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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File No. 33-10122
POLARIS AIRCRAFT INCOME FUND III
(A California Limited Partnership)
(Exact name of registrant as specified in its charter)
California 94-3023671
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
Four Embarcadero Center, San Francisco, California 94111-4146
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(415) 362-0333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 1993.
Documents incorporated by reference: None
This document consists of 40 pages.
PART I
Item 1. Business
The principal objectives of Polaris Aircraft Income Fund III (PAIF-III or the
Partnership) are to purchase and lease used commercial jet aircraft in order to
provide quarterly distributions of cash from operations, to maximize the
residual values of aircraft upon sale and to protect Partnership capital through
experienced management and diversification. PAIF-III was organized as a
California limited partnership on June 27, 1984 and will terminate no later than
December 2020.
PAIF-III has many competitors in the aircraft leasing market, including
airlines, aircraft leasing companies, other limited partnerships, banks and
several other types of financial institutions. This market is highly
competitive and there is no single competitor who has a significant influence on
the industry. In addition to other competitors, the general partner, Polaris
Investment Management Corporation (PIMC), and its affiliates, including Polaris
Aircraft Leasing Corporation (PALC), Polaris Holding Company and GE Capital
Corporation (GE Capital), acquire, lease, finance and sell aircraft for their
own accounts and for existing aircraft-leasing programs sponsored by them.
Accordingly, in seeking to re-lease and sell its aircraft, the Partnership may
be in competition with the general partner and its affiliates.
A brief description of the aircraft owned by the Partnership is set forth in
Item 2, on page 4. The following table describes the material terms of the
Partnership's leases to Continental Airlines, Inc. (Continental) and Trans
World Airlines, Inc. (TWA) as of December 31, 1993:
Number
Aircraft of Lease Renewal
Lessee Type Aircraft Expiration Options
Continental B727-200 3 4/94 (1) none
B727-200A 5 10/96 (1) none
TWA DC-9-30 13 2/98 (2) none
(1) The Continental leases were modified in 1991; the leases for the Boeing
727-200 aircraft were extended for seven months beyond the initial lease
expiration date in September 1993 at approximately 64% of the original
lease rates. Continental may terminate the leases for these aircraft at
the earlier of April 1994 or 60,000 cycles. The leases for the Boeing
727-200 Advanced aircraft were extended for 37 months beyond the initial
lease expiration date in September 1993 at approximately 90% of the
original lease rates. The Partnership also agreed to pay for certain
aircraft maintenance, modification and refurbishment costs, not to exceed
approximately $3.2 million, a portion of which will be recovered with
interest through payments from Continental over the extended lease terms.
(2) TWA may specify a lease expiration date for each aircraft up to six months
before the date shown, provided the average date for the 13 aircraft is
2
February 1998. The TWA leases were modified in 1991; the leases were
extended for an aggregate of 75 months beyond the initial lease expiration
date in November 1991 at approximately 46% of the original lease rates.
The Partnership also agreed to share in the costs of certain Airworthiness
Directives (ADs). If such costs are incurred by TWA, they will be credited
against rental payments, subject to annual limitations with a maximum of
$500,000 per aircraft over the lease terms. On January 31, 1992, TWA
commenced reorganization proceedings under Chapter 11 of the federal
Bankruptcy Code and subsequently emerged from bankruptcy protection in
August 1993 as discussed further in Note 4 to the financial statements of
the Partnership's 1993 Annual Report to the Securities and Exchange
Commission on Form 10-K (Form 10 -K) (Item 8).
The Partnership also owns 3 McDonnell Douglas DC-9-10 aircraft formerly leased
to Midway Airlines, Inc. (Midway) which have been transferred to aircraft
inventory and have been disassembled for sale of their component parts and six
Boeing 727-100 aircraft formerly leased to Continental which have been
transferred to aircraft inventory and are being remarketed for sale.
Approximately 700 commercial aircraft are currently available for sale or lease.
The current surplus has negatively affected market lease rates and fair market
values of both new and used aircraft. Current depressed demand for air travel
has limited airline expansion plans, with new aircraft orders and scheduled
delivery being cancelled or substantially deferred. As profitability has
declined, many airlines have opted to downsize, liquidate assets or file for
bankruptcy protection. The Partnership has been forced to adjust its estimates
of the residual values realizable from its aircraft and aircraft inventory,
which resulted in an increase in depreciation expense in 1993, 1992 and 1991, as
discussed in Note 3 to the financial statements of the Form 10-K (Item 8). A
discussion of the current market condition for the type of aircraft owned by the
Partnership follows:
Boeing 727-100 The Boeing 727 was the first tri-jet introduced into commercial
service. The Boeing 727-100 is a short to medium range jet carrying
approximately 125 passengers on trips of up to 1,500 miles. The operating
characteristics of the aircraft, as well as the cost of aging aircraft and
corrosion control ADs, have significantly reduced the possibility of re-leasing
this type of aircraft.
Boeing 727-200 and Boeing 727-200 Advanced The Boeing 727 was the first
tri-jet introduced into commercial service. The Boeing 727 is a short to medium
range jet used for trips of up to 1,500 miles. The Boeing 727-200 aircraft was
introduced in 1967 and 299 were built between 1967 and 1972. In 1972, Boeing
introduced the Boeing 727-200 Advanced model, a higher gross weight version with
increased fuel capacity. Noise suppression hardware, commonly known as a
"hushkit," has been developed which, when installed on the aircraft, bring the
Boeing 727-200 and the Boeing 727-200 Advanced into compliance with Federal
Aviation Administration (FAA) Stage 3 noise limits. The cost of the hushkit is
approximately $1.75 million for the Boeing 727-200 aircraft and approximately
$2.5 million for the Boeing 727-200 Advanced aircraft. However, while
technically feasible, hushkits may not be cost effective on all aircraft due to
the age of some of the aircraft and the time required to fully amortize the
3
additional investment. Certain ADs applicable to all models of the Boeing 727
have been issued to prevent fatigue cracks and control corrosion. Demand for
Boeing 727-200 aircraft is currently very soft due to the general oversupply of
narrowbody aircraft.
McDonnell Douglas DC-9-10/30 The McDonnell Douglas DC-9-10, a short to medium
range twin-engine jet, was introduced in 1965. The DC-9-30, which is a
stretched version of the DC-9-10, was introduced in 1967. This model offered
improved performance when carrying heavier loads. Over 970 DC-9 aircraft were
produced and there are approximately 56 operators worldwide. Providing
reliable, inexpensive lift, these aircraft fill thin niche markets, mostly in
the United States. Hushkits costing approximately $1.6 million are available to
bring these aircraft into compliance with Stage 3 requirements. The market for
this type of aircraft, as for all Stage 2 narrowbody aircraft, is currently
soft.
It is expected that the FAA will continue to propose and adopt ADs similar to
those discussed above for the Boeing 727s, which will require modifications at
some point in the future to prevent fatigue cracks and control corrosion.
Likewise demand, and hence value, of the aircraft is expected to continue to
diminish to the extent that the costs of bringing DC-9 aircraft into compliance
with any ADs reduces the economic efficiency of operating these aircraft.
The general partner believes that the current soft market reflects, in addition
to the factors cited above, the airline industry's reaction to the significant
expenditures potentially necessary to bring these aircraft into compliance with
certain ADs issued by the FAA relating to aging aircraft, corrosion prevention
and control and structural inspection and modification.
Item 2. Properties
PAIF-III owns a portfolio of 27 commercial jet aircraft out of its original
portfolio of 38 aircraft. The portfolio includes 13 McDonnell Douglas DC-9-30
aircraft leased to TWA and eight Boeing 727 (Series 200 and 200 Advanced)
aircraft leased to Continental. All leases are operating leases. The
Partnership also owns 3 McDonnell Douglas DC-9-10 aircraft formerly leased to
Midway which were transferred to aircraft inventory and have been disassembled
for sale of their component parts and six Boeing 727-100 aircraft formerly
leased to Continental which are being remarketed for sale. The following table
describes the Partnership's aircraft portfolio in greater detail:
Cycles
Year of As of 10/31/93
Aircraft Type Serial Number Manufacture (1)
Boeing 727-100 18329 1965 47,689
Boeing 727-100 18331 1965 47,626
Boeing 727-100 18848 1965 47,200
Boeing 727-100 18852 1965 46,960
Boeing 727-100 18854 1965 45,877
Boeing 727-100 18860 1965 45,772
4
Boeing 727-200 19804 1968 56,817
Boeing 727-200 20243 1969 54,558
Boeing 727-200 20384 1970 53,515
Boeing 727-200A 21247 1976 28,909
Boeing 727-200A 21248 1976 28,505
Boeing 727-200A 21249 1976 28,343
Boeing 727-200A 21363 1977 26,971
Boeing 727-200A 21366 1977 26,770
McDonnell Douglas DC-9-10 45737 1966 (2)
McDonnell Douglas DC-9-10 45741 1966 (2)
McDonnell Douglas DC-9-10 45779 1967 (2)
McDonnell Douglas DC-9-30 47028 1967 76,411
McDonnell Douglas DC-9-30 47029 1967 75,497
McDonnell Douglas DC-9-30 47030 1967 75,602
McDonnell Douglas DC-9-30 47095 1967 71,249
McDonnell Douglas DC-9-30 47109 1968 74,369
McDonnell Douglas DC-9-30 47134 1967 70,639
McDonnell Douglas DC-9-30 47136 1968 70,826
McDonnell Douglas DC-9-30 47172 1968 71,660
McDonnell Douglas DC-9-30 47173 1968 74,595
McDonnell Douglas DC-9-30 47248 1968 78,219
McDonnell Douglas DC-9-30 47250 1968 75,803
McDonnell Douglas DC-9-30 47344 1969 72,367
McDonnell Douglas DC-9-30 47491 1970 67,761
(1) Cycle information as of 12/31/93 is not yet available.
(2) Aircraft disassembled for sale of component parts.
Item 3. Legal Proceedings
Continental - On August 23, 1991, the court overseeing Continental's bankruptcy
case approved the negotiated agreement reached by Continental and the
Partnership as discussed in Note 6 to the financial statements of the Form 10-K
(Item 8). Continental emerged from bankruptcy under a plan of reorganization
approved by the Bankruptcy Court effective April 28, 1993. The Bankruptcy Court
retains jurisdiction over Continental for the purpose of approving the terms of
a stipulated settlement in which Continental would continue to operate certain
of the Partnership's aircraft under lease.
Midway As discussed in the Partnership's 1991 Form 10-K, the Partnership had
previously filed a proof of claim in the Midway bankruptcy proceeding to recover
damages for lost rent and for Midway's failure to meet return conditions with
respect to four of the Partnership's aircraft. In light of Midway's cessation
of operations, on April 30, 1992, the Partnership amended and restated its prior
proof of claim and filed an additional proof. To date no action has been taken
to pay or settle the Partnership's bankruptcy claims.
TWA Bankruptcy TWA submitted a plan of reorganization which has been approved
by the Bankruptcy Court and became effective November 3, 1993. TWA has affirmed
all of the Partnership's aircraft leases.
5
Prudential Securities Incorporated (Prudential) Settlement - On October 21,
1993, the U.S. Securities and Exchange Commission announced a settlement with
Prudential of an administrative proceeding alleging violations of the anti-fraud
provisions of the federal securities laws. It is our understanding that, in
connection with this settlement, Prudential has agreed to establish certain
claim resolution procedures and expedited arbitration procedures for persons
with claims against Prudential arising from their purchase of various limited
partnership interests through Prudential. Information regarding the Prudential
settlement and claims procedures may be obtained by calling toll-free 1-800-774-
0700.
Other Proceedings - Item 10 discusses certain actions which have been filed
against the general partner in connection with certain public offerings,
including that of the Partnership. With the exception of Novak, et al v.
Polaris Holding Company, et al, where the registrant is named as a nominal
defendant, the registrant is not a party to these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
6
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
a) PAIF-III's units representing assignments of limited partnership interest
(Units) are not publicly traded. The Units are held by Polaris Depositary
III on behalf of the Partnership's investors (Unit Holders). Currently
there is no market for PAIF-III's Units and it is unlikely that any market
will develop.
b) Number of Security Holders:
Number of Record Holders
Title of Class as of December 31, 1993
Limited Partnership Interest: 18,139
General Partnership Interest: 1
c) Dividends:
The Partnership distributed cash to partners on a quarterly basis beginning
April 1987. Cash distributions to Unit Holders totalled $12,500,000, or
$25.00 per limited partnership unit, and $10,000,000, or $20.00 per unit,
in 1993 and 1992, respectively.
Item 6. Selected Financial Data
1993 1992 1991 1990 1989
Revenues $20,500,665 $16,910,098 $16,574,900 $37,257,609 $38,863,405
Net Income (Loss) 2,707,789 (4,800,779) (20,128,461) 19,362,089 20,897,036
Net Income (Loss) allocated
to Limited Partners 1,430,836 (5,752,671) (21,239,545) 15,918,793 17,438,391
Net Income (Loss) per
Weighted Average Limited
Partnership Unit 2.86 (11.51) (42.48) 31.84 34.88
Cash Distributions per
Weighted Average Limited
Partnership Unit 25.00 20.00 26.25 65.00 65.00
Total Assets 114,953,271 128,585,579 142,116,664 175,991,064 192,787,249
Partners' Capital 113,826,743 125,007,844 140,919,734 175,631,528 192,380,550
7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Polaris Aircraft Income Fund III (the Partnership) owns a portfolio of 27
commercial jet aircraft out of its original portfolio of 38 aircraft. The
portfolio includes 13 McDonnell Douglas DC-9-30 aircraft leased to Trans World
Airlines, Inc. (TWA) and eight Boeing 727 (series 200 and 200 Advanced) aircraft
leased to Continental Airlines, Inc. (Continental). The Partnership also owns
six Boeing 727-100 aircraft formerly leased to Continental which have been
transferred to aircraft inventory and are being remarketed for sale. Three
McDonnell Douglas DC-9-10 aircraft formerly leased to Midway Airlines, Inc.
(Midway) have been transferred to aircraft inventory and disassembled for sale
of their component parts. The Partnership sold one former Continental DC-9-10
aircraft in December 1992, one former Midway DC-9-10 aircraft in January 1993,
the former Aero California S.A. de C.V. (Aero California) DC-9-10 aircraft in
September 1993 and five of the former Continental DC-9-10 aircraft at varying
dates in 1993.
Partnership Operations
For the year ended December 31, 1993, the Partnership recorded net income of
$2,707,789, or $2.86 per limited partnership unit, a significant improvement
over net losses of $4,800,779 and $20,128,461, or $11.51 and $42.48 per limited
partnership unit, for the years ended December 31, 1992 and 1991 respectively.
The losses in 1992 and 1991 resulted primarily from adjustments to depreciation
expense for declines in estimated future values of aircraft and aircraft
inventory, as discussed in the Industry Update section. Depreciation
adjustments for 1992 and 1991 were approximately $10.1 million and $19.0
million, respectively, compared to approximately $825,000 in 1993.
Rental revenues, net of related management fees, were higher during 1993 in
comparison to the previous two years. Continental began making deferred rent
payments in July 1992 on rents deferred and not previously recognized as revenue
in 1990 and 1991. Continental also began making deferred rent payments in
October 1993 on rents deferred and not previously recognized in 1992. The
increase in rent due primarily to the commencement of rent payments by
Continental on previously deferred rent was partially offset by lower TWA rental
rates (1992 revenues included two months at the higher pre-bankruptcy rates,
whereas all rent from TWA in 1993 is at the lower renegotiated rates) and the
absence of rental revenue from the Aero California lease.
Interest income also increased for 1993 as additional interest was earned on the
rent deferral and modification advances with Continental. Revenues for 1993
include the gain on the sale of two aircraft totalling $233,387 as discussed
below and income from a forfeited deposit of $25,000.
Partially offsetting the higher revenues for 1993 were increased operating
expenses incurred in the remarketing of off-lease aircraft and disassembling of
the former Midway aircraft as discussed below. During the off-lease period, the
Partnership bears the operating costs of all routine expenses associated with
8
the aircraft, including storage, insurance and maintenance. When the aircraft
are on lease, the lessee bears these costs.
Liquidity and Cash Distributions
As discussed in the Industry Update section, the airline industry in general is
facing tremendous economic adversities which have impacted all of the
Partnership's lessees. In order to keep the Partnership's aircraft on lease and
generating revenue, the Partnership has entered into leases with lower rental
rates on all its aircraft, with the exception of those aircraft that were
previously off-lease and later sold.
Liquidity The Partnership has received all lease payments due from TWA and
Continental under the respective modified agreements. In addition, Aero
California has made all payments due on the financed sale of the DC-9-10
aircraft as discussed below.
The agreement with Continental stipulates that the Partnership pay for the costs
of certain maintenance work, Airworthiness Directive (AD) compliance, aircraft
modification and refurbishment costs, which are not to exceed approximately $3.2
million, a portion of which will be recovered with interest through payments
from Continental over the extended lease terms. In accordance with the cost
sharing agreement, the Partnership financed $165,937 for new image modifications
during 1993. The Partnership's balance sheets, in the financial statements of
the Form 10-K (Item 8), reflect as notes receivable such reimbursable costs
financed through December 31, 1993. The Partnership will use a portion of its
cash reserves of approximately $25.6 million as of December 31, 1993 to finance
additional costs to Continental.
Cash Distributions Distributions of cash available from operations commenced
in the second quarter of 1987. Cash distributions to Limited Partners totalled
$12,500,000, $10,000,000, and $13,125,000 in 1993, 1992 and 1991, respectively.
Cash distributions per limited partnership unit totalled $25.00, $20.00 and
$26.25 in 1993, 1992 and 1991, respectively. The amount of future cash
distributions will depend on the Partnership's future cash requirements,
continued receipt of the renegotiated rental payments from Continental and TWA,
proceeds from the sale of parts from the Partnership disassembled aircraft and
the general partner's success in selling the six Boeing 727-100 aircraft
formerly on lease to Continental and the three Boeing 727-200 aircraft scheduled
to be returned from lease with Continental in April 1994.
TWA Lease Modification
During 1991, TWA defaulted under its leases with the Partnership when it failed
to pay its lease payments due on March 5, 1991. On March 28, 1991, TWA and the
Partnership entered into lease amendments which specified (i) renegotiated lease
rates equal to approximately 71% of the original rates; (ii) payment of the
March and April lease payments at the renegotiated rates on March 27, 1991; and
(iii) an advance lump sum payment on March 29, 1991 representing the present
value of the remaining lease payments due through the end of the leases in
November 1991 at the renegotiated rate. The Partnership recorded the lump sum
9
payment from TWA as deferred income, and recognized the rental revenue as it was
earned over the lease term. The Partnership also recognized interest expense
equal to the difference between the cash received and the rental revenue earned
over the lease term.
In December 1991, the leases for all 13 aircraft were amended further to extend
the terms to February 1998, at approximately 46% of the initial lease rates. In
addition, the Partnership agreed to share in the costs of certain ADs. If such
costs are incurred by TWA, they will be credited against rental due to the
Partnership, subject to annual limitations with a maximum of $500,000 per
aircraft over the term of the leases.
In January 1992, TWA commenced reorganization proceedings under Chapter 11 of
the federal Bankruptcy Code. TWA has made all payments due under the leases.
TWA received court approval to emerge from bankruptcy protection effective
November 3, 1993. TWA notified the partnership of its intention to affirm its
leases for all 13 DC-9 aircraft. In addition, while the court had originally
granted TWA an additional 90-day period subsequent to its emergence from
bankruptcy during which it could exercise its right to reject the Partnerships's
leases, TWA has elected to waive that right with respect to the Partnership's
aircraft. As previously agreed with TWA, August and September 1993 rentals were
drawn from a security deposit held by the Partnership, which had been posted for
this purpose by TWA prior to its bankruptcy filing.
In accordance with the cost sharing arrangement described above, in 1993, TWA
submitted to the Partnership invoices for expenses paid to date by TWA to meet
the ADs. These expenses were offset against rental payments totalling $1.95
million that were due the Partnership in 1993. TWA may offset rental payments
up to an additional $4.55 million subject to limitations over the lease term.
Midway Bankruptcy
In March 1991, Midway commenced reorganization proceedings under Chapter 11 of
the federal Bankruptcy Code. In August 1991, the Bankruptcy Court approved
Midway's proposal to discontinue use of the Partnership's aircraft, and the
aircraft were subsequently returned to the Partnership.
The aircraft were not in compliance with the return conditions specified under
the lease. The general partner has retained counsel on behalf of the
Partnership to pursue all legal remedies available to protect the interests of
the limited partners. Although Midway remains liable for expenses for which it
was responsible under its lease, including the costs of complying with return
conditions, the Partnership is unlikely to recover material damages resulting
from Midway's failure to meet its obligations under the leases, as Midway's
bankruptcy estate is minimal. The Partnership sold one of these aircraft in
January 1993 and has disassembled the remaining three aircraft for sale of their
component parts as discussed later.
10
Continental Lease Modification
As discussed in the Partnership's Form 10-K for the year ended December 31,
1990, Continental filed for Chapter 11 bankruptcy protection in December 1990.
Continental terminated the leases on the six 727-100s and has returned these
aircraft to the Partnership. The leases for the seven McDonnell Douglas DC-9-10
aircraft expired from April through June 1991. During the off-lease period, the
Partnership bears the cost of all operating expenses associated with the
aircraft including storage, insurance, maintenance and remarketing costs.
Continental will be entitled, under certain circumstances related to a possible
future substantial downsizing by Continental, which is not currently
anticipated, to reject the remaining existing leases. The terms of the modified
agreement are described below.
For the Partnership's Boeing aircraft, the agreement approved by the Bankruptcy
Court in 1991 specifies (i) extension of the leases for the three 727-200s to
the earlier of April 1994 or 60,000 cycles, and for the five 727-200 Advanced
aircraft to October 1996; (ii) renegotiated rental rates averaging approximately
73% of the original lease rates; (iii) payment of ongoing rentals at the reduced
rates beginning in October 1991; (iv) payment of deferred rentals with interest
beginning in July 1992; and (v) payment by the Partnership of certain aircraft
maintenance, modification and refurbishment costs, expected not to exceed
approximately $3.2 million, a portion of which will be recovered with interest
through payments from Continental over the extended lease terms. The
Partnership's balance sheets reflect the net reimbursable costs incurred of
$456,308 and $413,832 as of December 31, 1993 and 1992, respectively, as notes
receivable. The Partnership's share of such costs will be capitalized and
depreciated over the remaining lease term.
The Partnership recognized rent receivable from Continental of $1,511,750 in its
financial statements for the year ended December 31, 1990. As a result of the
terms of the above agreement, which included an extended deferral of the dates
when Continental will remit its rental payments for the period from December 3,
1990 through September 30, 1991 (the Deferred Amount), the Partnership has not
recognized the Deferred Amount as rental revenue until it is received, or until
the contingencies regarding collectability are removed. Accordingly, the rent
receivable recognized at December 31, 1990 was reversed during the first quarter
of 1991. The unrecognized Deferred Amounts as of December 31, 1993 and 1992
were $4,148,922 and $6,862,417, respectively. In accordance with the
aforementioned agreement, Continental began making supplemental payments for
accrued unpaid rent plus interest on July 1, 1992. During 1993 and 1992, the
Partnership received supplemental payments of $3,946,788 and $1,973,394, of
which $2,713,495 and $1,202,583 was recognized as rental income in 1993 and
1992, respectively.
Additional Continental Deferral Agreement As part of its reorganization plan,
Continental requested additional concessions from its aircraft lessors. As a
result, the Partnership and Continental reached an agreement to defer rental
payments for a period of three months, beginning in November 1992, for a total
of $1,852,500 (Additional Deferred Amount), with repayment over the shorter of
three and one-half years or the remaining lease term. Repayment with interest
began October 1, 1993. The unrecognized Additional Deferred Amount as of
11
December 31, 1993 was $1,733,100. During 1993, the Partnership received
supplemental payments of $162,819, of which $119,400 was recognized as rental
income in 1993. Continental continues to pay all other amounts due under the
prior agreement.
The Partnership's rights to receive payments under the agreements fall into
various categories of priority under the Bankruptcy Code. In general, the
Partnership's claims are administrative claims, with the exception of certain
deferred amounts. If Continental's reorganization is not successful, it is
likely that a portion of the Partnership's claims will not be paid in full.
Disassembly of Aircraft
In an attempt to maximize the economic return from three of the four aircraft
formerly leased to Midway (the fourth aircraft was sold in 1993 as discussed
below), the Partnership entered into an agreement with Soundair, Inc. (Soundair)
in 1992 for the disassembly and sale of these aircraft. It is anticipated that
the disassembly and sales process will take at least three years. The
Partnership has borne the cost of disassembly of approximately $50,000 per
aircraft, and will receive the proceeds from the sale of such parts net of
commission paid to Soundair. During 1993, the Partnership paid $141,630 for
aircraft disassembly costs and received net proceeds from the sale of aircraft
inventory of $593,923.
These aircraft have been recorded as aircraft inventory in the Partnership's
balance sheet as of December 31, 1992. Upon transferring the aircraft to
inventory, the Partnership recorded downward adjustments of $1,050,000. During
1993, the Partnership recorded additional downward adjustments of $801,590 to
reflect the current estimate of net realizable aircraft inventory value. These
adjustments are included in depreciation expense in the statement of operations
in the Form 10-K (Item 8).
Aircraft Sale to Lear 25, Inc. (Lear 25)
In December 1992, the Partnership reached an agreement with Lear 25 for the
installment sale of one of the ex-Continental DC-9-10 aircraft which had been
off lease since it was returned to the Partnership in early 1991. Under the
terms of the sale, Lear 25 made a non-refundable $200,000 down payment and paid
the remaining $825,000 in March 1993. The total proceeds of $1,025,000 are
approximately 26% of the original acquisition price. The Partnership recorded a
$1,000 loss on the sale in 1992. Lear 25 is the owner of several charter
operators (passenger and freight) based in Las Vegas, Nevada.
Aircraft Sale to Target Airways, Ltd. (Target)
One ex-Midway DC-9-10 aircraft was sold to Target for $925,000 in January 1993,
which resulted in a gain on sale of $146,500. This aircraft was recorded in
aircraft inventory as of December 31, 1992.
12
Aircraft Sale to Aero California
In January 1993, the Partnership agreed to sell to Aero California the DC-9-10
aircraft it was leasing. The Partnership applied the existing security deposit
and maintenance reserves toward the purchase price of approximately $1.1
million, and the remainder was paid in monthly installments through September
1993, when title was transferred to Aero California. The Partnership recognized
a gain of $86,887 on the sale.
Aircraft Sale to Intercontinental De Aviacion, S.A. (Intercontinental)
In March 1993, the Partnership agreed to sell to Intercontinental five of the
six DC-9-10 aircraft formerly on lease to Continental, which had been off-lease
since they were returned to the Partnership in early 1991. Two aircraft were
sold in March 1993, a third aircraft was sold in April 1993, a fourth aircraft
was sold in June 1993, and a fifth aircraft was sold in October 1993 for total
proceeds of $3.4 million for the five aircraft. The Partnership recorded no
gain or loss on the sales, as the aircraft sales values equalled book values.
Hushkit Options
On August 30, 1990, the Partnership acquired options to purchase up to nine
hushkits for Boeing 727 aircraft from Federal Express Corporation (Federal
Express). The Partnership's deposit of $90,000 was refunded with interest of
$6,587 in 1992, as the Partnership elected not to exercise these options.
Reconciliation of Book Income to Taxable Loss
The following is a reconciliation between net income per limited partnership
unit reflected in the financial statements of the Form 10-K (Item 8) and
information provided to unit holders for federal income tax purposes:
1993 book net income per limited partnership unit $2.86
Adjustments for tax purposes:
Reversal of book rental income previously recognized for tax (2.60)
Tax depreciation in excess of book depreciation (6.13)
Tax loss on sale in excess of book loss on sale (10.10)
Sale of inventory and net tax loss on writedown of inventory (11.11)
Reversal of Continental rental income previously recognized for tax (4.39)
Reversal of Continental interest income previously recognized for tax (.73)
Reversal of management fees previously expensed for tax .21
Items capitalized for tax and expensed for book 3.76
1993 taxable loss per limited partnership unit $ (28.23)
The differences between the net income for book purposes and net loss for tax
purposes result from the timing differences of certain income and deductions.
The Partnership computes depreciation using the straight line method for
13
financial reporting and tax purposes; however, the aircraft are depreciated
using a shorter life for tax purposes. Thus, the current year tax depreciation
expense is greater than the book depreciation expense and provides unit holders
with the benefit of deferring taxation on a portion of their cash distributions.
The Partnership also periodically evaluates the ultimate recoverability of the
carrying values and the economic lives of its aircraft for book purposes and,
accordingly, recognized adjustments which increased depreciation expense. The
adjustments also resulted in a larger tax loss on the aircraft sale than for
book. Certain aircraft have been disassembled and held in inventory until their
component parts can be sold. A net tax loss resulted from the sale of these
component parts along with a writedown of aircraft to tax basis inventory value.
For book purposes, such assets are reflected at estimated net realizable value.
Certain costs were capitalized for tax purposes and expensed for book purposes.
In addition, there are differences between the recognition of certain deferred
rental income for book and tax. As previously discussed, one of the
Partnership's lessees, Continental, filed for Chapter 11 bankruptcy protection.
The Partnership and Continental subsequently reached agreement as to the payment
of deferred and future rentals. The original deferred rentals were converted
into promissory notes bearing interest at a 12% rate, to be repaid by
Continental over periods of up to 52 months beginning in July 1992. The
additional deferred rentals were converted to notes under a similar agreement.
For book purposes, the Partnership will not recognize any of these deferred
rentals, or the related interest, as income, nor will it accrue management fee
expense on such rentals, until the amounts due are received from Continental.
However, for tax purposes, these amounts have been accrued over the period in
which they were earned.
Industry Update
Maintenance of Aging Aircraft The process of aircraft maintenance begins at
the aircraft design stage. For aircraft operating under Federal Aviation
Administration (FAA) regulations, a review board consisting of representatives
of the manufacturer, FAA representatives and operating airline representatives
is responsible for specifying the aircraft's initial maintenance program. This
program is constantly reviewed and modified throughout the aircraft's
operational life.
Since 1988, the FAA, working with the aircraft manufacturers and operators, has
issued a series of ADs which mandate that operators conduct more intensive
inspections, primarily of the aircraft fuselages. The results of these
mandatory inspections may uncover the need for repairs or structural
modifications that may not have been required under existing maintenance
programs.
In addition, an AD adopted in 1990 requires replacement or modification of
certain structural items on a specific timetable. These structural items were
formerly subject to periodic inspection, with replacement when necessary. The
FAA estimates the cost of compliance with this AD to be approximately $1.0
million per Boeing 727 aircraft, if none of the required work had been done
previously. In general, the new maintenance requirements must be completed by
14
the later of March 1994, or 60,000 cycles for each Boeing 727. A similar AD was
adopted on September 24, 1990, applicable to McDonnell Douglas aircraft. The AD
requires specific work to be performed at various cycle thresholds between
50,000 and 100,000 cycles, and on specific date or age thresholds. The
estimated cost of compliance with all of the components of this AD is $1.0
million per aircraft.
The Partnership's existing leases require the lessees to maintain the
Partnership's aircraft in accordance with an FAA-approved maintenance program
during the lease term. At the end of the leases, each lessee is generally
required to return the aircraft in airworthy condition, including compliance
with all ADs for which action is mandated by the FAA during the lease term,
except for certain instances. In negotiating subsequent leases, market
conditions generally require that the Partnership bear some or all of the costs
of compliance with future ADs or ADs that have been issued, but which did not
require action during the previous lease term. The ultimate effect on the
Partnership of compliance with the FAA maintenance standards is not determinable
at this time and will depend on a variety of factors, including the state of the
commercial aircraft market, the timing of the issuance of ADs, and the status of
compliance therewith at the expiration of the current leases.
Aircraft Noise Another issue which has affected the airline industry is that
of aircraft noise levels. The FAA has categorized aircraft according to their
noise levels. Stage 1 aircraft, which have the highest noise level, are, with
few exceptions, no longer allowed to operate from civil airports in the United
States. Stage 2 aircraft meet current FAA requirements. Stage 3 aircraft are
the most quiet and Stage 3 is the standard for all new aircraft.
On September 24, 1991, the FAA issued final rules on the phase-out of Stage 2
aircraft by the end of this decade. The current U.S. fleet is comprised of
approximately 51% Stage 3 aircraft and 49% Stage 2 aircraft. The key features
of the rule include:
Compliance can be accomplished through a gradual process of phase-in
or phase-out (see below) on each of three interim compliance dates:
December 31, 1994, 1996 and 1998 (with waivers available in certain
specific cases to December 31, 2003).
All operators have the option of achieving compliance through a
gradual phase-out of Stage 2 aircraft (i.e., eliminate 25% of its
Stage 2 fleet on each of the compliance dates noted above), or a
gradual phase-in of Stage 3 aircraft (i.e., 55%, 65% and 75% of an
operator's fleet must consist of Stage 3 aircraft by the respective
compliance dates noted above).
Carryforward credits will be awarded to operators for early additions
of Stage 3 aircraft to their fleets. These credits may be used to
reduce either the number of Stage 2 aircraft it must phase-out or the
number of Stage 3 aircraft it must phase-in by the next interim
compliance date. The credits must be used by that operator, however,
and cannot be transferred or sold to another operator.
15
The federal rule does not prohibit local airports from issuing more stringent
phase-out rules. In fact, several local airports have adopted more stringent
noise requirements which restrict the operation of Stage 2 and certain Stage 3
aircraft.
Other countries have also adopted noise policies. The European Economic
Community (EEC) adopted a non-addition rule in 1989, which directed each member
country to pass the necessary legislation to prohibit airlines from adding Stage
2 aircraft to their fleets after November 1, 1990. The rule has specific
exceptions for leased aircraft and does allow the continued use of Stage 2
aircraft which were in operation before November 1, 1990, although adoption of
rules requiring the eventual phase-out of Stage 2 aircraft is anticipated.
The Partnership's entire fleet consists of Stage 2 aircraft. Hushkit
modifications, which allow Stage 2 aircraft to meet Stage 3 requirements, are
currently available for the Partnership's aircraft. However, while technically
feasible, hushkits may not be cost effective on all models due to increasing
maintenance and operation costs. The general partner will evaluate, as
appropriate, the potential benefits of hushkitting some or all of the
Partnership's aircraft. It is unlikely, however, that the Partnership will
incur such costs unless they can be recovered through a lease.
Implementation of the Stage 3 standards have adversely affected the value of
Stage 2 aircraft, as these aircraft will require eventual modification to be
operated in the U.S. or other countries with Stage 3 standards.
Demand for Aircraft Approximately 700 commercial aircraft are currently
available for sale or lease. The current surplus has negatively affected market
lease rates and fair market values of both new and used aircraft. Current
depressed demand for air travel has limited airline expansion plans, with new
aircraft orders and scheduled delivery being cancelled or substantially
deferred. As profitability has declined, many airlines have opted to downsize,
liquidate assets, or file for bankruptcy protection.
Effects on the Partnership's Aircraft The Partnership has made downward
adjustments to its estimates of aircraft value for certain of its on-lease
aircraft. To ensure that the carrying value of each asset equals its estimated
residual value at the end of its expected holding period, where appropriate the
Partnership has increased depreciation expense. The Partnership also made
downward adjustments to the carrying values of certain of its off-lease aircraft
and aircraft inventory where depreciated cost exceeded the estimated net
realizable value. During 1993, 1992 and 1991, the Partnership recognized
downward adjustments totalling approximately $825,000, $10.1 million and $19.0
million, respectively, for certain of its aircraft and, with respect to 1993,
the adjustment also included aircraft inventory. These adjustments are included
in depreciation expense in the statement of operations.
The Partnership's leases expire between April 1994 and February 1998. Current
market studies indicate that the Partnership's non-advanced Boeing and McDonnell
Douglas aircraft continue to be significantly affected by industry events.
Therefore, the Partnership will evaluate each aircraft as it comes off lease to
16
determine whether a re-lease or a sale at the then current market rates would be
most beneficial for unit holders.
Other Event
Effective October 18, 1993, James F. Walsh resigned as Senior Vice President and
Chief Financial Officer of Polaris Investment Management Corporation to assume
new responsibilities at GE Capital Corporation. Bobbe V. Sabella has assumed
the position of Vice President and Chief Financial Officer. Ms. Sabella has
served the general partner in various capacities since September 1986, most
recently as Vice President-Finance of Polaris Investment Management Corporation.
17
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND III
(A California Limited Partnership)
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1993 AND 1992
TOGETHER WITH
AUDITORS' REPORT
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Polaris Aircraft Income Fund III:
We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
III (a California Limited Partnership) as of December 31, 1993 and 1992, and the
related statements of operations, changes in partners' capital (deficit) and
cash flows for each of the three years ended December 31, 1993. These financial
statements and the schedules referred to below are the responsibility of the
general partner. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
general partner, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Polaris Aircraft Income Fund
III as of December 31, 1993 and 1992, and the results of its operations and its
cash flows for each of the three years ended December 31, 1993, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to the
financial statements are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
San Francisco, California,
January 21, 1994
19
POLARIS AIRCRAFT INCOME FUND III
(A California Limited Partnership)
BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
1993 1992
ASSETS:
CASH $ 17,047 $ 152,106
SHORT-TERM INVESTMENTS, at cost which approximates market value 29,065,069 22,317,000
Total Cash and Short-Term Investments 29,082,116 22,469,106
RENT AND OTHER RECEIVABLES 659,301 95,609
NOTES RECEIVABLE (Notes 6 and 8) 456,308 1,238,852
AIRCRAFT at cost, net of accumulated depreciation of
$64,978,597 in 1993 and $71,136,084 in 1992 81,448,340 98,908,533
AIRCRAFT INVENTORY (Note 7) 3,281,117 5,750,000
OTHER ASSETS, net of accumulated amortization of
$796,767 in 1993 and $744,585 in 1992 26,089 123,479
$ 114,953,271 $ 128,585,579
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 190,747 $ 110,661
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 14,000 102,451
LESSEE SECURITY DEPOSITS - 366,707
MAINTENANCE RESERVES 400,000 1,162,635
DEFERRED INCOME 521,781 1,835,281
Total Liabilities 1,126,528 3,577,735
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,066,735) (954,798)
Limited Partners, 500,000 units issued and outstanding 114,893,478 125,962,642
Total Partners' Capital 113,826,743 125,007,844
$ 114,953,271 $ 128,585,579
[FN]
The accompanying notes are an integral part of these statements.
20
POLARIS AIRCRAFT INCOME FUND III
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991
REVENUES:
Rent from operating leases $ 18,056,395 $ 15,366,316 $ 15,695,438
Interest 2,185,883 1,544,782 879,462
Gain (loss) on sale of aircraft Not 233,387 (1,000) -
Other income 25,000 - -
Total Revenues 20,500,665 16,910,098 16,574,900
EXPENSES:
Depreciation and amortization 13,939,172 20,421,260 34,576,650
Management and advisory fees 871,021 755,128 784,767
Operating 2,727,105 273,440 758,988
Interest - - 208,170
Administration and other 255,578 261,049 374,786
Total Expenses 17,792,876 21,710,877 36,703,361
NET INCOME (LOSS) $ 2,707,789 $ (4,800,779) $ (20,128,461)
NET INCOME ALLOCATED TO THE GENERAL PARTNER $ 1,276,953 $ 951,892 $ 1,111,084
NET INCOME (LOSS) ALLOCATED TO THE LIMITED PARTNERS $ 1,430,836 $ (5,752,671) $ (21,239,545)
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ 2.86 $ (11.51) $ (42.48)
[FN]
The accompanying notes are an integral part of these statements.
21
POLARIS AIRCRAFT INCOME FUND III
(A California Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
General Limited
Partner Partners Total
Balance, December 31, 1990 $ (448,330) $ 176,079,858 $ 175,631,528
Net income (loss) 1,111,084 (21,239,545) (20,128,461)
Cash distributions to partners (1,458,333) (13,125,000) (14,583,333)
Balance, December 31, 1991 (795,579) 141,715,313 140,919,734
Net income (loss) 951,892 (5,752,671) (4,800,779)
Cash distributions to partners (1,111,111) (10,000,000) (11,111,111)
Balance, December 31, 1992 (954,798) 125,962,642 125,007,844
Net income 1,276,953 1,430,836 2,707,789
Cash distributions to partners (1,388,890) (12,500,000) (13,888,890)
Balance, December 31, 1993 $ (1,066,735) $ 114,893,478 $ 113,826,743
[FN]
The accompanying notes are an integral part of these statements.
22
POLARIS AIRCRAFT INCOME FUND III
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991
OPERATING ACTIVITIES:
Net income (loss) $ 2,707,789 $ (4,800,779) $(20,128,461)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 13,939,172 20,421,260 34,576,650
Loss (gain) on sale of aircraft (233,387) 1,000 -
Changes in operating assets and liabilities:
Decrease (increase) in rent and other receivables (563,692) 945,485 525,022
Decrease (increase) in other assets - (26,089) 9,076
Decrease in inventory 465,000 - -
Increase (decrease) in payable to affiliates 80,086 (132,422) 88,245
Increase (decrease) in accounts payable and accrued
liabilities (88,451) (38,727) 117,112
Increase (decrease) in deferred income (1,313,500) 1,821,781 (168,132)
Increase (decrease) in lessee security
deposits (366,707) 204,429 162,278
Increase (decrease) in maintenance reserves (762,635) 681,713 480,922
Net cash provided by operating activities 13,863,675 19,077,651 15,662,712
INVESTING ACTIVITIES:
Lease acquisition costs - (12,517) (32,690)
Improvements to aircraft - (210,385) -
Net proceeds from sale of aircraft 6,228,388 200,000 -
Net proceeds from sale of aircraft inventory 593,923 - -
Inventory disassembly costs (141,630) - -
Increase in notes receivable (165,937) (506,771) -
Principal payments on notes receivable 123,481 92,919 -
Refund of deposit on hushkit options - 90,000 -
Net cash provided by (used in) investing activities 6,638,225 (346,754) (32,690)
FINANCING ACTIVITIES:
Cash distributions to partners (13,888,890) (11,111,111) (14,583,333)
Net cash used in financing activities (13,888,890) (11,111,111) (14,583,333)
CHANGES IN CASH AND SHORT-TERM INVESTMENTS 6,613,010 7,619,786 1,046,689
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 22,469,106 14,849,320 13,802,631
CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $29,082,116 $22,469,106 $14,849,320
[FN]
The accompanying notes are an integral part of these statements.
23
POLARIS AIRCRAFT INCOME FUND III
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. Accounting Principles and Policies
Accounting Method Polaris Aircraft Income Fund III (PAIF-III or the
Partnership), a California Limited Partnership, maintains its accounting
records, prepares financial statements and files its tax returns on the accrual
basis of accounting.
Aircraft and Depreciation The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated salvage value is computed using
the straight-line method over the estimated economic life of the aircraft which
was originally estimated to be 30 years from the date of manufacture.
Depreciation in the year of acquisition is calculated based upon the number of
days that the aircraft are in service.
The Partnership periodically reviews the estimated realizability of the residual
values at the end of each aircraft's economic life. For any downward adjustment
in estimated residual, or change in the estimated remaining economic life, the
depreciation expense over the remaining life of the aircraft is increased. If
the expected net income generated from the lease (rental revenue, net of
management fees, less adjusted depreciation and an allocation of estimated
administrative expense) results in a net loss, that loss will be recognized
currently. Off-lease aircraft are carried at the lower of depreciated cost or
estimated net realizable value. A further adjustment is made for those
aircraft, if any, that require substantial maintenance work.
Capitalized Costs Aircraft modification and maintenance costs which are
determined to increase the value or extend the useful life of the aircraft are
capitalized and amortized using the straight-line method over the appropriate
period. These costs are also subject to the periodic evaluation discussed
above.
Aircraft Inventory Aircraft held in inventory for sale are reflected at the
lower of depreciated cost or estimated net realizable value. Proceeds from
sales are applied against inventory until book value is fully recovered.
Operating Leases The aircraft leases are accounted for as operating leases.
Lease revenues are recognized in equal installments over the terms of the
leases.
Other Assets Lease acquisition costs are capitalized as other assets and
amortized using the straight-line method over the term of the lease.
Income Taxes The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
24
Net Income (Loss) Per Limited Partnership Unit Net income (loss) per limited
partnership unit is based on the limited partners' share of net income or loss
and the number of units outstanding for the years ended December 31, 1993, 1992
and 1991.
Short-Term Investments The Partnership classifies all liquid investments with
original maturities of three months or less as short-term investments.
Operating Expenses Operating expenses include costs incurred to maintain,
insure and lease the Partnership's aircraft, including costs related to lessee
defaults and costs of disassembling aircraft inventory.
2. Organization and the Partnership
The Partnership was formed on June 27, 1984 for the purpose of acquiring and
leasing aircraft. The Partnership will terminate no later than December 2020.
Upon organization, both the general partner and the depositary contributed $500
to capital. The Partnership recognized no profits and losses during the periods
ended December 31, 1984 and 1985. The offering of depositary units (Units),
representing assignments of limited partnership interest, terminated on
September 30, 1987 at which time the Partnership had sold 500,000 Units of $500,
representing $250,000,000. All unit holders were admitted to the Partnership on
or before September 30, 1987.
Polaris Investment Management Corporation (PIMC), the sole general partner of
the Partnership, supervises the day-to-day operations of the Partnership.
Polaris Depositary Company III (PDC) serves as the depositary. PIMC and PDC are
wholly owned subsidiaries of Polaris Aircraft Leasing Corporation (PALC).
Polaris Holding Company (PHC) is the parent company of PALC. GE Capital
Corporation (GE Capital), an affiliate of General Electric Company, owns 100% of
PHC's outstanding common stock. Allocations to affiliates are described in
Note 10.
3. Aircraft
The Partnership originally owned a portfolio of 38 used commercial jet aircraft,
which were acquired, leased and sold as discussed below. All aircraft were
acquired from an affiliate and purchased within one year of the affiliate's
acquisition at the affiliate's original price paid. The aircraft leases are
generally net leases, requiring the lessees to pay all operating expenses
associated with the aircraft during the lease term including Airworthiness
Directives (ADs) which have been or may be issued by the Federal Aviation
Administration (FAA) and require compliance during the lease term. The leases
generally state a minimum acceptable return condition for which the lessee is
liable under the terms of the lease agreement. Certain leases also provide that
if the aircraft are returned at a level above the minimum acceptable level, the
Partnership must reimburse the lessee for the related excess, subject to certain
limitations. The related liability, if any, is currently inestimable and
therefore is not reflected in the financial statements. Of its original
25
portfolio of 38 aircraft, the Partnership sold one aircraft in December 1992,
and another seven aircraft in 1993, as discussed in Note 8.
Thirteen McDonnell Douglas DC-9-30s These aircraft were acquired for
$86,163,046 during 1986 and 1987, and leased to Ozark Air Lines, Inc. (Ozark).
In 1987, Trans World Airlines, Inc. (TWA) merged with Ozark and assumed the
leases. The leases were modified and extended prior to TWA's bankruptcy filing
as discussed in Note 4.
Four McDonnell Douglas DC-9-10s These aircraft were acquired for $15,768,766
in 1987 and leased to Midway Airlines, Inc. (Midway). Midway defaulted under its
leases in January 1991 and returned the aircraft to the Partnership as described
in Note 5. The Partnership has disassembled three of the aircraft for sale of
their component parts (Note 7). One aircraft was sold to Target Airways, Ltd.
during January 1993 as described in Note 8.
Fourteen Boeing 727s (Series 100, 200 and 200 Advanced) and Seven McDonnell
Douglas DC-9-10s These aircraft were acquired for $111,830,728 in 1987 and
leased to Continental Airlines, Inc. (Continental) for terms of 72 months for
the Boeing aircraft and 42 months for the McDonnell Douglas aircraft.
Continental filed for Chapter 11 bankruptcy protection in December 1990. In
1991, the Partnership and Continental entered into an agreement for
Continental's continued lease of eight of the Partnership's Boeing aircraft;
however, Continental rejected the leases on six Boeing 727-100s and the seven
McDonnell Douglas DC-9-10s. Note 6 contains a detailed discussion of the
Continental events. Six of the seven McDonnell Douglas DC-9-10 aircraft were
sold in 1993 and 1992 as discussed in Note 8. During 1993, the six Boeing 727-
100s were transferred to aircraft inventory and are being remarketed for sale.
Upon transferring the aircraft to aircraft inventory, the Partnership recorded
downward adjustments to the aircraft value, which are included in the adjustment
discussed in Note 7.
In June 1991, one of the DC-9-10 aircraft formerly leased to Continental was
leased to Aero California S.A. de C.V. (Aero California) for a lease term of 18
months at approximately 76% of the original lease rate with Continental. The
aircraft was subsequently sold to Aero California in September 1993, as
discussed in Note 8.
The following is a schedule by year of future minimum rental income under the
existing leases including the deferred rental payments specified in the
Continental lease modifications (Note 6):
Continental Deferred
Year Amount (1) Rental Payments Total
1994 $ 2,211,440 $ 13,950,000 $ 16,161,440
1995 1,729,060 13,320,000 15,049,060
1996 1,781,940 12,400,000 14,181,940
1997 159,582 7,800,000 7,959,582
1998 and thereafter - 1,300,000 1,300,000
$ 5,882,022 $ 48,770,000 $ 54,652,022
26
(1) Rental payments for the period from December 1990 through September 1991
are payable with interest commencing in July 1992 according to the Continental
lease modification agreement. Rental payments for the period from November 1992
through January 1993 are payable with interest commencing in October 1993
according to the additional lease modification agreement with Continental.
These payments are shown separately from regular rental payments because of
contingencies regarding collectability as discussed in Note 6.
Future minimum rental payments may be offset or reduced by future costs as
described in Notes 4 and 6.
During 1992 and 1991, the Partnership made downward adjustments to its estimates
of aircraft value for certain of its on-lease aircraft. To ensure that the
carrying value of each asset equals its estimated residual value at the end of
its expected holding period, where appropriate, the Partnership has increased
depreciation expense as described in Note 1. The Partnership also made downward
adjustments to the carrying values of certain of its off-lease aircraft and
aircraft inventory where depreciated cost exceeded the estimated net realizable
value. During 1993, 1992 and 1991, the Partnership recognized downward
adjustments totalling approximately $825,000, $10.1 million and $19.0 million,
respectively, for certain of its off-lease and on-lease aircraft and, with
respect to 1993, the adjustment also included aircraft inventory. These
adjustments are included in depreciation expense in the statements of
operations.
4. TWA Lease Modification
During 1991, TWA defaulted under its leases with the Partnership when it failed
to make its lease payments due on March 5, 1991. On March 28, 1991, TWA and the
Partnership entered into lease amendments which specified (i) renegotiated lease
rates equal to approximately 71% of the original rates; (ii) payment of the
March and April lease payments at the renegotiated rates on March 27, 1991; and
(iii) an advance lump sum payment on March 29, 1991 representing the present
value of the remaining lease payments due through the end of the leases in
November 1991 at the renegotiated rate. The Partnership recorded the lump sum
payment from TWA as deferred income, and recognized the rental revenue as it was
earned over the lease term. The Partnership also recognized interest expense
equal to the difference between the cash received and the rental revenue earned
over the lease term.
In December 1991, the leases for all 13 aircraft were extended further to extend
the terms to February 1998 at approximately 46% of the initial lease rates. In
addition, the Partnership agreed to share in the costs of certain ADs. If such
costs are incurred by TWA, they will be credited against rental due to the
Partnership, subject to annual limitations with a maximum of $500,000 per
aircraft over the term of the leases.
In January 1992, TWA commenced reorganization proceedings under Chapter 11 of
the federal Bankruptcy Code. TWA has made all payments due under the leases.
27
TWA received court approval to emerge from bankruptcy protection effective
November 3, 1993. TWA notified the partnership of its intention to affirm its
leases for all 13 DC-9 aircraft. In addition, while the court had originally
granted TWA an additional 90-day period subsequent to its emergence from
bankruptcy during which it could exercise its right to reject the Partnerships's
leases, TWA has elected to waive that right with respect to the Partnership's
aircraft. As previously agreed with TWA, August and September 1993 rentals were
drawn from a security deposit held by the Partnership, which had been posted for
this purpose by TWA prior to its bankruptcy filing.
In accordance with the cost sharing arrangement described above, in 1993, TWA
submitted to the Partnership invoices for expenses paid to date by TWA to meet
the ADs. These expenses were offset against rental payments totalling $1.95
million that were due the Partnership in 1993. TWA may offset rent up to an
additional $4.55 million subject to limitations over the lease term.
28
5. Midway Bankruptcy
In March 1991, Midway commenced reorganization proceedings under Chapter 11 of
the federal Bankruptcy Code. In August 1991, the Bankruptcy Court approved
Midway's proposal to discontinue use of the Partnership's aircraft, and the
aircraft were subsequently returned to the Partnership.
The aircraft were not in compliance with the return conditions specified under
the lease. The general partner has retained counsel on behalf of the
Partnership to pursue all legal remedies available to protect the interests of
unit holders. Although Midway remains liable for expenses for which it was
responsible under its lease, including the costs of complying with return
conditions, the Partnership is unlikely to recover material damages resulting
from Midway's failure to meet its obligations under the leases, as Midway's
bankruptcy estate is minimal. The Partnership sold one of these aircraft in
January 1993 (Note 8), and has disassembled the remaining three aircraft for
sale of their component parts (Note 7).
6. Continental Lease Modification
As discussed in the Partnership's Form 10-K for the year ended December 31,
1990, Continental filed for Chapter 11 bankruptcy protection in December 1990.
Continental terminated the leases on the six 727-100s and has returned these
aircraft to the Partnership. The leases for the seven McDonnell Douglas DC-9-10
aircraft expired during the period of April through June 1991. During the
off-lease period, the Partnership must bear the cost of all operating expenses
associated with the aircraft including storage, insurance, maintenance and
remarketing costs. Continental will be entitled, under certain circumstances
related to a possible future substantial downsizing by Continental, which is not
currently anticipated, to reject the remaining existing leases. The terms of
the modified agreement are described below.
For the Partnership's Boeing aircraft, the agreement approved by the Bankruptcy
Court in 1991 specifies (i) extension of the leases for the three 727-200s to
the earlier of April 1994 or 60,000 cycles, and for the five 727-200 Advanced
aircraft to October 1996; (ii) renegotiated rental rates averaging approximately
73% of the original lease rates; (iii) payment of ongoing rentals at the reduced
rates beginning in October 1991; (iv) payment of deferred rentals with interest
beginning in July 1992; and (v) payment by the Partnership of certain aircraft
maintenance, modification and refurbishment costs, not to exceed approximately
$3.2 million, a portion of which will be recovered with interest through
payments from Continental over the extended lease terms. The Partnership's
balance sheets reflect the net reimbursable costs incurred of $456,308 and
$413,852 as of December 31, 1993 and 1992, respectively, as notes receivable.
The Partnership's share of such costs will be capitalized and depreciated over
the remaining lease term.
The Partnership recognized rent receivable from Continental of $1,511,750 in its
financial statements for the year ended December 31, 1990. As a result of the
terms of the agreement, which includes an extended deferral of the dates when
Continental will remit its rental payments for the period from December 3, 1990
29
through September 30, 1991 (Deferred Amount), the Partnership will not recognize
the Deferred Amount as rental revenue until it is received, or until the
contingencies regarding collectability are removed. Accordingly, the rent
receivable recognized at December 31, 1990 was reversed during the first quarter
of 1991. The unrecognized Deferred Amounts as of December 31, 1993 and 1992
were $4,148,922 and $6,862,417, respectively. In accordance with the
aforementioned agreement, Continental began making supplemental payments for
accrued unpaid rent plus interest on July 1, 1992. During 1993 and 1992, the
Partnership received supplemental payments of $3,946,788 and $1,973,394, of
which $2,713,495 and $1,202,583 was recognized as rental income in 1993 and
1992, respectively.
Additional Continental Deferral Agreement As part of its reorganization plan,
Continental requested additional concessions from its aircraft lessors. As a
result, the Partnership and Continental reached an agreement to defer rental
payments for a period of three months, beginning in November 1992, for a total
of $1,852,500 (Additional Deferred Amount), with repayment over the shorter of
three and one-half years or the remaining lease term. Repayment with interest
began October 1, 1993. During 1993, the Partnership received supplemental
payments of $162,819, of which $119,400 was recognized as rental income in 1993.
The unrecognized Additional Deferred Amount as of December 31, 1993 was
$1,733,100. Continental continues to pay all other amounts due under the prior
agreement.
The Partnership's rights to receive payments under the agreements fall into
various categories of priority under the Bankruptcy Code. In general, the
Partnership's claims are administrative claims, with the exception of certain
deferred amounts. If Continental's reorganization is not successful, it is
likely that a portion of the Partnership's claims will not be paid in full.
7. Disassembly of Aircraft
In an attempt to maximize the economic return from three of the remaining four
aircraft formerly leased to Midway (Note 5), the Partnership entered into an
agreement with Soundair, Inc. (Soundair) on October 31, 1992, for the
disassembly and sale of these aircraft. It is anticipated that the disassembly
and sales process will take approximately three years. The Partnership has
borne the cost of disassembly of approximately $50,000 per aircraft, and will
receive the proceeds from the sale of such parts net of commission paid to
Soundair. During 1993, the Partnership paid $141,630 for aircraft disassembly
costs and received net proceeds from the sale of aircraft inventory of $593,923.
These aircraft have been recorded as aircraft inventory in the accompanying
balance sheet as of December 31, 1993 and 1992 as described in Note 3. Upon
transferring the aircraft to inventory, the Partnership recorded downward
adjustments of $1,050,000. During 1993, the Partnership recorded additional
downward adjustments of $801,590 to reflect the current estimate of net
realizable aircraft inventory value. These adjustments are included in
depreciation expense in the statement of operations.
30
8. Aircraft Sales
Lear 25, Inc. (Lear 25) - In December 1992, the Partnership sold one of the
ex-Continental DC-9-10 aircraft to Lear 25 for $1,025,000. The aircraft had
been off lease since it was returned to the Partnership in early 1991. Under
the terms of the sale, Lear 25 made a non-refundable $200,000 down payment and
paid the remaining $825,000 in March 1993. The total proceeds of $1,025,000
were approximately 26% of the original acquisition price. The Partnership
recorded a $1,000 loss on the sale in 1992.
Target Airways, Ltd. (Target) - One ex-Midway DC-9-10 aircraft was sold to
Target for $925,000 in January 1993, resulting in a gain on sale of $146,500.
This aircraft was recorded in aircraft inventory as of December 31, 1992.
Aero California - In January 1993, the Partnership agreed to sell to Aero
California the DC-9-10 aircraft it was leasing. The Partnership applied the
existing security deposit and maintenance reserves toward the purchase price of
approximately $1.1 million, and the remainder was paid in monthly installments
through September 1993, when title was transferred to Aero California. The
Partnership recognized a gain of $86,887 on the sale.
Intercontinental De Aviacion S.A. (Intercontinental) - In March 1993, the
Partnership agreed to sell to Intercontinental five of the six DC-9-10 aircraft
formerly on lease to Continental, which had been off-lease since they were
returned to the Partnership in early 1991. Two aircraft were sold in March
1993, a third aircraft was sold in April 1993, a fourth aircraft was sold in
June 1993, and a fifth aircraft was sold in October 1993 for total proceeds of
$3.4 million for the five aircraft. The Partnership recorded no gain or loss on
the sales, as the aircraft sales prices equalled book values.
9. Hushkit Options
On August 30, 1990, the Partnership acquired options to purchase up to nine
hushkits for Boeing 727 aircraft from Federal Express Corporation (Federal
Express). The Partnership's deposit of $90,000 was refunded with interest of
$6,587 in 1992, as the Partnership elected not to exercise these options.
10. Related Parties
Under the Limited Partnership Agreement (Partnership Agreement), the Partnership
paid or agreed to pay the following amounts to PIMC and/or its affiliates in
connection with services rendered:
a. An aircraft management fee equal to 5% of gross rental revenues with
respect to operating leases or 2% of gross rental revenues with respect
to full payout leases of the Partnership, payable upon receipt of the
rent.
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets.
31
In 1993, 1992 and 1991, the Partnership reimbursed PIMC for expenses of
$754,345, $703,756 and $943,571, respectively. Reimbursements totalling
$190,747 and $110,661 were payable to PIMC at December 31, 1993 and
1992, respectively.
c. A 10% interest in all cash distributions and sales proceeds, gross
income in an amount equal to 9.09% of distributed cash available from
operations and 1% of net income or loss and taxable income or loss, as
such terms are defined in the Partnership Agreement.
d. A subordinated sales commission of 3% of the gross sales price of each
aircraft for services performed upon disposition and reimbursement of
out-of-pocket and other disposition expenses. Subordinated sales
commissions shall be paid only after unit holders have received
distributions in an aggregate amount equal to their capital
contributions plus a cumulative non-compounded 8% per annum return on
their adjusted capital contributions, as defined in the Partnership
Agreement. The Partnership did not pay or accrue a sales commission on
any aircraft sales to date as the above subordination threshold has not
been met.
11. Income Taxes
Federal and state income tax regulations provide that taxes on the income or
loss of the Partnership are reportable by the partners in their individual
income tax returns. Accordingly, no provision for such taxes has been made in
the accompanying financial statements.
In 1993, the Partnership adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). One of the requirements of SFAS
109 is for a public enterprise that is not subject to income taxes, because its
income is taxed directly to its owners, to disclose the net difference between
the tax basis and the reported amounts of the enterprise's assets and
liabilities.
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1993 are as follows:
Reported Amounts Tax Basis Net Difference
Assets $114,953,271 $89,815,206 $ 25,138,065
Liabilities 1,126,528 514,819 611,709
32
SCHEDULE V PROPERTY, PLANT, AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Balance at Beginning Additions Balance at
Classification of Period at Cost Retirements End of Period
1993: Aircraft $ 170,044,617 - 23,617,680 $ 146,426,937
1992: Aircraft $ 213,762,540 210,385 43,928,308 $ 170,044,617
1991: Aircraft $ 213,762,540 - - $ 213,762,540
SCHEDULE VI ACCUMULATED DEPRECIATION, DEPLETION, AND
AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Balance at Beginning Additions Charged to Balance at
Classification of Period Expense Retirements End of Period
1993: Aircraft $ 71,136,084 13,040,193 19,197,680 $ 64,978,597
1992: Aircraft $ 88,028,233 20,261,159 37,153,308 $ 71,136,084
1991: Aircraft $ 53,817,925 34,210,308 - $ 88,028,233
33
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers of the Registrant
PAIF-III has no directors or officers. PIMC is the General Partner of the
Partnership and as such manages and controls the business of the Partnership.
The directors and officers of PIMC are:
Name Position
Herbert D. Depp Chairman of the Board; President;
Director
Howard L. Feinsand Senior Vice President; Director
John E. Flynn Senior Vice President Aircraft
Marketing
Richard J. Adams Senior Vice President Aircraft
Sales and Leasing
James T. Caleshu Senior Vice President and General
Counsel; Secretary
Bobbe V. Sabella Vice President and Chief Financial
Officer
Robert M.J. Ward Vice President International
James R. Weiland Vice President Technical
James W. Linnan Vice President Financial
Management
Robert W. Dillon Vice President Aviation Legal and
Insurance Affairs; Assistant
Secretary
Mr. Depp, 49, assumed the position of the President effective April 1991,
previously having served as Executive Vice President of PIMC and PALC since July
1989, Vice President Aircraft Marketing since June 1986, Vice President
Commercial Aircraft since August 1984, and Director of Marketing Aircraft
since November 1980. Mr. Depp assumed the position of Chairman effective April
34
1991. He has been a director of PIMC and of PHC since May 1990 and a director
of PALC since April 1991.
Mr. Feinsand, 46, joined PIMC and PALC as Vice President and General Counsel;
Assistant Secretary in April 1989. Effective July 1989, Mr. Feinsand assumed
the positions of Senior Vice President which he continues to hold, and
previously served as General Counsel and Secretary from July 1989 to August
1992. Mr. Feinsand also serves as a director of PIMC. Mr. Feinsand, an
attorney, was a partner in the New York law firm of Golenbock and Barell from
1987 through 1989. In his previous capacities, Mr. Feinsand served as counsel
to PIMC and PALC. Mr. Feinsand also serves as a director on the board of Duke
Realty Investments, Inc.
Mr. Flynn, 53, was elected Senior Vice President Aircraft Marketing effective
April 1991, having previously served as Vice President North America of PIMC
and PALC since July 1989. Mr. Flynn joined PALC in March 1989 as Vice President
Cargo. For the two years prior to the time he joined PALC, Mr. Flynn was a
Transportation Consultant.
Mr. Adams, 60, serves as Senior Vice President Aircraft Sales and Leasing of
PIMC and PALC effective August 1992; having previously served as Vice President
Aircraft Sales & Leasing, Vice President North America, and Vice President
Corporate Aircraft since he joined PALC in August 1986.
Mr. Weiland, 50, joined PIMC and PALC in September 1990 as Vice President
Technical. Prior to joining PIMC and PALC, Mr. Weiland had been President and
Chief Executive Officer of RAMCO, a company organized to build and operate an
aircraft maintenance facility, since 1986.
Mr. Caleshu, 54, joined PIMC and PALC in August 1992 as Senior Vice President
and General Counsel. Prior to joining PIMC and PALC, Mr. Caleshu, an attorney,
was a partner in the San Francisco firm of Pettit and Martin from 1966 to 1992.
Ms. Sabella, 37, was elected Vice President and Chief Financial Officer
effective October 1993, having previously served as Vice President - Finance
since April 1992, Vice President and Controller since January 1990 and Corporate
Controller of PIMC and PALC since September 1986.
Mr. Ward, 50, has served as Vice President International of PIMC and PALC
since October 1987, with responsibility for Asia, Central America, Pacific and
Latin America.
Mr. Linnan, 52, was elected Vice President Financial Management effective
April 1991, having previously served as Vice President Investor Marketing of
PIMC and PALC since July 1986.
Mr. Dillon, 52, was elected Vice President Aviation Legal and Insurance
Affairs effective April 1989. Previously, he has served as General Counsel of
PIMC and PALC since January 1986.
Disclosure pursuant to Section 16, Item 405 of Regulation S-K:
35
Based solely on its review of the copies of such forms received or written
representations from certain reporting persons that no Forms 3, 4, or 5 were
required for those persons, the Partnership believes that, during 1993 all
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were met.
As reported in the Partnership's 1990 Form 10-K, on June 8, 1990, a purported
class action entitled Harner, et al, v Prudential Bache Securities, (to which
the Partnership was not a party) was filed by certain purchasers of units in a
1983 and 1984 public offering in several corporate aircraft public partnerships.
PALC and PIMC were named as two of the defendants in this action. On September
24, 1991, the court entered an order in favor of PALC and PIMC granting their
motion for summary judgement and dismissing the plaintiffs' complaint with
prejudice. On March 13, 1992, Plaintiff filed a notice of appeal to the United
States Court of Appeals for the Sixth Circuit. On August 21, 1992, the court of
Appeals ordered consolidation of the Appellants' causes for the purposes of
briefing and submission. This appeal was fully briefed and oral argument was
held. Parties are waiting for the Court to issue a decision.
On October 27, 1992, a Class Action Complaint entitled Edwin Weisl, Jr. et al,
Plaintiffs, v the General Partner of the Partnership, its affiliates and others,
Defendants, Index No. 29239/92 was filed in the Supreme Court of the State of
New York for the County of New York. The Complaint sets forth various causes of
action which include allegations against certain or all of the defendants (i)
for alleged fraud in connection with certain public offerings, including that of
the Partnership, on the basis of alleged misrepresentation and alleged omissions
contained in the written offering materials and all presentations allegedly made
to investors; (ii) for alleged negligent misrepresentation in connection with
such offerings; (iii) for alleged breach of fiduciary duties; (iv) for alleged
breach of third party beneficiary contracts; (v) for alleged violations of the
NASD Rules of Fair Practice by certain registered broker dealers; and (vi) for
alleged breach of implied covenants in the customer agreements by certain
registered brokers. The Complaint seeks an award of compensatory and other
damages and remedies. On January 19, 1993, Plaintiff's filed a motion for class
certification. On March 1, 1993, Defendants filed motions to dismiss Complaint
on numerous grounds, including failure to state a cause of action and statute of
limitations. The court has not ruled on the motion for class certification or
the motions to dismiss the complaint. The Partnership is not named as a
defendant in this action.
On or around February 17, 1993, a civil action entitled Einhorn, et al v Polaris
Public Income Funds, et al, was filed in the Circuit Court of the 11th Judicial
Circuit in and for Dade County, Florida against, among others, PIMC and Polaris
Depositary Company. Plaintiffs seek class action certification on behalf of a
class of investors in the Polaris Aircraft Income Funds IV, V and VI who
purchased their interests while residing in Florida. Plaintiffs allege the
violation of Section 517.301, Florida Statutes, in connection with the offering
and sale of the Partnerships. Among other things, Plaintiffs assert that the
Defendants sold interests in the Partnerships while "omitting and failing to
disclose the material facts questioning the economic efficacy of" the
Partnerships. Plaintiffs seek rescission or damages, in addition to interest,
costs, and attorneys' fees. On April 5, 1993, defendants filed a motion to stay
36
this action pending the final determination of a prior filed action in the
Supreme Court for the State of New York entitled Weisl v Polaris Holding
Company. On that date, defendants also filed a motion to dismiss the Complaint
on the grounds of failure to attach necessary documents, failure to plead fraud
with particularity and failure to plead reasonable reliance. On April 13, 1993,
the court denied the defendants' motion to stay. On May 7, 1993, the Court
stayed the action pending an appeal of the denial of the motion to stay.
Defendants subsequently filed with the Third District Court of Appeal a petition
for writ of certiorari to review the Circuit Court order denying the motion to
stay. On October 19, 1993, the Court of Appeal granted the writ of certiorari,
quashed the order, and remanded the action with instruction to grant the stay.
On or around May 14, 1993, a purported class action entitled Michael Moross, et
al, v Polaris Holding Company, et al, was filed in the United States District
Court for the District of Arizona. This purported class action was filed on
behalf of investors in the Polaris Aircraft Income Funds I - VI by nine
investors in the Polaris Aircraft Income Funds. The Compliant alleges that
defendants violated Arizona state securities statues and committed negligent
misrepresentation and breach of fiduciary duty by misrepresenting and failing to
disclose material facts in connection with the sale of limited partnership units
in the above-named funds. An Amended Compliant was filed on September 17, 1993,
but has not been served upon defendants. On or around October 4, 1993,
defendants filed a notice of removal to the United States District Court for the
district of Arizona. Defendants also filed a motion to stay the action pending
the final determination of a prior filed action in the Supreme Court for the
State of New York entitled Weisl v. Polaris Holding Company ("Weisl") and to
defendants' time to respond to the Complaint until 20 days after disposition of
the motion to action pending resolution of the motions for class certification
and motions to dismiss pending in Weisl. On January 20, 1994, the court stayed
the action and required defendants to file status reports every sixty days
setting forth the status of the motions in Weisl.
On September 21, 1993, a purported derivative action entitled Novak, et al, v.
Polaris Holding Company, et al, was filed in the Supreme Court of the State of
New York, County of New York. This action was brought on behalf of Polaris
Aircraft Income Funds I - III (the "Partnerships"). The Complaint names as
defendants Polaris Holding Company, its affiliates and others. Polaris Aircraft
Income Funds I - III are named as nominal defendants. The Complaint alleges,
among other things, that defendants mismanaged the Partnerships, engaged in
self-dealing transactions that were detrimental to the Partnerships and failed
to make required disclosure in connection with the sale of the Partnership
units. The Complaint alleges claims of breach of fiduciary duty and
constructive fraud and seeks, among other things an award of compensatory and
punitive damages in an unspecified amount, re-judgment interest, and attorneys'
fees and costs. On January 13, 1994, certain of the defendants, including
Polaris Holding Company, filed motions to dismiss the Complaint on the grounds
of, among others, failure to state a cause of action and failure to plead the
alleged wrong in detail.
On or around March 13, 1991, a purported class action entitled Kahn v Polaris
Holding Company, et al, was filed in the Supreme Court of the State of New York,
County of New York. This purported class action on behalf of investors in
37
Polaris Aircraft Income Fund V ("PAIF V") was filed by one investor in the above
named fund. The Complaint names as defendants the Company, Polaris Holding
Company, its affiliates and others. The Complaint charges defendants with
common law fraud, negligent misrepresentation and breach of fiduciary duty in
connection with certain misrepresentations and omissions allegedly made in
connection with the sale of interest in PAIF V. Plaintiffs seek compensatory
and consequential damages in an unspecified amount, plus interest, disgorgement
and restitution of all earnings, profits and other benefits received by
defendants as a result of their alleged practices, and attorneys' fees and
costs.
Defendants' time to move, answer or otherwise plead with respect to the
Complaint has been extended by stipulation up to and including 30 days after the
Court rules on the pending motions to dismiss, or the motions are otherwise
resolved, in Weisl v Polaris Holding Company, et al. The Partnership is not
named as a defendant in this action.
Item 11. Management Remuneration and Transactions
PAIF-III has no directors or officers. PAIF-III is managed by PIMC, the General
Partner. In connection with management services provided, management and
advisory fees of $893,701 were paid to PIMC in 1993.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a) No person owns of record, or is known by PAIF-III to own beneficially
more than five percent of any class of voting securities of PAIF-III.
b) The General Partner of PAIF-III owns the equity securities of PAIF-III
as set forth in the following table:
(1) (2) (3) (4)
Title Name of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
General Polaris Investment Represents a 10.0% interest of all cash distributions,
Partner Management Corporation gross income in an amount equal to 9.09% of distributed 100%
Interest cash available from operations, and a 1% interest in net
income or loss
c) There are no arrangements known to PAIF-III, including any pledge by any
person of securities of PAIF-III, the operation of which may at a
subsequent date result in a change in control of PAIF-III.
Item 13. Certain Relationships and Related Transactions
None.
38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements.
The following are included in Part II of this report:
Page No.
Report of Independent Public Accountants 19
Balance Sheets 20
Statements of Operations 21
Statements of Changes in Partners' Capital (Deficit) 22
Statements of Cash Flows 23
Notes to Financial Statements 24
2. Financial Statement Schedules.
a) The following are included in Part II of this report:
Page No.
Schedule V Property, Plant and Equipment 33
Schedule VI Accumulated Depreciation, Depletion; and
Amortization of Property, Plant, and Equipment 33
All other schedules are omitted because they are not applicable, not
required or because the required information is included in the
financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K and Reports on
Form 8-K.
a) Reports on Form 8-K:
None.
b) Exhibits required to be filed by Item 601 of Regulation S-K:
None.
39
SIGNATURES
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
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner
March 28, 1994 By: /S/ Herbert D. Depp
Date Herbert D. Depp, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/Herbert D. Depp Chairman of the Board and President of Polaris March 28, 1994
(Herbert D. Depp) Investment Management Corporation, General Partner
of the Registrant
/S/Howard L. Feinsand Senior Vice President, Secretary and Director of March 28, 1994
(Howard L. Feinsand) Polaris Investment Management Corporation, General
Partner of the Registrant
/S/Bobbe V. Sabella Vice President and Chief Financial Officer of March 28, 1994
(Bobbe V. Sabella) Polaris Investment Management Corporation, General
Partner of the Registrant
40