-----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, MYkgYLzwNQbQqrC+sJADHdMuS1pTXdJGvGKJVYfZFEejDYuyffVro4FJmBn5lPxI iDoocNm2vX9Pl4enyWDsmA== 0000806031-96-000004.txt : 19961118 0000806031-96-000004.hdr.sgml : 19961118 ACCESSION NUMBER: 0000806031-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96663799 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 SEPTEMBER 30, 1996 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 September 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 September 30, 1996 INDEX Part I. Financial Information Page Item 1. Financial Statements a) Balance Sheets - September 30, 1996 and December 31, 1995.....................................3 b) Statements of Income - Three and Nine Months Ended September 30, 1996 and 1995.....................4 c) Statements of Changes in Partners' Capital (Deficit) - Year Ended December 31, 1995 and Nine Months Ended September 30, 1996..............5 d) Statements of Cash Flows - Nine Months Ended September 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 5. Other Information.................................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 BALANCE SHEETS (Unaudited) September 30, December 31, 1996 1995 ---- ---- ASSETS: CASH AND CASH EQUIVALENTS $ 25,074,926 $ 25,014,205 MARKETABLE SECURITIES, trading -- 1,659,160 RENT AND OTHER RECEIVABLES 460,782 8,171 NOTES RECEIVABLE, net of allowance for credit losses of $445,645 in 1996 and $1,993,095 in 1995 57,239 1,546,407 AIRCRAFT, net of accumulated depreciation of $82,719,896 in 1996 and $75,198,827 in 1995 45,539,593 53,060,662 AIRCRAFT INVENTORY -- 686,670 OTHER ASSETS 26,089 26,089 ------------ ------------ $ 71,158,629 $ 82,001,364 ============ ============ LIABILITIES AND PARTNERS' CAPITAL (DEFICIT): PAYABLE TO AFFILIATES $ 104,411 $ 130,584 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 51,381 84,084 DEFERRED INCOME 521,781 521,781 ------------ ------------ Total Liabilities 677,573 736,449 ------------ ------------ PARTNERS' CAPITAL (DEFICIT): General Partner (1,500,692) (1,392,716) Limited Partners, 500,000 units issued and outstanding 71,981,748 82,657,631 ------------ ------------ Total Partners' Capital 70,481,056 81,264,915 ------------ ------------ $ 71,158,629 $ 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 Nine Months Ended September 30, September 30, ------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES: Rent from operating leases $ 3,850,601 $ 4,817,966 $11,489,924 $11,533,156 Interest 350,821 479,715 1,152,757 1,493,220 Lessee settlement -- 216,666 144,444 888,888 Other 5,222 -- 44,120 157,609 ----------- ----------- ----------- ----------- Total Revenues 4,206,644 5,514,347 12,831,245 14,072,873 ----------- ----------- ----------- ----------- EXPENSES: Depreciation 2,507,023 2,565,245 7,521,069 7,695,733 Management fees to general partner 192,530 240,898 574,496 576,658 Operating 2,777 10,272 12,438 32,034 Administration and other 70,459 81,089 229,323 226,285 ----------- ----------- ----------- ----------- Total Expenses 2,772,789 2,897,504 8,337,326 8,530,710 ----------- ----------- ----------- ----------- NET INCOME $ 1,433,855 $ 2,616,843 $ 4,493,919 $ 5,542,163 =========== =========== =========== =========== NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 439,296 $ 276,144 $ 1,419,802 $ 805,347 =========== =========== =========== =========== NET INCOME ALLOCATED TO LIMITED PARTNERS $ 994,559 $ 2,340,699 $ 3,074,117 $ 4,736,816 =========== =========== =========== =========== NET INCOME PER LIMITED PARTNERSHIP UNIT $ 1.99 $ 4.68 $ 6.15 $ 9.47 =========== =========== =========== =========== 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 Nine Months Ended September 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 1,419,802 3,074,117 4,493,919 Cash distributions to partners (1,527,778) (13,750,000) (15,277,778) ------------ ------------ ------------ Balance, September 30, 1996 $ (1,500,692) $ 71,981,748 $ 70,481,056 ============ ============ ============ 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)
Nine Months Ended September 30, ------------------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 4,493,919 $ 5,542,163 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,521,069 7,695,733 Changes in operating assets and liabilities: Decrease in marketable securities, trading 1,659,160 -- Decrease (increase) in rent and other receivables (452,611) 15,130 Increase in other assets -- (43,169) Decrease in payable to affiliates (26,173) (10,070) Increase (decrease) in accounts payable and accrued liabilities (32,703) 22,997 ------------ ------------ Net cash provided by operating activities 13,162,661 13,222,784 ------------ ------------ INVESTING ACTIVITIES: Net proceeds from sale of aircraft inventory 695,952 1,179,872 Inventory disassembly costs (9,282) (156,718) Increase in notes receivable -- (499,868) Principal payments on notes receivable 1,489,168 1,231,526 ------------ ------------ Net cash provided by investing activities 2,175,838 1,754,812 ------------ ------------ FINANCING ACTIVITIES: Cash distributions to partners (15,277,778) (8,333,333) ------------ ------------ Net cash used in financing activities (15,277,778) (8,333,333) ------------ ------------ CHANGES IN CASH AND CASH EQUIVALENTS 60,721 6,644,263 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,014,205 15,810,799 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,074,926 $ 22,455,062 ============ ============ 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. 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 September 30, 1996, the aggregate fair value of the Continental deferred rent notes receivable was estimated to be approximately $0.41 million. 7 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 three 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 nine months ended September 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 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, 8 (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 $57,239 and $547,549 as of September 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 $445,645 and $1,993,095 as of September 30, 1996 and December 31, 1995, respectively. The unrecognized Deferred Amounts as of September 30, 1996 and December 31, 1995 were $441,599 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 nine months ended September 30, 1996 and 1995, the Partnership received supplemental payments of $1,650,349 each period, of which $1,499,923 and $1,269,029 was recognized as rental revenue in the nine months ended September 30, 1996 and 1995, respectively. Continental continues to pay all other amounts due under the prior agreement. As of September 30, 1996, Continental is current on all payments due the Partnership. The Partnership has not recorded an allowance for credit losses on the Continental modification financing note receivable described above, as it is currently deemed to be collectible. The Partnership's rights to receive payments 9 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 $888,888 as revenue during the nine months ended September 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 recorded a note receivable for the sales price and agreed to accept payment in 29 monthly installments of $115,500, with interest at a rate of 9.5% per annum. The note receivable balance at December 31, 1995 was $998,858. The Partnership has received all scheduled payments due under the note, which was paid in full by Continental in September 1996. 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 the Three Months Ended Payable at September 30, 1996 September 30, 1996 ------------------ ------------------ Aircraft Management Fees $192,530 $ 23,000 Out-of-Pocket Administrative Expense Reimbursement 86,279 81,411 -------- -------- $278,809 $104,411 ======== ======== 6. Subsequent Event Continental Lease Extension - The leases of five Boeing 727-200 Advanced aircraft with Continental were originally scheduled to expire in October 1996. Continental extended the leases for the five aircraft for a two-year term through October 1998 at the current market lease rate, which is approximately 76% of the prior lease rate. 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. Remarketing Update Continental Lease Extension - The leases of five Boeing 727-200 Advanced aircraft with Continental were originally scheduled to expire in October 1996. Continental extended the leases for the five aircraft for a two-year term through October 1998 at the current market lease rate, which is approximately 76% of the prior lease rate. Partnership Operations The Partnership recorded net income of $1,433,855, or $1.99 per limited partnership unit, for the three months ended September 30, 1996 compared to net income of $2,616,843, or $4.68 per unit for the same period in 1995. The Partnership recorded net income of $4,493,919, or $6.15 per limited partnership unit, for the nine months ended September 30, 1996 compared to net income of $5,542,163, or $9.47 per unit for the same period in 1995. The decline in operating results during 1996 as compared to 1995 is primarily the result of higher total revenues recognized by the Partnership in 1995. 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, which resulted in increased rental revenues recognized by the Partnership during the third quarter of 1995. 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 $888,888 as revenue during the nine months ended September 30, 1996 and 1995, respectively. 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, 11 payments totaling $701,174 have been received during the first three quarters of 1996 from the sale of parts from the nine disassembled aircraft. The Partnership applied $695,952 of these payments against aircraft inventory, reducing the net book value of the Partnership's aircraft inventory to zero as of September 30, 1996. Payments of $5,222 in excess of the aircraft net book value were recorded as gain on sale of aircraft inventory during the three months ended September 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 completed prior to November 1, 1996, if any. 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 September 30, 1996 and 1995 were $4,250,000, or $8.50 per limited partnership unit and $2,500,000, or $5.00 per unit, respectively. Cash distributions to limited partners during the nine months ended September 30, 1996 and 1995 were $13,750,000, or $27.50 per limited partnership unit and $7,500,000, or $15.00 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; and the receipt of the deferred rental payments and modification financing payments from Continental. 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. Such financing agreements may also require the Partnership to maintain a minimum level of working capital reserves and, in the event of any shortfall of such minimum levels, cash distributions may be restricted. It is anticipated that the leases for the Partnership's 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 periods ended March 31, 1996 and June 30, 1996, there are a number of pending legal actions or proceedings involving the Partnership. There have been no material developments with respect to any such actions or proceedings during the period covered by this report. Other Proceedings - Item 10 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 periods ended March 31, 1996 and June 30, 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 during the period covered by this report with respect to any of the actions described in 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 periods ended March 31, 1996 and June 30, 1996. Wilson et al. v. Polaris Holding Company et al. - On October 1, 1996, a complaint was filed in the Superior Court of the State of California for the County of Sacramento by over 500 individual plaintiffs who purchased limited partnership units in one or more of Polaris Aircraft Income Funds I through VI. The complaint names Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc., General Electric Company, General Electric Capital Services, Inc., General Electric Capital Corporation, GE Capital Aviation Services, Inc. and DOES 1-100 as defendants. The Partnership has not been named as a defendant. The complaint alleges violations of state common law, including fraud, negligent misrepresentation, negligence, breach of contract, and breach of fiduciary duty. The complaint seeks to recover compensatory damages and punitive damages in an unspecified amount, interest and rescission with respect to the Polaris Aircraft Income Funds sold to plaintiffs. Defendants time to answer or otherwise respond to the complaint is November 18, 1996. B&L Industries, Inc. et al. v. Polaris Holding Company et al. - On August 16, 1996, defendants filed a motion to dismiss plaintiffs' amended complaint. The motion is returnable on January 16, 1997. In re Prudential Securities Inc. Limited Partnerships Litigation - The trial, which was scheduled for November 11, 1996, has not proceeded and no new trial date has been set. 13 Item 5. Other Information James W. Linnan resigned as Director and President of Polaris Investment Management Corporation effective December 31, 1996. Mr. Linnan's replacement has not presently been named. Mr. Linnan will continue to serve in those capacities through the effective date of his resignation. 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 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 12, 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
5 9-MOS DEC-31-1996 SEP-30-1996 25074926 0 963666 445645 0 0 128259489 82719896 71158629 0 0 0 0 0 70481056 71158629 0 12831245 0 0 8337326 0 0 4493919 0 4493919 0 0 0 4493919 6.15 0
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