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 March 31, 1997
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
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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 16 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 1997
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1997 and
December 31, 1996............................................3
b) Statements of Income - Three Months Ended
March 31, 1997 and 1996......................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1996
and Three Months Ended March 31, 1997........................5
d) Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1996................................6
e) Notes to Financial Statements................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........10
Part II. Other Information
Item 1. Legal Proceedings.......................................14
Item 5. Other Information.......................................14
Item 6. Exhibits and Reports on Form 8-K........................15
Signature ........................................................16
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1997 1996
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 19,534,538 $ 20,229,105
RENT AND OTHER RECEIVABLES 970,239 351,508
AIRCRAFT, net of accumulated depreciation
of $100,933,986 in 1997 and $97,860,513 in 1996 43,256,325 46,329,798
OTHER ASSETS 33,848 104,275
------------ -------------
$ 63,794,950 $ 67,014,686
============ =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 196,375 $ 86,005
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 41,726 72,159
DEFERRED INCOME 71,178 460,080
NOTES PAYABLE 12,883,339 12,907,278
------------ -------------
Total Liabilities 13,192,618 13,525,522
------------ -------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,699,561) (1,670,662)
Limited Partners, 500,000 units
issued and outstanding 52,301,893 55,159,826
------------ -------------
Total Partners' Capital 50,602,332 53,489,164
------------ -------------
$ 63,794,950 $ 67,014,686
============ =============
The accompanying notes are an integral part of these statements.
3
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
REVENUES:
Rent from operating leases $3,906,924 $3,809,570
Interest 248,686 420,308
Lessee settlement -- 144,444
Gain on sale of aircraft inventory 84,937 --
Other 21,099 38,898
---------- ----------
Total Revenues 4,261,646 4,413,220
---------- ----------
EXPENSES:
Depreciation 3,073,473 2,507,023
Management fees to general partner 195,346 190,478
Interest 322,556 --
Operating 4,874 3,804
Administration and other 80,007 62,860
---------- ----------
Total Expenses 3,676,256 2,764,165
---------- ----------
NET INCOME $ 585,390 $1,649,055
========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 318,323 $ 491,443
========== ==========
NET INCOME ALLOCATED TO
LIMITED PARTNERS $ 267,067 $1,157,612
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.53 $ 2.32
========== ==========
The accompanying notes are an integral part of these statements.
4
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1996 and
Three Months Ended March 31, 1997
---------------------------------
General Limited
Partner Partners Total
Balance, December 31, 1995 $(1,392,716) $ 82,657,631 $ 81,264,915
Net income (loss) 1,819,276 (8,622,805) (6,803,529)
Cash distributions to partners (2,097,222) (18,875,000) (20,972,222)
----------- ------------ ------------
Balance, December 31, 1996 (1,670,662) 55,159,826 53,489,164
Net income 318,323 267,067 585,390
Cash distributions to partners (347,222) (3,125,000) (3,472,222)
----------- ------------ ------------
Balance, March 31, 1997 $(1,699,561) $ 52,301,893 $ 50,602,332
=========== ============ ============
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>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 585,390 $ 1,649,055
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of aircraft inventory (84,937) --
Depreciation 3,073,473 2,507,023
Changes in operating assets and liabilities:
Decrease in marketable securities, trading -- 1,659,160
Increase in rent and other receivables (618,731) (457,341)
Decrease in other assets 70,427 --
Increase (decrease) in payable to affiliates 110,370 (44,929)
Decrease in accounts payable
and accrued liabilities (30,433) (30,630)
Decrease in deferred income (388,902) --
------------ ------------
Net cash provided by operating activities 2,716,657 5,282,338
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 84,937 390,423
Inventory disassembly costs -- (800)
Principal payments on notes receivable -- 483,624
------------ ------------
Net cash provided by investing activities 84,937 873,247
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable (23,939) --
Cash distributions to partners (3,472,222) (5,277,778)
------------ ------------
Net cash used in financing activities (3,496,161) (5,277,778)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (694,567) 877,807
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,229,105 25,014,205
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 19,534,538 $ 25,892,012
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Principles and Policies
In the opinion of management, the financial statements presented herein include
all adjustments, consisting only of normal recurring items, necessary to
summarize fairly Polaris Aircraft Income Fund III's (the Partnership's)
financial position and results of operations. The financial statements have been
prepared in accordance with the instructions of the Quarterly Report to the
Securities and Exchange Commission (SEC) Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto for the years ended December 31, 1996, 1995, and
1994 included in the Partnership's 1996 Annual Report to the SEC on Form 10-K
(Form 10-K).
2. Proposed Sale of Aircraft
During the first quarter of 1997, the Partnership received, and the General
Partner (upon recommendation of its servicer) has determined that it would be in
the best interests of the Partnership to accept an offer to purchase 8 of the
Partnership's 18 aircraft (the "Aircraft") and certain of its notes receivables
by a special purpose company (the "Purchaser"). The Purchaser is managed by
Triton Aviation Services Limited, a privately held aircraft leasing company (the
"Purchaser's Manager") which was formed in 1996. Each Aircraft is to be sold
subject to the existing leases, and as part of the transaction the Purchaser
assumes all obligations relating to maintenance reserves and security deposits,
if any, relating to such leases. At the same time cash balances related to
maintenance reserves and security deposits, if any, will be transferred to the
Purchaser.
The total proposed purchase price (the "Purchase Price") to be paid by the
Purchaser in the contemplated transaction would be $10,947,000 which would be
allocable to the Aircraft and to certain notes receivable by the Partnership.
The Purchaser proposes to pay $1,233,289 of the Purchase Price in cash at the
closing and the balance of $9,713,711 would be paid by delivery of a promissory
note (the "Promissory Note") by the Purchaser. The Promissory Note would be
repaid in equal quarterly installments over a period of seven years bearing
interest at a rate of 12% per annum with a balloon principal payment at the end
of year seven. The Purchaser would have the right to voluntarily prepay the
Promissory Note in whole or in part at any time without penalty. In addition,
the Promissory Note would be subject to mandatory partial prepayment in certain
specified instances.
Under the terms of the contemplated transaction, the Aircraft, including any
income or proceeds therefrom and any maintenance reserves or deposits with
respect thereto, constitute the sole source of payments under the Promissory
Note. No security interest over the Aircraft or the leases would be granted in
favor of the Partnership, but the equity interests in the Purchaser would be
pledged to the Partnership. The Purchaser would have the right to sell the
Aircraft, or any of them, without the consent of the Partnership, except that
the Partnership's consent would be required in the event that the proposed sale
price is less than the portion of the outstanding balance of the Promissory Note
which is allocable to the Aircraft in question and the Purchaser does not have
sufficient funds to make up the difference. The Purchaser would undertake to
keep the Aircraft and leases free of any lien, security interest or other
encumbrance other than (i) inchoate materialmen's liens and the like, and (ii)
in the event that the Purchaser elects to install hushkits on any Aircraft,
secured debt to the extent of the full cost of such hushkit. The Purchaser will
be prohibited from incurring indebtedness other than (i) the Promissory Note;
7
<PAGE>
(ii) deferred taxes not yet due and payable; (iii) indebtedness incurred to
hushkit Aircraft owned by the Purchaser and, (iv) demand loans from another SPC
(defined below) at a market rate of interest.
It is also contemplated that each of Polaris Aircraft Income Fund II, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI would sell certain aircraft assets to separate special purpose
companies under common management with the Purchaser (collectively, together
with the Purchaser, the "SPC's") on terms similar to those set forth above.
Under the terms of the contemplated transaction, Purchaser's Manager would
undertake to make available a working capital line to the Purchaser of up to
approximately $956,000 to fund operating obligations of the Purchaser. This
working capital line is to be guaranteed by Triton Investments Limited, the
parent of the Purchaser's Manager and such guarantor will provide the
Partnership with a copy of its most recent balance sheet showing a consolidated
net worth (net of minority interests) of at least $150-million. Furthermore,
pursuant to the respective operating agreements of each SPC, including the
Purchaser, the Purchaser's Manager would provide to each SPC all normal and
customary management services including remarketing, sales and repossession, if
necessary. Provided that the Purchaser is not in default in making payments due
under the Promissory Note to the Partnership, the Purchaser would be permitted
to dividend to its equity owners an amount not to exceed approximately $26,000
per month. The Purchaser may distribute additional dividends to the equity
owners to the extent of the working capital advances made by the Purchaser's
Manager provided that the working capital line available to the Purchaser will
be deemed increased to the extent of such dividends.
The Purchaser would be deemed to have purchased the Aircraft effective as of
April 1, 1997 notwithstanding the actual closing date. The Purchaser would have
the right to receive all income and proceeds, including rents and notes
receivables, from the Aircraft accruing from and after April 1, 1997, and the
Promissory Note would commence bearing interest as of April 1, 1997.
The Partnership has agreed to consult with Purchaser's Manager before taking any
significant action pertaining to the Aircraft after the effective date of the
purchase offer. The Purchaser also has the right to make all significant
decisions regarding the Aircraft from and after the date of completion of
definitive documentation legally binding the Purchaser and the Partnership to
the transaction, even if a delay occurs between the completion of such
documentation and the closing of the title transfer to the Purchaser.
In the event the Partnership receives and elects to accept an offer for all (but
not less than all) of the assets to be sold by it to the Purchaser on terms
which it deems more favorable, the Purchaser has the right to (i) match the
offer, or (ii) decline to match the offer and be entitled to compensation in an
amount equal to 1 1/2% of the Purchaser's proposed Purchase Price.
The Partnership adopted, effective January 1, 1996, SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." That statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The purchase offer constitutes a change in
circumstances which, pursuant to SFAS No. 121, requires the Partnership to
review the Aircraft for impairment. As previously discussed in Note 3 of the
Partnership's financial statements for the year ended December 31, 1996 included
in Form 10-K, the Partnership has determined that an impairment loss must be
recognized. In determining the amount of the impairment loss, the Partnership
estimated the "fair value" of the Aircraft based on the proposed Purchase Price
reflected in the contemplated transaction, less the estimated costs and expenses
of the proposed sale. The Partnership is deemed to have an impairment loss to
the extent that the carrying value exceeded the fair value. Management believes
the assumptions related to the fair value of impaired assets represent the best
estimates based on reasonable and supportable assumptions and projections.
It should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
execution of definitive documentation and various other contingencies.
8
<PAGE>
3. 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
March 31, 1997 March 31, 1997
-------------- --------------
Aircraft Management Fees $125,479 $ 76,311
Out-of-Pocket Administrative Expense
Reimbursement 111,919 120,064
Out-of-Pocket Operating and
Remarketing Expense Reimbursement -- --
-------- --------
$237,398 $196,375
======== ========
9
<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
Proposed Sale of Aircraft - During the first quarter of 1997, the Partnership
received, and the General Partner (upon recommendation of its servicer) has
determined that it would be in the best interests of the Partnership to accept
an offer to purchase 8 of the Partnership's 18 aircraft (the "Aircraft") and
certain of its notes receivables by a special purpose company (the "Purchaser").
The Purchaser is managed by Triton Aviation Services Limited, a privately held
aircraft leasing company (the "Purchaser's Manager") which was formed in 1996.
Each Aircraft is to be sold subject to the existing leases, and as part of the
transaction the Purchaser assumes all obligations relating to maintenance
reserves and security deposits, if any, relating to such leases. At the same
time cash balances related to maintenance reserves and security deposits, if
any, will be transferred to the Purchaser.
The total proposed purchase price (the "Purchase Price") to be paid by the
Purchaser in the contemplated transaction would be $10,947,000 which would be
allocable to the Aircraft and to certain notes receivable by the Partnership.
The Purchaser proposes to pay $1,233,289 of the Purchase Price in cash at the
closing and the balance of $9,713,711 would be paid by delivery of a promissory
note (the "Promissory Note") by the Purchaser. The Promissory Note would be
repaid in equal quarterly installments over a period of seven years bearing
interest at a rate of 12% per annum with a balloon principal payment at the end
of year seven. The Purchaser would have the right to voluntarily prepay the
Promissory Note in whole or in part at any time without penalty. In addition,
the Promissory Note would be subject to mandatory partial prepayment in certain
specified instances.
Under the terms of the contemplated transaction, the Aircraft, including any
income or proceeds therefrom and any maintenance reserves or deposits with
respect thereto, constitute the sole source of payments under the Promissory
Note. No security interest over the Aircraft or the leases would be granted in
favor of the Partnership, but the equity interests in the Purchaser would be
pledged to the Partnership. The Purchaser would have the right to sell the
Aircraft, or any of them, without the consent of the Partnership, except that
the Partnership's consent would be required in the event that the proposed sale
price is less than the portion of the outstanding balance of the Promissory Note
which is allocable to the Aircraft in question and the Purchaser does not have
sufficient funds to make up the difference. The Purchaser would undertake to
keep the Aircraft and leases free of any lien, security interest or other
encumbrance other than (i) inchoate materialmen's liens and the like, and (ii)
in the event that the Purchaser elects to install hushkits on any Aircraft,
secured debt to the extent of the full cost of such hushkit. The Purchaser will
be prohibited from incurring indebtedness other than (i) the Promissory Note;
(ii) deferred taxes not yet due and payable; (iii) indebtedness incurred to
hushkit Aircraft owned by the Purchaser and, (iv) demand loans from another SPC
(defined below) at a market rate of interest.
It is also contemplated that each of Polaris Aircraft Income Fund II, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI would sell certain aircraft assets to separate special purpose
companies under common management with the Purchaser (collectively, together
with the Purchaser, the "SPC's") on terms similar to those set forth above.
Under the terms of
10
<PAGE>
the contemplated transaction, Purchaser's Manager would undertake to make
available a working capital line to the Purchaser of up to approximately
$956,000 to fund operating obligations of the Purchaser. This working capital
line is to be guaranteed by Triton Investments Limited, the parent of the
Purchaser's Manager and such guarantor will provide the Partnership with a copy
of its most recent balance sheet showing a consolidated net worth (net of
minority interests) of at least $150-million. Furthermore, pursuant to the
respective operating agreements of each SPC, including the Purchaser, the
Purchaser's Manager would provide to each SPC all normal and customary
management services including remarketing, sales and repossession, if necessary.
Provided that the Purchaser is not in default in making payments due under the
Promissory Note to the Partnership, the Purchaser would be permitted to dividend
to its equity owners an amount not to exceed approximately $26,000 per month.
The Purchaser may distribute additional dividends to the equity owners to the
extent of the working capital advances made by the Purchaser's Manager provided
that the working capital line available to the Purchaser will be deemed
increased to the extent of such dividends.
The Purchaser would be deemed to have purchased the Aircraft effective as of
April 1, 1997 notwithstanding the actual closing date. The Purchaser would have
the right to receive all income and proceeds, including rents and notes
receivables, from the Aircraft accruing from and after April 1, 1997, and the
Promissory Note would commence bearing interest as of April 1, 1997.
The Partnership has agreed to consult with Purchaser's Manager before taking any
significant action pertaining to the Aircraft after the effective date of the
purchase offer. The Purchaser also has the right to make all significant
decisions regarding the Aircraft from and after the date of completion of
definitive documentation legally binding the Purchaser and the Partnership to
the transaction, even if a delay occurs between the completion of such
documentation and the closing of the title transfer to the Purchaser.
In the event the Partnership receives and elects to accept an offer for all (but
not less than all) of the assets to be sold by it to the Purchaser on terms
which it deems more favorable, the Purchaser has the right to (i) match the
offer, or (ii) decline to match the offer and be entitled to compensation in an
amount equal to 1 1/2% of the Purchaser's proposed Purchase Price.
It should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
execution of definitive documentation and various other contingencies.
Partnership Operations
The Partnership recorded net income of $585,390, or $0.53 per limited
partnership unit, for the three months ended March 31, 1997 compared to net
income of $1,649,055, or $2.32 per unit for the same period in 1996. The
decreased net income during the three months ended March 31, 1997 as compared to
the same period in 1996 was primarily the result of increased depreciation
expense and interest expense.
The increased depreciation expense and interest expense during the three months
ended March 31, 1997 compared to the same period in 1996, is attributable to the
acquisition of noise-suppression devices, commonly known as "hushkits", for 10
of the 13 Partnership aircraft currently on lease to TWA in November 1996. The
10 aircraft that received hushkits were designated by TWA. The hushkits
recondition the aircraft so as to meet Stage 3 noise level restrictions.
Installation of the 10 hushkits on the Partnership's aircraft was completed in
November 1996 and the leases for these 10 aircraft were extended for a period of
eight years until November 2004.
The aggregate cost of the hushkit reconditioning was $15,930,822, or
approximately $1.6 million per aircraft, which was capitalized by the
Partnership. The Partnership paid $3.0 million of the aggregate hushkit cost and
the balance of $12,930,822 was financed by UT Finance Corporation, a wholly
owned
11
<PAGE>
subsidiary of United Technologies Corporation, of which a division is Pratt and
Whitney Group, the hushkit manufacturer (UT Finance) over a 6-year period at an
interest rate of 10% per annum. The rent payable by TWA under the leases was
increased by an amount sufficient to cover the monthly debt service payments on
the hushkits and fully repay, during the term of the TWA leases, the amount
borrowed. The loan from UT Finance is non-recourse to the Partnership and
secured by a security interest in the lease receivables.
The increase in TWA rents described above was partially offset by a reduction in
Continental rents during the three months ended March 31, 1997 as compared to
the same period in 1996. The rental revenues from Continental decreased during
the three months ended March 31, 1997 as compared to the same period in 1996,
due to Continental having completed its payment of the deferred rental amounts
in the first quarter of 1997. In addition, the rental payments from Continental
leases during the three months ended March 31, 1997 were at a new lease rate
that was lower than the prior lease rate for the three months ended March 31,
1996. The Continental leases that expired in October 1996 were extended for two
years through October 1998 at a current market rate which is approximately 76%
of the prior lease rate.
Interest income decreased during the three months ended March 31, 1997 as
compared to the same period in 1996, primarily due to decreases in the cash
reserves balances retained by the Partnership at March 31, 1997 as compared to
March 31, 1996. In addition, interest on the deferred rents being paid by
Continental decreased during the three months ended March 31, 1997 as compared
to the same period in 1996, due to Continental having completed its payment of
the deferred rental amounts in the first quarter of 1997.
The Partnership recorded payments totaling $144,444 as lessee settlement revenue
during the three months ended March 31, 1996 related to an agreement between the
Partnership and Continental, approved by the United States Bankruptcy Court in
January 1995, 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 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 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.
Administration and other expenses increased during the three months ended March
31, 1997 as compared to the same period in 1996, due to increases in printing
and postage costs combined with an increase in outside services.
The decrease in the deferred income balance at March 31, 1997 is attributable to
differences between the payments due and the rental income earned on the TWA
leases for 10 of the 13 Partnership aircraft currently on lease to TWA that were
extended in 1996. For income recognition purposes, the Partnership recognizes
rental income over the life of the lease in equal monthly amounts. As a result,
the difference between rental income earned and the rental payments due is
recognized as deferred income. The rental income earned on the TWA leases during
the three months ended March 31, 1997 exceeded the rental payments due from TWA,
causing a decrease in the deferred income balance.
The Partnership reported an increase in rent and other receivables at March 31,
1997, as compared to December 31, 1996. This increase in rent and other
receivables was the result of certain rental payments due from TWA at the end of
March 1997 that were received by the Partnership in April 1997.
12
<PAGE>
Liquidity and Cash Distributions
Liquidity - The Partnership has received from Continental all payments due under
the modified lease agreements. Payments due from Continental for a prior year
aircraft sale agreement and the settlement agreement for the return of the six
Boeing 727-100 aircraft were completed in 1996. Payments totaling $84,937 have
been received during the first quarter of 1997 from the sale of parts from the
nine disassembled aircraft, as compared to payments of $390,423 during the same
period in 1996. The 1996 payments of $390,423 were applied against aircraft
inventory.
In 1995, the Partnership received from TWA warrants to purchase 159,919 shares
of TWA Common Stock. The Partnership exercised the warrants in 1995 at which
time a gain was recognized by the Partnership and sold the TWA Common Stock in
the first quarter of 1996, net of broker commissions, for $1,698,057.
As previously discussed in the Form 10-K, 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 amount of approximately $946,000 for new
image modifications in the future. As previously discussed in the Form 10-K, 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
$1.48 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 March 31, 1997 and 1996 were $3,125,000, or $6.25 per limited
partnership unit and $4,750,000, or $9.50 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 rental payments
from Continental and TWA, modification financing payments from Continental; the
receipt of payments generated from the sale of aircraft inventory; and
consummation of the Sale Transaction and timely performance by the Purchaser of
its obligations to the Partnership under the Promissory Note.
13
<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) 1996 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K), 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 except:
Equity Resources, Inc, et al v. Polaris Investment Management Corporation, et al
- - On or about April 18, 1997, an action entitled Equity Resources Group, Inc.,
et al v. Polaris Investment Management Corporation, et al was filed in the
Superior Court for the County of Middlesex, Commonwealth of Massachusetts. The
complaint names each of Polaris Investment Management Corporation, Polaris
Aircraft Income Fund II, the Partnership, Polaris Aircraft Income Fund IV,
Polaris Aircraft Income Fund V and Polaris Aircraft Income Fund VI, as
defendants. The complaint alleges that Polaris Investment Management
Corporation, as general partner of each of the partnerships, committed a breach
of its fiduciary duties, violated applicable partnership law statutory
requirement, and breached provisions of the partnership agreements of each of
the foregoing partnerships by failing to solicit a vote of the limited partners
in each of such partnership in connection with the Sale Transaction described in
Note 2 and in failing to disclose material facts relating to such transaction.
Plaintiffs filed a motion seeking to enjoin the Sale Transaction, which motion
was denied by the court on May 6, 1997.
Other Proceedings - Item 10 in Part III of the Partnership's 1996 Form 10-K
discusses certain actions which have been filed against Polaris Investment
Management Corporation and others in connection with the sale of interests in
the Partnership and the management of the Partnership. With the exception of
Novak, et al v. Polaris Holding Company, et al, (which has been dismissed, as
discussed in the 1996 Form 10-K) where the Partnership was named as a defendant
for procedural purposes, the Partnership is not a party to these actions. There
have been no material developments with respect to any of the actions described
therein during the period covered by this report except:
In Re Prudential Securities Inc. Limited Partnership Litigation - On April 22,
1997, the Polaris defendants entered into a settlement agreement with plaintiffs
pursuant to which, among other things, the Polaris defendants agreed to pay
$22.5 million to a class of unitholders previously certified by the Court. On
April 29, 1997, Judge Pollack signed an order preliminarily approving the
settlement. Under the terms of the order, (i) lead class counsel is required to
mail a notice to all class members on or before May 13, 1997 describing the
terms of the settlement; (ii) requests for exclusion from the class must be
mailed to the Claims Administrator no later than June 27, 1997; and (iii) a
hearing on the fairness of the settlement and other matters is scheduled to be
held before Judge Pollack on August 1, 1997.
Item 5. Other Information
The General Partner determined that it was necessary, in order to prevent the
Partnership from being treated for tax purposes as an association taxable as a
corporation, rather than being taxable as a partnership, to amend the
Partnership Agreement by adding the following as new Paragraph 12.4:
Notwithstanding anything to the contrary contained in this Partnership
Agreement, a Unit Holder wishing to transfer Units may do so only after
giving written notice of such intent to the General Partner, and only upon
obtaining the prior written consent of the General Partner to such
transfer, which consent the General Partner may withhold in its sole
discretion if it deems such action to be necessary to prevent the
14
<PAGE>
Partnership from being treated as a "publicly traded partnership" as
defined in the Code. Any purported or attempted transfer of Units that is
not made in full compliance with this Paragraph 12.4 shall be void and
ineffectual and shall not bind or be recognized by the Partnership, the
General Partner of the Depositary for any purpose.
Due to the number of transfers which occurred through the end of April 1997, the
General Partner concluded that this action was necessary to prevent the
Partnership from being treated as a "publicly-traded partnership" as defined in
the Internal Revenue Code. A "publicly-traded partnership" is treated as a
corporation for Federal income tax purposes, with the result that such an entity
pays Federal corporate income tax on its taxable income and its partners must
include in their taxable income as dividends all distributions received to the
extent that such distributions are paid out of current and accumulated earnings.
Thus, the General Partner adopted the foregoing amendment in an attempt to
protect the Partnership against the risk of such an adverse tax consequence.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
3. Amendment to Amended and Restated Limited Partnership Agreement
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.
15
<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
May 9, 1997 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)
16
Exhibit 3
AMENDMENT
TO
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
POLARIS AIRCRAFT INCOME FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
This AMENDMENT (this "Amendment") is entered into as of this 9th day of
May 1997 by and among Polaris Investment Management Corporation, a California
corporation, as General Partner (the "General Partner"), and Polaris Depositary
Company III, a California corporation, as Limited Partner and Depositary (the
"Limited Partner and Depositary").
RECITALS:
A. The limited partnership named "Polaris Aircraft Income Fund III, a
California Limited Partnership" was originally formed under the Uniform Limited
Partnership Act of the State of California on June 27, 1984, and was continued
on the terms and conditions specified in that certain Amended and Restated
Limited Partnership Agreement entered into in 1987 (the "Partnership Agreement")
among the General Partner, and the Limited Partner and Depositary. Capitalized
terms used but not otherwise defined in this Amendment have the meanings
assigned to them in the Partnership Agreement.
B. The Limited Partner and Depositary is the sole Limited Partner of the
Partnership, and the Unit Holders hold Units representing assignments by the
Depositary to such Unit Holders of all of the ownership attributes of the share
of the Interest of the Depositary in Fund III represented by such Units;
C. The General Partner has determined that it is in the best interests
of the Partnership and the Unit Holders that the Partnership Agreement be
amended to allow the General Partner to restrict transfers of Units in the
Partnership to the extent necessary or desirable to ensure that Partnership does
not become a "publicly traded partnership" as defined in Section 7704 of the
Internal Revenue Code of 1986, as amended (the "Code").
D. The General Partner has authority pursuant to Paragraph 15.1.12(v) of
the Partnership Agreement to amend the Partnership Agreement on the terms
specified herein, without obtaining the consent or approval of the Limited
Partner and Depository or of any of the Unit Holders.
NOW, THEREFORE, in consideration of the premises set forth herein, it is
agreed as follows:
<PAGE>
AGREEMENT
1. Addition of New Paragraph 12.4. Paragraph 12 of the Partnership
Agreement is hereby amended by a new Paragraph 12.4 thereto as follows:
12.4 Notwithstanding anything to the contrary
contained in this Partnership Agreement, a Unit Holder wishing
to transfer Units may do so only after giving written notice
of such intent to the General Partner, and only upon obtaining
the prior written consent of the General Partner to such
transfer, which consent the General Partner may withhold in
its sole discretion if it deems such action to be necessary to
prevent the Partnership from being treated as a "publicly
traded partnership" as defined in the Code. Any purported or
attempted transfer of Units that is not made in full
compliance with this Paragraph 12.4 shall be void and
ineffectual and shall not bind or be recognized by the
Partnership or the General Partner for any purpose.
2. Limitation on Amendment. Except as expressly modified by this
Amendment, the Partnership Agreement shall remain in full force and effect.
3. Miscellaneous.
a. Counterparts. This Amendment may be executed in any number of
counterparts, each of such counterparts shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same instrument.
b. Entire Agreement. The Partnership Agreement, as modified by this
Amendment, constitutes the entire agreement of the parties hereto and supersedes
any and all prior or contemporaneous understandings, whether oral or written,
pertaining to the subject matter hereof.
c. Governing Law. This Amendment shall be governed by and construed
in all respects in accordance with the internal laws of the State of California,
without regard to choice of law principles.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year specified in the first paragraph above.
"General Partner": POLARIS INVESTMENT MANAGEMENT
CORPORATION, a California corporation
By: /S/ Eric Dull
-------------------------------
Name: Eric Dull
-------------------------------
Title: President
-------------------------------
"Limited Partner
and Depositary": POLARIS DEPOSITARY COMPANY III, a
California corporation
By: /S/ Norm Liu
-------------------------------
Name: Norm Liu
-------------------------------
Title: Vice President
-------------------------------
3
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 19534538
<SECURITIES> 0
<RECEIVABLES> 970239
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 144190311
<DEPRECIATION> 100933986
<TOTAL-ASSETS> 63794950
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 50602332
<TOTAL-LIABILITY-AND-EQUITY> 63794950
<SALES> 0
<TOTAL-REVENUES> 4261646
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3353700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 322556
<INCOME-PRETAX> 585390
<INCOME-TAX> 0
<INCOME-CONTINUING> 585390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 585390
<EPS-PRIMARY> 0.53
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</TABLE>
