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 September 30, 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 13 pages.
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FORM 10-Q - For the Quarterly Period Ended September 30, 1999
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
a) Balance Sheets - September 30, 1999 and
December 31, 1998...........................................3
b) Statements of Operations - Three and Nine Months
Ended September 30, 1999 and 1998...........................4
c) Statements of Changes in Partners' Capital
(Deficit) - Year Ended December 31, 1998
and Nine Months Ended September 30, 1999....................5
d) Statements of Cash Flows - Nine Months
Ended September 30, 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)
September 30, December 31,
1999 1998
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 12,266,508 $ 13,423,701
RENT AND OTHER RECEIVABLES 863,276 850,748
AIRCRAFT, net of accumulated depreciation
of $58,247,798 in 1999 and $56,439,234
in 1998 23,936,779 25,745,343
------------ ------------
$ 37,066,563 $ 40,019,792
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 159,383 $ 115,888
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 95,283 121,632
DEFERRED INCOME 2,745,185 1,837,210
NOTES PAYABLE 5,113,816 7,792,177
------------ ------------
Total Liabilities 8,113,667 9,866,907
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (3,654,246) (3,642,196)
Limited Partners, 499,960 units outstanding
in 1999 and 1998 32,607,142 33,795,081
------------ ------------
Total Partners' Capital 28,952,896 30,152,885
------------ ------------
$ 37,066,563 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Rent from operating leases $2,247,342 $2,247,342 $6,742,026 $6,742,026
Interest and other 151,503 182,918 437,284 663,910
Gain on sale of aircraft
inventory -- 88,596 -- 230,577
---------- ---------- ---------- ----------
Total Revenues 2,398,845 2,518,856 7,179,310 7,636,513
---------- ---------- ---------- ----------
EXPENSES:
Depreciation 602,855 602,854 1,808,564 2,223,516
Management fees to general
partner 86,787 86,787 260,360 260,360
Interest 135,040 217,673 468,811 710,959
Operating 6,347 31,961 14,000 87,405
Administration and other 66,394 68,993 216,902 266,595
---------- ---------- ---------- ----------
Total Expenses 897,423 1,008,268 2,768,637 3,548,835
---------- ---------- ---------- ----------
NET INCOME $1,501,422 $1,510,588 $4,410,673 $4,087,678
========== ========== ========== ==========
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 152,490 $ 152,107 $ 549,016 $ 624,375
========== ========== ========== ==========
NET INCOME ALLOCATED
TO LIMITED PARTNERS $1,348,932 $1,358,481 $3,861,657 $3,463,303
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 2.69 $ 2.72 $ 7.72 $ 6.93
========== ========== ========== ==========
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
Nine Months Ended September 30, 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 (40 units) -- (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 549,016 3,861,657 4,410,673
Cash distributions to partners (561,066) (5,049,596) (5,610,662)
------------ ------------ ------------
Balance, September 30, 1999 $ (3,654,246) $ 32,607,142 $ 28,952,896
============ ============ ============
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)
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $ 4,410,673 $ 4,087,678
Adjustments to reconcile net income to
net cash provided by operating
activities:
Gain on sale of aircraft inventory -- (230,577)
Depreciation 1,808,564 2,223,516
Changes in operating assets and
liabilities:
Decrease in rent and other receivables (12,528) (201)
Increase in payable to affiliates 43,495 62,615
Decrease in accounts payable
and accrued liabilities (26,349) (8,273)
Increase in deferred income 907,975 907,974
------------ ------------
Net cash provided by operating
activities 7,131,830 7,042,732
------------ ------------
INVESTING ACTIVITIES:
Net proceeds from sale of aircraft
inventory -- 230,577
------------ ------------
Net cash provided by investing
activities -- 230,577
------------ ------------
FINANCING ACTIVITIES:
Principal payments on notes payable (2,678,361) (2,436,469)
Capital redemptions -- (3,920)
Cash distributions to partners (5,610,662) (19,665,093)
------------ ------------
Net cash used in financing
activities (8,289,023) (22,105,482)
------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (1,157,193) (14,832,173)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 13,423,701 28,632,488
------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 12,266,508 $ 13,800,315
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 471,639 $ 713,531
============ ============
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
September 30, 1999 September 30, 1999
------------------ ------------------
Aircraft Management Fees $ 75,000 $140,036
Out-of-Pocket Administrative Expense 59,760 19,347
Reimbusement
Out-of-Pocket Operating and
Remarketing Expense Reimbursement 2,625 --
-------- --------
$137,385 $159,383
======== ========
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.
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
7
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 September 30, 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 recorded net income of $1,501,422 or $2.69 per limited
partnership unit, for the three months ended September 30, 1999, as compared to
net income of $1,510,588 or $2.72 per limited partnership unit, for the three
months ended September 30, 1998. The Partnership recorded net income of
$4,410,673 or $7.72 per limited partnership unit, for the nine months ended
September 30, 1999 compared to net income of $4,087,678 or $6.93 per limited
partnership unit, for the nine months ended September 30, 1998.
The decrease in net income during the three months ended September 30, 1999, as
compared to the same period in 1998, is primarily the result of the sale of the
remaining inventory of aircraft parts from the dissembled aircraft to Soundair
in 1998. Additionally, decreased interest income in 1999, partially offset by
decreased interest and operating expenses, discussed below, contributed to the
decrease in net income for the three months ended September 30, 1999.
The increase in net income during the nine months ended September 30, 1999 is
due to decreases in depreciation, interest, operating and administrative
expenses, partially offset by decreases in interest and other income, and gains
on the sale of aircraft inventory in 1998.
The decrease in depreciation expense during the nine months ended September 30,
1999 is the result of several aircraft having been fully depreciated down to
their estimated salvage values during 1998.
Interest expense decreased during the three and nine months ended September 30,
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 and nine months ended September
30, 1999, as compared to the same period in 1998, due to legal expenses incurred
during 1998, related to the sale of aircraft to Triton.
Administration and other expenses decreased during the three and nine months
ended September 30, 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 1998. Also contributing to this decrease was a
decrease in consulting fees.
Interest income decreased during the three and nine months ended September 30,
1999, as compared to the same periods in 1998, primarily due to a decrease in
the cash reserves due to distributions over the same periods.
Payments totaling $230,577 were received, and recognized as other income, during
the nine months ended September 30, 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 September 30, 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
9
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, 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 September 1999 lease payment. On October 1, 1999, the
Partnership received its $850,000 rental payment from TWA that was due on
September 27, 1999. This amount was included in rent and other receivables on
the balance sheet at September 30, 1999.
Polaris Investment Management Corporation, the general partner, has determined
that cash reserves be maintained 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, 1999 and 1998 were $1,374,890 or $2.75 per limited
partnership unit, and $1,449,884 or $2.90 per limited partnership unit,
respectively. Cash distributions to limited partners during the nine months
ended September 30, 1999 and 1998 were $5,049,596 or $10.10 per limited
partnership unit, and $17,698,584 or $35.40 per limited partnership 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), 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.
As discussed in the Partnership's Annual Report on Form 10-K, GECC and GECAS are
applying a Six Sigma quality approach 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 affect their
customers. Each business has a Year 2000 leader who oversees a multi-functional
remediation project team responsible for remediation and contingency planning,
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. As of the end of
June 1999, virtually all significant information systems, products and services,
facilities and suppliers were in the control phase. As a final step in the
control phase, GECC has developed, tested and is prepared to implement
contingency plans to minimize disruption of critical business processes.
As noted elsewhere, the Partnership has ten aircraft and spare parts inventory
remaining in its portfolio at this time. All of these remaining aircraft are on
10
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 has applied the same
standards in determining the Year 2000 capabilities of the Partnership's
third-party vendors, as GECAS has applied 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
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) and in Item 1 of Part II of the Partnership's Quarterly
Reports to the SEC on Form 10-Q (Form 10-Q) for the periods ended March 31, 1999
and June 30, 1999, there are several 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.
Kepford, et al. v. Prudential Securities, et al. - On September 6, 1999, the
Court entered an order granting a stay of this action pending the submission of
the remaining plaintiffs' claims to arbitration.
Other Proceedings - Item 10 in Part III of the Partnership's 1998 Form 10-K and
Item 1 in Part II of the Partnership's Form 10-Q for the periods ended March 31,
1999 and June 30, 1999 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
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 12, 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