UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 High Ridge Road, Stamford, Connecticut 06927
Telephone - (203) 357-3776
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 14 pages.
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended September 30, 1998
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - September 30, 1998 and
December 31, 1997..........................................3
b) Statements of Income - Three and Nine Months
Ended September 30, 1998 and 1997..........................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1997
and Nine Months Ended September 30, 1998...................5
d) Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997..........................6
e) Notes to Financial Statements..............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........9
Part II. Other Information
Item 1. Legal Proceedings.....................................12
Item 6. Exhibits and Reports on Form 8-K......................12
Signature ......................................................13
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,
1998 1997
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 13,800,315 $ 28,632,488
RENT AND OTHER RECEIVABLES 850,961 850,760
AIRCRAFT, net of accumulated depreciation
of $55,836,379 in 1998 and $53,612,863 in 1997 26,348,198 28,571,714
------------ ------------
$ 40,999,474 $ 58,054,962
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 185,857 $ 123,242
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 71,938 80,211
DEFERRED INCOME 1,534,552 626,578
NOTES PAYABLE 8,643,535 11,080,004
------------ ------------
Total Liabilities 10,435,882 11,910,035
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (4,196,238) (2,854,104)
Limited Partners, 499,960 and 500,000 units
outstanding in 1998 and 1997, respectively 34,759,830 48,999,031
------------ ------------
Total Partners' Capital 30,563,592 46,144,927
------------ ------------
$ 40,999,474 $ 58,054,962
============ ============
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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rent from operating leases $ 2,247,342 $ 2,247,341 $ 6,742,026 $ 9,718,274
Interest 182,918 542,030 663,910 1,076,774
Gain on sale of aircraft inventory 88,596 185,355 230,577 481,602
Other -- -- -- 785,094
----------- ----------- ----------- -----------
Total Revenues 2,518,856 2,974,726 7,636,513 12,061,744
----------- ----------- ----------- -----------
EXPENSES:
Depreciation 602,854 1,225,284 2,223,516 6,705,107
Management fees to general partner 86,787 25,982 260,360 333,695
Interest 217,673 293,043 710,959 927,724
Operating 31,961 3,865 87,405 17,650
Administration and other 68,993 94,547 266,595 291,205
----------- ----------- ----------- -----------
Total Expenses 1,008,268 1,642,721 3,548,835 8,275,381
----------- ----------- ----------- -----------
NET INCOME $ 1,510,588 $ 1,332,005 $ 4,087,678 $ 3,786,363
=========== =========== =========== ===========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 152,107 $ 310,790 $ 624,375 $ 960,271
=========== =========== =========== ===========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $ 1,358,481 $ 1,021,215 $ 3,463,303 $ 2,826,092
=========== =========== =========== ===========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 2.72 $ 2.04 $ 6.93 $ 5.65
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1997 and
Nine Months Ended September 30, 1998
------------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1996 $ (1,670,662) $ 55,159,826 $ 53,489,164
Net income 49,891 4,939,205 4,989,096
Cash distributions to partners (1,233,333) (11,100,000) (12,333,333)
------------ ------------ ------------
Balance, December 31, 1997 (2,854,104) 48,999,031 46,144,927
Net income 624,375 3,463,303 4,087,678
Capital redemptions (40 units) -- (3,920) (3,920)
Cash distributions to partners (1,966,509) (17,698,584) (19,665,093)
------------ ------------ ------------
Balance, September 30, 1998 $ (4,196,238) $ 34,759,830 $ 30,563,592
============ ============ ============
The accompanying notes are an integral part of these statements.
5
<PAGE>
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income $ 4,087,678 $ 3,786,363
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of aircraft inventory (230,577) (481,602)
Depreciation 2,223,516 6,705,107
Changes in operating assets and
liabilities:
Increase in rent and other receivables (201) (498,866)
Decrease in prepaid fees -- 104,275
Increase in payable to affiliates 62,615 66,247
Decrease in accounts payable
and accrued liabilities (8,273) (22,049)
Increase (decrease) in deferred income 907,974 (136,160)
------------ ------------
Net cash provided by operating
activities 7,042,732 9,523,315
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft
inventory 230,577 481,602
Proceeds from sale of aircraft -- 1,506,762
Payments to Purchaser related to sale of
aircraft -- (1,341,968)
Principal payments on notes receivable -- 375,577
------------ ------------
Net cash provided by investing
activities 230,577 1,021,973
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable (2,436,469) (1,052,804)
Capital redemptions (3,920) --
Cash distributions to partners (19,665,093) (10,250,000)
------------ ------------
Net cash used in financing
activities (22,105,482) (11,302,804)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (14,832,173) (757,516)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 28,632,488 20,229,105
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 13,800,315 $ 19,471,589
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 713,531 $ 825,117
============ ============
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 (GAAP). These statements should be read in conjunction with the
financial statements and notes thereto for the years ended December 31, 1997,
1996, and 1995 included in the Partnership's 1997 Annual Report to the SEC on
Form 10-K.
2. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, Polaris
Investment Management Corporation, in connection with services rendered or
payments made on behalf of the Partnership:
Payments for the
Three Months Ended Payable at
September 30, 1998 September 30, 1998
------------------ ------------------
Aircraft Management Fees $ 75,000 $ 92,890
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 3,474 62,613
Out-of-Pocket Administrative and
Selling Expense Reimbursement 120,359 30,354
-------- --------
$198,833 $185,857
======== ========
3. Sale of Aircraft Inventory to Soundair, Inc.
The Partnership sold its remaining inventory of aircraft parts from the nine
disassembled aircraft, to Soundair, Inc. The remaining inventory, with a net
carrying value of $-0-, was sold effective February 1, 1998 for $100,000, less
amounts previously received for sales as of that date. The net purchase price of
$88,596 was paid in September 1998.
7
<PAGE>
4. Partners' Capital
The Partnership Agreement (the Agreement) stipulates different methods by which
revenue, income and loss from operations and gain or loss on the sale of
aircraft are to be allocated to the general partner and the limited partners.
Such allocations are made using income or loss calculated under GAAP for book
purposes, which varies from income or loss calculated for tax purposes.
Cash available for distributions, including the proceeds from the sale of
aircraft, is distributed 10% to the general partner and 90% to the limited
partners.
The different methods of allocating items of income, loss and cash available for
distribution combined with the calculation of items of income and loss for book
and tax purposes result in book basis capital accounts that may vary
significantly from tax basis capital accounts. The ultimate liquidation and
distribution of remaining cash will be based on the tax basis capital accounts
following liquidation, in accordance with the Agreement.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
At September 30, 1998, Polaris Aircraft Income Fund III (the Partnership) owned
a portfolio of 10 used McDonnell Douglas DC-9-30 aircraft leased to Trans World
Airlines, Inc. (TWA) out of its original portfolio of 38 aircraft.
The Partnership entered into an agreement for the sale of its remaining
inventory of aircraft parts, with a net carrying value of $-0-, from the nine
disassembled aircraft, to Soundair, Inc. The remaining inventory was sold
effective February 1, 1998 for $100,000, less amounts previously received for
sales as of that date. The net purchase price of $88,596 was paid in September
1998.
Partnership Operations
The Partnership recorded net income of $1,510,588, or $2.72 per limited
partnership unit, for the three months ended September 30, 1998 compared to net
income of $1,332,005, or $2.04 per unit for the same period in 1997. The
Partnership recorded net income of $4,087,678, or $6.93 per limited partnership
unit, for the nine months ended September 30, 1998 compared to net income of
$3,786,363, or $5.65 per unit for the same period in 1997. The variance in net
income per limited partnership unit will differ from the variance of total net
income from period to period due to the methods by which income or loss from
operations and gain or loss on the sale of aircraft are allocated in accordance
with the partnership agreement.
Rental revenues, management fees and depreciation decreased during the nine
months ended September 30, 1998, as compared to the same period in 1997,
primarily due to the sale of aircraft to Triton Aviation Services III LLC
(Triton) in 1997.
The Partnership recorded other income of $785,094 during the nine months ended
September 30, 1997. This other income was primarily the result of the receipt of
$743,476 during the second quarter of 1997 related to amounts due under the TWA
maintenance credit and rent deferral agreement.
Interest income decreased during the three and nine months ended September 30,
1998, as compared to the same periods in 1997, primarily due to the payoff of
notes receivable from Continental Airlines, Inc. and Triton during 1997.
Interest expense decreased during the three and nine months ended September 30,
1998, as compared to the same periods in 1997, due to the continuing principal
payments on the TWA hushkit notes payable.
Operating expenses increased during the three and nine months ended September
30, 1998 as compared to the same periods in 1997, due to an increase in legal
expenses related to the sale of aircraft to Triton in 1997.
Administrative expenses decreased during the three and nine months ended
September 30, 1998 as compared to the same periods in 1997, primarily due to
decreases in consulting and trustee fees.
The increase in the deferred income balance at September 30, 1998 is
attributable to differences between the payments due and the rental income
earned on the TWA leases for the 10 aircraft currently on lease to TWA. 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
9
<PAGE>
rental income earned and the rental payments due is recognized as deferred
income. The rental payments due from TWA during the three and nine months ended
September 30, 1998 exceeded the rental income earned on the TWA leases, causing
an increase in the deferred income balance.
Liquidity and Cash Distributions
Liquidity - The Partnership received all lease payments from its sole lessee,
TWA, although the September 1998 lease payment was not received until October 1,
1998. This rent was included in rent and other receivables on the balance sheet
at September 30, 1998. In addition, payments totaling $230,577 have been
received during the first nine months of 1998 from the sale of parts from the
nine disassembled aircraft, as compared to payments of $481,602 during the same
period in 1997.
Polaris Investment Management Corporation, the general partner, has determined
that the Partnership maintain cash reserves as a prudent measure to ensure that
the Partnership has available funds in the event that the aircraft presently on
lease to TWA require remarketing and for other contingencies, including expenses
of the Partnership. The Partnership's cash reserves will be monitored and may be
revised from time to time as further information becomes available in the
future.
Cash Distributions - Cash distributions to limited partners during the three
months ended September 30, 1998 and 1997 were $1,449,884, or $2.90 per limited
partnership unit and $2,975,000, or $5.95 per unit, respectively. Cash
distributions to limited partners during the nine months ended September 30,
1998 and 1997 were $17,698,584, or $35.40 per limited partnership unit and
$9,225,000, or $18.45 per unit, respectively. The increase in distributions
during the nine months ended September 30, 1998, as compared to the same period
in 1997, is due to the distribution of the proceeds received from the prepayment
of a note due from Triton Aviation Services III LLC on December 30, 1997. The
timing and amount of future cash distributions are not yet known and will depend
on the Partnership's future cash requirements (including expenses of the
Partnership), the need to retain cash reserves as previously discussed in the
Liquidity section, and the receipt of rental payments from TWA.
Impact of the Year 2000 Issue
The inability of business processes to continue to function correctly after the
beginning of the Year 2000 could have serious adverse effects on companies and
entities throughout the world. As discussed in prior filings with the Securities
and Exchange Commission, the General Partner has engaged GE Capital Aviation
Services, Inc. ("GECAS") to provide certain management services to the
Partnership. Both the General Partner and GECAS are wholly-owned subsidiaries
(either direct or indirect) of General Electric Capital Corporation ("GECC").
All of the Partnership's operational functions are handled either by the General
Partner and GECAS or by third parties (as discussed in the following
paragraphs), and the Partnership has no information systems of its own.
GECC and GECAS have undertaken a global effort to identify and mitigate Year
2000 issues in their information systems, products and services, facilities and
suppliers as well as to assess the extent to which Year 2000 issues will impact
their customers. Each business has a Year 2000 leader who oversees a
multi-functional remediation project team responsible for applying a Six Sigma
quality approach in four phases: (1) define/measure -- identify and inventory
possible sources of Year 2000 issues; (2) analyze -- determine the nature and
extent of Year 2000 issues and develop project plans to address those issues;
(3) improve -- execute project plans and perform a majority of the testing; and
10
<PAGE>
(4) control -- complete testing, continue monitoring readiness and complete
necessary contingency plans. The progress of this program is monitored at each
business, and company-wide reviews with senior management are conducted monthly.
GECC and GECAS management plan to have completed the first three phases of the
program for a substantial majority of mission-critical systems by the end of
1998 and to have nearly all significant information systems, products and
services, facilities and suppliers in the control phase of the program by
mid-1999.
As noted elsewhere, the Partnership has ten aircraft remaining in its portfolio
at this time. All of these remaining aircraft are on lease with Trans World
Airlines, Inc. ("TWA"). TWA has advised GECAS that it has adopted procedures
to identify and address Year 2000 issues and that it has developed a plan to
implement required changes in its equipment, operations and systems. To the
extent, however, that TWA suffers any material disruption of its business and
operations due to Year 2000 failure of equipment or information systems, such
disruption would likely have a material adverse effect on the Partnership's
operations and financial condition.
Aside from maintenance and other matters relating to the Partnership's
aircraft-related assets discussed above, the principal third-party vendors to
the Partnership are those providing the Partnership with services such as
accounting, auditing, banking and investor services. GECAS intends to apply the
same standards in determining the Year 2000 capabilities of the Partnership's
third-party vendors as GECAS will apply with respect to its outside vendors
pursuant to its internal Year 2000 program.
The scope of the global Year 2000 effort encompasses many thousands of
applications and computer programs; products and services; facilities and
facilities-related equipment; suppliers; and, customers. The Partnership, like
all business operations, is also dependent on the Year 2000 readiness of
infrastructure suppliers in areas such as utility, communications,
transportation and other services. In this environment, there will likely be
instances of failure that could cause disruptions in business processes or that
could affect customers' ability to repay amounts owed to the Partnership or
vendors' ability to provide services without interruption. The likelihood and
effects of failures in infrastructure systems, over which the Partnership has no
control, cannot be estimated. However, aside from the impact of any such
possible failures or the possibility of a disruption of TWA's business caused by
Year 2000 failures, the General Partner does not believe that occurrences of
Year 2000 failures will have a material adverse effect on the financial
position, results of operations or liquidity of the Partnership.
To date, the Partnership has not incurred any Year 2000 expenditures nor does it
expect to incur any material costs in the future. However, the activities
involved in the Year 2000 effort necessarily involve estimates and projections
of activities and resources that will be required in the future. These estimates
and projections could change as work progresses.
11
<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) 1997 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, 1998
and June 30, 1998, 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.
Ron Wallace v. Polaris Investment Management Corporation, et al. - On November
9, 1998, defendants, acting through their counsel, entered into a settlement
agreement with plaintiffs and with the plaintiff in a related action,
Accelerated High Yield Income Fund v. Polaris Investment Management Corporation,
et al. The settlement is subject to final approval by the Court. The settlement
agreement does not provide for any payments to be made to the Partnership.
Plaintiff's counsel is seeking reimbursement from the Partnership of an as yet
to be determined amount of fees and expenses. A settlement notice setting forth
the terms of the settlement will be mailed to the last known address of each
unitholder of the Partnership by November 20, 1998. On November 10, 1998, the
Court preliminarily approved the settlement. A hearing to determine whether the
settlement should be finally approved by the Court is scheduled for December 22,
1998.
Other Proceedings - Item 10 in Part III of the Partnership's 1997 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the periods ended March 31,
1998 and June 30, 1998 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. 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.
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 (in electronic format 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.
12
<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 16, 1998 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)
13
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 13800315
<SECURITIES> 0
<RECEIVABLES> 850961
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 82184577
<DEPRECIATION> 55836379
<TOTAL-ASSETS> 40999474
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 30563592
<TOTAL-LIABILITY-AND-EQUITY> 40999474
<SALES> 0
<TOTAL-REVENUES> 7636513
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3548835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4087678
<INCOME-TAX> 0
<INCOME-CONTINUING> 4087678
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<CHANGES> 0
<NET-INCOME> 4087678
<EPS-PRIMARY> 6.93
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</TABLE>
