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, 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 13 pages.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended June 30, 1998
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - June 30, 1998 and
December 31, 1997...........................................3
b) Statements of Operations - Three and Six Months
Ended June 30, 1998 and 1997................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1997
and Six Months Ended June 30, 1998..........................5
d) Statements of Cash Flows - Six Months
Ended June 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......................................11
Item 6. Exhibits and Reports on Form 8-K.......................11
Signature .......................................................12
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,
1998 1997
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 13,838,513 $ 28,632,488
RENT AND OTHER RECEIVABLES 851,008 850,760
AIRCRAFT, net of accumulated depreciation
of $55,233,525 in 1998 and $53,612,863 in 1997 26,951,052 28,571,714
------------ ------------
$ 41,640,573 $ 58,054,962
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 166,329 $ 123,242
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 103,380 80,211
DEFERRED INCOME 1,231,894 626,578
NOTES PAYABLE 9,474,984 11,080,004
------------ ------------
Total Liabilities 10,976,587 11,910,035
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (4,187,247) (2,854,104)
Limited Partners, 499,960 and 500,000 units
outstanding in 1998 and 1997, respectively 34,851,233 48,999,031
------------ ------------
Total Partners' Capital 30,663,986 46,144,927
------------ ------------
$ 41,640,573 $ 58,054,962
============ ============
The accompanying notes are an integral part of these statements.
3
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES:
Rent from operating leases $2,247,342 $3,564,009 $4,494,684 $7,470,933
Interest 183,246 286,058 480,992 534,744
Gain on sale of aircraft inventory 52,447 211,310 141,981 296,247
Other -- 763,995 -- 785,094
---------- ---------- ---------- ----------
Total Revenues 2,483,035 4,825,372 5,117,657 9,087,018
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 602,854 2,406,350 1,620,662 5,479,823
Management fees to general partner 86,786 112,367 173,573 307,713
Interest 237,138 312,125 493,286 634,681
Operating 18,724 8,911 55,444 13,785
Administration and other 100,268 116,651 197,602 196,658
---------- ---------- ---------- ----------
Total Expenses 1,045,770 2,956,404 2,540,567 6,632,660
---------- ---------- ---------- ----------
NET INCOME $1,437,265 $1,868,968 $2,577,090 $2,454,358
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 154,627 $ 331,158 $ 472,268 $ 649,481
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $1,282,638 $1,537,810 $2,104,822 $1,804,877
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 2.57 $ 3.08 $ 4.21 $ 3.61
========== ========== ========== ==========
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, 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 472,268 2,104,822 2,577,090
Capital redemptions (40 units) -- (3,920) (3,920)
Cash distributions to partners (1,805,411) (16,248,700) (18,054,111)
----------- ------------ ------------
Balance, June 30, 1998 $(4,187,247) $ 34,851,233 $ 30,663,986
=========== ============ ============
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,
-------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income $ 2,577,090 $ 2,454,358
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of aircraft inventory (141,981) (296,247)
Depreciation 1,620,662 5,479,823
Changes in operating assets and liabilities:
Increase in rent and other receivables (248) (498,866)
Decrease in prepaid fees -- 104,275
Increase in payable to affiliates 43,087 78,265
Increase in accounts payable
and accrued liabilities 23,169 102,439
Increase (decrease) in deferred income 605,316 (438,818)
------------ ------------
Net cash provided by operating activities 4,727,095 6,985,229
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory 141,981 296,247
Proceeds from sale of aircraft -- 1,491,329
Payments to Purchaser related to sale of aircraft -- (1,341,968)
Principal payments on notes receivable -- 185,013
------------ ------------
Net cash provided by investing activities 141,981 630,621
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable (1,605,020) (296,446)
Capital redemptions (3,920) --
Cash distributions to partners (18,054,111) (6,944,444)
------------ ------------
Net cash used in financing activities (19,663,051) (7,240,890)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (14,793,975) 374,960
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 28,632,488 20,229,105
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 13,838,513 $ 20,604,065
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 494,980 $ 531,475
============ ============
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 (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 curren quarter to the general partner,
Polaris Investment Management Corporation, in connection with services
rendered or payments made on behalf of the Partnership:
Payments for
Three Months Ended Payable at
June 30, 1998 June 30, 1998
------------- -------------
Aircraft Management Fees $ 75,000 $ 81,103
Out-of-Pocket Administrative and
Selling Expense Reimbursement 133,247 83,703
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 11,882 1,523
----------- -----------
$ 220,129 $ 166,329
=========== ===========
3. 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.
7
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.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
At June 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) and certain inventoried aircraft parts out of its
original portfolio of 38 aircraft. The Partnership transferred three McDonnell
Douglas DC-9-10 aircraft and six Boeing 727-100 aircraft to aircraft inventory
in 1992. The inventoried aircraft have been disassembled for sale of their
component parts.
In August 1998, 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 in the month of February of $11,404. The net purchase price
will be paid in four monthly installments commencing in August.
Partnership Operations
The Partnership recorded net income of $1,437,265, or $2.57 per limited
partnership unit, for the three months ended June 30, 1998, as compared to net
income of $1,868,968, or $3.08 per limited partnership unit, for the three
months ended June 30, 1997. The Partnership recorded net income of $2,577,090
or $4.21 per limited partnership unit, for the six months ended June 30, 1998
compared to net income of $2,454,358, or $3.61 per limited partnership unit,
for the six months ended June 30, 1997.
Rental revenues, management fees and depreciation decreased during the three
and six months ended June 30, 1998, as compared to the same periods 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 six months ended
June 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 six months ended June 30, 1998,
as compared to the same periods in 1997, due to the payoff of notes receivable
from Continental Airlines, Inc. and Triton during 1997.
Interest expense decreased during the three and six months ended June 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 six months ended June 30, 1998
as compared to the same periods in 1997, due to an increase in legal expenses
related to the sale of the remaining aircraft.
The increase in the deferred income balance at June 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 rental income
earned and the rental payments due is recognized as deferred income. The
rental payments due from TWA during the three and six months ended June 30, 1998
exceeded the rental income earned on the TWA leases, causing an increase in
the deferred income balance.
9
Liquidity and Cash Distributions
Liquidity - The Partnership received all lease payments from its sole lessee,
TWA, except for the June 1998 lease payment. On July 2, 1998, the Partnership
received its $850,000 rental payment from TWA that was due on June 27,1998. This
amount was included in rent and other receivables on the balance sheet at June
30, 1998. In addition, payments totaling $141,981 have been received during
the first six months of 1998 from the sale of parts from the nine disassembled
aircraft, as compared to payments of $296,247 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 June 30, 1998 and 1997 were $1,449,884, or $2.90 per limited
partnership unit, and $3,125,000, or $6.25 per limited partnership unit,
respectively. Cash distributions to limited partners during the six months ended
June 30, 1998 and 1997 were $16,248,700, or $32.50 per limited partnership
unit, and $6,250,000, or $12.50 per limited partnership unit, respectively.
The increase, as compared to 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) and need to retain cash reserves as
previously discussed in the Liquidity section; and the receipt of rental
payments from TWA.
10
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 period ended
March 31, 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 April
23, 1998, the Court consolidated for discovery purposes this action with the
action entitled "Accelerated" High Yield Income Fund II, Ltd., L.P. v. Polaris
Investment Management Corporation, et. al. On July 9, 1998, the Court denied
the defendants' demurrer to dismiss the plaintiffs' second amended complaint. On
July 28, 1998, defendants filed an answer to the second amended complaint.
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 period ended March 31,
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.
11
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, 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)
12