UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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Commission File No. 33-10122
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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 18 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended September 30, 1995
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - September 30, 1995 and
December 31, 1994..........................................3
b) Statements of Operations - Three Months and
Nine Months Ended September 30, 1995 and 1994..............4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1994
and Nine Months Ended September 30, 1995...................5
d) Statements of Cash Flows - Nine Months
Ended September 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..............................17
Signature..................................................................18
2
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Part I. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1995 1994
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 22,455,062 $ 15,810,799
RENT AND OTHER RECEIVABLES 470,421 485,551
NOTES RECEIVABLE, net of allowances for
credit losses of $3,344,840 in 1995
and $5,006,929 in 1994 2,017,743 2,749,401
AIRCRAFT at cost, net of accumulated
depreciation of $70,862,613 in 1995
and $63,166,880 in 1994 57,396,876 65,092,609
AIRCRAFT INVENTORY 1,365,223 2,388,377
OTHER ASSETS 69,258 26,089
------------ ------------
$ 83,774,583 $ 86,552,826
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 111,588 $ 121,658
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 65,415 42,418
DEFERRED INCOME 521,781 521,781
------------ ------------
Total Liabilities 698,784 685,857
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,374,569) (1,346,583)
Limited Partners, 500,000 units
issued and outstanding 84,450,368 87,213,552
------------ ------------
Total Partners' Capital 83,075,799 85,866,969
------------ ------------
$ 83,774,583 $ 86,552,826
============ ============
The accompanying notes are an integral part of these statements.
3
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<TABLE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rent from operating leases $ 4,817,966 $ 3,701,359 $ 11,533,156 $ 12,443,489
Interest 479,715 427,459 1,493,220 1,223,638
Lessee settlement 216,666 -- 888,888 --
Loss on sale of aircraft -- -- -- (3,588,919)
Other -- -- 157,609 --
------------ ------------ ------------ ------------
Total Revenues 5,514,347 4,128,818 14,072,873 10,078,208
------------ ------------ ------------ ------------
EXPENSES:
Depreciation 2,565,245 2,256,263 7,695,733 7,481,757
Management fees to general partner 240,898 185,067 576,658 609,786
Operating 10,272 16,551 32,034 2,664,127
Administration and other 81,089 62,407 226,285 186,036
------------ ------------ ------------ ------------
Total Expenses 2,897,504 2,520,288 8,530,710 10,941,706
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 2,616,843 $ 1,608,530 $ 5,542,163 $ (863,498)
============ ============ ============ ============
NET INCOME ALLOCATED TO THE
GENERAL PARTNER $ 276,144 $ 391,049 $ 805,347 $ 2,116,153
============ ============ ============ ============
NET INCOME (LOSS) ALLOCATED
TO LIMITED PARTNES $ 2,340,699 $ 1,217,481 $ 4,736,816 $ (2,979,651)
============ ============ ============ ============
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 4.68 $ 2.44 $ 9.47 $ (5.96)
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
4
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1994 and
Nine Months Ended September 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 805,347 4,736,816 5,542,163
Cash distributions to partners (833,333) (7,500,000) (8,333,333)
------------- ------------- -------------
Balance, September 30, 1995 $ (1,374,569) $ 84,450,368 $ 83,075,799
============= ============= =============
The accompanying notes are an integral part of these statements.
5
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<TABLE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 5,542,163 $ (863,498)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 7,695,733 7,481,757
Loss on sale of aircraft -- 3,588,919
Changes in operating assets and liabilities:
Decrease in rent and other receivables 15,130 179,412
Increase in other assets (43,169) --
Decrease in payable to affiliates (10,070) (104,166)
Increase in accounts payable and
accrued liabilities 22,997 26,504
------------ ------------
Net cash provided by operating activities 13,222,784 10,308,928
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 1,179,872 587,165
Inventory disassembly costs (156,718) --
Increase in notes receivable (499,868) (315,145)
Principal payments on notes receivable 1,231,526 713,039
------------ ------------
Net cash provided by investing activities 1,754,812 985,059
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (8,333,333) (23,611,111)
------------ ------------
Net cash used in financing activities (8,333,333) (23,611,111)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS AND SHORT-TERM
INVESTMENTS 6,644,263 (12,317,124)
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 $ 22,455,062 $ 16,764,992
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
6
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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, 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
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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 the
deferred rental revenue and interest revenue as payments are received. The
deferred rents and corresponding allowance for credit losses were $863,372 and
$1,137,500 as of September 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
$2,481,468 and $3,869,429 as of September 30, 1995 and December 31, 1994,
respectively. As of September 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 repayment schedule was subsequently
accelerated upon confirmation of TWA's bankruptcy plan. 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
8
<PAGE>
deferred in 1994 or the $1,462,500 rental amount deferred during the first
quarter of 1995 as rental revenue until the deferred rents are 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 September 30, 1995 and has
recognized $1,736,628 of the deferred rents as rental revenue in the second and
third quarters of 1995. The balance of the deferred rents due from TWA as of
September 30, 1995 was $863,372 which was paid to the Partnership on October 2,
1995 as discussed in Note 6.
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 nine months ended September 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 had not been
issued by TWA as of September 30, 1995. As discussed in Note 6, the Partnership
received the warrants from TWA in November 1995.
In order to resolve certain issues that arose after the execution of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995, pursuant to which they agreed to amend certain provisions of the Deferral
Agreement (as so amended, the Amended Deferral Agreement). The effect of the
Amended Deferral Agreement, which 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 value of the maintenance reimbursement will be determined by the market
value of the warrants 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.
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 of the 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. On August 4, 1995, the
Bankruptcy Court confirmed TWA's plan of reorganization, which became effective
on August 23, 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
9
<PAGE>
of deferred rent plus interest was due September 30, 1995. As discussed in Note
6, the payment due from TWA on September 30, 1995 was paid to the Partnership on
October 2, 1995. While TWA has committed to an uninterrupted flow of lease
payments, there is no assurance that TWA will continue to honor its obligations
in the future.
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 may be capitalized and depreciated over the
remaining lease terms. The Partnership approved 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, and they 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 $701,467 and $525,526 as of September 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 $216,666 and $888,888 as revenue
during the three and nine months ended September 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 September 30, 1995 and December 31,
1994 was $1,316,276 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
September 30, 1995 September 30, 1995
------------------ ------------------
Aircraft Management Fees $287,538 $ 23,000
Out-of-Pocket Administrative Expense
Reimbursement 98,291 56,163
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 35,983 32,425
-------- --------
$421,812 $111,588
======== ========
6. Subsequent Event
TWA Reorganization - On October 2, 1995, TWA paid to the Partnership $895,546,
which represented the remaining balance of the deferred rent with interest which
was due September 30, 1995 as discussed in Note 2. The Partnership will record
rental and interest revenue from this payment in the fourth quarter of 1995.
TWA Stock Warrants - In November 1995, the Partnership received warrants to
purchase 159,919 shares of TWA Common Stock at an exercise price of $.01 per
share. The exercise period expires August 22, 1996. The market value of the
warrants at the time of receipt was approximately $1.2 million.
11
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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 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 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 $2,616,843, or $4.68 per limited
partnership unit, for the three months ended September 30, 1995 compared to net
income of $1,608,530, or $2.44 per unit for the same period in 1994. The
Partnership recorded net income of $5,542,163, or $9.47 per limited partnership
unit, for the nine months ended September 30, 1995 compared to a net loss of
$863,498, or $5.96 per unit for the same period in 1994. The 1994 year to date
net loss was 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), combined with operating expenses recognized
in 1994 on the Partnership's leases with TWA.
Operating expenses were higher in the nine months ended September 30, 1994 as
compared to the same period in 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 nine months ended September 30, 1994, the Partnership
recognized as operating expense $2.6 million of these AD expenses. No operating
expense was recognized for these ADs during the first three quarters of 1995.
Operating results improved for the three and nine months ended September 30,
1995 as compared to the same periods in 1994 as a result of higher revenues,
combined with lower operating expenses, as discussed above. Total revenues in
1995 increased as a result of increased rental revenue, interest revenue and
other revenue recognized primarily from the leases with TWA. As discussed in
Note 2 to the financial statements, the Partnership reached an Amended Deferral
Agreement with TWA in June 1995, which provided 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 totaled $2.6
million plus interest at a rate of 12% per annum, were repaid by TWA beginning
in May 1995 and ending in October 1995. The Partnership does not recognize the
deferred rent as rental revenue until the deferred amounts are received,
including $1,462,500 deferred in the first three months of 1995. TWA began
repaying the deferred amounts with interest in May 1995. The Partnership
recognized rental revenue from these deferred rental payments of $1,191,823 and
$1,736,628 during the three and nine months ended September 30, 1995,
12
<PAGE>
respectively. Further impacting the increase in total revenues during the nine
months ended September 30, 1995 as compared to the same period in 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 nine months ended September 30, 1995,
the Partnership recognized as revenue payments of $216,666 and $888,888,
respectively, from Continental in accordance with the settlement agreement for
the return of six Boeing 727-100 aircraft, as discussed in the 1994 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 $427,246 and $1,179,872 have been received during the three
and nine months ended September 30, 1995, respectively, from the sale of parts
from the nine disassembled aircraft and have been applied against aircraft
inventory.
As discussed above and in Notes 2 and 6 to the financial statements, TWA repaid
its deferred rents with interest beginning in May 1995. The Partnership received
the final payment from TWA of $895,546 on October 2, 1995. In November 1995, the
Partnership received warrants to purchase 159,919 shares of TWA Common Stock at
an exercise price of $.01 per share. The exercise period expires August 22,
1996. The market value of the warrants at the time of receipt was approximately
$1.2 million. While TWA has committed to an uninterrupted flow of lease
payments, there is no assurance that TWA will continue to honor its obligations
in the future. Any failure by TWA to perform its financial obligations with the
Partnership will have an adverse effect on the Partnership's financial position.
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 to finance potential future
modification costs for Continental.
13
<PAGE>
Cash Distributions - Cash distributions to limited partners during the three
months ended September 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 nine months ended September 30,
1995 and 1994 were $7,500,000, or $15.00 per limited partnership unit and
$21,250,000, or $42.50 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 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.
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
Reports to the SEC on Form 10-Q for the period ended March 31, 1995 and the
period ended June 30, 1995, respectively, 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) - TWA has emerged from its bankruptcy
proceeding and has repaid all outstanding rent deferrals in accordance with its
commitment to the Partnership and in accordance with its plan of reorganization.
TWA has since remained current on all of its payment obligations to the
Partnership.
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.
Subsequent to this verdict, all of the remaining defendants (with the exception
of Prudential Securities, Inc. which had previously settled) entered into a
settlement with the plaintiffs.
Adams, et al. v. Prudential Securities, Inc., et al. - The Judicial Panel has
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.
Scott v. Prudential Securities, Inc. et al. - On or around August 15, 1995, a
complaint entitled Mary C. Scott v. Prudential Securities Inc. et al. was filed
in the Court of Common Pleas, County of Summit, Ohio. The complaint names as
defendants Prudential Securities Inc., the Partnership, Polaris Aircraft Income
Fund II, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund VI,
P-Bache/A.G. Spanos Genesis Income Partners LP 1, Prudential-Bache Properties,
Inc., A.G. Spanos Residential Partners - 86, Polaris Securities Corporation and
Robert Bryan Fitzpatrick. Plaintiff alleges claims of fraud and violation of
Ohio securities law arising out of the public offerings of the Partnership,
Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund IV, Polaris
Aircraft Income Fund VI, and P-Bache/A.G. Spanos Genesis Income Partners LP 1.
Plaintiff seeks compensatory damages, general, consequential and incidental
damages, punitive damages, rescission, costs, attorneys' fees and other and
further relief as the Court deems just and proper. On September 15, 1995,
defendants removed this action to the United States District Court, Eastern
District of Ohio. On September 18, 1995, defendants sought the transfer of this
action to the Multi-District Litigation and sought a stay of all proceedings by
the district court, which stay was granted on September 25, 1995. The Judicial
Panel conditionally transferred this action to the Multi-District Litigation on
October 13, 1995.
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
15
<PAGE>
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.
Bashein, et al. v. Kidder, Peabody & Company Inc., et al. - On October 2, 1995,
the Court denied the defendants' motion to dismiss.
B & L Industries, Inc., et al. v. Polaris Holding Company, et al. - On October
2, 1995, defendants moved to dismiss the complaint.
Harrison v. General Electric Company, et al. - On or around September 27, 1995,
a complaint entitled Martha J. Harrison v. General Electric Company, et al., was
filed in the Civil District Court for the Parish of Orleans, State of Louisiana.
The complaint names as defendants General Electric Company and Prudential
Securities Incorporated. Plaintiff alleges claims of tort, breach of fiduciary
duty in tort, contract and quasi-contract, violation of sections of the
Louisiana Blue Sky Law and violation of the Louisiana Civil Code concerning the
inducement and solicitation of purchases arising out of the public offering of
Polaris Aircraft Income Fund IV. Plaintiff seeks compensatory damages,
attorney's fees, interest, costs and general relief. The Partnership is not
named as a defendant in this action.
In re: Prudential Securities Limited Partnerships (Multi-District Litigation) -
Prudential Securities, Inc. on behalf of itself and its affiliates has made an
Offer of Settlement. A class has been certified for purposes of the Prudential
Settlement and notice to the class has been sent. Any questions concerning
Prudential's Offer of Settlement should be directed to 1-800- 327-3664, or write
to the Claims Administrator at:
Prudential Securities Limited Partnerships
Litigation Claims Administrator
P.O. Box 9388
Garden City, New York 11530-9388
16
<PAGE>
Item 5. Other Information
Directors and Officers
James F. Walsh resigned as Chief Financial Officer of Polaris Investment
Management Corporation (PIMC) effective October 9, 1995. Marc A. Meiches, 42,
has assumed the position of Chief Financial Officer of PIMC effective October 9,
1995. Mr. Meiches presently holds the position of Executive Vice President and
Chief Financial Officer of General Electric Capital Aviation Services, Inc.
(GECAS). Prior to joining GECAS, Mr. Meiches has been with General Electric
Company (GE) and its subsidiaries since 1978. Since 1992, Mr. Meiches held the
position of Vice President of the General Electric Capital Corporation Audit
Staff. Between 1987 and 1992, Mr. Meiches held Manager of Finance positions for
GE Re-entry Systems, GE Government Communications Systems and the GE Astro-Space
Division.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedule (Filed electronically only)
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter for
which this report is filed.
17
<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
November 9, 1995 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)
18
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