rental payments for the period from December 3, 1990 through September 30, 1991 and for a period of three months, beginning in November 1992, aggregating $9,917,500 (the Deferred Amount). The Partnership recorded a note receivable and an allowance for credit losses equal to the total of the deferred rents and prior accrued interest, the net of which is reflected in the accompanying balance sheets. The note receivable and corresponding allowance for credit losses are reduced by the principal portion of payments received. In addition, the Partnership recognizes rental revenue and interest revenue in the period the deferred rental payments are received. The allowances for credit losses on the principal and prior interest portions due were $975,569 and $1,993,095 as of June 30, 1996 and December 31, 1995, respectively. The unrecognized Deferred Amounts as of June 30, 1996 and December 31, 1995 were $962,200 and $1,941,522, respectively. In accordance with the aforementioned agreement, Continental began making supplemental payments for the Deferred Amount plus interest on July 1, 1992. During the six months ended June 30, 1996 and 1995, the Partnership received supplemental payments of $1,100,233 and $1,283,605, respectively, of which $979,323 and $972,886 was recognized as rental revenue in the six months ended June 30, 1996 and 1995, respectively. Continental continues to pay all other amounts due under the prior agreement. As of June 30, 1996, Continental is current on all payments due the Partnership. The Partnership has not recorded an allowance for credit losses on the 9 additional Continental aircraft finance sale note receivable described in Note 4 or the Continental modification financing note receivable described above, as they are currently deemed to be collectible. The Partnership's rights to receive payments under the agreements fall into various categories of priority under the Bankruptcy Code. In general, the Partnership's claims are administrative claims. If Continental's reorganization is not successful, it is likely that a portion of the Partnership's claims will not be paid in full. In January 1995, the United States Bankruptcy Court approved an agreement between the Partnership and Continental which specified payment to the Partnership by Continental of approximately $1.3 million as final settlement for the return of six Boeing 727-100 aircraft, as discussed in the Form 10-K. The Partnership received an initial payment of $311,111 in February 1995 and received the balance of the settlement in equal monthly installments of $72,222 through February 1996. The settlement payments were recorded as revenue when received. The Partnership recorded payments of $144,444 and $672,222 as revenue during the six months ended June 30, 1996 and 1995, respectively. 4. Sale of Aircraft to Continental In May 1994, the Partnership sold three Boeing 727-200 aircraft to Continental for an aggregate sale price of $3,019,719. The Partnership agreed to accept payment of the sale price in 29 monthly installments of $115,500, with interest at a rate of 9.5% per annum. The Partnership recorded a note receivable for the sales price and has received all scheduled payments due under the note. The note receivable balance at June 30, 1996 and December 31, 1995 was $340,997 and $998,858, respectively. 5. 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 for Three Months Ended Payable at June 30, 1996 June 30, 1996 ------------- ------------- Aircraft Management Fees $191,488 $ 23,000 Out-of-Pocket Administrative Expense Reimbursement 71,033 77,192 Out-of-Pocket Operating and Remarketing Expense Reimbursement 9,509 -- -------- -------- $272,030 $100,192 ======== ======== 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Polaris Aircraft Income Fund III (the Partnership) owns a portfolio of 18 used commercial jet aircraft and certain inventoried aircraft parts out of its original portfolio of 38 aircraft. The portfolio includes 13 McDonnell Douglas DC-9-30 aircraft leased to Trans World Airlines, Inc. (TWA) and five Boeing 727-200 Advanced aircraft leased to Continental Airlines, Inc. (Continental). The Partnership transferred three McDonnell Douglas DC-9-10 aircraft and six Boeing 727-100 aircraft to aircraft inventory. The inventoried aircraft have been disassembled for sale of their component parts. Of its original aircraft portfolio, the Partnership sold eight DC-9-10 aircraft in 1992 and 1993 and three Boeing 727-200 aircraft in May 1994. Partnership Operations The Partnership recorded net income of $1,411,009, or $1.84 per limited partnership unit, for the three months ended June 30, 1996 compared to net income of $2,360,671, or $4.17 per unit for the same period in 1995. The Partnership recorded net income of $3,060,064, or $4.16 per limited partnership unit, for the six months ended June 30, 1996 compared to net income of $2,925,320, or $4.79 per unit for the same period in 1995. Operating results for the six months ended June 30, 1995 were negatively impacted by a decrease in rental revenue recognized during the first three months of 1995 on the Partnership's leases with TWA. In December 1994, GE Capital Aviation Services, Inc. (GECAS) negotiated a standstill agreement with TWA, as set forth in a letter agreement dated December 16, 1994 (the Deferral Agreement). That agreement provided for a deferral of the rent due the Partnership in November 1994 and 75% of the rents due the Partnership from December 1994 through March 1995. The Partnership did not recognize the deferred rent as rental revenue until it was received, including $1,462,500 deferred in the first three months of 1995. TWA repaid the deferred rent in full from May 1995 through October 1995. In consideration for the rent deferral, TWA agreed to make a lump sum payment of $1,000,000 to GECAS for the TWA lessors for whom GECAS provides management services and who agreed to the Deferral Agreement. The Partnership received $157,568 in January 1995 as its pro-rata share of such payment by TWA. This amount was recognized as other revenue in the first quarter of 1995. In addition, TWA agreed to issue warrants to the Partnership for TWA Common Stock. The Partnership received warrants to purchase 159,919 shares of TWA Common Stock from TWA in November 1995 and exercised the warrants on December 29, 1995. The Partnership sold the TWA Common Stock by February 1996, net of broker commissions, for $1,698,057 and recognized a gain on trading securities of $38,898 during the first quarter of 1996. In January 1995, the United States Bankruptcy Court approved an agreement between the Partnership and Continental which specified payment to the Partnership by Continental of approximately $1.3 million as final settlement for the return of six Boeing 727-100 aircraft. The Partnership received an initial payment of $311,111 in February 1995 and received the balance of the settlement in equal monthly installments of $72,222 through February 1996. The Partnership recorded payments of $144,444 and $672,222 as revenue during the six months ended June 30, 1996 and 1995, respectively. 11 Liquidity and Cash Distributions Liquidity - The Partnership has received all payments due from Continental under the modified lease agreement, the aircraft sale agreement, and the settlement agreement for the return of the six Boeing 727-100 aircraft. In addition, payments totaling $582,732 have been received during the first two quarters of 1996 from the sale of parts from the nine disassembled aircraft and have been applied against aircraft inventory. The net book value of the Partnership's aircraft inventory was $113,220 as of June 30, 1996. As discussed in Note 3 to the financial statements, the Continental leases provide for payment by the Partnership of the costs of certain maintenance work, Airworthiness Directive (AD) compliance, aircraft modification and refurbishment costs, which are not to exceed approximately $3.2 million, a portion of which will be recovered with interest through payments from Continental over the lease terms. In accordance with the Continental leases, the Partnership may be required to finance up to an additional $946,346 for new image modifications in the future. As discussed in Note 2 to the financial statements, the Partnership agreed to share the cost of meeting certain ADs with TWA. In accordance with the cost-sharing agreement, TWA may offset up to an additional $1.95 million against rental payments, subject to annual limitations, over the remaining lease terms. The Partnership's cash reserves are being retained to finance future modification costs for Continental and to meet the obligations under the TWA leases. Cash Distributions - Cash distributions to limited partners during the three months ended June 30, 1996 and 1995 were $4,750,000, or $9.50 per limited partnership unit and $2,500,000, or $5.00 per unit, respectively. Cash distributions to limited partners during the six months ended June 30, 1996 and 1995 were $9,500,000, or $19.00 per limited partnership unit and $5,000,000, or $10.00 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 the potential costs of remarketing the Partnership's aircraft; continued receipt of the renegotiated rental payments from Continental and TWA; the receipt of the deferred rental payments, modification financing payments and aircraft sale payments from Continental; and the receipt of payments generated from the sale of aircraft inventory. TWA Leases GECAS, on behalf of the Partnership, is negotiating with TWA regarding the acquisition of noise-suppression devices, commonly known as "hushkits", for 10 of the 13 Partnership aircraft currently on lease to TWA, as well as 18 other aircraft owned by affiliates of the General Partner and leased to TWA. The hushkits would recondition the aircraft so as to meet Stage 3 noise level restrictions, which are discussed in the Partnership's 1995 Annual Report to the Securities and Exchange Commission on Form 10-K. The anticipated cost of the hushkit reconditioning is approximately $1.6 million per aircraft, approximately $300,000 of which will be paid out of the Partnership's cash reserves and the balance of which will be financed by the engine/hushkit manufacturer over a 6-year period at an interest rate of approximately 10% per year. It is anticipated that the leases for these 10 aircraft would be extended for a period of eight years from the date of installation or purchase of the hushkits, and the rent payable by TWA under the leases would be increased by an amount sufficient to cover the monthly debt service payments on the hushkits and fully repay during the term of the leases the amount borrowed. The loan from the engine/hushkit manufacturer would be non-recourse to the Partnership and secured by a security interest in the leases. 12 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) 1995 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, 1996, there are a number of 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. Trans World Airlines, Inc. (TWA) - On May 2, 1996, the United States Bankruptcy Court for the Northern District of California issued a notice of final decree declaring that the estate of TWA had been fully administered and that TWA's proceedings under Chapter 11 of the United States Bankruptcy Code were closed. Other Proceedings - Item 10 in Part III of the Partnership's 1995 Form 10-K and Item 1 in Part II of the Partnership's Form 10-Q for the period ended March 31, 1996 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. With the exception of Novak, et al v. Polaris Holding Company, et al, (which has been dismissed, as discussed in Item 10 of the Partnership's 1995 Form 10-K) where the Partnership was named as a defendant for procedural purposes, the Partnership is not a party to these actions. Except as discussed below, there have been no material developments with respect to any of the actions described therein during the period covered by this report. Bishop v. Kidder Peabody & Co., Incorporated et al. - On June 18, 1996, defendants filed a motion to transfer venue from Sacramento to San Francisco County. The Court subsequently denied the motion. Weisl et al. v. Polaris Holding Company et al. - On April 25, 1996, the Appellate Division for the First Department affirmed the trial court's order which had dismissed most of plaintiffs' claims. In re Prudential Securities Inc. Limited Partnerships Litigation - On June 5, 1996, the Court certified a class with respect to claims against Polaris Holding Company, one of its former officers, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, and Polaris Securities Corporation. The class is comprised of all investors who purchased securities in any of Polaris Aircraft Income Funds I through VI during the period from January 1985 until January 29, 1991, regardless of which brokerage firm the investor purchased from. Excepted from the class are those investors who settled in the SEC/Prudential settlement or otherwise opted for arbitration pursuant to the settlement and any investor who has previously released the Polaris defendants through any other settlement. On June 10, 1996, the Court issued an opinion denying summary judgment to Polaris on plaintiffs' Section 1964(c) and (d) RICO claims and state causes of action, and granting summary judgment to Polaris on plaintiffs' 1964(a) RICO claims and the New Jersey State RICO claims. On August 5, 1996, the Court signed an order providing for notice to be given to the class members. The case has been set for trial on November 11, 1996. 13 Item 6. Exhibits and Reports on Form 8-K a) Exhibits (numbered in accordance with Item 601 of Regulation S-K) 27. Financial Data Schedule (Filed electronically only) 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 8, 1996 By: /S/Marc A. Meiches - -------------------------------- ------------------ Marc A. Meiches Chief Financial Officer (principal financial officer and principal accounting officer of Polaris Investment Management Corporation, General Partner of the Registrant) 15 EX-27 2
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