-----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, TQFXppgaa+GtWUOMpiYCW5LDviqTLlFkbl8beAolM0NqfW6WU2u5/jRwphTtWOyx ylqevp71bdwjyavXi+vJ5Q== 0000948524-97-000134.txt : 19971115 0000948524-97-000134.hdr.sgml : 19971115 ACCESSION NUMBER: 0000948524-97-000134 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 033-10122 FILM NUMBER: 97717281 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, 1997 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 September 30, 1997 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 16 pages. 1 POLARIS AIRCRAFT INCOME FUND III, A California Limited Partnership FORM 10-Q - For the Quarterly Period Ended September 30, 1997 INDEX Part I. Financial Information Page Item 1. Financial Statements a) Balance Sheets - September 30, 1997 and December 31, 1996........................................3 b) Statements of Income - Three and Nine Months Ended September 30, 1997 and 1996........................4 c) Statements of Changes in Partners' Capital (Deficit) - Year Ended December 31, 1996 and Nine Months Ended September 30, 1997.................5 d) Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996........................6 e) Notes to Financial Statements............................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........10 Part II. Other Information Item 1. Legal Proceedings.......................................15 Item 6. Exhibits and Reports on Form 8-K........................15 Signature ....................................................16 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, 1997 1996 ---- ---- ASSETS: CASH AND CASH EQUIVALENTS $19,471,589 $20,229,105 RENT AND OTHER RECEIVABLES 850,760 351,508 NOTE RECEIVABLE 9,338,134 - AIRCRAFT, net of accumulated depreciation of $52,387,578 in 1997 and $97,860,513 in 1996 29,796,999 46,329,798 OTHER ASSETS - 104,275 ----------- ----------- $59,457,482 $67,014,686 =========== =========== LIABILITIES AND PARTNERS' CAPITAL (DEFICIT): PAYABLE TO AFFILIATES $ 152,252 $ 86,005 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 101,309 72,159 DEFERRED INCOME 323,920 460,080 NOTES PAYABLE 11,854,474 12,907,278 ----------- ----------- Total Liabilities 12,431,955 13,525,522 ----------- ----------- PARTNERS' CAPITAL (DEFICIT): General Partner (1,735,391) (1,670,662) Limited Partners, 500,000 units issued and outstanding 48,760,918 55,159,826 ----------- ----------- Total Partners' Capital 47,025,527 53,489,164 ----------- ----------- $59,457,482 $67,014,686 =========== =========== 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, ------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- REVENUES: Rent from operating leases $2,247,341 $3,850,601 $ 9,718,274 $11,489,924 Interest 542,030 350,821 1,076,774 1,152,757 Gain on sale of aircraft inventory 185,355 -- 481,602 -- Lessee settlement -- -- -- 144,444 Other -- 5,222 785,094 44,120 ---------- ---------- ----------- ----------- Total Revenues 2,974,726 4,206,644 12,061,744 12,831,245 ---------- ---------- ----------- ----------- EXPENSES: Depreciation 1,225,284 2,507,023 6,705,107 7,521,069 Management fees to general partner 25,982 192,530 333,695 574,496 Interest 293,043 -- 927,724 -- Operating 3,865 2,777 17,650 12,438 Administration and other 94,547 70,459 291,205 229,323 ---------- ---------- ----------- ----------- Total Expenses 1,642,721 2,772,789 8,275,381 8,337,326 ---------- ---------- ----------- ----------- NET INCOME $1,332,005 $1,433,855 $ 3,786,363 $ 4,493,919 ========== ========== =========== =========== NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 310,790 $ 439,296 $ 960,271 $ 1,419,802 ========== ========== =========== =========== NET INCOME ALLOCATED TO LIMITED PARTNERS $1,021,215 $ 994,559 $ 2,826,092 $ 3,074,117 ========== ========== =========== =========== NET INCOME PER LIMITED PARTNERSHIP UNIT $ 2.04 $ 1.99 $ 5.65 $ 6.15 ========== ========== =========== =========== 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, 1996 and Nine Months Ended September 30, 1997 ------------------------------------ General Limited Partner Partners Total ------- -------- ----- Balance, December 31, 1995 $(1,392,716) $ 82,657,631 $ 81,264,915 Net income (loss) 1,819,276 (8,622,805) (6,803,529) Cash distributions to partners (2,097,222) (18,875,000) (20,972,222) ----------- ------------ ------------ Balance, December 31, 1996 (1,670,662) 55,159,826 53,489,164 Net income 960,271 2,826,092 3,786,363 Cash distributions to partners (1,025,000) (9,225,000) (10,250,000) ----------- ------------ ------------ Balance, September 30, 1997 $(1,735,391) $ 48,760,918 $ 47,025,527 =========== ============ ============ 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, ------------------------------- 1997 1996 ---- ---- OPERATING ACTIVITIES: Net income $ 3,786,363 $ 4,493,919 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of aircraft inventory (481,602) -- Depreciation 6,705,107 7,521,069 Changes in operating assets and liabilities, net of effect of sale of aircraft: Decrease in marketable securities, trading -- 1,659,160 Increase in rent and other receivables (498,866) (452,611) Decrease in prepaid fees 104,275 -- Increase (decrease) in payable to affiliates 66,247 (26,173) Decrease in accounts payable and accrued liabilities (22,049) (32,703) Decrease in deferred income (136,160) -- ------------ ------------ Net cash provided by operating activities 9,523,315 13,162,661 ------------ ------------ INVESTING ACTIVITIES: Net proceeds from sale of aircraft inventory 481,602 695,952 Proceeds from sale of aircraft 1,506,762 -- Payments to Purchaser related to sale of aircraft (1,341,968) -- Inventory disassembly costs -- (9,282) Principal payments on notes receivable 375,577 1,489,168 ------------ ------------ Net cash provided by investing activities 1,021,973 2,175,838 ------------ ------------ FINANCING ACTIVITIES: Principal payments on notes payable (1,052,804) -- Cash distributions to partners (10,250,000) (15,277,778) ------------ ------------ Net cash used in financing activities (11,302,804) (15,277,778) ------------ ------------ CHANGES IN CASH AND CASH EQUIVALENTS (757,516) 60,721 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,229,105 25,014,205 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,471,589 $ 25,074,926 ============ ============ 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, 1996, 1995, and 1994 included in the Partnership's 1996 Annual Report to the SEC on Form 10-K (Form 10-K). 2. Sale of Aircraft to Triton On May 28, 1997, Polaris Investment Management Corporation (the "General Partner" or "PIMC"), on behalf of the Partnership, executed definitive documentation for the purchase of 8 of the Partnership's 18 remaining aircraft (the "Aircraft") and certain of its notes receivables by Triton Aviation Services III LLC, a special purpose company (the "Purchaser"). The closings for the purchase of the 8 Aircraft occurred from June 5, 1997 to June 25, 1997. The Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the "Manager"), a privately held aircraft leasing company which was formed in 1996 by Triton Investments, Ltd., a company which has been in the marine cargo container leasing business for 17 years and is diversifying its portfolio by leasing commercial aircraft. Each Aircraft was sold subject to the existing leases. The Terms of the Transaction - The total contract purchase price (the "Purchase Price") to the Purchaser is $10,947,000 which is allocable to the Aircraft and a note receivable by the Partnership. The Purchaser paid into an escrow account $1,233,289 of the Purchase Price in cash at the closing of the first aircraft and delivered a promissory note (the "Promissory Note") for the balance of $9,713,711. The Partnership received payment of $1,233,289 from the escrow account on June 26, 1997. The Promissory Note is due in 28 quarterly installments of principal and interest commencing June 30, 1997 in the amount of $476,425 over a period of seven years bearing interest at a rate of 12% per annum with a balloon principal payment in the amount of $1,770,917 due on March 31, 2004. The Purchaser has the right to voluntarily prepay the Promissory Note in whole or in part at any time without penalty. In addition, the Promissory Note is subject to mandatory partial prepayment in certain specified instances. The Purchaser is current on its Promissory Note obligation. Under the terms of the transaction, the Purchaser's assets, which are limited to the Aircraft, including any income or proceeds therefrom, and any funds made available to Purchaser under the working capital line described below constitute the sole source of payments under the Promissory Note. Although no security interest over the Aircraft or the leases is granted in favor of the Partnership, the equity interests in the Purchaser have been pledged to the Partnership. In connection with that pledge, the Purchaser is prohibited from incurring indebtedness other than (i) the Promissory Note; (ii) deferred taxes not yet due and payable; (iii) indebtedness incurred to hushkit Aircraft owned by the Purchaser; (iv) demand loans to another SPC (defined below) at a market rate of interest; and (v) debt to trade creditors incurred in the ordinary course of business. In addition, the Purchaser undertakes to keep the Aircraft and leases 7 free of any lien, security interest or other encumbrance other than (i) inchoate taxes and materialmen's liens and the like; (ii) in the event that the Purchaser elects to install hushkits on any Aircraft, secured debt to the extent of the full cost of such hushkit and other hushkits acquired with proceeds from the same loan facility; and (iii) liens lessees are customarily permitted to incur that are required to be removed. The Purchaser has the right to sell any of the Aircraft without the consent of the Partnership, except that the Partnership's consent would be required in the event that the sale price is less than the portion of the outstanding balance of the Promissory Note which is allocable to the Aircraft in question and the Purchaser does not have sufficient funds to make up the difference. In the event that any of the Aircraft are sold by the Purchaser, the Promissory Note is subject to a mandatory prepayment of the portion of the Promissory Note which is allocable to the Aircraft sold. Under the terms of the transaction, the Purchaser's Manager has undertaken to make available a working capital line to the Purchaser of up to approximately $956,000 to fund operating obligations of the Purchaser. This working capital line is guaranteed by Triton Investments, Ltd., the parent of the Purchaser's Manager and such guarantor provided the Partnership with a copy of its most recent balance sheet showing a consolidated net worth (net of minority interests) of at least $150-million at December 31, 1996. Provided that the Purchaser is not in default in making payments due under the Promissory Note to the Partnership, the Purchaser is permitted to dividend to its equity owners an amount not to exceed approximately $26,000 per month. The Purchaser may distribute additional dividends to the equity owners to the extent of the working capital advances made by the Purchaser's Manager provided that the working capital line available to the Purchaser will be deemed increased to the extent of such dividends. Under the purchase agreement, the Purchaser purchased the Aircraft effective as of April 1, 1997 notwithstanding the actual closing dates. The utilization of an effective date facilitated the determination of rent and other allocations between the parties. The Purchaser has the right to receive all income and proceeds, including rents and receivables, from the Aircraft accruing from and after April 1, 1997, and the Promissory Note commenced bearing interest as of April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold subject to the existing leases. Neither PIMC nor GE Capital Aviation Services, Inc. (GECAS) will receive a sales commission in connection with the transaction. In addition, PIMC will not be paid a management fee with respect to the collection of the Promissory Note or on any rents accruing from or after April 1, 1997 with respect to the 8 Aircraft. Neither PIMC nor GECAS or any of its affiliates holds any interest in Triton Aviation or any of Triton Aviation's affiliates. John Flynn, the current President of Triton Aviation, was a Polaris executive until May 1996 and has over 15 years experience in the commercial aviation industry. At the time Mr. Flynn was employed at PIMC, he had no affiliation with Triton Aviation or its affiliates. Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold certain aircraft assets to separate special purpose companies under common management with the Purchaser (collectively, together with the Purchaser, the "SPC's") on terms similar to those set forth above, with the exception of the Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis. The Accounting Treatment of the Transaction - In accordance with generally accepted accounting principles (GAAP), the Partnership recognized rental income up until the closing date for each aircraft which occurred from June 5, 1997 to June 25, 1997. However, under the terms of the transaction, the Purchaser was entitled to receive any payments of the rents, interest income and receivables accruing from April 1, 1997. As a result, the Partnership made payments to the Purchaser for the amounts due and received from April 1, 1997 to the closing date. Amounts totaling $1,341,968 during this period are included in rents from operating leases, interest and other income. For financial reporting purposes, the cash down payment portion of the sales proceeds of $1,233,289 has been adjusted by the following; income and proceeds, including rents and receivables from the effective date of April 1, 1997 to the closing date, interest due from the Purchaser on the cash portion of the purchase price, interest on the 8 Promissory Note from the effective date of April 1, 1997 to the closing date and estimated selling costs. As a result of these GAAP adjustments, the net adjusted sales price recorded by the Partnership, including the Promissory Note, was $9,847,824. The Aircraft sold pursuant to the definitive documentation executed on May 28, 1997 had been classified as aircraft held for sale from that date until the actual closing date. Under GAAP, aircraft held for sale are carried at their fair market value less estimated costs to sell. The adjustment to the sales proceeds described above and revisions to estimated costs to sell the Aircraft required the Partnership to record an adjustment to the net carrying value of the aircraft held for sale of $1,092,046 during the three months ended June 30, 1997. This adjustment to the net carrying value of the aircraft held for sale is included in depreciation and amortization expense on the statement of operations. 3. 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, 1997 September 30, 1997 ------------------ ------------------ Aircraft Management Fees $ 50,000 $ 70,743 Out-of-Pocket Operating and Remarketing Expense Reimbursement 4,389 40,596 Out-of-Pocket Administrative and Selling Expense Reimbursement 96,983 40,913 ----------- ----------- $ 151,372 $ 152,252 =========== =========== 9 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 10 used commercial jet aircraft and certain inventoried aircraft parts out of its original portfolio of 38 aircraft. The portfolio includes 10 McDonnell Douglas DC-9-30 aircraft leased to Trans World Airlines, Inc. (TWA). 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. In June 1997, the Partnership sold three McDonnell Douglas DC-9-30 aircraft leased to TWA, and five Boeing 727-200 Advanced aircraft leased to Continental Airlines, Inc.(Continental) to Triton Aviation Services III LLC. Remarketing Update Sale of Aircraft to Triton On May 28, 1997, Polaris Investment Management Corporation (the "General Partner" or "PIMC"), on behalf of the Partnership, executed definitive documentation for the purchase of 8 of the Partnership's 18 remaining aircraft (the "Aircraft") and certain of its notes receivables by Triton Aviation Services III LLC, a special purpose company (the "Purchaser" or "Triton"). The closings for the purchase of the 8 Aircraft had occurred from June 5, 1997 to June 25, 1997. The Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the "Manager"), a privately held aircraft leasing company which was formed in 1996 by Triton Investments, Ltd., a company which has been in the marine cargo container leasing business for 17 years and is diversifying its portfolio by leasing commercial aircraft. Each Aircraft was sold subject to the existing leases. General Partner's Decision to Approve the Transaction - In determining whether the transaction was in the best interests of the Partnership and its unitholders, the General Partner evaluated, among other things, the risks and significant expenses associated with continuing to own and remarket the Aircraft (many of which were subject to leases that were nearing expiration). The General Partner determined that such a strategy could require the Partnership to expend a significant portion of its cash reserves for remarketing and that there was a substantial risk that this strategy could result in the Partnership having to reduce or even suspend future cash distributions to limited partners. The General Partner concluded that the opportunity to sell the Aircraft at an attractive price would be beneficial in the present market where demand for Stage II aircraft is relatively strong rather than attempting to sell the aircraft "one-by-one" over the coming years when the demand for such Aircraft might be weaker. GE Capital Aviation Services, Inc. ("GECAS"), which provides aircraft marketing and management services to the General Partner, sought to obtain the best price and terms available for these Stage II aircraft given the aircraft market and the conditions and types of planes owned by the Partnership. Both the General Partner and GECAS approved the sale terms of the Aircraft (as described below) as being in the best interest of the Partnership and its unitholders because both believe that this transaction will optimize the potential cash distributions to be paid to limited partners. To ensure that no better offer could be obtained, the terms of the transaction negotiated by GECAS included a "market-out" provision that permitted the Partnership to elect to accept an offer for all (but no less than all) of the assets to be sold by it to the Purchaser on terms which it deemed more favorable, with the ability of the Purchaser to match the offer or decline to match the offer and be entitled to be compensated in an amount equal to 1 1/2% of the Purchaser's proposed purchase price. The Partnership did not receive any other offers and, accordingly, the General Partner believes that a valid market check has occurred confirming that the terms of this transaction were the most beneficial that could have been obtained. The Terms of the Transaction - The total contract purchase price (the "Purchase Price") to the Purchaser is $10,947,000 which is allocable to the Aircraft and a note receivable by the Partnership. The Purchaser paid into an escrow account 10 $1,233,289 of the Purchase Price in cash upon the closing of the first aircraft and delivered a promissory note (the "Promissory Note") for the balance of $9,713,711. The Partnership received payment of $1,233,289 from the escrow account on June 26, 1997. The Promissory Note is due in 28 quarterly installments of principal and interest commencing June 30, 1997 in the amount of $476,425 over a period of seven years bearing interest at a rate of 12% per annum with a balloon principal payment in the amount of $1,770,917 due on March 31, 2004. The Purchaser has the right to voluntarily prepay the Promissory Note in whole or in part at any time without penalty. In addition, the Promissory Note is subject to mandatory partial prepayment in certain specified instances. The Purchaser is current on its Promissory Note obligation. Under the terms of the transaction, the Purchaser's assets, which are limited to the Aircraft, including any income or proceeds therefrom, and any funds made available to Purchaser under the working capital line described below constitute the sole source of payments under the Promissory Note. Although no security interest over the Aircraft or the leases is granted in favor of the Partnership, the equity interests in the Purchaser have been pledged to the Partnership. In connection with that pledge, the Purchaser is prohibited from incurring indebtedness other than (i) the Promissory Note; (ii) deferred taxes not yet due and payable; (iii) indebtedness incurred to hushkit Aircraft owned by the Purchaser; (iv) demand loans to another SPC (defined below) at a market rate of interest; and (v) debt to trade creditors incurred in the ordinary course of business. In addition, the Purchaser undertakes to keep the Aircraft and leases free of any lien, security interest or other encumbrance other than (i) inchoate taxes and materialmen's liens and the like; (ii) in the event that the Purchaser elects to install hushkits on any Aircraft, secured debt to the extent of the full cost of such hushkit and other hushkits acquired with proceeds from the same loan facility; and (iii) liens lessees are customarily permitted to incur that are required to be removed. The Purchaser has the right to sell any of the Aircraft without the consent of the Partnership, except that the Partnership's consent would be required in the event that the sale price is less than the portion of the outstanding balance of the Promissory Note which is allocable to the Aircraft in question and the Purchaser does not have sufficient funds to make up the difference. In the event that any of the Aircraft are sold by the Purchaser, the Promissory Note is subject to a mandatory prepayment of the portion of the Promissory Note which is allocable to the Aircraft sold. Under the terms of the transaction, the Purchaser's Manager has undertaken to make available a working capital line to the Purchaser of up to approximately $956,000 to fund operating obligations of the Purchaser. This working capital line is guaranteed by Triton Investments, Ltd., the parent of the Purchaser's Manager and such guarantor provided the Partnership with a copy of its most recent balance sheet showing a consolidated net worth (net of minority interests) of at least $150-million at December 31, 1996. Provided that the Purchaser is not in default in making payments due under the Promissory Note to the Partnership, the Purchaser is permitted to dividend to its equity owners an amount not to exceed approximately $26,000 per month. The Purchaser may distribute additional dividends to the equity owners to the extent of the working capital advances made by the Purchaser's Manager provided that the working capital line available to the Purchaser will be deemed increased to the extent of such dividends. Under the purchase agreement, the Purchaser purchased the Aircraft effective as of April 1, 1997 notwithstanding the actual closing dates. The utilization of an effective date facilitated the determination of rent and other allocations between the parties. The Purchaser has the right to receive all income and proceeds, including rents and receivables, from the Aircraft accruing from and after April 1, 1997, and the Promissory Note commenced bearing interest as of April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold subject to the existing leases. Neither PIMC nor GECAS will receive a sales commission in connection with the transaction. In addition, PIMC will not be paid a management fee with respect to the collection of the Promissory Note or on any rents accruing from or after April 1, 1997 with respect to the 8 Aircraft. Neither PIMC nor GECAS or any of its affiliates holds any interest in Triton Aviation or any of Triton Aviation's affiliates. 11 John Flynn, the current President of Triton Aviation, was a Polaris executive until May 1996 and has over 15 years experience in the commercial aviation industry. At the time Mr. Flynn was employed at PIMC, he had no affiliation with Triton Aviation or its affiliates. Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold certain aircraft assets to separate special purpose companies under common management with the Purchaser (collectively, together with the Purchaser, the "SPC's") on terms similar to those set forth above, with the exception of the Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis. The Accounting Treatment of the Transaction - In accordance with generally accepted accounting principles (GAAP), the Partnership recognized rental income up until the closing date for each aircraft which occurred from June 5, 1997 to June 25, 1997. However, under the terms of the transaction, the Purchaser was entitled to receive any payments of the rents, interest income and receivables accruing from April 1, 1997. As a result, the Partnership made payments to the Purchaser for the amounts due and received from April 1, 1997 to the closing date. Amounts totaling $1,341,968 during this period are included in rents from operating leases, interest and other income. For financial reporting purposes, the cash down payment portion of the sales proceeds of $1,233,289 has been adjusted by the following; income and proceeds, including rents and receivables from the effective date of April 1, 1997 to the closing date, interest due from the Purchaser on the cash portion of the purchase price, interest on the Promissory Note from the effective date of April 1, 1997 to the closing date and estimated selling costs. As a result of these GAAP adjustments, the net adjusted sales price recorded by the Partnership, including the Promissory Note, was $9,847,824. The Aircraft sold pursuant to the definitive documentation executed on May 28, 1997 had been classified as aircraft held for sale from that date until the actual closing date. Under GAAP, aircraft held for sale are carried at their fair market value less estimated costs to sell. The adjustment to the sales proceeds described above and revisions to estimated costs to sell the Aircraft required the Partnership to record an adjustment to the net carrying value of the aircraft held for sale of $1,092,046 during the three months ended June 30, 1997. This adjustment to the net carrying value of the aircraft held for sale is included in depreciation and amortization expense on the statement of operations. Partnership Operations The Partnership recorded net income of $1,332,005, or $2.04 per limited partnership unit, for the three months ended September 30, 1997 compared to net income of $1,433,855, or $1.99 per unit for the same period in 1996. The Partnership recorded net income of $3,786,363, or $5.65 per limited partnership unit, for the nine months ended September 30, 1997 compared to net income of $4,493,919, or $6.15 per unit for the same period in 1996. The decrease in rental revenues, depreciation expense and management fees during the three and nine months ended September 30, 1997, is attributable to the sale of 8 aircraft to Triton during the second quarter of 1997. This decrease in rental revenues and depreciation expense was offset in part by increased depreciation expense attributable to the acquisition in November 1996 of noise-suppression devices, commonly known as "hushkits", for the 10 aircraft currently on lease to TWA. The hushkits are being financed over a 6 year period at an interest rate of 10% per annum. The leases for these 10 aircraft were extended for a period of eight years until November 2004. The rent payable by TWA under the leases has been increased by an amount sufficient to cover the monthly debt service payments on the hushkits and fully repay, during the term of the TWA leases, the amount borrowed. The Partnership recorded $293,043 and $927,724 in interest expense on the amount borrowed to finance the hushkits during the three and nine months ended September 30, 1997, respectively. 12 The increase in TWA rents described above was partially offset by a reduction in Continental rents during the nine months ended September 30, 1997, as compared to the same period in 1996. The rental revenues from Continental decreased during the nine months ended September 30, 1997 as compared to the same period in 1996, due to Continental having completed its payment of the deferred rental amounts in the first quarter of 1997. In addition, the rental payments from Continental leases during the nine months ended September 30, 1997 were at a new lease rate that was lower than the prior lease rate for the nine months ended September 30, 1996. The Continental leases that expired in October 1996 were extended for two years through October 1998 at a current market rate which was approximately 76% of the prior lease rate. 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 as revenue during the nine months ended September 30, 1996. The Partnership recorded an increase in other income during the nine months ended September 30, 1997. This increase in other income was the result of the receipt of $743,476 related to amounts due under the TWA maintenance credit and rent deferral agreement. 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, which is included in other income. Interest income decreased during the nine months ended September 30, 1997 as compared to the same period in 1996, primarily due to decreases in the cash reserves balances retained by the Partnership at September 30, 1997 as compared to September 30, 1996. In addition, interest on the deferred rents being paid by Continental decreased due to Continental having completed its payment of the deferred rental amounts in the first quarter of 1997. The increase in interest income during the three months ended September 30, 1997, as compared to the same period in 1996, was attributable to interest earned on the Promissory Note related to the Triton sale that occurred during the second quarter of 1997. Administration and other expenses increased during the three and nine months ended September 30, 1997 as compared to the same periods in 1996, due to increases in printing and postage costs combined with an increase in outside services. The Partnership's balance sheet shows an increase in rent and other receivables at September 30, 1997, as compared to December 31, 1996. This increase in rent and other receivables was the result of certain rental payments due from TWA at the end of September 1997 that were subsequently received by the Partnership in October 1997. Liquidity and Cash Distributions Liquidity -The Partnership received all note payments due from Triton and all lease payments from lessees, except for the September 27, 1997 payment due from TWA. On October 2, 1997, the Partnership received its $850,000 rental payment from TWA that was due on September 27, 1997. This amount was included in rent and other receivables on the balance sheet at September 30, 1997. In addition, payments totaling $481,602 have been received for the sale of parts from the nine disassembled aircraft during the nine months ended September 30, 1997, as compared to payments of and $701,174 during the same period in 1996. The net book value of the Partnership's aircraft inventory was recovered in full during 1996. As a result, the payments of $481,602 received during the nine months ended September 30, 1997 have been recorded as gain on sale of aircraft inventory. 13 PIMC has determined that the Partnership maintain cash reserves as a prudent measure to insure that the Partnership has available funds in the event that the aircraft presently on lease to TWA require remarketing, the Purchaser defaults under the Promissory Note, and for other contingencies including expenses of the Partnership. The Partnership's cash reserves will be monitored and may be revised from time to time as further information becomes available in the future. Cash Distributions - Cash distributions to limited partners during the three months ended September 30, 1997 and 1996 were $2,975,000, or $5.95 per limited partnership unit and $4,250,000, or $8.50 per unit, respectively. Cash distributions to limited partners during the nine months ended September 30, 1996 and 1995 were $9,225,000, or $18.45 per limited partnership unit and $13,750,000, or $27.50 per unit, respectively. The timing and amount of future cash distributions are not yet known and will depend on the Partnership's future cash requirements (including expenses of the Partnership) and need to retain cash reserves as previously discussed in the Liquidity section; the receipt of rental payments from TWA; the receipt of note payments from Triton; and payments generated from the aircraft disassembly process. 14 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) 1996 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, 1997 and June 30, 1997, there are a number of pending legal actions or proceedings involving the Partnership. Except as discussed below, there have been no material developments with respect to any such actions or proceedings during the period covered by this report. Equity Resources, Inc., et al. v. Polaris Investment Management Corporation, et al. - As previously disclosed, on May 23, 1997, the defendants filed a motion to dismiss this action. Subsequently, plaintiffs voluntarily sought dismissal of their suit without prejudice. On September 16, 1997, the court dismissed plaintiffs' complaint without prejudice. Ron Wallace v. Polaris Investment Management Corporation, et al. - On September 2, 1997, an amended complaint was filed adding additional plaintiffs. On September 16, 1997, the Polaris defendants filed a demurrer seeking to dismiss the amended complaint. Simultaneously with the filing of the demurrer, the Polaris defendants sought a stay of discovery. The hearing on the demurrer occurred on November 4, 1997. On November 5, 1997, the court granted the Polaris defendants' demurrer and ordered that plaintiffs be given 10 days leave to amend their complaint to plead demand futility. On or about October 14, 1997, the plaintiffs in this action filed a separate Petition for Writ of Mandate in the San Francisco Superior Court entitled Ron Wallace, et al. v. Polaris Investment Management Corp., et al., seeking to obtain access to all the Partnership's books, records and documents. Subsequently, pursuant to an agreement between the parties, plaintiffs agreed to dismiss their Petition for Writ of Mandate with prejudice and the Polaris defendants agreed to withdraw its motion seeking a stay of discovery. Other Proceedings - Item 10 in Part III of the Partnership's 1996 Form 10-K and Item 1 in Part II of the Partnership's Form 10-Q for the periods ended March 31, 1997 and June 30, 1997 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 the 1996 Form 10-K) where the Partnership was named as a defendant for procedural purposes, 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) 27. Financial Data Schedule. b) Reports on Form 8-K A Current Report on Form 8-K/A, dated May 28, 1997, amending certain exhibits listed in Item 7, was filed on August 18, 1997. 15 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, 1997 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) 16 EX-27 2
5 9-MOS DEC-31-1997 SEP-30-1997 19471589 0 10188894 0 0 0 82184577 52387578 59457482 0 0 0 0 0 47025527 59457482 0 12061744 0 0 8275381 0 0 3786363 0 3786363 0 0 0 3786363 5.65 0
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