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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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
Four Embarcadero Center, San Francisco, California 94111-4146
Telephone (415) 362-0333
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 13 pages.
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarter Ended March 31, 1994
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . 3
b) Statements of Operations - Three Months Ended
March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . 4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1993
and Three Months Ended March 31, 1994 . . . . . . . . . . 5
d) Statements of Cash Flows - Three Months
Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . 6
e) Notes to Financial Statements . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 9
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 12
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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Part I. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
<CAPTION>
March 31 December 31,
1994 1993
(Unaudited)
ASSETS:
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 16,679,397 $ 17,047
SHORT-TERM INVESTMENTS, at cost which approximates market value - 29,065,069
Total Cash and Cash Equivalents and Short-Term Investments 16,679,397 29,082,116
RENT AND OTHER RECEIVABLES 620,043 659,301
NOTES RECEIVABLE 626,959 456,308
AIRCRAFT at cost, net of accumulated depreciation of
$67,672,048 in 1994 and $64,978,597 in 1993 78,754,889 81,448,340
AIRCRAFT INVENTORY 3,045,149 3,281,117
OTHER ASSETS 26,089 26,089
$ 99,752,526 $ 114,953,271
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 112,110 $ 190,747
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2,500 14,000
MAINTENANCE RESERVES 400,000 400,000
DEFERRED INCOME 521,781 521,781
Total Liabilities 1,036,391 1,126,528
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,217,979) (1,066,735)
Limited Partners, 500,000 units issued and outstanding 99,934,114 114,893,478
Total Partners' Capital 98,716,135 113,826,743
$ 99,752,526 $ 114,953,271
<FN>
The accompanying notes are an integral part of these statements.
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1994 1993
<S> <C> <C>
REVENUES:
Rent from operating leases $ 4,703,809 $ 4,430,284
Interest 408,842 573,810
Gain on sale of aircraft - 146,500
Other income - 25,000
Total Revenues 5,112,651 5,175,594
EXPENSES:
Depreciation and amortization 2,693,451 5,394,064
Management and advisory fees 226,002 213,848
Operating 1,965,706 544,260
Administration and other 60,322 67,695
Total Expenses 4,945,481 6,219,867
NET INCOME (LOSS) $ 167,170 $ (1,044,273)
NET INCOME ALLOCATED TO THE
GENERAL PARTNER $ 1,376,534 $ 239,532
NET LOSS ALLOCATED TO
LIMITED PARTNERS $ (1,209,364) $ (1,283,805)
NET LOSS PER LIMITED
PARTNERSHIP UNIT $ (2.42) $ (2.57)
<FN>
The accompanying notes are an integral part of these statements.
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<CAPTION>
Year Ended December 31, 1993 and
Three Months Ended March 31, 1994
General Limited
Partner Partners Total
<S> <C> <C> <C>
Balance, December 31, 1992 $ (954,798) $125,962,642 $125,007,844
Net income 1,276,953 1,430,836 2,707,789
Cash distributions to partners (1,388,890) (12,500,000) (13,888,890)
Balance, December 31, 1993 (1,066,735) 114,893,478 113,826,743
Net income (loss) 1,376,534 (1,209,364) 167,170
Cash distribution to partners (1,527,778) (13,750,000) (15,277,778)
Balance, March 31, 1994 $ (1,217,979) $ 99,934,114 $ 98,716,135
<FN>
The accompanying notes are an integral part of these statements.
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended March 31,
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 167,170 $ (1,044,273)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,693,451 5,394,064
Gain on sale of aircraft - (146,500)
Changes in operating assets and liabilities:
Decrease (increase) in rent and other receivables 39,258 (555,074)
Decrease in aircraft inventory - 450,000
Increase (decrease) in payable to affiliates (78,637) 52,807
Decrease in accounts payable and accrued
liabilities (11,500) (18,446)
Decrease in deferred income - (13,500)
Increase in lessee security deposits - 75,552
Increase in maintenance reserves - 50,000
Net cash provided by operating activities 2,809,742 4,244,630
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft - 3,050,000
Net proceeds from sale of aircraft inventory 235,968 28,542
Increase in notes receivable (249,934) -
Principal payments on notes receivable 79,283 29,502
Net cash provided by investing activities 65,317 3,108,044
FINANCING ACTIVITIES:
Cash distribution to partners (15,277,778) (2,777,778)
Net cash used in financing activities (15,277,778) (2,777,778)
CHANGES IN CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (12,402,719) 4,574,896
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 29,082,116 22,469,106
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 16,679,397 $ 27,044,002
<FN>
The accompanying notes are an integral part of these statements.
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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, 1993, 1992, and
1991 included in the Partnership's 1993 Annual Report to the SEC on Form 10-K
(Form 10-K).
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds.
2. Trans World Airlines, Inc. (TWA) Reorganization
As part of the TWA lease extension as discussed in the 1993 Form 10-K, the
Partnership agreed to share the cost of meeting certain Airworthiness Directives
(ADs) after TWA successfully reorganized. The agreement stipulates that such
costs incurred by TWA may be credited against monthly rentals, subject to annual
limitations and a maximum of $500,000 per aircraft through the end of the lease.
In accordance with the cost sharing agreement, TWA submitted to the Partnership
invoices for expenses paid to date by TWA to meet the ADs. Expenses were offset
against rental payments totalling $1.95 million during 1993. Additional
expenses totalling $1.95 million, which are included in operating expense in the
statement of operations, were offset against rental payments due the Partnership
in the first three months of 1994. TWA may offset an additional amount of $2.6
million against rental payments, subject to annual limitations over the lease
term.
3. Continental Airlines, Inc. (Continental) Lease Modification
As discussed in the Form 10-K, the Continental leases for the Partnership's
three Boeing 727-200 aircraft and five Boeing 727-200 Advanced aircraft were
modified. The modified agreement specifies (i) extension of the leases for the
three 727-200s to the earlier of April 1994 or 60,000 cycles, and for the five
727-200 Advanced aircraft to October 1996; (ii) renegotiated rental rates
averaging approximately 73% of the original lease rates; (iii) payment of
ongoing rentals at the reduced rates beginning in October 1991; (iv) payment of
deferred rentals with interest beginning in July 1992; and (v) payment by the
Partnership of certain aircraft maintenance, modification and refurbishment
costs, not to exceed approximately $3.2 million, a portion of which will be
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recovered with interest through payments from Continental over the extended
lease terms. The Partnership's share of such costs will be capitalized and
depreciated over the remaining lease term. In February 1994, the Partnership
loaned Continental $249,934 for modification costs. The Partnership's balance
sheets reflect the net reimbursable costs incurred of $626,959 and $456,308 as
of March 31, 1994 and December 31, 1993, respectively, as notes receivable.
4. 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, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for
Three Months
Ended Payable at
March 31, 1994 March 31, 1994
Aircraft Management Fees $ 226,002 $ 30,875
Out-of-Pocket Administrative
Expense Reimbursement 57,085 75,522
Out-of-Pocket Maintenance and
Remarketing Expense
Reimbursement 109,079 5,713
$ 392,166 $ 112,110
5. Subsequent Event
The leases of three Boeing 727-200 aircraft to Continental expired on April 30,
1994. The Partnership is currently negotiating an agreement to sell these
aircraft to Continental.
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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 27
commercial jet aircraft 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), five Boeing 727-200 Advanced aircraft leased to
Continental Airlines, Inc. (Continental) and three Boeing 727-200 aircraft lease
to Continental through April 1994 as discussed below. The Partnership also owns
six Boeing 727-100 aircraft formerly leased to Continental which have been
transferred to aircraft inventory and are being remarketed for sale. Three
McDonnell Douglas DC-9-10 aircraft formerly leased to Midway Airlines, Inc.
(Midway) have been transferred to aircraft inventory and disassembled for sale
of their component parts. Of its original portfolio of 38 aircraft, the
Partnership sold one former Continental DC-9-10 aircraft in December 1992, one
former Midway DC-9-10 aircraft in January 1993, the former Aero California S.A.
de C.V. (Aero California) DC-9-10 aircraft in September 1993 and five of the
former Continental DC-9-10 aircraft at varying dates in 1993.
Remarketing Update
The leases of three Boeing 727-200 aircraft to Continental expired on April 30,
1994. The Partnership is currently negotiating an agreement to sell these
aircraft to Continental.
Partnership Operations
The Partnership recorded net income of $167,170, or an allocated net loss of
$2.42 per limited partnership unit, for the three months ended March 31, 1994
compared to a net loss of $1,044,273, or $2.57 per limited partnership unit for
the same period in 1993. The 1993 net losses were primarily attributable to an
increase in depreciation expense for declines in the estimated future value of
the Partnership's aircraft during the first quarter of 1993. No such adjustments
were made in the first quarter of 1994.
Interest income declined for the quarter ended March 31, 1994 compared to the
same period in 1993. Interest earned on the rent deferral with Continental was
lower as the balance of the deferred rental amounts owed by Continental has
decreased through monthly payments by Continental. In addition, interest income
earned on the Partnership's cash reserves declined during the first three months
of 1994, as compared to the same period in 1993, as a result of lower cash
reserve balances partially offset by higher interest rates. Revenues for the
three months ended March 31, 1993 include the gain on the sale of two aircraft
of $146,500 and income from a forfeited deposit of $25,000.
The decrease in depreciation expense was partially offset by increased operating
expenses. Operating expenses for the quarter ended March 31, 1994 increased
substantially compared to the same period in 1993 resulting from maintenance
expenses incurred from the Partnership's leases to TWA. As described in Item 7
of the Partnership's 1993 Annual Report to the Securities and Exchange
Commission on Form 10-K (Form 10-K), the leases with TWA provide for the offset
against rent, subject to certain limits, of maintenance expenses incurred to
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meet certain Airworthiness Directives (ADs). During the first three months of
1994, TWA offset $1.95 million against rental payments due the Partnership for
such maintenance expenses. The Partnership recognizes the $1.95 million offset
as operating expense. Operating expenses for the quarter ended March 31, 1993
reflect the estimated costs of disassembling of the former Midway and
Continental aircraft. No aircraft disassembly expenses were incurred in the
comparable period in 1994.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all lease payments due from TWA and
Continental under the respective modified agreements subject to the rent offset
as described above with respect to TWA. Payments of $235,968 have been received
during the three months ended March 31, 1994 from sales of parts from the
disassembled aircraft.
As described in Item 7 of the Form 10-K, the Continental leases provide for
payment by the Partnership of the costs of certain maintenance work, 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 financed $249,934 for new image
modifications during the first three months of 1994. The Partnership's balance
sheets reflect as notes receivable such reimbursable costs financed through
March 31, 1994 and December 31, 1993. Cash reserves of approximately $13.2
million as of March 31, 1994 are being retained to finance additional costs to
Continental, to meet the obligations under the TWA leases and to cover potential
costs of maintaining and remarketing the Partnership's off-lease aircraft.
Cash Distributions - Cash distributions to limited partners during the first
quarter of 1994 totaled $13,750,000, or $27.50 per limited partnership unit,
compared to $2,500,000, or $5.00 per unit for the same period in 1993. The
timing and amount of future cash distributions will depend on the Partnership's
future cash requirements, continued receipt of the renegotiated rental payments
from Continental and TWA, proceeds from the sale of parts from the Partnership's
disassembled aircraft and the Partnership's ability to sell the six Boeing 727-
100 aircraft and the three Boeing 727-200 aircraft formerly on lease to
Continental.
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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) 1993 Annual Report to the Securities and Exchange Commission on
Form 10-K (Form 10-K), 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.
Vern A. Kepford, et al. v. Prudential Securities, et al. On April 13, 1994, an
action entitled Vern A. Kepford, et al. v. Prudential Securities, Inc. was filed
in the District Court of Harris County, Texas. Plaintiffs' Original Petition
(the Petition) names Polaris Investment Management Corporation (PIMC), Polaris
Securities Corporation (PSC), Polaris Holding Company (PHC), Polaris Aircraft
Leasing Corporation (PALC), Polaris Aircraft Income Funds I - VI (collectively,
the Partnerships), General Electric Capital Corporation (GE Capital), Prudential
Securities, Inc., Prudential Insurance Company of America and James J. Darr, as
defendants. Certain defendants were served with a Summons and the Petition on
or about May 2, 1994. The Petition alleges that defendants violated the Texas
Securities Act, the Texas Deceptive Trade Practices Act (the DTPA), sections 11
and 12 of the Securities Act of 1933 and committed common law fraud, fraud in
the inducement, negligent misrepresentation, negligence, breach of fiduciary
duty and civil conspiracy by misrepresenting and failing to disclose material
facts in connection with the sale of limited partnership units in the
Partnerships. Plaintiffs seek, among other things, an award of compensatory
damages in an unspecified amount plus interest thereon, and double and treble
damages under the DTPA.
Howland, et al. v. Polaris Holding Company, et al. On or about February 4, 1994,
a purported class action entitled Howland, et al. v. Polaris Holding Company, et
al. was filed in the United States District Court for the District of Arizona on
behalf of investors in the Partnerships. The complaint names each of the
Partnerships, PIMC, PHC, PALC, PSC, GE Capital, Prudential Securities, Inc.,
Prudential Securities Group, Inc., Prudential Insurance Company of America,
George W. Ball, Robert J. Sherman, James J. Darr, Paul J. Proscia, Frank W.
Giordano, William A. Pittman, Joseph H. Quinn, Joe W. Defur, James M. Kelso and
Brian J. Martin, as defendants. As of May 11, 1994, neither PIMC nor any of its
affiliates has been served with the complaint. The complaint alleges that
defendants violated federal RICO statutes, committed negligent
misrepresentations, and breached of their fiduciary duties by misrepresenting
and failing to disclose material facts in connection with the sale of limited
partnership units in the Partnerships. Plaintiffs seek, among other things, an
accounting of all monies invested by Plaintiffs and the class and the uses made
thereof by defendants, an award of compensatory, punitive and treble damages in
unspecified amounts plus interest thereon, rescission, attorneys' fees and
costs.
Reuben Riskind, et al. v. Prudential Securities, Inc., et al. An action
entitled Reuben Riskind, et al. v. Prudential Securities, Inc., et al. has been
filed in the District Court of the 165 Judicial District, Maverick County,
Texas. Plaintiffs have subsequently filed a Second Amended Original Petition
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(the Amended Petition). As of May 11, 1994, neither PIMC nor any of its
affiliates has received service of any petition, and the Partnership has not yet
determined when this action was commenced. This action purports to be on behalf
of over one hundred individual investors who purchased units in the
Partnerships. The Amended Petition names PIMC, Polaris Aircraft Income Fund I,
Prudential Securities, Inc. and Jerry Cohn as defendants and alleges that these
defendants violated the Texas Securities Act and the DTPA and committed common
law fraud, fraud in the inducement, negligent misrepresentation, negligent
breach of fiduciary duty and civil conspiracy by misrepresenting and failing to
disclose material facts in connection with the sale of limited partnership units
in the Partnerships. Plaintiffs seek, among other things, an award of
compensatory damages in an unspecified amount plus interest thereon, and double
and treble damages under the DTPA.
Other Proceedings - Item 10 of Part III of the Partnership's 1993 Form 10-K
discusses certain actions which have been filed against PIMC and others in
connection with the sale of interests in the Partnerships and the management of
the Partnerships. With respect to Weisl, et al., v. Polaris Holding Company, et
al., the Supreme Court of the State of New York, County of New York, granted the
defendants' motion to dismiss the complaint on April 19, 1994 on the grounds
that the action was barred by the statute of limitations. In addition, an
amended complaint filed by plaintiffs in Weisl on or about January 25, 1994,
which may contain timely claims, is pending. There have been no material
developments with respect to any of the other 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)
None
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.
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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
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
May 12, 1994 By: /S/Bobbe V. Sabella
Bobbe V. Sabella
Vice President and
Chief Financial Officer
(principal financial
officer and principal
accounting officer of
Polaris Investment
Management Corporation,
General Partner of the
Registrant)
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