UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
---------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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 19 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1995
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1995 and
December 31, 1994...............................3
b) Statements of Operations - Three Months and
Six Months Ended June 30, 1995 and 1994.........4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1994
and Six Months Ended June 30, 1995..............5
d) Statements of Cash Flows - Six Months
Ended June 30, 1995 and 1994....................6
e) Notes to Financial Statements...................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......12
Part II. Other Information
Item 1. Legal Proceedings..................................15
Item 5. Other Information..................................17
Item 6. Exhibits and Reports on Form 8-K...................18
Signature.......................................................19
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
1995 1994
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 19,854,126 $ 15,810,799
RENT AND OTHER RECEIVABLES 460,000 485,551
NOTES RECEIVABLE, net of allowances for credit
losses of $4,854,947 in 1995 and $5,006,929 in
1994 2,374,058 2,749,401
AIRCRAFT at cost, net of accumulated depreciation
of $68,297,368 in 1995 and $63,166,880 in 1994 59,962,121 65,092,609
AIRCRAFT INVENTORY 1,758,444 2,388,377
OTHER ASSETS 26,089 26,089
------------ ------------
$ 84,434,838 $ 86,552,826
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 110,351 $ 121,658
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 105,972 42,418
DEFERRED INCOME 981,781 521,781
------------ ------------
Total Liabilities 1,198,104 685,857
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,372,935) (1,346,583)
Limited Partners, 500,000 units
issued and outstanding 84,609,669 87,213,552
------------ ------------
Total Partners' Capital 83,236,734 85,866,969
------------ ------------
$ 84,434,838 $ 86,552,826
============ ============
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Rent from operating leases $ 4,442,594 $ 4,038,321 $ 6,715,190 $ 8,742,130
Interest 580,345 387,337 1,013,505 796,179
Lessee settlement 216,667 -- 672,222 --
Loss on sale of aircraft -- (3,588,919) -- (3,588,919)
Other -- -- 157,609 --
---------- ---------- ---------- ----------
Total Revenues 5,239,606 836,739 8,558,526 5,949,390
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 2,565,244 2,532,043 5,130,488 5,225,494
Management fees to general partner 222,130 198,717 335,760 424,719
Operating 13,869 681,870 21,762 2,647,576
Administration and other 77,692 63,307 145,196 123,629
---------- ---------- ---------- ----------
Total Expenses 2,878,935 3,475,937 5,633,206 8,421,418
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 2,360,671 $(2,639,198) $ 2,925,320 $(2,472,028)
========== ========== ========== ==========
NET INCOME ALLOCATED TO THE
GENERAL PARTNER $ 273,581 $ 348,570 $ 529,203 $ 1,725,104
========== ========== ========== ==========
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNERS $ 2,087,090 $(2,987,768) $ 2,396,117 $(4,197,132)
========== ========== ========== ==========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 4.17 $ (5.98) $ 4.79 $ (8.40)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1994 and
Six Months Ended June 30, 1995
General Limited
Partner Partners Total
Balance, December 31, 1993 $ (1,066,735) $ 114,893,478 $ 113,826,743
Net income (loss) 2,497,930 (2,679,926) (181,996)
Cash distributions to
partners (2,777,778) (25,000,000) (27,777,778)
------------- ------------- -------------
Balance, December 31, 1994 (1,346,583) 87,213,552 85,866,969
Net income 529,203 2,396,117 2,925,320
Cash distributions to
partners (555,555) (5,000,000) (5,555,555)
------------- ------------- -------------
Balance, June 30, 1995 $ (1,372,935) $ 84,609,669 $ 83,236,734
============= ============= =============
The accompanying notes are an integral part of these statements.
5
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1995 1994
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 2,925,320 $ (2,472,028)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 5,130,488 5,225,494
Loss on sale of aircraft -- 3,588,919
Changes in operating assets and liabilities:
Decrease in rent and other receivables 25,551 19,687
Decrease in payable to affiliates (11,307) (73,981)
Increase (decrease) in accounts payable
and accrued liabilities 63,554 (7,875)
Increase in deferred income 460,000 --
------------ ------------
Net cash provided by operating activities 8,593,606 6,280,216
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 752,626 475,376
Inventory disassembly costs (122,693) --
Increase in notes receivable (499,868) (249,934)
Principal payments on notes receivable 875,211 379,937
------------ ------------
Net cash provided by investing activities 1,005,276 605,379
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (5,555,555) (19,444,444)
------------ ------------
Net cash used in financing activities (5,555,555) (19,444,444)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS AND SHORT-TERM
INVESTMENTS 4,043,327 (12,558,849)
CASH AND CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 15,810,799 29,082,116
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 19,854,126 $ 16,523,267
============ ============
The accompanying notes are an integral part of these statements.
6
<PAGE>
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, 1994, 1993, and
1992 included in the Partnership's 1994 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 end of each aircraft's economic life based on estimated residual
values obtained from an independent party which provides current and future
estimated aircraft values by aircraft type. For any downward adjustment in
estimated residual, or decrease in the projected remaining economic life, the
depreciation expense over the projected remaining life of the aircraft is
increased. If the projected net income generated from the lease (projected
rental revenue, net of management fees, less adjusted depreciation and an
allocation of estimated administrative expense) results in a net loss, that loss
will be recognized currently. Off-lease aircraft are carried at the lower of
depreciated cost or estimated net realizable value. A further adjustment is made
for those aircraft, if any, that require substantial maintenance work.
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 - The Partnership adopted Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," and the related SFAS No. 118 as of January 1, 1995. SFAS
No. 114 and SFAS No. 118 require that certain impaired loans be measured based
on the present value of expected cash flows discounted at the loan's effective
interest rate; or, alternatively, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The
Partnership had previously measured the allowance for credit losses using
methods similar to that prescribed in SFAS No. 114. As a result, no additional
provision was required by the adoption of this pronouncement. The Partnership
has recorded an allowance for credit losses equal to the full amount of the
following impaired loans as a result of issues regarding their collection due to
cash flow deficiencies of the lessee or restrictions regarding the cash flow by
the Bankruptcy Court. The Partnership recognizes revenue on these loans only as
payments are received.
7
<PAGE>
As discussed in Note 2, the Deferral Agreement with Trans World Airlines, Inc.
(TWA) provides for a deferral of certain rents due the Partnership. The
Partnership recorded a note receivable and an allowance for credit losses equal
to the total of the deferred rents, the net of which is reflected in the
accompanying balance sheets. The note receivable and corresponding allowance for
credit losses will be reduced by the principal portion of payments received
which commenced May 31, 1995. In addition, the Partnership recognizes rental
revenue and interest revenue as payments are received. The deferred rents and
corresponding allowance for credit losses were $2,055,195 and $1,137,500 as of
June 30, 1995 and December 31, 1994, respectively.
As discussed in Note 3, the modified leases with Continental Airlines, Inc.
(Continental) include an extended deferral of the dates when certain rental
payments are due the Partnership. The Partnership recorded a note receivable and
an allowance for credit losses equal to the total of the deferred rents, 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 deferred rents and corresponding allowance for credit losses were
$2,799,752 and $3,869,429 as of June 30, 1995 and December 31, 1994,
respectively. As of June 30, 1995, Continental is current on all payments due
the Partnership. The Partnership has not recorded an allowance for credit losses
on the additional Continental notes described in Notes 3 and 4, as they are
currently deemed to be collectible.
2. TWA Reorganization
As part of the TWA lease extensions negotiated in 1991, the Partnership agreed
to share the cost of meeting certain Airworthiness Directives after TWA
successfully reorganized. The agreement stipulated 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 applicable lease.
Pursuant to this cost-sharing agreement, since TWA emerged from its
reorganization proceedings in 1993, expenses totaling $4.55 million have been
offset against rental payments ($1.95 million in 1993 and $2.6 million in 1994).
Under the terms of this agreement, TWA may offset 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) which, as discussed in the Form 10-K, now provides
certain management services to the Partnership's general partner, Polaris
Investment Management Corporation (PIMC), among others, 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 PIMC
on behalf of the Partnership with respect to the Partnership's aircraft.
The Deferral Agreement provided for (i) a moratorium on all the rent 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 Partnership recorded a note receivable and
an allowance for credit losses equal to the total of the deferred rents, the net
of which is reflected in the accompanying balance sheets. The Partnership will
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
8
<PAGE>
revenue until it is received. The Partnership has received all scheduled rent
payments beginning in April 1995, and all scheduled deferred rental payments
beginning in May 1995, including interest at a rate of 12% per annum, from TWA
through June 30, 1995 and has recognized $544,805 of the deferred rents as
rental revenue in the second quarter of 1995. The balance of the deferred rents
due from TWA as of June 30, 1995 was $2,055,195.
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 share of such payment by
TWA. This amount was recognized as other revenue in the accompanying statement
of operations for the six months ended June 30, 1995. In addition, TWA agreed to
issue warrants to the Partnership for such amount of TWA Common Stock as would
have a value (based on the projected balance sheet provided by TWA in connection
with the Deferral Agreement) on December 31, 1997, on a fully diluted basis,
equal to the total amount of rent deferred (which agreement has since been
revised, as discussed below). The Partnership has not currently recognized these
stock warrants in its financial statements as the warrants have not been issued
by TWA and their ultimate value cannot currently be accurately estimated.
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 agree to amend certain provisions of the Deferral
Agreement (as so amended, the Amended Deferral Agreement). The effect of the
Amended Deferral Agreement, which has been 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 will be determined by formula) in consideration
for the aircraft owners' agreement to defer rent under the Deferral Agreement,
and, (ii) to the extent the market value of the warrants is less than the
payment amount, to supply maintenance services to the aircraft owners having a
value equal to such deficiency. The payment amount is to be 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 market value of the warrants will be determined by reference to the market
price of the underlying TWA Common Stock calculated with reference to the period
falling from 120 days to 210 days after the effective date of TWA's plan of
reorganization.
The Amended Deferral Agreement further provided that if the confirmation date of
TWA's plan of reorganization occurred before September 30, 1995, TWA would
accelerate repayment of all deferred amounts and repay 50% of such amounts on
the plan confirmation date, and the remaining 50% on September 30, 1995.
Moreover, TWA agreed that, upon filing of its prepackaged plan, it would take
all reasonable steps to implement the terms of the Amended Deferral Agreement
and would immediately assume all of the Partnership's leases. TWA also agreed
that, not withstanding the 60-day cure period provided by section 1110 U.S.
Bankruptcy Code, it would remain current on the performance of its obligations
under the leases, as amended by the Amended Deferral Agreement.
On June 30, 1995, TWA filed its prepackaged Chapter 11 bankruptcy in the U.S.
Bankruptcy Court for the Eastern District of Missouri. As discussed in Note 6,
the Bankruptcy Court confirmed TWA's plan of reorganization on August 4, 1995.
While TWA has committed to an uninterrupted flow of lease payments, along with
full repayment of the deferred rents by the end of September 1995, there is no
assurance that TWA will continue to honor its obligations in the future.
9
<PAGE>
3. 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 (which were subsequently sold to Continental as discussed in Note
4) 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 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 terms. Continental has submitted to the Partnership for review
invoices aggregating $499,868 for interior modifications on two of the
Partnership's aircraft. The Partnership financed the aggregate amount of these
invoices to Continental during the second quarter of 1995, which will 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
$850,860 and $525,526 as of June 30, 1995 and December 31, 1994, respectively,
as notes receivable.
In January 1995, the United States Bankruptcy Court approved an agreement
between the Partnership and Continental which specifies 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 is
entitled to receive the balance of the settlement in equal monthly installments
of $72,222 through February 1996. The Partnership has received all payments due
from Continental for the settlement, which are recorded as revenue when
received. The Partnership recorded payments of $216,667 and $672,222 as revenue
during the three and six months ended June 30, 1995, respectively.
On January 26, 1995, Continental announced a number of actual and proposed
changes in its operations and financial situation. In connection with those
changes, Continental indicated that it was discussing with certain of its major
lenders modifications to existing debt amortization schedules to enhance the
airline's capital structure. Continental stated that during those discussions it
would not be making payments to such lenders and lessors otherwise required
under the current contracts. The Partnership is not engaged in any such
discussions with Continental at the present time, and Continental has made all
payments due to the Partnership on a current basis to date.
In early April 1995, Continental announced that it had successfully concluded
discussions with The Boeing Company, as well as its primary lender and the City
and County of Denver, that would provide Continental with approximately $370
million in cash deferrals and savings over the next two years, and that it had
reached a preliminary agreement with certain of its lessors for additional cash
deferrals.
10
<PAGE>
4. Sale of Aircraft to Continental
The leases of three Boeing 727-200 aircraft to Continental expired on April 30,
1994 as discussed in Note 3. In May 1994, the Partnership sold these aircraft to
Continental for an aggregate sale price of $3,019,719. The Partnership agreed to
accept payment of the sale price in 29 monthly installments of $115,500, with
interest at a rate of 9.5% per annum. The Partnership recorded a note receivable
for the sale price and recognized a loss on sale of $3,588,919 in the second
quarter of 1994. The Partnership has received all scheduled payments due under
the note. The note receivable balance at June 30, 1995 and December 31, 1994 was
$1,523,198 and $2,223,875, respectively.
5. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
June 30, 1995 June 30, 1995
------------- -------------
Aircraft Management Fees $218,659 $ 26,471
Out-of-Pocket Administrative Expense
Reimbursement 48,232 53,255
Out-of-Pocket Maintenance and
Remarketing Expense Reimbursement 86,503 30,625
-------- --------
$353,394 $110,351
======== ========
6. Subsequent Event
TWA Reorganization - On August 4, 1995, the Bankruptcy Court confirmed TWA's
plan of reorganization. The confirmation order remains subject to appeal for ten
days at which time it will become final. The plan will become effective after
the confirmation order becomes final and certain other conditions precedent are
satisfied. It is anticipated that the Plan of Reorganization will become
effective in late August 1995. Pursuant to the Amended Deferral Agreement, on
the confirmation date of the plan, August 4, 1995, the Partnership received a
payment of $881,480 from TWA which represented fifty percent (50%) of the
deferred rent outstanding plus interest as of such date. The remaining balance
of deferred rent plus interest is due by September 30, 1995.
11
<PAGE>
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, formerly
leased to Midway Airlines, Inc. (Midway), and six Boeing 727-100 aircraft,
formerly leased to Continental, to aircraft inventory. The inventoried aircraft
have been or are being disassembled for sale of their component parts. Of its
original aircraft portfolio, the Partnership sold one former Continental DC-9-10
aircraft in December 1992, one former Midway DC-9-10 aircraft in January 1993,
one former Aero California S.A. de C.V. DC-9-10 aircraft in September 1993, five
of the former Continental DC-9-10 aircraft at various dates in 1993, and three
former Continental Boeing 727-200 aircraft in May 1994.
Partnership Operations
The Partnership recorded net income of $2,360,671, or $4.17 per limited
partnership unit, for the three months ended June 30, 1995 compared to a net
loss of $2,639,198, or $5.98 per unit for the same period in 1994. The
Partnership recorded net income of $2,925,320, or $4.79 per limited partnership
unit, for the six months ended June 30, 1995 compared to a net loss of
$2,472,028, or $8.40 per unit for the same period in 1994. The 1994 net losses
were attributable to the loss of $3,588,919 recorded in the second quarter of
1994 on the sale of three Boeing 727-200 aircraft to Continental as discussed in
the Partnership's 1994 Annual Report to the Securities and Exchange Commission
on Form 10-K (Form 10-K). In addition, the Partnership recognized operating
expenses in 1994 on the Partnership's leases with TWA. Operating results for the
three and six months ended June 30, 1995 were impacted by a reduction in rental
revenue recognized on the leases with TWA.
Operating expenses were higher in the three and six months ended June 30, 1994
as compared to the same periods of 1995 as a result of maintenance expenses
incurred from the Partnership's leases to TWA. As described in Note 2 to the
financial statements, the Partnership agreed to share the cost of meeting
certain Airworthiness Directives (ADs) after TWA successfully reorganized in
1993. 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 leases. In accordance with the cost-sharing
agreement, during the three and six months ended June 30, 1994, the Partnership
recognized as operating expense $650,000 and $2.6 million of these AD expenses.
No operating expense was recognized for these ADs during the first two quarters
of 1995.
The decrease in total revenues in the three and six months ended June 30, 1995
as compared to the same periods of 1994 resulted primarily from a decrease in
rental revenue, net of related management fees, recognized from the leases with
TWA and Continental. As discussed in Note 2 to the financial statements, the
Partnership reached an Amended Deferral Agreement with TWA in June 1995, which
provides for a moratorium on the rent due the Partnership in November 1994 and
on 75% of the rents due the Partnership from December 1994 through March 1995.
The deferred rents, which aggregate $2.6 million plus interest at a rate of 12%
per annum, are being repaid by TWA beginning in May 1995 and ending in September
1995. The Partnership will not recognize the deferred rent as rental revenue
until it is received, including $1,462,500 deferred in the six months ended June
30, 1995. TWA began repaying the deferred amounts in May 1995 and the
Partnership recognized rental revenue from these deferred rental payments of
$544,805 during the second quarter of 1995. In addition, the leases of three
Boeing 727-200 aircraft to Continental expired in April 1994 and the aircraft
were subsequently sold to Continental in May 1994. The Partnership recognized no
rental revenue or deferred rental revenue on these aircraft after April 1994.
12
<PAGE>
Partially offsetting the decline in rental revenue during 1995 as compared to
1994, the Partnership received $157,569 as consideration for the agreement with
TWA. The Partnership recognized the $157,569 as other revenue during the first
quarter of 1995. In addition, during the three and six months ended June 30,
1995, the Partnership recognized as revenue payments of $216,667 and $672,222,
respectively, from Continental in accordance with the settlement agreement for
the return of six Boeing 727-100 aircraft, as discussed in the Form 10-K.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
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. This Statement will be adopted by the Partnership as of January 1,
1996 and will be applied prospectively. Management is gathering information and
evaluating the requirements of the Statement, but has not determined the impact
of its application on the Partnership's financial position or results of
operations.
Liquidity and Cash Distributions
Liquidity - The Partnership has received from Continental all payments due under
the modified lease agreement, the aircraft sale agreement and the settlement
agreement for the return of the six Boeing 727-100 aircraft. In addition,
payments totaling $241,729 and $752,626 have been received during the three and
six months ended June 30, 1995, respectively, from the sale of parts from the
nine disassembled aircraft and have been applied against aircraft inventory.
As discussed above, the Partnership and TWA agreed to defer certain rents due
the Partnership totaling $2.6 million, to be repaid by TWA, with interest
beginning in May 1995 and ending in September 1995. Until the deferred rents are
repaid by TWA in full, the negative impact on the Partnership's cash flows is
significant.
As described in 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 June 1995, the Partnership financed an
additional amount of $499,868 to Continental for modifications performed on two
of the Partnership's aircraft, which will be repaid by Continental with interest
over the remaining lease terms of the aircraft.
As discussed above, the Partnership agreed to share the cost of meeting certain
ADs with TWA. In accordance with the cost-sharing agreement, TWA may offset an
additional $1.95 million against rental payments, subject to annual limitations,
over the lease terms. The Partnership's cash reserves are being retained to meet
the obligations under the TWA leases and restructuring agreement and to finance
potential future modification costs for Continental.
13
<PAGE>
Cash Distributions - Cash distributions to limited partners during the three
months ended June 30, 1995 and 1994 were $2,500,000, or $5.00 per limited
partnership unit and $3,750,000, or $7.50 per unit, respectively. Cash
distributions to limited partners during the six months ended June 30, 1995 and
1994 were $5,000,000, or $10.00 per limited partnership unit and $17,500,000, or
$35.00 per unit, respectively. The timing and amount of future cash
distributions will depend upon the Partnership's future cash requirements;
continued receipt of the renegotiated rental payments from Continental and TWA;
the receipt of the deferred rental payments from TWA and Continental; the
receipt of modification financing payments from Continental; the receipt of
payments from Continental for the sale of three Boeing 727-200 aircraft; the
receipt of payments generated from the aircraft disassembly process; and the
receipt of payments from Continental as settlement for the return of six Boeing
727-100 aircraft.
Industry Effects on the Partnership's Aircraft
As discussed in Note 1 to the financial statements, the Partnership periodically
reviews the estimated realizability of the residual values at the projected end
of each aircraft's economic life. For any downward adjustment in estimated
residual value, depreciation expense over the projected remaining life of the
aircraft is increased. If the increase in depreciation expense for on-lease
aircraft causes the projected future net income generated from the lease to
result in a net loss, that loss will be recognized currently as additional
depreciation expense. The Partnership made downward adjustments to the estimated
residual value of five of its on-lease aircraft as of December 31, 1994. As a
result of these adjustments to the estimated residual values, the Partnership
will recognize increased depreciation expense of approximately $1.23 million per
year beginning in 1995 through the end of the projected economic lives of the
aircraft.
14
<PAGE>
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) 1994 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 for the period ended March 31, 1995, there are a
number of pending legal actions or proceedings involving the Partnership. Except
as described below, there have been no material developments with respect to any
such actions or proceedings during the period covered by this report.
Trans World Airlines, Inc. (TWA) - On June 30, 1995, TWA filed a reorganization
proceeding under Chapter 11 of the federal Bankruptcy Code in the United States
Bankruptcy Court for the Eastern District of Missouri. The filing by TWA is
characterized as a pre-packaged bankruptcy, and no interruption in rent payments
by TWA is expected. Immediately before the filing, the Partnership and TWA
entered into an Amended Deferral Agreement in anticipation of the filing by TWA.
Pursuant to the Amended Deferral Agreement, TWA has agreed to accelerate the
payment of certain rental amounts that were previously deferred and has also
agreed to perform certain maintenance for the benefit of the Partnership. At the
time of filing, TWA was current in its rent payments to the Partnership as set
forth in the Amended Deferral Agreement. TWA's plan of reorganization, in which
TWA confirmed all of its leases with the Partnership, was confirmed by the
Bankruptcy Court on August 4, 1995.
Reuben Riskind, et al. v. Prudential Securities, Inc., et al. - Prudential
Securities, Inc. has reached a settlement with the plaintiffs. The trial of the
claims of one plaintiff, Robert W. Wilson, against Polaris aircraft Income Funds
I - VI, their general partner Polaris Investment Management Corporation and
various affiliates of Polaris Investment Management Corporation, including
General Electric Capital Corporation, was commenced on July 10, 1995. On July
26, 1995, the jury returned a verdict in favor of the defendants on all counts.
Other Proceedings - Item 10 in Part III of the Partnership's 1994 Form 10-K
discusses 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, where the Partnership is named
as a defendant, the Partnership is not a party to these actions. In Novak, a
derivative action, the Partnership is named as a defendant for procedural
purposes, but the plaintiffs in such lawsuit do not seek an award from the
Partnership. Except as described below, there have been no material developments
with respect to any of the actions described therein during the period covered
by this report.
Adams, et al. v. Prudential Securities, Inc., et al. - The Judicial Panel
conditionally transferred the action to the Multi-District Litigation filed in
the United States District Court for the Southern District of New York, which is
described in Item 10 of Part III of the Partnership's 1994 Form 10-K. Defendants
time to answer or otherwise respond to the complaint has been extended by the
court until 20 days after the Judicial Panel determines whether to transfer the
case to the Multi-District Litigation.
Moross, et al. v. Polaris Holding Company, et al. - On April 11, 1995, the
action was transferred to the Multi-District Litigation described in Item 10 of
Part III of the Partnership's 1994 Form 10-K. On April 20, 1995, the parties
stipulated that defendants need not answer or otherwise respond to the complaint
at this time.
15
<PAGE>
Kahn v. Polaris Holding Company, et al. - On April 18, 1995, the action was
discontinued without prejudice.
Novak, et al. v. Polaris Holding Company, et al. - On July 7, 1995, defendants
filed briefs in support of their appeal from that portion of the trial court's
order denying the motion to dismiss.
Cohen, et al. v. J.B. Hanauer & Company, et al. - On June 7, 1995, plaintiffs
filed an amended complaint which did not include as defendants General Electric
Capital Corporation, General Electric Financial Services, Inc., and General
Electric Company, thus effectively dismissing without prejudice the case against
these entities.
Bashein, et al. v. Kidder, Peabody & Company Inc., et al. - As previously
disclosed in the Partnership's 1994 Form 10-K and first quarter 1995 Form 10-Q,
a purported class action entitled Cohen, et al. v. Kidder Peabody & Company
Inc., et al. was filed in the Circuit Court of the Fifteenth Judicial Circuit In
And For Palm Beach County, Florida on January 12, 1995, and on March 31, 1995,
the case was removed to the United States District Court for the Southern
District of Florida. An amended class action complaint (the "amended
complaint"), which re-named this action as Bashein, et al. v. Kidder, Peabody &
Company Inc., et al., was filed on June 12, 1995. The amended complaint names
Kidder, Peabody & Company Inc., General Electric Capital Corporation, General
Electric Financial Services, Inc., and General Electric Company. The amended
complaint sets forth various causes of action purportedly arising in connection
with the public offerings of the Partnership, Polaris Aircraft Income Fund IV,
Polaris Aircraft Income Fund V, and Polaris Aircraft Income Fund VI.
Specifically, plaintiffs assert claims for violation of Sections 12(2) and 15 of
the Securities Act of 1933, fraud, negligent misrepresentation, breach of
fiduciary duty, breach of third party beneficiary contract, violation of NASD
Rules of Fair Practice, breach of implied covenant, and breach of contract.
Plaintiffs seek compensatory damages, interest, punitive damages, costs and
attorneys' fees, as well as any other relief the court deems just and proper.
Defendants moved to dismiss the amended complaint on June 26, 1995. The
Partnership is not named as a defendant in this action.
B & L Industries, Inc., et al. v. Polaris Holding Company, et al. - On or around
April 13, 1995, a class action complaint entitled B & L Industries, Inc., et al.
v. Polaris Holding Company, et al. was filed in the Supreme Court of the State
of New York. The complaint names as defendants Polaris Holding Company, Polaris
Aircraft Leasing Corporation, Polaris Investment Management Corporation, Polaris
Securities Corporation, Peter G. Pfendler, Marc P. Desautels, General Electric
Capital Corporation, General Electric Financial Services, Inc., General Electric
Company, Prudential Securities Inc., and Kidder Peabody & Company Incorporated.
The complaint sets forth various causes of action purportedly arising out of the
public offerings of the Partnership and Polaris Aircraft Income Fund IV.
Plaintiffs allege claims of fraud, negligent misrepresentation, breach of
fiduciary duty, knowingly inducing or participating in breach of fiduciary duty,
breach of third party beneficiary contract, violation of NASD Rules of Fair
Practice, breach of implied covenant, and unjust enrichment. Plaintiffs seek
compensatory damages, interest, general, consequential and incidental damages,
exemplary and punitive damages, disgorgement, rescission, costs, attorneys'
fees, accountants' and experts' fees, and other legal and equitable relief as
the court deems just and proper. The Partnership is not named as a defendant in
this action.
16
<PAGE>
Item 5. Other Information
Directors and Officers
James W. Linnan, 53, has assumed the position of Director and President of PIMC
effective March 31, 1995. Mr. Linnan has served PIMC in various capacities since
April 1979, most recently as Vice President.
Effective July 31, 1995, Eric Dull resigned as Director of PIMC.
Richard L. Blume, 53, has assumed the position of Secretary of PIMC effective
May 1, 1995. Mr. Blume presently holds the position of Executive Vice President
and General Counsel of GE Capital Aviation Services, Inc. (GECAS). Prior to
joining GECAS, Mr. Blume was counsel at GE Aircraft Engines since 1987.
Norman Liu, 37, has assumed the position of Vice President of PIMC effective May
1, 1995 and has assumed the position of Director of PIMC effective July 31,
1995. Mr. Liu presently holds the position of Executive Vice President, Capital
Funding and Portfolio Management of GECAS. Prior to joining GECAS, Mr. Liu was
with General Electric Capital Corporation for nine years. He has held management
positions in corporate Business Development and in Syndications and Leasing for
Transportation and Industrial Funding Corporation (TIFC). Mr. Liu was also at
Kidder, Peabody as a managing director.
Edward Sun, 45, has assumed the position of Vice President of PIMC effective May
1, 1995. Mr. Sun presently holds the position of Senior Managing Director,
Structured Finance of GECAS. Prior to joining GECAS, Mr. Sun held various
positions with TIFC since 1990.
Selected Financial Data
For the years ended December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Cash Distributions per Limited
Partnership Unit $ 50.00 $ 25.00 $ 20.00 $ 26.25 $ 65.00
Amount of Cash Distributions
Included Above Representing
a Return of Capital on a Generally
Accepted Accounting Principle
Basis per Limited Partnership Unit * $ 50.00 $ 25.00 $ 20.00 $ 26.25 $ 33.16
* The portion of such distributions which represents a return of capital on an
economic basis will depend in part on the residual sale value of the
Partnership's aircraft and thus will not be ultimately determinable until the
Partnership disposes of its aircraft. However, such portion may be significant
and may equal, exceed or be smaller than the amount shown in the above table.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedules (Filed electronically only)
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter for
which this report is filed.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
August 9, 1995 By: /S/James F. Walsh
-------------------------------- -----------------
James F. Walsh
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
19
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