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 June 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
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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 15 pages.
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1996
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1996 and
December 31, 1995..............................................3
b) Statements of Income - Three and Six Months
Ended June 30, 1996 and 1995...................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1995
and Six Months Ended June 30, 1996.............................5
d) Statements of Cash Flows - Six Months
Ended June 30, 1996 and 1995...................................6
e) Notes to Financial Statements..................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............11
Part II. Other Information
Item 1. Legal Proceedings..........................................13
Item 6. Exhibits and Reports on Form 8-K...........................14
Signature ...........................................................15
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)
June 30, December 31,
1996 1995
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 25,244,058 $ 25,014,205
MARKETABLE SECURITIES, trading -- 1,659,160
RENT AND OTHER RECEIVABLES 463,482 8,171
NOTES RECEIVABLE, net of allowance for credit
losses of $975,569 in 1996 and $1,993,095
in 1995 566,575 1,546,407
AIRCRAFT, net of accumulated depreciation
of $80,212,873 in 1996 and $75,198,827
in 1995 48,046,616 53,060,662
AIRCRAFT INVENTORY 113,220 686,670
OTHER ASSETS 26,089 26,089
------------ ------------
$ 74,460,040 $ 82,001,364
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 100,192 $ 130,584
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 68,644 84,084
DEFERRED INCOME 521,781 521,781
------------ ------------
Total Liabilities 690,617 736,449
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,467,766) (1,392,716)
Limited Partners, 500,000 units
issued and outstanding 75,237,189 82,657,631
------------ ------------
Total Partners' Capital 73,769,423 81,264,915
------------ ------------
$ 74,460,040 $ 82,001,364
============ ============
The accompanying notes are an integral part of these statements.
3
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
Rent from operating leases $3,829,753 $4,442,594 $7,639,323 $6,715,190
Interest 381,628 580,345 801,936 1,013,505
Lessee settlement -- 216,667 144,444 672,222
Other -- -- 38,898 157,609
---------- ---------- ---------- ----------
Total Revenues 4,211,381 5,239,606 8,624,601 8,558,526
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 2,507,023 2,565,244 5,014,046 5,130,488
Management fees to general partner 191,488 222,130 381,966 335,760
Operating 5,857 13,869 9,661 21,762
Administration and other 96,004 77,692 158,864 145,196
---------- ---------- ---------- ----------
Total Expenses 2,800,372 2,878,935 5,564,537 5,633,206
---------- ---------- ---------- ----------
NET INCOME $1,411,009 $2,360,671 $3,060,064 $2,925,320
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 489,063 $ 273,581 $ 980,506 $ 529,203
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 921,946 $2,087,090 $2,079,558 $2,396,117
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 1.84 $ 4.17 $ 4.16 $ 4.79
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
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, 1995 and
Six Months Ended June 30, 1996
------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1994 $ (1,346,583) $ 87,213,552 $ 85,866,969
Net income 1,203,867 6,694,079 7,897,946
Cash distributions to partners (1,250,000) (11,250,000) (12,500,000)
------------ ------------ ------------
Balance, December 31, 1995 (1,392,716) 82,657,631 81,264,915
Net income 980,506 2,079,558 3,060,064
Cash distributions to partners (1,055,556) (9,500,000) (10,555,556)
------------ ------------ ------------
Balance, June 30, 1996 $ (1,467,766) $ 75,237,189 $ 73,769,423
============ ============ ============
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)
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net income $ 3,060,064 $ 2,925,320
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 5,014,046 5,130,488
Changes in operating assets and liabilities:
Decrease in marketable securities, trading 1,659,160 --
Decrease (increase) in rent and other
receivables (455,311) 25,551
Decrease in payable to affiliates (30,392) (11,307)
Increase (decrease) in accounts payable
and accrued liabilities (15,440) 63,554
Increase in deferred income -- 460,000
------------ ------------
Net cash provided by operating activities 9,232,127 8,593,606
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 582,732 752,626
Inventory disassembly costs (9,282) (122,693)
Increase in notes receivable -- (499,868)
Principal payments on notes receivable 979,832 875,211
------------ ------------
Net cash provided by investing activities 1,553,282 1,005,276
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (10,555,556) (5,555,555)
------------ ------------
Net cash used in financing activities (10,555,556) (5,555,555)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS 229,853 4,043,327
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 25,014,205 15,810,799
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 25,244,058 $ 19,854,126
============ ============
The accompanying notes are an integral part of these statements.
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, 1995, 1994, and
1993 included in the Partnership's 1995 Annual Report to the SEC on Form 10-K
(Form 10-K).
Aircraft and Depreciation - The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual value is computed using
the straight-line method over the estimated economic life of the aircraft which
was originally estimated to be 30 years from the date of manufacture.
Depreciation in the year of acquisition was calculated based upon the number of
days that the aircraft were in service.
The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life based on estimated
residual values obtained from independent parties which provide current and
future estimated aircraft values by aircraft type. For any downward adjustment
in estimated residual value or decrease in the projected remaining economic
life, the depreciation expense over the projected remaining economic life of the
aircraft is increased.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, an impairment
loss is recognized. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 121, as discussed below, measurement of an impairment loss will be
based on the "fair value" of the asset as defined in the statement.
Capitalized Costs - Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft are
capitalized and amortized using the straight-line method over the estimated
useful life of the improvement. These costs are also subject to periodic
evaluation as discussed above.
Financial Accounting Pronouncements - SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," requires the Partnership to disclose the fair
value of financial instruments. Cash and cash equivalents is stated at cost,
which approximates fair value. Marketable Securities, trading (Note 2) were
carried at fair value, which was determined based on quoted market prices. The
fair value of the Partnership's notes receivable is estimated by discounting
future estimated cash flows using current interest rates at which similar loans
would be made to borrowers with similar credit ratings and remaining maturities.
As discussed in Note 3, the carrying value of the notes receivable from
Continental Airlines, Inc. (Continental) for deferred rents is zero due to a
recorded allowance for credit losses equal to the balance of the notes. As of
June 30, 1996, the aggregate fair value of the Continental deferred rent notes
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receivable was estimated to be approximately $0.9 million. The carrying value of
the Partnership's remaining notes receivable discussed in Notes 2 and 4
approximate their estimated fair value.
The Partnership adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of January 1,
1996. This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Partnership estimates that this pronouncement will
not have a material impact on the Partnership's financial position or results of
operations unless events or circumstances change that would cause projected net
cash flows to be adjusted. No impairment loss was recognized by the Partnership
during the first two quarters of 1996.
2. Trans World Airlines, Inc. (TWA) Reorganization
As discussed in the Form 10-K, the Partnership renegotiated the TWA leases after
TWA defaulted under its leases with the Partnership during 1991. The
renegotiated agreement stipulated that the Partnership share in the cost of
certain Airworthiness Directives after TWA successfully reorganized. Pursuant to
this cost-sharing agreement, since TWA emerged from its reorganization
proceedings in 1993, expenses totaling $4.55 million ($1.95 million in 1993 and
$2.6 million in 1994) have been offset against rental payments. Under the terms
of this agreement, TWA may offset up to an additional $1.95 million against
rental payments, subject to annual limitations, over the remaining lease terms.
In October 1994, TWA notified its creditors, including the Partnership, of
another proposed restructuring of its debt. Subsequently, GE Capital Aviation
Services, Inc. (GECAS) negotiated a standstill arrangement, as set forth in a
letter agreement dated December 16, 1994 (the Deferral Agreement), with TWA for
the 46 aircraft that are managed by GECAS, 13 of which are owned by the
Partnership. As required by its terms, the Deferral Agreement (which has since
been amended as discussed below) was approved by Polaris Investment Management
Corporation (PIMC) on behalf of the Partnership with respect to the
Partnership's aircraft.
The Deferral Agreement provided for (i) a moratorium on the rents due to the
Partnership in November 1994 and on 75% of the rents due to the Partnership from
December 1994 through March 1995, and (ii) all of the deferred rents, together
with interest thereon, to be repaid in monthly installments beginning in May
1995 and ending in December 1995. The repayment schedule was subsequently
accelerated upon confirmation of TWA's bankruptcy plan. The Partnership did not
recognize either the $1,137,500 rental amount deferred in 1994 or the $1,462,500
rental amount deferred during the first quarter of 1995 as rental revenue until
the deferred rents were received. The deferred rents were paid in full by
October 1995.
In consideration for the partial rent moratorium described above, TWA agreed to
make a lump sum payment of $1,000,000 to GECAS for the TWA lessors for whom
GECAS provides management services and who agreed to the Deferral Agreement. The
Partnership received $157,568 in January 1995 as its pro-rata share of such
payment by TWA. This amount was recognized as other revenue in the accompanying
statement of operations for the six months ended June 30, 1995. In addition, TWA
agreed to issue warrants to the Partnership for TWA Common Stock.
In order to resolve certain issues that arose after the execution of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995, pursuant to which they agreed to amend certain provisions of the Deferral
Agreement (as so amended, the Amended Deferral Agreement). The effect of the
Amended Deferral Agreement, which was approved by PIMC with respect to the
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Partnership's aircraft, is that TWA, in addition to agreeing to repay the
deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable
in warrants, the number of which was determined by formula) in consideration for
the aircraft owners' agreement to defer rent under the Deferral Agreement, and,
(ii) to the extent the market value of the warrants is less than the payment
amount, to supply maintenance services to the aircraft owners having a value
equal to such deficiency. The payment amount was determined by subtracting
certain maintenance reimbursements owed to TWA by certain aircraft owners,
including the Partnership, from the aggregate amount of deferred rents. The
amount of such maintenance reimbursement has not been finally determined.
The Partnership received warrants to purchase 159,919 shares of TWA Common Stock
from TWA in November 1995. The Partnership exercised the warrants on December
29, 1995 for the strike price of $0.01 per share. The fair market value of the
TWA stock at December 31, 1995 of $1,659,160 is reflected in the accompanying
December 31, 1995 balance sheet. The Partnership sold the TWA Common Stock by
February 1996, net of broker commissions, for $1,698,057 and recognized a gain
on trading securities of $38,898 in the first quarter of 1996.
3. Continental Lease Modification
As discussed in the Form 10-K, the leases with Continental were modified after
Continental filed for Chapter 11 bankruptcy protection in December 1990. The
modified agreement stipulates that the Partnership pay certain aircraft
maintenance, modification and refurbishment costs, not to exceed approximately
$3.2 million, a portion of which will be recovered with interest through
payments from Continental over the extended lease terms. The Partnership's share
of such costs may be capitalized and depreciated over the remaining lease terms,
subject to the capitalized cost policy as described in Note 1. The Partnership
has approved invoices aggregating $1,698,106 for interior modifications on the
Partnership's aircraft. The Partnership financed the aggregate amount of these
invoices to Continental from 1992 through 1995 to be repaid by Continental with
interest over the remaining lease terms of the aircraft. The Partnership's
balance sheets reflect the net reimbursable costs incurred of $225,578 and
$547,549 as of June 30, 1996 and December 31, 1995, respectively, as notes
receivable.
The agreement with Continental included an extended deferral of the dates when
Continental will remit its rental payments for the period from December 3, 1990
through September 30, 1991 and for a period of three months, beginning in
November 1992, aggregating $9,917,500 (the Deferred Amount). The Partnership
recorded a note receivable and an allowance for credit losses equal to the total
of the deferred rents and prior accrued interest, the net of which is reflected
in the accompanying balance sheets. The note receivable and corresponding
allowance for credit losses are reduced by the principal portion of payments
received. In addition, the Partnership recognizes rental revenue and interest
revenue in the period the deferred rental payments are received.
The allowances for credit losses on the principal and prior interest portions
due were $975,569 and $1,993,095 as of June 30, 1996 and December 31, 1995,
respectively. The unrecognized Deferred Amounts as of June 30, 1996 and December
31, 1995 were $962,200 and $1,941,522, respectively. In accordance with the
aforementioned agreement, Continental began making supplemental payments for the
Deferred Amount plus interest on July 1, 1992. During the six months ended June
30, 1996 and 1995, the Partnership received supplemental payments of $1,100,233
and $1,283,605, respectively, of which $979,323 and $972,886 was recognized as
rental revenue in the six months ended June 30, 1996 and 1995, respectively.
Continental continues to pay all other amounts due under the prior agreement. As
of June 30, 1996, Continental is current on all payments due the Partnership.
The Partnership has not recorded an allowance for credit losses on the
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additional Continental aircraft finance sale note receivable described in Note 4
or the Continental modification financing note receivable described above, as
they are currently deemed to be collectible. The Partnership's rights to receive
payments under the agreements fall into various categories of priority under the
Bankruptcy Code. In general, the Partnership's claims are administrative claims.
If Continental's reorganization is not successful, it is likely that a portion
of the Partnership's claims will not be paid in full.
In January 1995, the United States Bankruptcy Court approved an agreement
between the Partnership and Continental which specified payment to the
Partnership by Continental of approximately $1.3 million as final settlement for
the return of six Boeing 727-100 aircraft, as discussed in the Form 10-K. The
Partnership received an initial payment of $311,111 in February 1995 and
received the balance of the settlement in equal monthly installments of $72,222
through February 1996. The settlement payments were recorded as revenue when
received. The Partnership recorded payments of $144,444 and $672,222 as revenue
during the six months ended June 30, 1996 and 1995, respectively.
4. Sale of Aircraft to Continental
In May 1994, the Partnership sold three Boeing 727-200 aircraft to Continental
for an aggregate sale price of $3,019,719. The Partnership 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
sales price and has received all scheduled payments due under the note. The note
receivable balance at June 30, 1996 and December 31, 1995 was $340,997 and
$998,858, 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, PIMC, in
connection with services rendered or payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
June 30, 1996 June 30, 1996
------------- -------------
Aircraft Management Fees $191,488 $ 23,000
Out-of-Pocket Administrative Expense
Reimbursement 71,033 77,192
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 9,509 --
-------- --------
$272,030 $100,192
======== ========
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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 and six
Boeing 727-100 aircraft to aircraft inventory. The inventoried aircraft have
been disassembled for sale of their component parts. Of its original aircraft
portfolio, the Partnership sold eight DC-9-10 aircraft in 1992 and 1993 and
three Boeing 727-200 aircraft in May 1994.
Partnership Operations
The Partnership recorded net income of $1,411,009, or $1.84 per limited
partnership unit, for the three months ended June 30, 1996 compared to net
income of $2,360,671, or $4.17 per unit for the same period in 1995. The
Partnership recorded net income of $3,060,064, or $4.16 per limited partnership
unit, for the six months ended June 30, 1996 compared to net income of
$2,925,320, or $4.79 per unit for the same period in 1995.
Operating results for the six months ended June 30, 1995 were negatively
impacted by a decrease in rental revenue recognized during the first three
months of 1995 on the Partnership's leases with TWA. In December 1994, GE
Capital Aviation Services, Inc. (GECAS) negotiated a standstill agreement with
TWA, as set forth in a letter agreement dated December 16, 1994 (the Deferral
Agreement). That agreement provided for a deferral of the rent due the
Partnership in November 1994 and 75% of the rents due the Partnership from
December 1994 through March 1995. The Partnership did not recognize the deferred
rent as rental revenue until it was received, including $1,462,500 deferred in
the first three months of 1995. TWA repaid the deferred rent in full from May
1995 through October 1995.
In consideration for the rent deferral, TWA agreed to make a lump sum payment of
$1,000,000 to GECAS for the TWA lessors for whom GECAS provides management
services and who agreed to the Deferral Agreement. The Partnership received
$157,568 in January 1995 as its pro-rata share of such payment by TWA. This
amount was recognized as other revenue in the first quarter of 1995. In
addition, TWA agreed to issue warrants to the Partnership for TWA Common Stock.
The Partnership received warrants to purchase 159,919 shares of TWA Common Stock
from TWA in November 1995 and exercised the warrants on December 29, 1995. The
Partnership sold the TWA Common Stock by February 1996, net of broker
commissions, for $1,698,057 and recognized a gain on trading securities of
$38,898 during the first quarter of 1996.
In January 1995, the United States Bankruptcy Court approved an agreement
between the Partnership and Continental which specified payment to the
Partnership by Continental of approximately $1.3 million as final settlement for
the return of six Boeing 727-100 aircraft. The Partnership received an initial
payment of $311,111 in February 1995 and received the balance of the settlement
in equal monthly installments of $72,222 through February 1996. The Partnership
recorded payments of $144,444 and $672,222 as revenue during the six months
ended June 30, 1996 and 1995, respectively.
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Liquidity and Cash Distributions
Liquidity - The Partnership has received all payments due from Continental under
the modified lease agreement, the aircraft sale agreement, and the settlement
agreement for the return of the six Boeing 727-100 aircraft. In addition,
payments totaling $582,732 have been received during the first two quarters of
1996 from the sale of parts from the nine disassembled aircraft and have been
applied against aircraft inventory. The net book value of the Partnership's
aircraft inventory was $113,220 as of June 30, 1996.
As discussed in Note 3 to the financial statements, the Continental leases
provide for payment by the Partnership of the costs of certain maintenance work,
Airworthiness Directive (AD) compliance, aircraft modification and refurbishment
costs, which are not to exceed approximately $3.2 million, a portion of which
will be recovered with interest through payments from Continental over the lease
terms. In accordance with the Continental leases, the Partnership may be
required to finance up to an additional $946,346 for new image modifications in
the future. As discussed in Note 2 to the financial statements, the Partnership
agreed to share the cost of meeting certain ADs with TWA. In accordance with the
cost-sharing agreement, TWA may offset up to an additional $1.95 million against
rental payments, subject to annual limitations, over the remaining lease terms.
The Partnership's cash reserves are being retained to finance future
modification costs for Continental and to meet the obligations under the TWA
leases.
Cash Distributions - Cash distributions to limited partners during the three
months ended June 30, 1996 and 1995 were $4,750,000, or $9.50 per limited
partnership unit and $2,500,000, or $5.00 per unit, respectively. Cash
distributions to limited partners during the six months ended June 30, 1996 and
1995 were $9,500,000, or $19.00 per limited partnership unit and $5,000,000, or
$10.00 per unit, respectively. The timing and amount of future cash
distributions are not yet known and will depend on the Partnership's future cash
requirements including the potential costs of remarketing the Partnership's
aircraft; continued receipt of the renegotiated rental payments from Continental
and TWA; the receipt of the deferred rental payments, modification financing
payments and aircraft sale payments from Continental; and the receipt of
payments generated from the sale of aircraft inventory.
TWA Leases
GECAS, on behalf of the Partnership, is negotiating with TWA regarding the
acquisition of noise-suppression devices, commonly known as "hushkits", for 10
of the 13 Partnership aircraft currently on lease to TWA, as well as 18 other
aircraft owned by affiliates of the General Partner and leased to TWA. The
hushkits would recondition the aircraft so as to meet Stage 3 noise level
restrictions, which are discussed in the Partnership's 1995 Annual Report to the
Securities and Exchange Commission on Form 10-K. The anticipated cost of the
hushkit reconditioning is approximately $1.6 million per aircraft, approximately
$300,000 of which will be paid out of the Partnership's cash reserves and the
balance of which will be financed by the engine/hushkit manufacturer over a
6-year period at an interest rate of approximately 10% per year.
It is anticipated that the leases for these 10 aircraft would be extended for a
period of eight years from the date of installation or purchase of the hushkits,
and the rent payable by TWA under the leases would be increased by an amount
sufficient to cover the monthly debt service payments on the hushkits and fully
repay during the term of the leases the amount borrowed. The loan from the
engine/hushkit manufacturer would be non-recourse to the Partnership and secured
by a security interest in the leases.
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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) 1995 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the period ended March 31, 1996,
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 May 2, 1996, the United States Bankruptcy
Court for the Northern District of California issued a notice of final decree
declaring that the estate of TWA had been fully administered and that TWA's
proceedings under Chapter 11 of the United States Bankruptcy Code were closed.
Other Proceedings - Item 10 in Part III of the Partnership's 1995 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the period ended March 31,
1996 discuss certain actions which have been filed against Polaris Investment
Management Corporation and others in connection with the sale of interests in
the Partnership and the management of the Partnership. With the exception of
Novak, et al v. Polaris Holding Company, et al, (which has been dismissed, as
discussed in Item 10 of the Partnership's 1995 Form 10-K) where the Partnership
was named as a defendant for procedural purposes, the Partnership is not a party
to these actions. Except as discussed below, there have been no material
developments with respect to any of the actions described therein during the
period covered by this report.
Bishop v. Kidder Peabody & Co., Incorporated et al. - On June 18, 1996,
defendants filed a motion to transfer venue from Sacramento to San Francisco
County. The Court subsequently denied the motion.
Weisl et al. v. Polaris Holding Company et al. - On April 25, 1996, the
Appellate Division for the First Department affirmed the trial court's order
which had dismissed most of plaintiffs' claims.
In re Prudential Securities Inc. Limited Partnerships Litigation - On June 5,
1996, the Court certified a class with respect to claims against Polaris Holding
Company, one of its former officers, Polaris Aircraft Leasing Corporation,
Polaris Investment Management Corporation, and Polaris Securities Corporation.
The class is comprised of all investors who purchased securities in any of
Polaris Aircraft Income Funds I through VI during the period from January 1985
until January 29, 1991, regardless of which brokerage firm the investor
purchased from. Excepted from the class are those investors who settled in the
SEC/Prudential settlement or otherwise opted for arbitration pursuant to the
settlement and any investor who has previously released the Polaris defendants
through any other settlement. On June 10, 1996, the Court issued an opinion
denying summary judgment to Polaris on plaintiffs' Section 1964(c) and (d) RICO
claims and state causes of action, and granting summary judgment to Polaris on
plaintiffs' 1964(a) RICO claims and the New Jersey State RICO claims. On August
5, 1996, the Court signed an order providing for notice to be given to the class
members. The case has been set for trial on November 11, 1996.
13
<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 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.
14
<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 8, 1996 By: /S/Marc A. Meiches
- -------------------------------- ------------------
Marc A. Meiches
Chief Financial Officer
(principal financial officer and
principal accounting officer of
Polaris Investment Management
Corporation, General Partner of
the Registrant)
15
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