UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
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Commission File No. 33-10122
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POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
State of Organization: California
IRS Employer Identification No. 94-3023671
201 Mission Street, 27th Floor, San Francisco, California 94105
Telephone - (415) 284-7400
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
This document consists of 17 pages.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1997
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1997 and
December 31, 1996.........................................3
b) Statements of Income - Three and Six Months
Ended June 30, 1997 and 1996..............................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1996
and Six Months Ended June 30, 1997........................5
d) Statements of Cash Flows - Six Months
Ended June 30, 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....................................15
Item 6. Exhibits and Reports on Form 8-K.....................16
Signature .....................................................17
2
Part I. Financial Information
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 20,604,065 $ 20,229,105
RENT AND OTHER RECEIVABLES 866,193 351,508
NOTES RECEIVABLE 9,528,698 --
AIRCRAFT, net of accumulated depreciation
of $51,162,293 in 1997 and $97,860,513 in 1996 31,022,284 46,329,798
OTHER ASSETS -- 104,275
------------ ------------
$ 62,021,240 $ 67,014,686
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 164,270 $ 86,005
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 225,798 72,159
DEFERRED INCOME 21,262 460,080
NOTES PAYABLE 12,610,832 12,907,278
------------ ------------
Total Liabilities 13,022,162 13,525,522
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,715,625) (1,670,662)
Limited Partners, 500,000 units
issued and outstanding 50,714,703 55,159,826
------------ ------------
Total Partners' Capital 48,999,078 53,489,164
------------ ------------
$ 62,021,240 $ 67,014,686
============ ============
The accompanying notes are an integral part of these statements.
3
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
REVENUES:
Rent from operating leases $3,564,009 $3,829,753 $7,470,933 $7,639,323
Interest 286,058 381,628 534,744 801,936
Gain on sale of aircraft inventory 211,310 -- 296,247 --
Lessee settlement -- -- -- 144,444
Other 763,995 -- 785,094 38,898
---------- ---------- ---------- ----------
Total Revenues 4,825,372 4,211,381 9,087,018 8,624,601
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 2,406,350 2,507,023 5,479,823 5,014,046
Management fees to general partner 112,367 191,488 307,713 381,966
Interest 312,125 -- 634,681 --
Operating 8,911 5,857 13,785 9,661
Administration and other 116,651 96,004 196,658 158,864
---------- ---------- ---------- ----------
Total Expenses 2,956,404 2,800,372 6,632,660 5,564,537
---------- ---------- ---------- ----------
NET INCOME $1,868,968 $1,411,009 $2,454,358 $3,060,064
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 331,158 $ 489,063 $ 649,481 $ 980,506
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $1,537,810 $ 921,946 $1,804,877 $2,079,558
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 3.08 $ 1.84 $ 3.61 $ 4.16
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
4
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Year Ended December 31, 1997 and
Six Months Ended June 30, 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 649,481 1,804,877 2,454,358
Cash distributions to partners (694,444) (6,250,000) (6,944,444)
------------ ------------ ------------
Balance, June 30, 1997 $ (1,715,625) $ 50,714,703 $ 48,999,078
============ ============ ============
The accompanying notes are an integral part of these statements.
5
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
OPERATING ACTIVITIES:
Net income $ 2,454,358 $ 3,060,064
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of aircraft inventory (296,247) --
Depreciation 5,479,823 5,014,046
Changes in operating assets and liabilities,
net of effect of sale of aircraft:
Decrease in marketable securities, trading -- 1,659,160
Increase in rent and other receivables (498,866) (455,311)
Decrease in prepaid fees 104,275 --
Increase (decrease) in payable to affiliates 78,265 (30,392)
Increase (decrease) in accounts payable
and accrued liabilities 102,439 (15,440)
Decrease in deferred income (438,818) --
------------ ------------
Net cash provided by operating activities 6,985,229 9,232,127
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 296,247 582,732
Proceeds from sale of aircraft 1,491,329 --
Payments to Purchaser related to sale of aircraft (1,341,968) --
Inventory disassembly costs -- (9,282)
Principal payments on notes receivable 185,013 979,832
------------ ------------
Net cash provided by investing activities 630,621 1,553,282
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable (296,446) --
Cash distributions to partners (6,944,444) (10,555,556)
------------ ------------
Net cash used in financing activities (7,240,890) (10,555,556)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS 374,960 229,853
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 20,229,105 25,014,205
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 20,604,065 $ 25,244,058
============ ============
The accompanying notes are an integral part of these statements.
6
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. Sale of Aircraft to Triton
On May 28, 1997, Polaris Investment Management Corporation (the "General
Partner" or "PIMC"), on behalf of the Partnership, executed definitive
documentation for the purchase of 8 of the Partnership's 18 remaining aircraft
(the "Aircraft") and certain of its notes receivables by Triton Aviation
Services III LLC, a special purpose company (the "Purchaser"). The closings for
the purchase of the 8 Aircraft occurred from June 5, 1997 to June 25, 1997. The
Purchaser is managed by Triton Aviation Services, Ltd. ("Triton Aviation" or the
"Manager"), a privately held aircraft leasing company which was formed in 1996
by Triton Investments, Ltd., a company which has been in the marine cargo
container leasing business for 17 years and is diversifying its portfolio by
leasing commercial aircraft. Each Aircraft was sold subject to the existing
leases.
The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser is $10,947,000 which is allocable to the Aircraft and a
note receivable by the Partnership. The Purchaser paid into an escrow account
$1,233,289 of the Purchase Price in cash at the closing of the first aircraft
and delivered a promissory note (the "Promissory Note") for the balance of
$9,713,711. The Partnership received payment of $1,233,289 from the escrow
account on June 26, 1997.
The Promissory Note is due in 28 quarterly installments of principal and
interest commencing June 30, 1997 in the amount of $476,425 over a period of
seven years bearing interest at a rate of 12% per annum with a balloon principal
payment in the amount of $1,770,917 due on March 31, 2004. The Purchaser has the
right to voluntarily prepay the Promissory Note in whole or in part at any time
without penalty. In addition, the Promissory Note is subject to mandatory
partial prepayment in certain specified instances. The Purchaser is current on
its Promissory Note obligation.
Under the terms of the transaction, the Purchaser's assets, which are limited to
the Aircraft, including any income or proceeds therefrom, and any funds made
available to Purchaser under the working capital line described below constitute
the sole source of payments under the Promissory Note. Although no security
interest over the Aircraft or the leases is granted in favor of the Partnership,
the equity interests in the Purchaser have been pledged to the Partnership. In
connection with that pledge, the Purchaser is 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; (iv) demand loans to another SPC (defined below) at a market rate of
interest; and (v) debt to trade creditors incurred in the ordinary course of
business. In addition, the Purchaser undertakes to keep the Aircraft and leases
7
free of any lien, security interest or other encumbrance other than (i) inchoate
taxes and materialmen's liens and the like, (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 and other hushkits acquired with proceeds from the
same loan facility; (iii) liens lessees are customarily permitted to incur that
are required to be removed. The Purchaser has the right to sell any of the
Aircraft without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the 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. In the event that any of the Aircraft are sold by the
Purchaser, the Promissory Note is subject to a mandatory prepayment of the
portion of the Promissory Note which is allocable to the Aircraft sold.
Under the terms of the transaction, the Purchaser's Manager has undertaken 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 guaranteed by Triton Investments, Ltd., the parent of the Purchaser's
Manager and such guarantor provided 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 at December 31, 1996. Provided that the
Purchaser is not in default in making payments due under the Promissory Note to
the Partnership, the Purchaser is 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.
Under the purchase agreement, the Purchaser purchased the Aircraft effective as
of April 1, 1997 notwithstanding the actual closing dates. The utilization of an
effective date facilitated the determination of rent and other allocations
between the parties. The Purchaser has the right to receive all income and
proceeds, including rents and receivables, from the Aircraft accruing from and
after April 1, 1997, and the Promissory Note commenced bearing interest as of
April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold
subject to the existing leases.
Neither PIMC nor GECAS will receive a sales commission in connection with the
transaction. In addition, PIMC will not be paid a management fee with respect to
the collection of the Promissory Note or on any rents accruing from or after
April 1, 1997 with respect to the 8 Aircraft. Neither PIMC nor GECAS or any of
its affiliates holds any interest in Triton Aviation or any of Triton Aviation's
affiliates. John Flynn, the current President of Triton Aviation, was a Polaris
executive until May 1996 and has over 15 years experience in the commercial
aviation industry. At the time Mr. Flynn was employed at PIMC, he had no
affiliation with Triton Aviation or its affiliates.
Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund IV, Polaris
Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold
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, with the exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.
The Accounting Treatment of the Transaction - In accordance with generally
accepted accounting principles (GAAP), the Partnership recognized rental income
up until the closing date for each aircraft which occurred from June 5, 1997 to
June 25, 1997. However, under the terms of the transaction, the Purchaser was
entitled to receive any payments of the rents, interest income and receivables
accruing from April 1, 1997. As a result, the Partnership made payments to the
Purchaser for the amounts due and received from April 1, 1997 to the closing
date. Amounts totaling $1,341,968 during this period are included in rents from
operating leases, interest and other income. For financial reporting purposes,
the cash down payment portion of the sales proceeds of $1,233,289 has been
adjusted by the following; income and proceeds, including rents and receivables
from the effective date of April 1, 1997 to the closing date, interest due from
8
the Purchaser on the cash portion of the purchase price, interest on the
Promissory Note from the effective date of April 1, 1997 to the closing date and
estimated selling costs. As a result of these GAAP adjustments, the net adjusted
sales price recorded by the Partnership, including the Promissory Note, was
$9,847,824.
The Aircraft sold pursuant to the definitive documentation executed on May 28,
1997 have been classified as aircraft held for sale from that date until the
actual closing date. Under GAAP, aircraft held for sale are carried at their
fair market value less estimated costs to sell. The adjustment to the sales
proceeds described above and revisions to estimated costs to sell the Aircraft
required the Partnership to record an adjustment to the net carrying value of
the aircraft held for sale of $1,092,046 during the three months ended June 30,
1997. This adjustment to the net carrying value of the aircraft held for sale is
included in depreciation and amortization expense on the statement of operations
for the three and six months ended June 30, 1997.
4. Related Parties
Under the Limited Partnership Agreement, the Partnership paid or agreed to pay
the following amounts for the current quarter to the general partner, PIMC, in
connection with services rendered or payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
June 30, 1997 June 30, 1997
------------- -------------
Aircraft Management Fees $ 93,917 $ 94,761
Out-of-Pocket Administrative and
Selling Expense Reimbursement 112,997 65,120
Out-of-Pocket Operating and
Remarketing Expense Reimbursement -- 4,389
-------- --------
$206,914 $164,270
======== ========
5. Subsequent Event
In July 1997, the Partnership received its $850,000 rental payment from TWA that
was due on June 27, 1997. This amount was included in rent and other receivables
on the balance sheet at June 30, 1997.
9
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 10 used
commercial jet aircraft and certain inventoried aircraft parts out of its
original portfolio of 38 aircraft. The portfolio includes 10 McDonnell Douglas
DC-9-30 aircraft leased to Trans World Airlines, Inc. (TWA). 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. In June 1997, the Partnership sold 3 McDonnell
Douglas DC-9-30 aircraft leased to TWA, and 5 Boeing 727-200 Advanced aircraft
leased to Continental Airlines, Inc. (Continental).
REMARKETING UPDATE
Sale of Aircraft to Triton
On May 28, 1997, Polaris Investment Management Corporation (the "General
Partner" or "PIMC"), on behalf of the Partnership, executed definitive
documentation for the purchase of 8 of the Partnership's 18 remaining aircraft
(the "Aircraft") and certain of its notes receivables by Triton Aviation
Services III LLC, a special purpose company (the "Purchaser" or "Triton"). The
closings for the purchase of the 8 Aircraft had occurred from June 5, 1997 to
June 25, 1997. The Purchaser is managed by Triton Aviation Services, Ltd.
("Triton Aviation" or the "Manager"), a privately held aircraft leasing company
which was formed in 1996 by Triton Investments, Ltd., a company which has been
in the marine cargo container leasing business for 17 years and is diversifying
its portfolio by leasing commercial aircraft. Each Aircraft was sold subject to
the existing leases.
General Partner's Decision to Approve the Transaction - In determining whether
the transaction was in the best interests of the Partnership and its
unitholders, the General Partner evaluated, among other things, the risks and
significant expenses associated with continuing to own and remarket the Aircraft
(many of which were subject to leases that were nearing expiration). The General
Partner determined that such a strategy could require the Partnership to expend
a significant portion of its cash reserves for remarketing and that there was a
substantial risk that this strategy could result in the Partnership having to
reduce or even suspend future cash distributions to limited partners. The
General Partner concluded that the opportunity to sell the Aircraft at an
attractive price would be beneficial in the present market where demand for
Stage II aircraft is relatively strong rather than attempting to sell the
aircraft "one-by-one" over the coming years when the demand for such Aircraft
might be weaker. During the months of intense negotiations, GE Capital Aviation
Services, Inc. ("GECAS"), which provides aircraft marketing and management
services to the General Partner, sought to obtain the best price and terms
available for these Stage II aircraft given the aircraft market and the
conditions and types of planes owned by the Partnership. Both the General
Partner and GECAS approved the sale terms of the Aircraft (as described below)
as being in the best interest of the Partnership and its unitholders because
both believe that this transaction will optimize the potential cash
distributions to be paid to limited partners. To ensure that no better offer
could be obtained, the terms of the transaction negotiated by GECAS included a
"market-out" provision that permitted the Partnership to elect to accept an
offer for all (but no less than all) of the assets to be sold by it to the
Purchaser on terms which it deemed more favorable, with the ability of the
Purchaser to match the offer or decline to match the offer and be entitled to be
compensated in an amount equal to 1 1/2% of the Purchaser's proposed purchase
price. The Partnership did not receive any other offers and, accordingly, the
General Partner believes that a valid market check has occurred confirming that
the terms of this transaction were the most beneficial that could have been
obtained.
The Terms of the Transaction - The total contract purchase price (the "Purchase
Price") to the Purchaser is $10,947,000 which is allocable to the Aircraft and a
10
note receivable by the Partnership. The Purchaser paid into an escrow account
$1,233,289 of the Purchase Price in cash upon the closing of the first aircraft
and delivered a promissory note (the "Promissory Note") for the balance of
$9,713,711. The Partnership received payment of $1,233,289 from the escrow
account on June 26, 1997.
The Promissory Note is due in 28 quarterly installments of principal and
interest commencing June 30, 1997 in the amount of $476,425 over a period of
seven years bearing interest at a rate of 12% per annum with a balloon principal
payment in the amount of $1,770,917 due on March 31, 2004. The Purchaser has the
right to voluntarily prepay the Promissory Note in whole or in part at any time
without penalty. In addition, the Promissory Note is subject to mandatory
partial prepayment in certain specified instances. The Purchaser is current on
its Promissory Note obligation.
Under the terms of the transaction, the Purchaser's assets, which are limited to
the Aircraft, including any income or proceeds therefrom, and any funds made
available to Purchaser under the working capital line described below constitute
the sole source of payments under the Promissory Note. Although no security
interest over the Aircraft or the leases is granted in favor of the Partnership,
the equity interests in the Purchaser have been pledged to the Partnership. In
connection with that pledge, the Purchaser is 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; (iv) demand loans to another SPC (defined below) at a market rate of
interest; and (v) debt to trade creditors incurred in the ordinary course of
business. In addition, the Purchaser undertakes to keep the Aircraft and leases
free of any lien, security interest or other encumbrance other than (i) inchoate
taxes and materialmen's liens and the like, (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 and other hushkits acquired with proceeds from the
same loan facility; (iii) liens lessees are customarily permitted to incur that
are required to be removed. The Purchaser has the right to sell any of the
Aircraft without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the 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. In the event that any of the Aircraft are sold by the
Purchaser, the Promissory Note is subject to a mandatory prepayment of the
portion of the Promissory Note which is allocable to the Aircraft sold.
Under the terms of the transaction, the Purchaser's Manager has undertaken 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 guaranteed by Triton Investments, Ltd., the parent of the Purchaser's
Manager and such guarantor provided 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 at December 31, 1996. Provided that the
Purchaser is not in default in making payments due under the Promissory Note to
the Partnership, the Purchaser is 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.
Under the purchase agreement, the Purchaser purchased the Aircraft effective as
of April 1, 1997 notwithstanding the actual closing dates. The utilization of an
effective date facilitated the determination of rent and other allocations
between the parties. The Purchaser has the right to receive all income and
proceeds, including rents and receivables, from the Aircraft accruing from and
after April 1, 1997, and the Promissory Note commenced bearing interest as of
April 1, 1997 subject to the closing of the Aircraft. Each Aircraft was sold
subject to the existing leases.
Neither PIMC nor GECAS will receive a sales commission in connection with the
transaction. In addition, PIMC will not be paid a management fee with respect to
the collection of the Promissory Note or on any rents accruing from or after
April 1, 1997 with respect to the 8 Aircraft. Neither PIMC nor GECAS or any of
its affiliates holds any interest in Triton Aviation or any of Triton Aviation's
affiliates.
11
John Flynn, the current President of Triton Aviation, was a Polaris executive
until May 1996 and has over 15 years experience in the commercial aviation
industry. At the time Mr. Flynn was employed at PIMC, he had no affiliation with
Triton Aviation or its affiliates.
Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund IV, Polaris
Aircraft Income Fund V and Polaris Aircraft Income Fund VI have also sold
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, with the exception of the
Polaris Aircraft Income Fund VI aircraft, which were sold on an all cash basis.
The Accounting Treatment of the Transaction - In accordance with generally
accepted accounting principles (GAAP), the Partnership recognized rental income
up until the closing date for each aircraft which occurred from June 5, 1997 to
June 25, 1997. However, under the terms of the transaction, the Purchaser was
entitled to receive any payments of the rents, interest income and receivables
accruing from April 1, 1997. As a result, the Partnership made payments to the
Purchaser for the amounts due and received from April 1, 1997 to the closing
date. Amounts totaling $1,341,968 during this period are included in rents from
operating leases, interest and other income. For financial reporting purposes,
the cash down payment portion of the sales proceeds of $1,233,289 has been
adjusted by the following; income and proceeds, including rents and receivables
from the effective date of April 1, 1997 to the closing date, interest due from
the Purchaser on the cash portion of the purchase price, interest on the
Promissory Note from the effective date of April 1, 1997 to the closing date and
estimated selling costs. As a result of these GAAP adjustments, the net adjusted
sales price recorded by the Partnership, including the Promissory Note, was
$9,847,824.
The Aircraft sold pursuant to the definitive documentation executed on May 28,
1997 have been classified as aircraft held for sale from that date until the
actual closing date. Under GAAP, aircraft held for sale are carried at their
fair market value less estimated costs to sell. The adjustment to the sales
proceeds described above and revisions to estimated costs to sell the Aircraft
required the Partnership to record an adjustment to the net carrying value of
the aircraft held for sale of $1,092,046 during the three months ended June 30,
1997. This adjustment to the net carrying value of the aircraft held for sale is
included in depreciation and amortization expense on the statement of operations
for the three and six months ended June 30, 1997.
PARTNERSHIP OPERATIONS
The Partnership recorded net income of $1,868,968, or $3.08 per limited
partnership unit, for the three months ended June 30, 1997, as compared to net
income of $1,411,009, or $1.84 per limited partnership unit, for the three
months ended June 30, 1996. The Partnership recorded net income of $2,454,358 or
$3.61 per limited partnership unit, for the six months ended June 30, 1997
compared to net income of $3,060,064, or $4.16 per limited partnership unit, for
the six months ended June 30, 1996.
In January 1995, the United States Bankruptcy Court approved an agreement
between the Partnership and Continental which specified payment to the
Partnership by Continental of approximately $1.3 million as final settlement for
the return of six Boeing 727-100 aircraft, payable in installments through
February 1996. The Partnership recorded payments of $144,444 as revenue during
the six months ended June 30, 1996. The final settlement payment was received in
February 1996.
The increased depreciation expense during the six months ended June 30, 1997
compared to the same period in 1996, is attributable to the acquisition in
November 1996 of noise-suppression devices, commonly known as "hushkits", for
the 10 aircraft currently on lease to TWA. The hushkits are being financed over
a 6 year period at an interest rate of 10% per annum. The leases for these 10
aircraft were extended for a period of eight years until November 2004. The rent
payable by TWA under the leases has been increased by an amount sufficient to
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cover the monthly debt service payments on the hushkits and fully repay, during
the term of the TWA leases, the amount borrowed. The Partnership recorded
$312,125 and $634,681 in interest expense on the amount borrowed to finance the
hushkits during the three and six months ended June 30, 1997, respectively.
The increase in depreciation expense due to the acquisition of hushkits was
offset by a decrease in depreciation expense for the aircraft sold to Triton
during the three months ended June 30, 1997, compared to the same period in
1996.
The increase in TWA rents described above was partially offset by a reduction in
Continental rents during the three months ended June 30, 1997 as compared to the
same period in 1996. The rental revenues from Continental decreased during the
six months ended June 30, 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 six months ended June 30, 1997 were at a new lease rate that was
lower than the prior lease rate for the six months ended June 30, 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.
Another factor contributing to the decrease in rental income was the sale of the
8 aircraft leased to Continental and TWA during the three months ended June 30,
1997, as previously discussed under the Remarketing Update section.
The Partnership recorded an increase in other income during the three and six
months ended June 30, 1997. This increase in other income was the result of the
receipt of $743,476 related to amounts due under the TWA maintenance credit and
rent deferral agreement.
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.
Interest income decreased during the three and six months ended June 30, 1997 as
compared to the same period in 1996, primarily due to decreases in the cash
reserves balances retained by the Partnership at June 30, 1997 as compared to
June 30, 1996. In addition, interest on the deferred rents being paid by
Continental decreased during the three and six months ended June 30, 1997 as
compared to the same periods in 1996, due to Continental having completed its
payment of the deferred rental amounts in the first quarter of 1997.
LIQUIDITY AND CASH DISTRIBUTIONS
Liquidity - The Partnership has received all payments due from TWA and
Continental under the lease agreements, and the Promissory Note from Triton for
the sale of Aircraft. In addition, payments totaling $296,247 and $582,732 have
been received during the six months ended June 30, 1997 and 1996, respectively,
for the sale of parts from the nine disassembled aircraft. The net book value of
the Partnership's aircraft inventory was recovered in full during 1996. As a
result, the payments of $296,247 received during the six months ended June 30,
1997 have been applied against gain on sale of aircraft inventory.
In July 1997, the Partnership received its $850,000 rental payment from TWA that
was due on June 27, 1997. This amount was included in rent and other receivables
on the balance sheet at June 30, 1997.
PIMC has determined that the Partnership maintain cash reserves as a prudent
measure to insure that the Partnership has available funds in the event that the
aircraft presently on lease to TWA require remarketing, the Purchaser defaults
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under the Promissory Note, 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 six
months ended June 30, 1997 and 1996 were $6,250,000, or $12.50 per limited
partnership unit, and $9,500,000, or $19.00 per limited partnership unit,
respectively.
In accordance with the Limited Partnership Agreement, cash distributions are to
be allocated 90% to the limited partners and the 10% to the general partner. In
July 1997, the Partnership made a cash distribution to limited partners of
$2,975,000 ($5.95 per limited partnership unit) and $330,556 to the general
partner. 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 as previously discussed in the Liquidity section; the receipt
of rental payments from TWA; the receipt of note payments from Triton; and
payments generated from the aircraft disassembly process.
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Part II. Other Information
Item 1. Legal Proceedings
As discussed in Item 3 of Part I of Polaris Aircraft Income Fund III's (the
Partnership) 1996 Annual Report to the Securities and Exchange Commission (SEC)
on Form 10-K (Form 10-K) and in Item 1 of Part II of the Partnership's Quarterly
Report to the SEC on Form 10-Q (Form 10-Q) for the period ended March 31, 1997,
there are a number of pending legal actions or proceedings involving the
Partnership. Except as discussed below, there have been no material developments
with respect to any such actions or proceedings during the period covered by
this report.
Equity Resources, Inc., et al. v. Polaris Investment Management Corporation, et
al. - On May 12, 1997, plaintiffs appealed the Superior Court's denial of their
motion seeking to enjoin the sale by the Partnership of certain of its aircraft
and notes receivable. On May 15, 1997, the Appellate Court denied plaintiffs'
appeal. On May 19, 1997, plaintiffs appealed the Superior Court's denial of
their motion to the Supreme Court of Massachusetts. The Supreme Court of
Massachusetts denied plaintiffs' appeal on May 29, 1997. On May 23, 1997, the
defendants filed a motion to dismiss the action.
Ron Wallace v. Polaris Investment Management Corporation, et al. - On or about
June 18, 1997, a purported class action entitled Ron Wallace v. Polaris
Investment Management Corporation, et al. was filed on behalf of the unit
holders of Polaris Aircraft Income Funds II through VI in the Superior Court of
the State of California, County of San Francisco. The complaint names each of
Polaris Investment Management Corporation (PIMC), GE Capital Aviation Services,
Inc. (GECAS), Polaris Aircraft Leasing Corporation, Polaris Holding Company,
General Electric Capital Corporation, certain executives of PIMC and GECAS and
John E. Flynn, a former PIMC executive, as defendants. The complaint alleges
that defendants committed a breach of their fiduciary duties with respect to the
Sale Transaction involving the Partnership as described in Item 2, under the
caption "Remarketing Update -- Sale of Aircraft to Triton."
Other Proceedings - Item 10 in Part III of the Partnership's 1996 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the period ended March 31,
1997 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 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. Except
as discussed below, there have been no material developments with respect to any
of the actions described therein during the period covered by this report.
The following actions have been settled pursuant to a settlement agreement
entered into on June 6, 1997:
- - Thelma Abrams, et al. v. Polaris Holding Company, et al.
- - Sara J. Bishop, et al. v. Kidder, Peabody & Co. Incorporated, et al.
- - Enita V. Elphick, et al. v. Kidder, Peabody & Co. Incorporated, et al.
- - Janet K. Johnson, et al. v. Polaris Holding Company, et al.
- - Wayne W. Kuntz, et al. v. Polaris Holding Company, et al.
- - Joyce H. McDevitt, et al. v. Polaris Holding Company, et al.
- - Mary Grant Tarrer, et al. v. Kidder, Peabody & Co. Incorporated, et al.
- - Harry R. Wilson, et al. v. Polaris Holding Company, et al.
- - George Zicos, et al. v. Polaris Holding Company, et al.
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- - Michael J. Ouellette, et al. v. Kidder, Peabody & Co. Incorporated, et al.;
Thelma A. Rolph, et al. v. Polaris Holding Company, et al.; Carl L. Self, et al.
v. Polaris Holding Company, et al. - On or about March 21, 1997, three
complaints were filed in the Superior Court of the State of California, County
of Sacramento naming as defendants Kidder, Peabody & Company, Incorporated,
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, General Electric Capital Corporation, GE
Capital Aviation Services and Does 1-100. The first complaint, entitled Michael
J. Ouellette, et al. v. Kidder Peabody & Co., et al., was filed by over 50
individual plaintiffs who purchased limited partnership units in one or more of
Polaris Aircraft Income Funds I-VI. The second complaint, entitled Thelma A.
Rolph, et al. v. Polaris Holding Company, et al., was filed by over 500
individual plaintiffs who purchased limited partnership units in one or more of
Polaris Aircraft Income Funds I-VI. The third complaint, entitled Carl L. Self,
et al. v. Polaris Holding Company, et al., was filed by over 500 individual
plaintiffs who purchased limited partnership units in one or more of Polaris
Aircraft Income Funds I-VI. Each complaint alleges violations of state common
law, including fraud, negligent misrepresentation and breach of fiduciary duty,
and violations of the rules of the National Association of Securities Dealers,
Inc. Each complaint seeks to recover compensatory damages and punitive damages
in an unspecified amount, interest and rescission with respect to Polaris
Aircraft Income Funds I-VI and all other limited partnerships alleged to have
been sold by Kidder Peabody to the plaintiffs.
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
A Current Report on Form 8-K, dated May 28, 1997, reporting the sale of
assets under Item 2 was filed on June 12, 1997.
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SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
(Registrant)
By: Polaris Investment
Management Corporation,
General Partner
August 12, 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)
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