UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 15 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended September 30, 1996
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - September 30, 1996 and
December 31, 1995.....................................3
b) Statements of Income - Three and Nine Months
Ended September 30, 1996 and 1995.....................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1995
and Nine Months Ended September 30, 1996..............5
d) Statements of Cash Flows - Nine Months
Ended September 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 5. Other Information.................................14
Item 6. Exhibits and Reports on Form 8-K..................14
Signature ..................................................15
2
<PAGE>
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 25,074,926 $ 25,014,205
MARKETABLE SECURITIES, trading -- 1,659,160
RENT AND OTHER RECEIVABLES 460,782 8,171
NOTES RECEIVABLE, net of allowance for credit
losses of $445,645 in 1996 and $1,993,095 in 1995 57,239 1,546,407
AIRCRAFT, net of accumulated depreciation
of $82,719,896 in 1996 and $75,198,827 in 1995 45,539,593 53,060,662
AIRCRAFT INVENTORY -- 686,670
OTHER ASSETS 26,089 26,089
------------ ------------
$ 71,158,629 $ 82,001,364
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 104,411 $ 130,584
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 51,381 84,084
DEFERRED INCOME 521,781 521,781
------------ ------------
Total Liabilities 677,573 736,449
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,500,692) (1,392,716)
Limited Partners, 500,000 units
issued and outstanding 71,981,748 82,657,631
------------ ------------
Total Partners' Capital 70,481,056 81,264,915
------------ ------------
$ 71,158,629 $ 82,001,364
============ ============
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rent from operating leases $ 3,850,601 $ 4,817,966 $11,489,924 $11,533,156
Interest 350,821 479,715 1,152,757 1,493,220
Lessee settlement -- 216,666 144,444 888,888
Other 5,222 -- 44,120 157,609
----------- ----------- ----------- -----------
Total Revenues 4,206,644 5,514,347 12,831,245 14,072,873
----------- ----------- ----------- -----------
EXPENSES:
Depreciation 2,507,023 2,565,245 7,521,069 7,695,733
Management fees to general partner 192,530 240,898 574,496 576,658
Operating 2,777 10,272 12,438 32,034
Administration and other 70,459 81,089 229,323 226,285
----------- ----------- ----------- -----------
Total Expenses 2,772,789 2,897,504 8,337,326 8,530,710
----------- ----------- ----------- -----------
NET INCOME $ 1,433,855 $ 2,616,843 $ 4,493,919 $ 5,542,163
=========== =========== =========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 439,296 $ 276,144 $ 1,419,802 $ 805,347
=========== =========== =========== ===========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 994,559 $ 2,340,699 $ 3,074,117 $ 4,736,816
=========== =========== =========== ===========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 1.99 $ 4.68 $ 6.15 $ 9.47
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1995 and
Nine Months Ended September 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 1,419,802 3,074,117 4,493,919
Cash distributions to partners (1,527,778) (13,750,000) (15,277,778)
------------ ------------ ------------
Balance, September 30, 1996 $ (1,500,692) $ 71,981,748 $ 70,481,056
============ ============ ============
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,493,919 $ 5,542,163
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 7,521,069 7,695,733
Changes in operating assets and liabilities:
Decrease in marketable securities, trading 1,659,160 --
Decrease (increase) in rent and other receivables (452,611) 15,130
Increase in other assets -- (43,169)
Decrease in payable to affiliates (26,173) (10,070)
Increase (decrease) in accounts payable
and accrued liabilities (32,703) 22,997
------------ ------------
Net cash provided by operating activities 13,162,661 13,222,784
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 695,952 1,179,872
Inventory disassembly costs (9,282) (156,718)
Increase in notes receivable -- (499,868)
Principal payments on notes receivable 1,489,168 1,231,526
------------ ------------
Net cash provided by investing activities 2,175,838 1,754,812
------------ ------------
FINANCING ACTIVITIES:
Cash distributions to partners (15,277,778) (8,333,333)
------------ ------------
Net cash used in financing activities (15,277,778) (8,333,333)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS 60,721 6,644,263
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 25,014,205 15,810,799
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 25,074,926 $ 22,455,062
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
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, 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. 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 September 30, 1996, the aggregate fair value of
the Continental deferred rent notes receivable was estimated to be approximately
$0.41 million.
7
<PAGE>
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 three 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 nine months ended September 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
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,
8
<PAGE>
(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 $57,239 and
$547,549 as of September 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 $445,645 and $1,993,095 as of September 30, 1996 and December 31, 1995,
respectively. The unrecognized Deferred Amounts as of September 30, 1996 and
December 31, 1995 were $441,599 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 nine months ended
September 30, 1996 and 1995, the Partnership received supplemental payments of
$1,650,349 each period, of which $1,499,923 and $1,269,029 was recognized as
rental revenue in the nine months ended September 30, 1996 and 1995,
respectively.
Continental continues to pay all other amounts due under the prior agreement. As
of September 30, 1996, Continental is current on all payments due the
Partnership. The Partnership has not recorded an allowance for credit losses on
the Continental modification financing note receivable described above, as it is
currently deemed to be collectible. The Partnership's rights to receive payments
9
<PAGE>
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 $888,888 as revenue
during the nine months ended September 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 recorded a note
receivable for the sales price and agreed to accept payment in 29 monthly
installments of $115,500, with interest at a rate of 9.5% per annum. The note
receivable balance at December 31, 1995 was $998,858. The Partnership has
received all scheduled payments due under the note, which was paid in full by
Continental in September 1996.
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 the
Three Months Ended Payable at
September 30, 1996 September 30, 1996
------------------ ------------------
Aircraft Management Fees $192,530 $ 23,000
Out-of-Pocket Administrative Expense
Reimbursement 86,279 81,411
-------- --------
$278,809 $104,411
======== ========
6. Subsequent Event
Continental Lease Extension - The leases of five Boeing 727-200 Advanced
aircraft with Continental were originally scheduled to expire in October 1996.
Continental extended the leases for the five aircraft for a two-year term
through October 1998 at the current market lease rate, which is approximately
76% of the prior lease rate.
10
<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 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.
Remarketing Update
Continental Lease Extension - The leases of five Boeing 727-200 Advanced
aircraft with Continental were originally scheduled to expire in October 1996.
Continental extended the leases for the five aircraft for a two-year term
through October 1998 at the current market lease rate, which is approximately
76% of the prior lease rate.
Partnership Operations
The Partnership recorded net income of $1,433,855, or $1.99 per limited
partnership unit, for the three months ended September 30, 1996 compared to net
income of $2,616,843, or $4.68 per unit for the same period in 1995. The
Partnership recorded net income of $4,493,919, or $6.15 per limited partnership
unit, for the nine months ended September 30, 1996 compared to net income of
$5,542,163, or $9.47 per unit for the same period in 1995. The decline in
operating results during 1996 as compared to 1995 is primarily the result of
higher total revenues recognized by the Partnership in 1995.
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, which resulted in increased
rental revenues recognized by the Partnership during the third quarter of 1995.
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 $888,888 as revenue during the nine months
ended September 30, 1996 and 1995, respectively.
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,
11
<PAGE>
payments totaling $701,174 have been received during the first three quarters of
1996 from the sale of parts from the nine disassembled aircraft. The Partnership
applied $695,952 of these payments against aircraft inventory, reducing the net
book value of the Partnership's aircraft inventory to zero as of September 30,
1996. Payments of $5,222 in excess of the aircraft net book value were recorded
as gain on sale of aircraft inventory during the three months ended September
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
completed prior to November 1, 1996, if any. 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 September 30, 1996 and 1995 were $4,250,000, or $8.50 per limited
partnership unit and $2,500,000, or $5.00 per unit, respectively. Cash
distributions to limited partners during the nine months ended September 30,
1996 and 1995 were $13,750,000, or $27.50 per limited partnership unit and
$7,500,000, or $15.00 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; and the receipt of the deferred rental payments and modification
financing payments from Continental.
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. Such financing
agreements may also require the Partnership to maintain a minimum level of
working capital reserves and, in the event of any shortfall of such minimum
levels, cash distributions may be restricted.
It is anticipated that the leases for the Partnership's 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.
12
<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) 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 periods ended March 31, 1996
and June 30, 1996, there are a number of pending legal actions or proceedings
involving the Partnership. There have been no material developments with respect
to any such actions or proceedings during the period covered by this report.
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 periods ended March 31,
1996 and June 30, 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 during the period covered by this report with
respect to any of the actions described in 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 periods ended March 31, 1996 and June 30, 1996.
Wilson et al. v. Polaris Holding Company et al. - On October 1, 1996, a
complaint was filed in the Superior Court of the State of California for the
County of Sacramento by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I through VI.
The complaint names Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Capital Services, Inc., General
Electric Capital Corporation, GE Capital Aviation Services, Inc. and DOES 1-100
as defendants. The Partnership has not been named as a defendant. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, negligence, breach of contract, and breach of fiduciary duty.
The complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest and rescission with respect to the Polaris Aircraft
Income Funds sold to plaintiffs. Defendants time to answer or otherwise respond
to the complaint is November 18, 1996.
B&L Industries, Inc. et al. v. Polaris Holding Company et al. - On August 16,
1996, defendants filed a motion to dismiss plaintiffs' amended complaint. The
motion is returnable on January 16, 1997.
In re Prudential Securities Inc. Limited Partnerships Litigation - The trial,
which was scheduled for November 11, 1996, has not proceeded and no new trial
date has been set.
13
<PAGE>
Item 5. Other Information
James W. Linnan resigned as Director and President of Polaris Investment
Management Corporation effective December 31, 1996. Mr. Linnan's replacement has
not presently been named. Mr. Linnan will continue to serve in those capacities
through the effective date of his resignation.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
27. Financial Data Schedule
b) Reports on Form 8-K
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
November 12, 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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 25074926
<SECURITIES> 0
<RECEIVABLES> 963666
<ALLOWANCES> 445645
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 128259489
<DEPRECIATION> 82719896
<TOTAL-ASSETS> 71158629
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 70481056
<TOTAL-LIABILITY-AND-EQUITY> 71158629
<SALES> 0
<TOTAL-REVENUES> 12831245
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8337326
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4493919
<INCOME-TAX> 0
<INCOME-CONTINUING> 4493919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4493919
<EPS-PRIMARY> 6.15
<EPS-DILUTED> 0
</TABLE>
