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 March 31, 1999
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.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended March 31, 1999
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - March 31, 1999 and
December 31, 1998...........................................3
b) Statements of Operations - Three Months Ended
March 31, 1999 and 1998.....................................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1998
and Three Months Ended March 31, 1999.......................5
d) Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998...............................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
Part I. Financial Information
-----------------------------
Item 1. Financial Statements
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1999 1998
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 12,332,384 $ 13,423,701
RENT AND OTHER RECEIVABLES 850,593 850,748
AIRCRAFT, net of accumulated depreciation
of $57,042,088 in 1999 and $56,439,234 in 1998 25,142,489 25,745,343
------------ ------------
$ 38,325,466 $ 40,019,792
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 136,665 $ 115,888
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 70,983 121,632
DEFERRED INCOME 2,139,868 1,837,210
NOTES PAYABLE 6,920,431 7,792,177
------------ ------------
Total Liabilities 9,267,947 9,866,907
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,653,173) (3,642,196)
Limited Partners, 499,960 units outstanding
in 1999 and 1998 32,710,692 33,795,081
------------ ------------
Total Partners' Capital 29,057,519 30,152,885
------------ ------------
$ 38,325,466 $ 40,019,792
============ ============
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 March 31,
1999 1998
---- ----
REVENUES:
Rent from operating leases $2,247,342 $2,247,342
Interest 145,382 297,746
Gain on sale of aircraft inventory -- 89,534
---------- ----------
Total Revenues 2,392,724 2,634,622
---------- ----------
EXPENSES:
Depreciation 602,854 1,017,808
Management fees to general partner 86,787 86,787
Interest 177,334 256,148
Operating 3,931 36,720
Administration and other 61,833 97,334
---------- ----------
Total Expenses 932,739 1,494,797
---------- ----------
NET INCOME $1,459,985 $1,139,825
========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 244,558 $ 317,641
========== ==========
NET INCOME ALLOCATED TO
LIMITED PARTNERS $1,215,427 $ 822,184
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 2.43 $ 1.64
========== ==========
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, 1998 and
Three Months Ended March 31, 1999
---------------------------------
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1997 $ (2,854,104) $ 48,999,031 $ 46,144,927
Net income 1,339,516 3,948,438 5,287,954
Capital redemptions -- (3,920) (3,920)
Cash distributions to partners (2,127,608) (19,148,468) (21,276,076)
------------ ------------ ------------
Balance, December 31, 1998 (3,642,196) 33,795,081 30,152,885
Net income 244,558 1,215,427 1,459,985
Cash distributions to partners (255,535) (2,299,816) (2,555,351)
------------ ------------ ------------
Balance, March 31, 1999 $ (3,653,173) $ 32,710,692 $ 29,057,519
============ ============ ============
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)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 1,459,985 $ 1,139,825
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of aircraft inventory -- (89,534)
Depreciation 602,854 1,017,808
Changes in operating assets and
liabilities:
Decrease (increase) in rent and other
receivables 155 (370)
Increase in payable to affiliates 20,777 24,579
(Decrease) increase in accounts payable
and accrued liabilities (50,649) 47,335
Increase in deferred income 302,658 302,658
------------ ------------
Net cash provided by operating
activities 2,335,780 2,442,301
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft inventory -- 89,534
------------ ------------
Net cash provided by investing
activities -- 89,534
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable (871,746) (793,015)
Capital redemptions -- (3,920)
Cash distributions to partners (2,555,351) (16,443,129)
------------ ------------
Net cash used in financing
activities (3,427,097) (17,240,064)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (1,091,317) (14,708,229)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 13,423,701 28,632,488
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 12,332,384 $ 13,924,259
============ ============
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, 1998,
1997, and 1996 included in the Partnership's 1998 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
Three Months Ended Payable at
March 31, 1999 March 31, 1999
-------------- --------------
Aircraft Management Fees $ 75,000 $116,463
Out-of-Pocket Administrative Expense
Reimbursement 103,202 20,202
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 1,345 --
-------- --------
$179,547 $136,665
======== ========
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.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
At March 31, 1999, 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.
Partnership Operations
The Partnership reported net income of $1,459,985, or $2.43 per limited
partnership unit, for the three months ended March 31, 1999 compared to net
income of $1,139,825, or $1.64 per unit, for the same period in 1998.
The increase in net income is due to decreases in depreciation, interest,
operating and administrative expenses, partially offset by decreases in interest
and other income, as discussed below.
The decrease in depreciation expense is the result of several aircraft having
been fully depreciated down to their estimated salvage values during 1998.
Interest expense decreased during the three months ended March 31, 1999, as
compared to the same period in 1998, due to the continuing payments being made
on the TWA hushkit notes payable.
Operating expenses decreased during the three months ended March 31, 1999, as
compared to the same period in 1998, due to legal expenses incurred during the
first quarter of 1998, related to the sale of aircraft to Triton.
Administration and other expenses decreased during the three months ended March
31, 1999, as compared to the same period in 1998, primarily due to a decrease in
printing and postage costs resulting from several additional investor mailings
required in the first quarter of 1998.
Interest income decreased during the first quarter of 1999, as compared to the
same period in 1998, primarily due to a decrease in the cash reserves over the
same periods.
Payments totaling $89,534 were received, and recognized as other income, during
the first quarter of 1998, from the sale of parts from nine disassembled
aircraft. There were no such sales in 1999.
The increase in the deferred income balance at March 31, 1999 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 months ended March 31, 1999 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, except for the March 1999 lease payment. On April 2, 1999, the Partnership
received its $850,000 rental payment from TWA that was due on March 27, 1999.
This amount was included in rent and other receivables on the balance sheet at
March 31, 1999.
9
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 March 31, 1999 and 1998 were $2,299,816, or $4.60 per limited
partnership unit, and $14,798,816, or $29.60 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 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.
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
(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.
The first three phases of the program have been completed for a substantial
majority of mission-critical activities. Management plans to have nearly all
significant information systems, products and services and facilities through
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.
10
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
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) 1998 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.
Other Proceedings - Item 10 in Part III of the Partnership's 1998 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. 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
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 11, 1999 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