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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
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_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, 1996
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)
201 Mission Street, 27th Floor, San Francisco, California 94105
--------------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 284-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Depository Units Representing Assignments of Limited Partnership Interests
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 ___
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. ___
No formal market exists for the units of limited partnership interest and
therefore there exists no aggregate market value at December 31, 1996.
Documents incorporated by reference: None
This document consists of 50 pages.
PART I
Item 1. Business
The principal objectives of Polaris Aircraft Income Fund III, A California
Limited Partnership (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 GE
Capital Aviation Services, Inc. (GECAS), Polaris Aircraft Leasing Corporation
(PALC), Polaris Holding Company (PHC) and General Electric Capital Corporation
(GE Capital), acquire, lease, finance, sell and remarket aircraft for their own
accounts and for existing aircraft and aircraft leasing programs managed by
them. Further, GECAS provides a significant range of management services to GPA
Group plc, a public limited company organized in Ireland, together with its
consolidated subsidiaries (GPA), which acquires, leases and sells aircraft.
Accordingly, in seeking to re-lease and sell its aircraft, the Partnership may
be in competition with the general partner, its affiliates, and GPA.
A brief description of the aircraft owned by the Partnership is set forth in
Item 2. The following table describes certain material terms of the
Partnership's leases to Continental Airlines, Inc. (Continental) and Trans World
Airlines, Inc. (TWA) as of December 31, 1996:
Number of Lease
Lessee Aircraft Type Aircraft Expiration Renewal Options
- ------ ------------- -------- ---------- ---------------
Continental Boeing 727-200 Advanced 5 10/98 (1) none
TWA McDonnell Douglas DC-9-30 3 2/98 (2) none
TWA McDonnell Douglas DC-9-30 10 11/04 (2) none
(1) The Continental leases were modified in 1991. 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. In 1996, Continental extended the leases for a
two year term until October 1998 at approximately 76% of the previous
rate.
(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 3
aircraft is February 1998 and the average date for the 10 aircraft is
November 2004. The TWA leases were modified in 1991 and 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.
As discussed in Item 7, in October 1994, TWA notified its creditors,
including the Partnership, of a proposed restructuring of its debt.
2
Subsequently, GECAS negotiated a standstill agreement with TWA which
was approved on behalf of the Partnership by PIMC. That agreement
provided for a moratorium of the rent due the Partnership in November
1994 and 75% of the rents due the Partnership from December 1994
through March 1995, with the deferred rents, which aggregated $2.6
million, plus interest being repaid in monthly installments between May
1995 through December 1995. The Partnership received as consideration
for the agreement $157,568 and warrants for TWA Common Stock (Item 7).
GECAS, on behalf of the Partnership, negotiated with TWA for the
acquisition of noise-suppression devices, commonly known as "hushkits",
for 10 of the 13 Partnership aircraft currently on lease to TWA, as
well as other aircraft owned by affiliates of PIMC and leased to TWA.
The 10 aircraft were designated by TWA. The hushkits recondition the
aircraft so as to meet Stage 3 noise level restrictions. The
installation of the 10 hushkits was completed on the Partnership's
aircraft in November 1996 and the leases for these 10 aircraft were
extended for a period of eight years until November 2004.
The Partnership transferred three McDonnell Douglas DC-9-10 aircraft, formerly
leased to Midway Airlines, Inc. (Midway), and six Boeing 727-100 aircraft,
formerly leased to Continental, to aircraft inventory in 1992. The three
McDonnell Douglas DC-9-10 aircraft have been disassembled for sale of their
component parts. Disassembly of the six Boeing 727-100 aircraft commenced in
December 1994. The leases for three Boeing 727-200 aircraft to Continental
expired in April 1994. These aircraft were subsequently sold to Continental.
Industry-wide, approximately 280 commercial jet aircraft were available for sale
or lease at December 31, 1996, approximately 195 less than a year ago, and at
under 2.5% of the total available jet aircraft fleet, this is the lowest level
of availability since 1988. From 1991 to 1994, depressed demand for travel
limited airline expansion plans, with new aircraft orders and scheduled
deliveries being canceled or substantially deferred. As profitability declined,
many airlines took action to downsize or liquidate assets and some airlines were
forced to file for bankruptcy protection. Following three years of good traffic
growth accompanied by rising yields, this trend is reversing with many airlines
reporting record profits. As a result of this improving trend, just over 1200
new jet aircraft were ordered in 1996, making this the second highest ever order
year in the history of the industry. To date, this strong recovery has mainly
benefited Stage 3 narrow-bodies and younger Stage 2 narrow-bodies, many of which
are now being upgraded with hushkits, which, when installed on the aircraft,
bring Stage 2 aircraft into compliance with Federal Aviation Administration
(FAA) Stage 3 noise restrictions as discussed in the Industry Update section of
Item 7. Older Stage 2 narrow-bodies have shown only marginal signs of recovery
since the depressed 1991 to 1994 period. In 1996, several airline accidents have
also impacted the market for older Stage 2 aircraft. The Partnership has been
forced to adjust its estimates of the residual values realizable from its
aircraft, which resulted in an increase in depreciation expense, as discussed in
Items 7 and 8. A discussion of the current market condition for the type of
aircraft owned by the Partnership follows:
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 nautical miles. In 1972, Boeing introduced the Boeing
727-200 Advanced model, a higher gross weight version with increased fuel
capacity as compared with the non-advanced model. Hushkits which bring the
Boeing 727-200 Advanced into compliance with FAA Stage 3 noise restrictions, are
now available at an average cost of approximately $2.6 million per aircraft.
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 additional investment.
Certain ADs applicable to all models of the Boeing 727 have been issued to
prevent fatigue cracks and control corrosion as discussed in Item 7.
McDonnell Douglas DC-9-30 - The McDonnell Douglas DC-9-30 is a short- to
medium-range twin-engine jet that was introduced in 1967. Providing reliable,
inexpensive lift, these aircraft fill thin niche markets, mostly in the United
States. Hushkits are available to bring these aircraft into compliance with
3
Stage 3 noise restrictions at a cost of approximately $1.6 million per aircraft.
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 additional investment.
Certain ADs applicable to the McDonnell Douglas DC-9 have been issued to prevent
fatigue cracks and control corrosion.
The general partner believes that, in addition to the factors cited above, the
deteriorated market for the Partnership's aircraft reflects 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 as discussed in the Industry Update section of Item 7.
Item 2. Properties
At December 31, 1996, PAIF-III owns a portfolio of 18 commercial jet aircraft
and certain inventoried aircraft parts out of its original portfolio of 38
aircraft. The portfolio includes 13 McDonnell Douglas DC-9-30 aircraft leased to
TWA and five Boeing 727 Series 200 Advanced aircraft leased to Continental. All
leases are operating leases. In 1992, the Partnership transferred three
McDonnell Douglas DC-9-10 aircraft, formerly leased to Midway, and six Boeing
727-100 aircraft, formerly leased to Continental, to aircraft inventory. The
inventoried aircraft, which are not included in the following table, have been
disassembled for sale of their component parts.
The following table describes the Partnership's aircraft portfolio at December
31, 1996 in greater detail:
Year of Cycles
Aircraft Type Serial Number Manufacture As of 10/31/96 (1)
- ------------- ------------- ----------- ------------------
Boeing 727-200 Advanced 21247 1976 33,268
Boeing 727-200 Advanced 21248 1976 32,648
Boeing 727-200 Advanced 21249 1976 32,612
Boeing 727-200 Advanced 21363 1977 31,348
Boeing 727-200 Advanced 21366 1977 31,106
McDonnell Douglas DC-9-30 47028 1967 82,037
McDonnell Douglas DC-9-30 47029 1967 81,195
McDonnell Douglas DC-9-30 47030 1967 81,386
McDonnell Douglas DC-9-30 47095 1967 77,170
McDonnell Douglas DC-9-30 47109 1968 80,204
McDonnell Douglas DC-9-30 47134 1967 76,439
McDonnell Douglas DC-9-30 47136 1968 76,857
McDonnell Douglas DC-9-30 47172 1968 77,489
McDonnell Douglas DC-9-30 47173 1968 80,324
McDonnell Douglas DC-9-30 47248 1968 84,156
McDonnell Douglas DC-9-30 47250 1968 81,539
McDonnell Douglas DC-9-30 47344 1969 78,020
McDonnell Douglas DC-9-30 47491 1970 73,553
(1) Cycle information as of 12/31/96 was not available.
4
Item 3. Legal Proceedings
Continental Airlines, Inc. (Continental) Bankruptcy - On December 3, 1990,
Continental Airlines Holdings, Inc. and its subsidiaries, including Continental,
filed a petition under Chapter 11 of the Federal Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. Polaris Aircraft Income
Fund III (the Partnership) filed an administrative claim for the fair rental
value of aircraft operated by Continental during the bankruptcy period and a
general unsecured claim for the rental value of aircraft that were not so
operated. The Bankruptcy Court approved a negotiated agreement between
Continental and the Partnership on August 23, 1991, and Continental emerged from
bankruptcy under a plan of reorganization approved by the Bankruptcy Court
effective April 28, 1993. On January 30, 1995, the Bankruptcy Court approved a
stipulation between Continental and the Partnership settling the Partnership's
administrative expense priority claims against Continental with respect to
certain Boeing 727-100 aircraft that Continental returned to the Partnership in
January 1992. Continental paid the Partnership an aggregate amount of $1.3
million. The Partnership received an initial payment of approximately $311,000
in February 1995 and received the balance of the settlement in equal monthly
installments through February 1996, with respect to the Partnership's
administrative priority claims pursuant to the terms of the stipulation.
Midway Airlines, Inc. (Midway) Bankruptcy - In March 1991, Midway commenced
reorganization proceedings under Chapter 11 of the Federal Bankruptcy Code in
the United States Bankruptcy Court for the Northern District of Illinois,
Eastern Division. On August 9, 1991, the Bankruptcy Court approved Midway's
rejection of the leases of the Partnership's four DC-9-10 aircraft, and the
aircraft were returned to the Partnership on August 12, 1991. On September 18,
1991, the Partnership filed a proof of claim in Midway's bankruptcy proceeding
to recover damages for lost rent and for Midway's failure to meet return
conditions with respect to the four 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.
Trans World Airlines, Inc. (TWA) - On June 30, 1995, TWA filed a reorganization
proceeding under Chapter 11 of the federal Bankruptcy Code in the United States
Bankruptcy Court for the Eastern District of Missouri. Immediately before the
filing, the Partnership and TWA entered into an Amended Deferral Agreement,
pursuant to which TWA agreed to bring lease rents current over a period of
several months and to confirm all of its leases with the Partnership. As agreed,
TWA proposed a plan of reorganization in which, among other things, it confirmed
all of its leases with the Partnership, and the plan was confirmed by the
Bankruptcy Court on August 4, 1995. TWA has emerged from its bankruptcy
proceeding and has repaid all outstanding rent deferrals in accordance with its
commitment to the Partnership and in accordance with its plan of reorganization.
TWA has since remained current on all of its payment obligations to the
Partnership. On May 2, 1996, the United States Bankruptcy Court for the Eastern
District of Missouri issued a notice of final decree declaring that the estate
of TWA had been fully administered and that TWA's proceedings under Chapter 11
of the United States Bankruptcy Code was closed.
Kepford, et al. v. Prudential Securities, et al. - On April 13, 1994, an action
entitled Kepford, et al. v. Prudential Securities, Inc. was filed in the
District Court of Harris County, Texas. The complaint names Polaris Investment
Management Corporation, Polaris Securities Corporation, Polaris Holding Company,
Polaris Aircraft Leasing Corporation, the Partnership, Polaris Aircraft Income
Fund I, Polaris Aircraft Income Fund II, Polaris Aircraft Income Fund IV,
Polaris Aircraft Income Fund V, Polaris Aircraft Income Fund VI, General
Electric Capital Corporation, Prudential Securities, Inc., Prudential Insurance
Company of America and James J. Darr, as defendants. Certain defendants were
served with a summons and original petition on or about May 2, 1994. Plaintiffs'
original petition alleges that defendants violated the Texas Securities Act, the
Texas Deceptive Trade Practices Act, sections 11 and 12 of the Securities Act of
1933 and committed common law fraud, fraud in the inducement, negligent
misrepresentation, negligence, breach of fiduciary duty and civil conspiracy by
misrepresenting and failing to disclose material facts in connection with the
sale of limited partnership units in the Partnership and the other Polaris
Aircraft Income Funds.
5
Plaintiffs seek, among other things, an award of compensatory damages in an
unspecified amount plus interest thereon, and double and treble damages under
the Texas Deceptive Trade Practices Act.
Certain defendants, including Polaris Investment Management Corporation and the
Partnership, filed a general denial on June 29, 1994 and a motion for summary
judgment on June 17, 1994 on the basis that the statute of limitations has
expired. On June 29, 1994 and July 14, 1994, respectively, plaintiffs filed
their first amended original petition and second amended original petition, both
of which added plaintiffs. On July 18, 1994, plaintiffs filed their response and
opposition to defendants' motion for partial summary judgment and also moved for
a continuance on the motion for partial summary judgment. On August 11, 1994,
after plaintiffs again amended their petition to add numerous plaintiffs, the
defendants withdrew their summary judgment motion and motion to stay discovery,
without prejudice to refiling these motions at a later date. On January 9, 1997,
the trial court issued a scheduling order setting a July 21, 1997 trial date.
Riskind, et al. v. Prudential Securities, Inc., et al. - An action entitled
Riskind, et al. v. Prudential Securities, Inc., et al. has been filed in the
District Court of the 165 Judicial District, Maverick County, Texas. This action
is on behalf of over 3,000 individual investors who purchased units in "various
Polaris Aircraft Income Funds," including the Partnership. The Partnership and
Polaris Investment Management Corporation received service of plaintiffs' second
amended original petition and, on June 13, 1994, filed an original answer
containing a general denial.
The second amended original petition names the Partnership, Polaris Investment
Management Corporation, Prudential Securities, Inc. and others as defendants and
alleges that these defendants violated the Texas Securities Act and the Texas
Deceptive Trade Practices Act and committed common law fraud, fraud in the
inducement, negligent misrepresentation, negligent breach of fiduciary duty and
civil conspiracy by misrepresenting and failing to disclose material facts in
connection with the sale of limited partnership units in the Partnership and the
other Polaris Aircraft Income Funds. Plaintiffs seek, among other things, an
award of compensatory damages in an unspecified amount plus interest thereon,
and double and treble damages under the Texas Deceptive Trade Practices Act.
Kidder, Peabody & Co. was added as an additional defendant by virtue of an
Intervenor's Amended Plea in Intervention filed on or about April 7, 1995.
Prudential Securities, Inc. reached a settlement with the plaintiffs. The trial
of the claims of one plaintiff, Robert W. Wilson, against Polaris Aircraft
Income Funds I-VI, Polaris Investment Management Corporation and various
affiliates of Polaris Investment Management Corporation, including General
Electric Capital Corporation, was commenced on July 10, 1995. On July 26, 1995,
the jury returned a verdict in favor of the defendants on all counts. Subsequent
to this verdict, all of the defendants (with the exception of Prudential
Securities, Inc., which had previously settled) entered into a settlement with
the plaintiffs. On February 26, 1997, the court issued an order notifying the
remaining plaintiffs, who did not accept the settlement with the non-Prudential
defendants, that the action would be dismissed on April 21, 1997 for want of
prosecution unless the plaintiffs showed cause why the action should not be
dismissed.
Howland, et al. v. Polaris Holding Company, et al. - On or about February 4,
1994, a purported class action entitled Howland, et al. v. Polaris Holding
Company, et al. was filed in the United States District Court for the District
of Arizona on behalf of investors in Polaris Aircraft Income Funds I-VI. The
complaint names each of Polaris Investment Management Corporation, Polaris
Securities Corporation, Polaris Holding Company, Polaris Aircraft Leasing
Corporation, the Partnership, Polaris Aircraft Income Fund I, Polaris Aircraft
Income Fund II, Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V,
Polaris Aircraft Income Fund VI, General Electric Capital Corporation,
Prudential Securities, Inc., Prudential Securities Group, Inc., Prudential
Insurance Company of America, George W. Ball, Robert J. Sherman, James J. Darr,
Paul J. Proscia, Frank W. Giordano, William A. Pittman, Joseph H. Quinn, Joe W.
Defur, James M. Kelso and Brian J. Martin, as defendants. The complaint alleges
that defendants violated federal RICO statutes, committed negligent
6
misrepresentations, and breached their fiduciary duties by misrepresenting and
failing to disclose material facts in connection with the sale of limited
partnership units in the Partnership and the other Polaris Aircraft Income
Funds. Plaintiffs seek, among other things, an accounting of all monies invested
by plaintiffs and the class and the uses made thereof by defendants, an award of
compensatory, punitive and treble damages in unspecified amounts plus interest
thereon, rescission, attorneys' fees and costs. On August 3, 1994, the action
was transferred to the multi-district litigation in the Southern District of New
York entitled In re Prudential Securities Limited Partnerships Litigation,
discussed in Part III, Item 10 below.
Mary C. Scott v. Prudential Securities Inc. et al. - On or around August 15,
1995, a complaint entitled Mary C. Scott v. Prudential Securities Inc. et al.
was filed in the Court of Common Pleas, County of Summit, Ohio. The complaint
names as defendants Prudential Securities Inc., the Partnership, Polaris
Aircraft Income Fund II, Polaris Aircraft Income Fund IV, Polaris Aircraft
Income Fund VI, P-Bache/A.G. Spanos Genesis Income Partners LP 1,
Prudential-Bache Properties, Inc., A.G. Spanos Residential Partners - 86,
Polaris Securities Corporation and Robert Bryan Fitzpatrick. Plaintiff alleges
claims of fraud and violation of Ohio securities law arising out of the public
offerings of the Partnership, Polaris Aircraft Income Fund II, Polaris Aircraft
Income Fund IV, Polaris Aircraft Income Fund VI, and P-Bache/A.G. Spanos Genesis
Income Partners LP 1. Plaintiff seeks compensatory damages, general,
consequential and incidental damages, punitive damages, rescission, costs,
attorneys' fees and other and further relief as the Court deems just and proper.
On September 15, 1995, defendants removed this action to the United States
District Court, Eastern District of Ohio. On September 18, 1995, defendants
sought the transfer of this action to the Multi-District Litigation and sought a
stay of all proceedings by the district court, which stay was granted on
September 25, 1995. The Judicial Panel transferred this action to the
Multi-District Litigation on or about February 7, 1996.
Other Proceedings - Part III, Item 10 discusses certain other 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, (which has been dismissed, as discussed in
Item 10) where the Partnership was named as a defendant for procedural purposes,
the Partnership is not a party to these actions.
Item 4. Submission of Matters to a Vote of Security Holders
None.
7
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
a) Polaris Aircraft Income Fund III's (PAIF-III or the Partnership) 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, 1996
----------------------------------- ---------------------------
Depository Units Representing Assignments 17,660
of Limited Partnership Interests:
General Partnership Interest: 1
c) Dividends:
The Partnership distributed cash to partners on a quarterly basis
beginning April 1987. Cash distributions to Unit Holders during 1996
and 1995 totaled $18,875,000 and $11,250,000 respectively. Cash
distributions per limited partnership unit were $37.75 and $22.50 in
1996 and 1995, respectively.
8
Item 6. Selected Financial Data
For the years ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues $ 17,077,758 $ 21,096,762 $ 13,486,506 $ 20,500,665 $ 16,910,098
Net Income (Loss) (6,803,529) 7,897,946 (181,996) 2,707,789 (4,800,779)
Net Income (Loss)
allocated to Limited
Partners (8,622,805) 6,694,079 (2,679,926) 1,430,836 (5,752,671)
Net Income (Loss) per
Limited Partnership Unit (17.25) 13.39 (5.36) 2.86 (11.51)
Cash Distributions per
Limited Partnership
Unit 37.75 22.50 50.00 25.00 20.00
Amount of Cash
Distributions Included
Above Representing
a Return of Capital on
a Generally Accepted
Accounting Principle
Basis per Limited
Partnership Unit* 37.75 22.50 50.00 25.00 20.00
Total Assets 67,014,686 82,001,364 86,552,826 114,953,271 128,585,579
Partners' Capital 53,489,164 81,264,915 85,866,969 113,826,743 125,007,844
* The portion of such distributions which represents a return of capital on an economic basis will
depend in part on the residual sale value of the Partnership's aircraft and thus will not be
ultimately determinable until the Partnership disposes of its aircraft. However, such portion may
be significant and may equal, exceed or be smaller than the amount shown in the above table.
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
At December 31, 1996, Polaris Aircraft Income Fund III (the Partnership) owned a
portfolio of 18 used commercial jet aircraft and certain inventoried aircraft
parts 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 five Boeing 727-200 Advanced aircraft leased to Continental Airlines, Inc.
(Continental). The Partnership transferred three McDonnell Douglas DC-9-10
aircraft, formerly leased to Midway Airlines, Inc. (Midway), and six Boeing
727-100 aircraft, formerly leased to Continental, to aircraft inventory. The
inventoried aircraft have been disassembled for sale of their component parts.
Of its original aircraft portfolio, the Partnership sold one former Continental
DC-9-10 aircraft in December 1992, one former Midway DC-9-10 aircraft in January
1993, one former Aero California S.A. de C.V. DC-9-10 aircraft in September
1993, five of the former Continental DC-9-10 aircraft at various dates in 1993,
and three former Continental Boeing 727-200 aircraft in May 1994.
Remarketing Update
Continental Lease Extension - The leases of five Boeing 727-200 Advanced
aircraft to Continental expired in October 1996. Continental extended the leases
for a two year term through October 1998 at the current market rate, which is
approximately 76% of the prior lease rate.
TWA Lease Extension - GECAS, on behalf of the Partnership, negotiated with TWA
for the acquisition of noise-suppression devices, commonly known as "hushkits",
for 10 of the 13 Partnership aircraft currently on lease to TWA. The 10 aircraft
that received hushkits were designated by TWA. The hushkits recondition the
aircraft so as to meet Stage 3 noise level restrictions. Installation of the 10
hushkits on the Partnership's aircraft was completed in November 1996 and the
leases for these 10 aircraft were extended for a period of eight years until
November 2004.
The aggregate cost of the hushkit reconditioning was $15,930,822, or
approximately $1.6 million per aircraft, which was capitalized by the
Partnership. The Partnership paid $3.0 million of the aggregate hushkit cost and
the balance of $12,930,822 was financed by the engine/hushkit manufacturer over
a 6-year period at an interest rate of 10% per annum. The balance of the note
payable at December 31, 1996 was $12,907,278. The rent payable by TWA under the
leases was increased by an amount sufficient to cover the monthly debt service
payments on the hushkits and fully repay, during the term of the TWA leases, the
amount borrowed. The loan from the engine/hushkit manufacturer is non-recourse
to the Partnership and secured by a security interest in the lease receivables.
Proposed Sale of Aircraft - The Partnership has received, and the General
Partner (upon recommendation of its servicer) has determined that it would be in
the best interests of the Partnership to accept an offer to purchase 8 of the
Partnership's 18 aircraft (the "Aircraft") and certain of its notes receivables
by a special purpose company (the "Purchaser"). The Purchaser is managed by
Triton Aviation Services, Ltd., a privately held aircraft leasing company (the
"Purchaser's Manager") which was formed in 1996. Each Aircraft is to be sold
subject to the existing leases, and as part of the transaction the Purchaser
assumes all obligations relating to maintenance reserves and security deposits,
if any, relating to such leases. At the same time cash balances related to
maintenance reserves and security deposits, if any, will be transferred to the
Purchaser.
The total proposed purchase price (the "Purchase Price") to be paid by the
Purchaser in the contemplated transaction would be $10,947,000 which would be
allocable to the Aircraft and to certain notes receivable by the Partnership.
The Purchaser proposes to pay $1,233,289 of the Purchase Price in cash at the
closing and the balance of $9,713,711 would be paid by delivery of a promissory
note ( the "Promissory Note") by the Purchaser. The Promissory Note would be
repaid in equal quarterly installments over a period of seven years bearing
interest at a rate of 12% per annum with a balloon principal payment at the end
of year seven. The Purchaser would have the right to voluntarily prepay the
10
Promissory Note in whole or in part at any time without penalty. In addition,
the Promissory Note would be subject to mandatory partial prepayment in certain
specified instances.
Under the terms of the contemplated transaction, the Aircraft, including any
income or proceeds therefrom and any reserves or deposits with respect thereto,
constitute the sole source of payments under the Promissory Note. No security
interest over the Aircraft or the leases would be granted in favor of the
Partnership, but the equity interests in the Purchaser would be pledged to the
Partnership. The Purchaser would have the right to sell the Aircraft, or any of
them, without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the proposed sale price is less than
the portion of the outstanding balance of the Promissory Note which is allocable
to the Aircraft in question and the Purchaser does not have sufficient funds to
make up the difference. The Purchaser would undertake to keep the Aircraft and
leases free of any lien, security interest or other encumbrance other than (i)
inchoate materialmen's liens and the like, and (ii) in the event that the
Purchaser elects to install hushkits on any Aircraft, secured debt to the extent
of the full cost of such hushkit. The Purchaser will be prohibited from
incurring indebtedness other than (I) the Promissory Note; (ii) deferred taxes
not yet due and payable; (iii) indebtedness incurred to hushkit Aircraft owned
by the Purchaser and, (iv) demand loans from another SPC (defined below) at a
market rate of interest.
It is also contemplated that each of Polaris Aircraft Income Fund II, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI would sell certain aircraft assets to separate special purpose
companies under common management with the Purchaser (collectively, together
with the Purchaser, the "SPC's") on terms similar to those set forth above.
Under the terms of the contemplated transaction, Purchaser's Manager would
undertake to make available a working capital line to the Purchaser of up to
approximately $956,000 to fund operating obligations of the Purchaser. This
working capital line is to be guaranteed by Triton Investments, Ltd., the parent
of the Purchaser's Manager and such guarantor will provide the Partnership with
a copy of its most recent balance sheet showing a consolidated net worth (net of
minority interests) of at least $150-million. Furthermore, each of the SPC's,
including the Purchaser, is to enter into a management agreement with
Purchaser's Manager pursuant to which Purchaser's Manager would provide all
normal and customary management services including remarketing, sales and
repossession, if necessary. Provided that the Purchaser is not in default in
making payments due under the Promissory Note to the Partnership, the Purchaser
would be permitted to dividend to its equity owners an amount not to exceed
approximately $26,000 per month. The Purchaser may distribute additional
dividends to the equity owners to the extent of the working capital advances
made by the Purchaser's Manager provided that the working capital line available
to the Purchaser will be deemed increased to the extent of such dividends.
The Purchaser would be deemed to have purchased the Aircraft effective as of
April 1, 1997 notwithstanding the actual closing date. The Purchaser would have
the right to receive all income and proceeds, including rents and notes
receivables, from the Aircraft accruing from and after April 1, 1997, and the
Promissory Note would commence bearing interest as of April 1, 1997.
The Partnership has agreed to consult with Purchaser's Manager before taking any
significant action pertaining to the Aircraft after the effective date of the
purchase offer. The Purchaser also has the right to make all significant
decisions regarding the Aircraft from and after the date of completion of
definitive documentation legally binding the Purchaser and the Partnership to
the transaction,, even if a delay occurs between the completion of such
documentation and the closing of the title transfer to the Purchaser.
In the event the Partnership receives and elects to accept an offer for all (but
not less than all) of the assets to be sold by it to the Purchaser on terms
which it deems more favorable, the Purchaser has the right to (i) match the
offer, or (ii) decline to match the offer and be entitled to compensation in an
amount equal to 1 1/2% of the Purchaser's proposed Purchase Price.
11
It should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
execution of definitive documentation and various other contingencies.
Partnership Operations
The Partnership recorded a net loss of $6,803,529, or $17.25 per limited
partnership unit for the year ended December 31, 1996, compared to net income of
$7,897,946, or $13.39 per limited partnership unit, and a net loss of $181,996,
or $5.36 per limited partnership unit, for the years ended December 31, 1995 and
1994, respectively. The net loss for 1994 resulted primarily from the loss of
$3,588,919 recorded on the sale of three Boeing 727-200 aircraft to Continental
combined with a reduction in rental revenue recognized on the leases with TWA
and operating expenses incurred from the TWA leases. The improvement in
operating results in 1995 was primarily the result of substantially increased
revenues resulting from collection of rents deferred in 1994 combined with lower
operating expenses and partially offset by increased depreciation expense in
1995 as compared to 1994. The net loss in 1996 resulted primarily from
substantially increased depreciation expense.
Rental revenues, net of related management fees, declined in 1996 as compared to
1995 due to the extension of the Continental leases at a current market rate
that was lower than the prior lease rate. Additionally, TWA rental revenues were
higher in 1995 due to the receipt, during 1995, of certain deferred rental
amounts from 1994 as discussed below. Rental revenues, net of related management
fees, increased during 1995 as compared to 1994. As discussed below, in December
1994, GE Capital Aviation Services, Inc. (GECAS) negotiated a standstill
agreement with TWA. That agreement provided for a deferral of the rent due the
Partnership in November 1994 and 75% of the rents due the Partnership from
December 1994 through March 1995. The Partnership did not recognize the rental
amount deferred in 1994 of $1,137,500 as rental revenue until it was received in
1995. The Partnership has received from TWA all scheduled rent payments
beginning in April 1995 and all scheduled deferred rental payments were paid in
full beginning in May 1995 through October 1995, including interest at a rate of
12% per annum.
In consideration for the rent deferral, TWA agreed to make a lump sum payment of
$1,000,000 to GECAS for the TWA lessors for whom GECAS provides management
services and who agreed to the Deferral Agreement. The Partnership received
$157,568 in January 1995 as its share of such payment by TWA. This amount was
recognized as other revenue in 1995. In addition, TWA agreed to issue warrants
to the Partnership for TWA Common Stock. The Partnership received warrants to
purchase 159,919 shares of TWA Common Stock from TWA in November 1995 and has
recognized the net warrant value as of the date of receipt of $1,247,768 as
revenue in 1995. The Partnership exercised the warrants on December 29, 1995 for
the strike price of $0.01 per share and has recognized a gain on the value of
the warrants of $409,792 in 1995. In 1996, the Partnership sold its TWA Common
Stock.
Further impacting the increased revenues in 1995 as compared to 1994, in January
1995, the United States Bankruptcy Court approved an agreement between the
Partnership and Continental which specified payment to the Partnership by
Continental of approximately $1.3 million as final settlement for the return of
six Boeing 727-100 aircraft. The Partnership received an initial payment of
$311,111 in February 1995 and received the balance of the settlement in equal
monthly installments of $72,222 through February 1996. The Partnership has
received all payments due from Continental for the settlement, which were
recorded as revenue when received. The Partnership recorded payments of
$1,105,556 and $144,444 as other revenue during 1995 and 1996, respectively.
During 1994, the Partnership recognized as revenue $400,000 that it had
previously held as maintenance reserves relating to two aircraft formerly on
lease to Continental.
12
Operating expenses decreased in 1996 and 1995 as compared to 1994. As part of
the TWA lease extension in 1991 as discussed in Note 4 to the financial
statements (Item 8), the Partnership agreed to share the cost of meeting certain
Airworthiness Directives (ADs) after TWA successfully reorganized in 1993. The
agreement stipulated that such costs incurred by TWA may be credited against
monthly rentals, subject to annual limitations and a maximum of $500,000 per
aircraft through the end of the leases. In accordance with the cost sharing
agreement, the Partnership recognized as operating expense $2.6 million of these
expenses during 1994. No operating expenses relating to the TWA aircraft were
recognized by the Partnership during 1995 and 1996.
The Partnership recognized substantially higher depreciation expense in 1996 and
1995 as compared to the prior years. As discussed in the Industry Update
section, if the projected net cash flow for each aircraft (projected rental
revenue, net of management fees, less projected maintenance costs, if any, plus
the estimated residual value) is less than the carrying value of the aircraft,
the Partnership recognizes the deficiency currently as increased depreciation
expense. The Partnership recognized impairment losses on aircraft to be held and
used by the Partnership of approximately $12.5 million and $1.8 million in 1996
and 1995 as increased depreciation expense. In 1996, the impairment loss was the
result of several significant factors. As a result of industry and market
changes, a more extensive review of the Partnership's aircraft was completed in
the fourth quarter of 1996 which resulted in revised assumptions of future cash
flows including reassessment of projected re-lease terms and potential future
maintenance costs. As discussed in Note 11, the Partnership accepted an offer to
purchase eight of the Partnership's remaining aircraft subject to each
aircraft's existing lease. This offer constitutes an event that required the
Partnership to review the aircraft carrying value pursuant to SFAS 121. In
determining this additional impairment loss, the Partnership estimated the fair
value of the aircraft based on the purchase price reflected in the offer, less
the estimated costs and expenses of the proposed sale. The partnership is deemed
to have an impairment loss to the extent that the carrying value exceeded the
fair value. Management believes the assumptions related to fair value of
impaired assets represents the best estimates based on reasonable and
supportable assumptions and projections. It should be noted that there can be no
assurance that the contemplated sale transaction will be consummated. The
contemplated transaction remains subject to execution of definitive
documentation and various other contingencies.
The increased depreciation expense reduces the aircraft's carrying value and
reduces the amount of future depreciation expense that the Partnership will
recognize over the projected remaining economic life of the aircraft. The
Partnership also made downward adjustments to the estimated residual value of
certain of its on-lease aircraft as of December 31, 1995 and 1994. For any
downward adjustment to the estimated residual values, future depreciation
expense over the projected remaining economic life of the aircraft is increased.
The Partnership's earnings are impacted by the net effect of the adjustments to
the aircraft carrying values recorded in 1996, 1995 and 1994 and the downward
adjustments to the estimated residual values recorded in 1995 and 1994 as
discussed later in the Industry Update section.
Liquidity and Cash Distributions
Liquidity - The Partnership has received all payments due from Continental under
the modified lease agreement, the aircraft sale agreement, and the settlement
agreement for the return of the six Boeing 727- 100 aircraft. In addition,
payments totaling $902,734, $1,915,820 and $748,740 were received during 1996,
1995 and 1994, respectively, from the sale of parts from the nine disassembled
aircraft and have been applied against aircraft inventory. The remaining net
book value of the Partnership's aircraft inventory was fully recovered during
1996.
As discussed above, TWA repaid its deferred rents in full with interest by
October 1995. The Partnership also received from TWA warrants to purchase
13
159,919 shares of TWA Common Stock and a payment of $157,568 in consideration
for the rent deferral. The Partnership exercised the warrants in 1995 and sold
the TWA Common Stock in the first quarter of 1996, net of broker commissions,
for $1,698,057.
As discussed in Note 6 to the financial statements (Item 8), the Continental
leases provide for payment by the Partnership of the costs of certain
maintenance work, 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 lease terms.
In accordance with the Continental leases, the Partnership financed $315,145 and
$165,937 for new image modifications during 1994 and 1993, respectively. As
discussed above and in Note 4 to the financial statements (Item 8), the
Partnership agreed to share the cost of meeting certain ADs with TWA. In
accordance with the cost- sharing agreement, TWA may offset up to an additional
$1.95 million against rental payments, subject to annual limitations, over the
remaining lease terms. The Partnership's cash reserves are being retained to
finance future modification costs for Continental and to meet the potential
obligations under the TWA leases.
Cash Distributions - Cash distributions to limited partners were $18,875,000,
$11,250,000, and $25,000,000, and in 1996, 1995 and 1994, respectively. Cash
distributions per limited partnership unit totaled $37.75, $22.50, and $50.00 in
1996, 1995 and 1994, respectively. The timing and amount of future cash
distributions are not yet known and will depend on the Partnership's future cash
requirements including the potential costs of remarketing the Partnership's
aircraft; continued receipt of the renegotiated rental payments from Continental
and TWA; the receipt of the deferred rental payments from Continental; the
receipt of modification financing payments from Continental; the receipt of
payments from Continental for the sale of three Boeing 727-200 aircraft; the
receipt of payments generated from the aircraft disassembly process; the receipt
of payments from Continental as settlement for the return of six Boeing 727-100
aircraft.
TWA Restructuring
In October 1994, TWA notified its creditors, including the Partnership, of
another proposed restructuring of its debt. Subsequently, GECAS negotiated a
standstill arrangement, as set forth in a letter agreement dated December 16,
1994 (the Deferral Agreement), with TWA for the 46 aircraft that are managed by
GECAS, 13 of which are owned by the Partnership. As required by its terms, the
Deferral Agreement (which has since been amended as discussed below) was
approved by PIMC on behalf of the Partnership with respect to the Partnership's
aircraft.
The Deferral Agreement provided for (i) a moratorium on all the rent due to the
Partnership in November 1994 and on 75% of the rents due to the Partnership from
December 1994 through March 1995, and (ii) all of the deferred rents, together
with interest thereon, to be repaid in monthly installments beginning in May
1995 and ending in December 1995. The repayment schedule was subsequently
accelerated upon confirmation of TWA's bankruptcy plan. The Partnership recorded
a note receivable and an allowance for credit losses equal to the total of the
deferred rents, the net of which was reflected in the Partnership's 1994 balance
sheet (Item 8). The Partnership did not recognize either the $1,137,500 rental
amount deferred in 1994 or the $1,462,500 rental amount deferred during the
first quarter of 1995 as rental revenue until the deferred rents were received.
The Partnership received all scheduled rent payments beginning in April 1995,
and all scheduled deferred rental payments beginning in May 1995, including
interest at a rate of 12% per annum, from TWA and has recognized the $2.6
million deferred rents as rental revenue during 1995. The deferred rents were
paid in full by October 1995.
In consideration for the partial rent moratorium described above, TWA agreed to
make a lump sum payment of $1,000,000 to GECAS for the TWA lessors for whom
GECAS provides management services and who agreed to the Deferral Agreement. The
14
Partnership received $157,568 in January 1995 as its share of such payment by
TWA. This amount was recognized as other revenue in the accompanying 1995
statement of operations. In addition, TWA agreed to issue warrants to the
Partnership for TWA Common Stock.
In order to resolve certain issues that arose after the execution of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995, pursuant to which they agreed to amend certain provisions of the Deferral
Agreement (as so amended, the Amended Deferral Agreement). The effect of the
Amended Deferral Agreement, which was approved by PIMC with respect to the
Partnership's aircraft, is that TWA, in addition to agreeing to repay the
deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable
in warrants, the number of which was determined by formula) in consideration for
the aircraft owners' agreement to defer rent under the Deferral Agreement, and,
(ii) to the extent the market value of the warrants is less than the payment
amount, to supply maintenance services to the aircraft owners having a value
equal to such deficiency. The payment amount was determined by subtracting
certain maintenance reimbursements owed to TWA by certain aircraft owners,
including the Partnership, from the aggregate amount of deferred rents.
On June 30, 1995, TWA filed its prepackaged Chapter 11 bankruptcy in the United
States Bankruptcy Court for the Eastern District of Missouri. On August 4, 1995,
the Bankruptcy Court confirmed TWA's plan of reorganization, which became
effective on August 23, 1995. Pursuant to the Amended Deferral Agreement, on the
confirmation date of the plan, August 4, 1995, the Partnership received a
payment of $881,480 from TWA which represented fifty percent (50%) of the
deferred rent outstanding plus interest as of such date. The remaining balance
of deferred rent plus interest was paid in full to the Partnership on October 2,
1995. TWA has been current with its obligation to the Partnership since August
1995. While TWA has committed to an uninterrupted flow of lease payments, there
can be no assurance that TWA will continue to honor its obligations in the
future.
The Partnership received warrants to purchase 159,919 shares of TWA Common Stock
from TWA in November 1995 and has recognized the net warrant value as of the
date of receipt of $1,247,768 as revenue in the 1995 statement of operations.
The Partnership exercised the warrants on December 29, 1995 for the strike price
of $0.01 per share and recognized a gain on the value of the warrants of
$409,792 in the 1995 statement of operations. The TWA Common Stock was
classified as trading securities in 1995 because the Partnership intended to
sell the stock in the near term. The fair market value of the TWA stock at
December 31, 1995 of $1,659,160 is reflected in the Partnership's December 31,
1995 balance sheet (Item 8). The Partnership sold the TWA Common Stock in the
first quarter of 1996, net of broker commissions, for $1,698,057.
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. The
general partner understands that 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 pre-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
15
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
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 approximately
$850,000 per aircraft. The extent of modifications required to an aircraft
varies according to the level of incorporation of design improvements at
manufacture.
In December 1990, the FAA adopted another AD intended to mitigate corrosion of
structural components, which would require repeated inspections from 5 years of
age throughout the life of an aircraft, with replacement of corroded components
as needed. Integration of the new inspections into each aircraft operator's
maintenance program was required by December 31, 1991 on Boeing aircraft.
In 1996, the manufacturer proposed certain Boeing 737 rudder system product
improvements of which some will be mandated by the FAA. Airworthiness Directives
issued in the last quarter of 1996 and the first quarter of 1997 on this subject
have not been of significant maintenance cost impact. The cost of compliance
with future FAA maintenance requirements not yet issued is not determinable at
this time.
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. The
Partnership agreed to bear a portion of certain maintenance and/or AD compliance
costs, as discussed in Item 1, with respect to the aircraft leased to
Continental and TWA. An aircraft returned to the Partnership as a result of a
lease default would most likely not be returned to the Partnership in compliance
with all return conditions required by the lease. In negotiating subsequent
leases, market conditions currently 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 industry, 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 no
longer allowed to operate from civil airports in the United States. Stage 2
aircraft meet current FAA requirements, subject to the phase-out rules discussed
below. 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 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. All Stage
2 aircraft must be phased out of operations in the contiguous
United States by December 31, 1999, 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 interim compliance dates noted
above).
16
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 Union (EU)
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, with all Stage 2 aircraft phased-out by the
year 2002. The International Civil Aviation Organization has also endorsed the
phase-out of Stage 2 aircraft on a world-wide basis by the year 2002.
Hushkit modifications, which allow Stage 2 aircraft to meet Stage 3
requirements, are currently available for the Partnership's aircraft. Hushkits
were added to 10 of the Partnership's Stage 2 aircraft in 1996. However, while
technically feasible, hushkits may not be cost effective on all models due to
the age of some of the aircraft and the time required to fully amortize the
additional investment. The general partner has evaluated the potential benefits
of installing hushkits on some or all of the Partnership's aircraft. It is
unlikely that the Partnership would incur such costs unless they can be
substantially recovered through a lease.
Implementation of the Stage 3 standards has 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 after the
applicable dates.
Demand for Aircraft - Industry-wide, approximately 280 commercial jet aircraft
were available for sale or lease at December 31, 1996, approximately 195 less
than a year ago, and at under 2.5% of the total available jet aircraft fleet,
this is the lowest level of availability since 1988. From 1991 to 1994,
depressed demand for travel limited airline expansion plans, with new aircraft
orders and scheduled deliveries being canceled or substantially deferred. As
profitability declined, many airlines took action to downsize or liquidate
assets and some airlines were forced to file for bankruptcy protection.
Following three years of good traffic growth accompanied by rising yields, this
trend is reversing with many airlines reporting record profits. As a result of
this improving trend, just over 1200 new jet aircraft were ordered in 1996,
making this the second highest ever order year in the history of the industry.
To date, this strong recovery has mainly benefited Stage 3 narrow-bodies and
younger Stage 2 narrow-bodies, many of which are now being upgraded with
hushkits, whereas older Stage 2 narrow-bodies have shown only marginal signs of
recovery since the depressed period 1991 to 1994.
The general partner believes that, in addition to the factors cited above, the
deteriorated market for the Partnership's aircraft reflects 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 as previously discussed.
Effects on the Partnership's Aircraft - The Partnership periodically reviews the
estimated realizability of the residual values at the projected end of each
aircraft's economic life based on estimated residual values obtained from
independent parties which provide current and future estimated aircraft values
by aircraft type. The Partnership made downward adjustments to the estimated
residual value of certain of its on-lease aircraft as of December 31, 1995 and
1994. For any downward adjustment in estimated residual value or decrease in the
projected remaining economic life, the depreciation expense over the projected
remaining economic life of the aircraft is increased. As a result of the 1994
adjustments to the estimated residual values, the Partnership is recognizing
increased depreciation expense of approximately $1,227,000 per year beginning in
1995 through the end of the estimated economic lives of the aircraft. As a
result of the 1995 adjustments to the estimated residual values, the Partnership
17
is recognizing increased depreciation expense of approximately $194,000 per year
beginning in 1996 through the end of the estimated economic lives of the
aircraft.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, the Partnership
recognizes the deficiency currently as increased depreciation expense. The
Partnership recognized approximately $12.5 million and $1.8 million, or $24.95
and $3.54 per limited Partnership unit, of this deficiency as increased
depreciation expense in 1996 and 1995. In 1996, the impairment loss was the
result of several significant factors. As a result of industry and market
changes, a more extensive review of the Partnership's aircraft was completed in
the fourth quarter of 1996 which resulted in revised assumptions of future cash
flows including reassessment of projected re-lease terms and potential future
maintenance costs. As discussed in Note 11, the Partnership accepted an offer to
purchase eight of the Partnership's remaining aircraft subject to each
aircraft's existing lease. This offer constitutes an event that required the
Partnership to review the aircraft carrying value pursuant to SFAS 121. In
determining this additional impairment loss, the Partnership estimated the fair
value of the aircraft based on the proposed purchase price reflected in the
offer, and then deducted this amount from the carrying value of the aircraft.
The partnership recorded an impairment loss to the extent that the carrying
value exceeded the fair value. Management believes the assumptions related to
fair value of impaired assets represents the best estimates based on reasonable
and supportable assumptions and projections. It should be noted that there can
be no assurance that the contemplated sale transaction will be consummated. The
contemplated transaction remains subject to execution of definitive
documentation and various other contingencies. The deficiency in 1995 was
generally the result of declining estimates in the residual values of the
aircraft. The increased depreciation expense reduces the aircraft's carrying
value and reduces the amount of future depreciation expense that the Partnership
will recognize over the projected remaining economic life of the aircraft.
The Partnership's future earnings are impacted by the net effect of the
adjustments to the carrying value of the aircraft recorded in 1995 (which has
the effect of decreasing future depreciation expense), and the downward
adjustments to the estimated residual values recorded in 1995 (which has the
effect of increasing future depreciation expense). The net effect of the 1995
adjustments to the estimated residual values and the adjustments to the carrying
value of the aircraft recorded in 1995 is to cause the Partnership to recognize
increased depreciation expense of approximately $194,000 in 1996.
Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability,
the statement provides that the Partnership should estimate the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the projected net undiscounted cash flow for each
aircraft (projected rental revenue, net of management fees, less projected
maintenance costs, if any, plus the estimated residual value) is less than the
carrying value of the aircraft, an impairment loss is recognized. Pursuant to
the statement, measurement of an impairment loss for long-lived assets will be
based on the "fair value" of the asset as defined in the statement.
SFAS No. 121 states that the fair value of an asset is the amount at which the
asset could be bought or sold in a current transaction between willing parties,
i.e., other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and will be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value will be based on the best information available in the
circumstances. Pursuant to the statement, the estimate of fair value will
consider prices for similar assets and the results of valuation techniques to
the extent available in the circumstances. Examples of valuation techniques
18
include the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved, option-pricing models,
matrix pricing, option-adjusted spread models, and fundamental analysis.
The Partnership periodically reviews its aircraft for impairment in accordance
with SFAS No. 121. Using an estimate of the fair value of the Partnership's
aircraft to measure impairment may result in greater write-downs than would be
recognized under the accounting method previously applied by the Partnership.
The Partnership uses information obtained from third party valuation services in
arriving at its estimate of fair value for purposes of determining residual
values. The Partnership will use similar information, plus available information
and estimates related to the Partnership's aircraft, to determine an estimate of
fair value to measure impairment as required by the statement. The estimates of
fair value can vary dramatically depending on the condition of the specific
aircraft and the actual marketplace conditions at the time of the actual
disposition of the asset. If assets are deemed impaired, there could be
substantial write-downs in the future.
The Partnership's leases expire between October 1998 and November 2004 To the
extent that the Partnership's Boeing and McDonnell Douglas aircraft continue to
be significantly affected by industry events, the Partnership will evaluate each
aircraft as it comes off lease to determine whether a re-lease or a sale at the
then-current market rates would be most beneficial for unit holders.
19
Item 8. Financial Statements and Supplementary Data
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH
AUDITORS' REPORT
20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Polaris Aircraft Income Fund III,
A California Limited Partnership:
We have audited the accompanying balance sheets of Polaris Aircraft Income Fund
III, A California Limited Partnership as of December 31, 1996 and 1995, and the
related statements of operations, changes in partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the general partner. Our
responsibility is to express an opinion on these financial statements 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, A California Limited Partnership as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Francisco, California,
March 3, 1997
21
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
ASSETS:
CASH AND CASH EQUIVALENTS $ 20,229,105 $ 25,014,205
MARKETABLE SECURITIES, trading -- 1,659,160
RENT AND OTHER RECEIVABLES 351,508 8,171
NOTES RECEIVABLE, net of allowance for credit
losses of $160,571 in 1996 and $1,993,095 in 1995 -- 1,546,407
AIRCRAFT, net of accumulated depreciation
of $97,860,513 in 1996 and $75,198,827 in 1995 46,329,798 53,060,662
AIRCRAFT INVENTORY -- 686,670
OTHER ASSETS 104,275 26,089
------------ ------------
$ 67,014,686 $ 82,001,364
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
PAYABLE TO AFFILIATES $ 86,005 $ 130,584
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 72,159 84,084
DEFERRED INCOME 460,080 521,781
NOTES PAYABLE 12,907,278 --
------------ ------------
Total Liabilities 13,525,522 736,449
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (1,670,662) (1,392,716)
Limited Partners, 500,000 units
issued and outstanding 55,159,826 82,657,631
------------ ------------
Total Partners' Capital 53,489,164 81,264,915
------------ ------------
$ 67,014,686 $ 82,001,364
============ ============
The accompanying notes are an integral part of these statements.
22
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
REVENUES:
Rent from operating leases $ 15,230,936 $ 16,186,560 $ 15,023,940
Interest 1,438,839 1,989,518 1,651,485
Gain on sale of aircraft inventory 206,781 -- --
Lessee settlements 144,444 1,263,124 400,000
Loss on sale of aircraft -- -- (3,588,919)
Receipt of lessee stock warrants -- 1,247,768 --
Gain on trading securities 38,898 409,792 --
Other 17,860 -- --
------------ ------------ ------------
Total Revenues 17,077,758 21,096,762 13,486,506
------------ ------------ ------------
EXPENSES:
Depreciation 22,661,686 12,031,947 9,891,093
Management fees to general partner 761,547 809,328 738,809
Interest 122,197 -- --
Operating 24,549 29,282 2,745,928
Administration and other 311,308 328,259 292,672
------------ ------------ ------------
Total Expenses 23,881,287 13,198,816 13,668,502
------------ ------------ ------------
NET INCOME (LOSS) $ (6,803,529) $ 7,897,946 $ (181,996)
============ ============ ============
NET INCOME ALLOCATED TO
THE GENERAL PARTNER $ 1,819,276 $ 1,203,867 $ 2,497,930
============ ============ ============
NET INCOME (LOSS) ALLOCATED
TO THE LIMITED PARTNERS $ (8,622,805) $ 6,694,079 $ (2,679,926)
============ ============ ============
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (17.25) $ 13.39 $ (5.36)
============ ============ ============
The accompanying notes are an integral part of these statements.
23
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1993 $ (1,066,735) $ 114,893,478 $ 113,826,743
Net income (loss) 2,497,930 (2,679,926) (181,996)
Cash distributions to partners (2,777,778) (25,000,000) (27,777,778)
------------- ------------- -------------
Balance, December 31, 1994 (1,346,583) 87,213,552 85,866,969
Net income 1,203,867 6,694,079 7,897,946
Cash distributions to partners (1,250,000) (11,250,000) (12,500,000)
------------- ------------- -------------
Balance, December 31, 1995 (1,392,716) 82,657,631 81,264,915
Net income (loss) 1,819,276 (8,622,805) (6,803,529)
Cash distributions to partners (2,097,222) (18,875,000) (20,972,222)
------------- ------------- -------------
Balance, December 31, 1996 $ (1,670,662) $ 55,159,826 $ 53,489,164
============= ============= =============
The accompanying notes are an integral part of these statements.
24
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (6,803,529) $ 7,897,946 $ (181,996)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 22,661,686 12,031,947 9,891,093
Gain on sale of aircraft inventory (206,781) -- --
Loss on sale of aircraft -- -- 3,588,919
Changes in operating assets and liabilities:
Increase in marketable securities, trading 1,659,160 (1,659,160) --
Decrease (increase) in rent and other
receivables (343,337) 477,380 173,750
Increase in other assets (78,186) -- --
Increase (decrease) in payable to affiliates (44,579) 8,926 (69,089)
Increase (decrease) in accounts payable
and accrued liabilities (11,925) 41,666 28,418
Decrease in deferred income (61,701) -- --
Decrease in maintenance reserves -- -- (400,000)
------------ ------------ ------------
Net cash provided by operating activities 16,770,808 18,798,705 13,031,095
------------ ------------ ------------
INVESTING ACTIVITIES:
Increase in aircraft capitalized costs (15,930,822) -- --
Proceeds from sale of aircraft inventory 902,733 1,915,820 748,740
Inventory disassembly costs (9,282) (214,113) --
Increase in notes receivable -- (499,868) (315,145)
Principal payments on notes receivable 1,546,407 1,702,862 1,041,771
------------ ------------ ------------
Net cash provided by (used in)
investing activities (13,490,964) 2,904,701 1,475,366
------------ ------------ ------------
FINANCING ACTIVITIES:
Increase in notes payable 12,930,822 -- --
Principle payments on notes payable (23,544) -- --
Cash distributions to partners (20,972,222) (12,500,000) (27,777,778)
------------ ------------ ------------
Net cash used in financing activities (8,064,944) (12,500,000) (27,777,778)
------------ ------------ ------------
CHANGES IN CASH AND CASH
EQUIVALENTS (4,785,100) 9,203,406 (13,271,317)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 25,014,205 15,810,799 29,082,116
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 20,229,105 $ 25,014,205 $ 15,810,799
============ ============ ============
The accompanying notes are an integral part of these statements.
25
POLARIS AIRCRAFT INCOME FUND III,
A California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Accounting Principles and Policies
Accounting Method - Polaris Aircraft Income Fund III, A California Limited
Partnership (PAIF-III or the Partnership), maintains its accounting records,
prepares its financial statements and files its tax returns on the accrual basis
of accounting. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates with regard to these financial statements are related to
the projected cash flows analysis in determining the fair value of assets.
Cash and Cash Equivalents - This includes deposits at banks and investments in
money market funds. Cash and Cash Equivalents is stated at cost, which
approximates fair value.
Marketable Securities, trading - Marketable Securities, trading were carried at
fair value, which was determined based on quoted market prices. These securities
were held for sale in the near term (Note 4).
Aircraft and Depreciation - The aircraft are recorded at cost, which includes
acquisition costs. Depreciation to an estimated residual 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 was calculated based upon the number of
days that the aircraft were in service.
The Partnership periodically reviews the estimated realizability of the residual
values at the projected end of each aircraft's economic life based on estimated
residual values obtained from independent parties which provide current and
future estimated aircraft values by aircraft type. For any downward adjustment
in estimated residual value or decrease in the projected remaining economic
life, the depreciation expense over the projected remaining economic life of the
aircraft is increased.
If the projected net cash flow for each aircraft (projected rental revenue, net
of management fees, less projected maintenance costs, if any, plus the estimated
residual value) is less than the carrying value of the aircraft, an impairment
loss is recognized. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 121, as discussed in Note 3, measurement of an impairment loss will
be based on the "fair value" of the asset as defined in the statement.
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 estimated
useful life of the improvement. These costs are also subject to periodic
evaluation as 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
26
are applied against inventory until the book value is fully recovered. The
remaining book value of the inventory was recovered in 1996. Proceeds in excess
of the inventory net book value are recorded as revenue when received.
Operating Leases - The aircraft leases are accounted for as operating leases.
Lease revenues are recognized in equal installments over the terms of the
leases.
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.
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, 1996, 1995
and 1994.
Income Taxes - The Partnership files federal and state information income tax
returns only. Taxable income or loss is reportable by the individual partners.
Notes Receivable - The Partnership had recorded an allowance for credit losses
for certain impaired notes as discussed in Note 6. The Partnership recognizes
revenue on these notes only as payments are received.
1996 1995
---- ----
Allowance for credit losses,
beginning of year $(1,993,095) $(5,006,929)
Provision for credit losses -- --
Write-downs -- --
Collections 1,832,524 3,013,834
----------- -----------
Allowance for credit losses,
end of year $ (160,571) $(1,993,095)
=========== ===========
The fair value of the notes receivable is estimated by discounting future
estimated cash flows using current interest rates at which similar loans would
be made to borrowers with similar credit ratings and remaining maturities.
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 Depository 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. General Electric
Capital Corporation (GE Capital), an affiliate of General Electric Company, owns
100% of PHC's outstanding common stock. PIMC has entered into a services
agreement dated as of July 1, 1994 with GE Capital Aviation Services, Inc.
(GECAS). Allocations to affiliates are described in Note 8.
27
3. Aircraft
At December 31, 1996, the Partnership owned 18 aircraft and certain inventoried
aircraft parts from its original portfolio of 38 used commercial jet aircraft,
which were acquired and leased or 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 net
operating leases, requiring the lessees to pay all operating expenses associated
with the aircraft during the lease term. While the leases require the lessees to
comply with Airworthiness Directives (ADs) which have been or may be issued by
the Federal Aviation Administration (FAA) and require compliance during the
lease term, in certain of the leases, the Partnership has agreed to share in the
cost of compliance with ADs. 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 portfolio of 38 aircraft, the
Partnership sold one aircraft in December 1992, seven aircraft in 1993, and
three aircraft in 1994. In addition, nine aircraft have been disassembled for
sale of their component parts (Note 7).
The following table describes the Partnership's aircraft portfolio at December
31, 1996 in greater detail:
Year of
Aircraft Type Serial Number Manufacture
- ------------- ------------- -----------
Boeing 727-200 Advanced 21247 1976
Boeing 727-200 Advanced 21248 1976
Boeing 727-200 Advanced 21249 1976
Boeing 727-200 Advanced 21363 1977
Boeing 727-200 Advanced 21366 1977
McDonnell Douglas DC-9-30 47028 1967
McDonnell Douglas DC-9-30 47029 1967
McDonnell Douglas DC-9-30 47030 1967
McDonnell Douglas DC-9-30 47095 1967
McDonnell Douglas DC-9-30 47109 1968
McDonnell Douglas DC-9-30 47134 1967
McDonnell Douglas DC-9-30 47136 1968
McDonnell Douglas DC-9-30 47172 1968
McDonnell Douglas DC-9-30 47173 1968
McDonnell Douglas DC-9-30 47248 1968
McDonnell Douglas DC-9-30 47250 1968
McDonnell Douglas DC-9-30 47344 1969
McDonnell Douglas DC-9-30 47491 1970
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. The leases for 10 of the 13 aircraft were extended again
for eight years until November 2004 as discussed in Note 5.
Four McDonnell Douglas DC-9-10s - These aircraft were acquired for $15,768,766
in 1987 and leased to Midway Airlines, Inc. (Midway). In March 1991, Midway
commenced reorganization proceedings under Chapter 11 of the United States
28
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
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. During 1992, the
Partnership transferred the four aircraft to aircraft inventory and subsequently
disassembled three of the aircraft for sale of their component parts (Note 7).
The remaining aircraft was sold during 1993.
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 three Boeing 727-200 aircraft and five Boeing
727-200 Advanced aircraft; however, Continental rejected the leases on six
Boeing 727-100s and the seven McDonnell Douglas DC-9-10s and returned these
aircraft to the Partnership. Note 6 contains a detailed discussion of the
Continental events.
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. During 1992
and 1993, the Partnership sold the remaining six ex-Continental McDonnell
Douglas DC-9-10 aircraft.
During 1993, the six Boeing 727-100s were transferred to aircraft inventory and
disassembled for sale of their component parts (Note 7). In January 1995, the
United States Bankruptcy Court approved an agreement between the Partnership and
Continental which specified payment to the Partnership by Continental of
approximately $1.3 million as final settlement for the return of six Boeing
727-100 aircraft. The Partnership received an initial payment of $311,111 in
February 1995 and received the balance of the settlement in equal monthly
installments of $72,222 through February 1996. The Partnership received all
payments due from Continental for the settlement, which were recorded as revenue
when received.
The leases of the three Boeing 727-200 aircraft expired in April 1994. In May
1994, the Partnership sold these aircraft to Continental for an aggregate sale
price of $3,019,719. The Partnership agreed to accept payment of the sale price
in 29 monthly installments of $115,500, with interest at a rate of 9.5% per
annum. The Partnership recorded a note receivable for the sale price and
recognized a loss on sale of $3,588,919 in 1994. The note receivable balance at
December 31, 1995 was $998,858. The Partnership received all scheduled payments
due under the note, which was paid in full during 1996.
The leases of the five Boeing 727-200 Advanced aircraft with Continental were
scheduled to expire in October 1996. Continental extended the leases for the
five aircraft for a two-year term through October 1998 at the current market
lease rate, which is approximately 76% of the prior lease rate.
29
The following is a schedule by year of future minimum rental revenue under the
existing leases including the deferred rental payments specified in the
Continental lease modifications (Note 6):
Continental
Deferred Rental
Year Amount (1) Payments (2) Total
- ---- ---------- ------------ -----
1997 $ 159,582 $15,277,920 $15,437,502
1998 -- 14,700,000 14,700,000
1999 -- 10,200,000 10,200,000
2000 -- 10,200,000 10,200,000
2001 and thereafter -- 30,850,000 30,850,000
----------- ----------- -----------
$ 159,582 $81,227,920 $81,387,502
=========== =========== ===========
(1) Rental payments for the period from November 1992 through January 1993
are payable with interest commencing in October 1993 through March 1,
1997 according to the Continental lease modification.
(2) Future minimum rental payments may be offset or reduced by future costs
as described in Note 4.
Effective January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability,
the statement provides that the Partnership should estimate the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If the projected net undiscounted cash flow for each
aircraft (projected rental revenue, net of management fees, less projected
maintenance costs, if any, plus the estimated residual value) is less than the
carrying value of the aircraft, an impairment loss is recognized. Pursuant to
the statement, measurement of an impairment loss for long-lived assets will be
based on the "fair value" of the asset as defined in the statement.
SFAS No. 121 states that the fair value of an asset is the amount at which the
asset could be bought or sold in a current transaction between willing parties,
i.e., other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and will be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value will be based on the best information available in the
circumstances. Pursuant to the statement, the estimate of fair value will
consider prices for similar assets and the results of valuation techniques to
the extent available in the circumstances. Examples of valuation techniques
include the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved, option-pricing models,
matrix pricing, option-adjusted spread models, and fundamental analysis.
As discussed in Note 1, the Partnership periodically reviews the estimated
realizability of the residual values at the projected end of each aircraft's
economic life based on estimated residual values obtained from independent
parties which provide current and future estimated aircraft values by aircraft
type. As a result, the Partnership made downward adjustments to the estimated
residual value of certain of its on-lease aircraft as of December 31, 1995 and
1994.
The Partnership's future earnings are impacted by the net effect of the
adjustments to the carrying value of the aircraft (which has the effect of
decreasing future depreciation expense), and the downward adjustments to the
estimated residual values (which has the effect of increasing future
depreciation expense).
30
As discussed above, the Partnership uses information obtained from third party
valuation services in arriving at its estimate of fair value for purposes of
determining residual values. The Partnership will use similar information, plus
available information and estimates related to the Partnership's aircraft, to
determine an estimate of fair value to measure impairment as required by the
statement. The estimates of fair value can vary dramatically depending on the
condition of the specific aircraft and the actual marketplace conditions at the
time of the actual disposition of the asset. If assets are deemed impaired,
there could be substantial write-downs in the future.
The Partnership recognized impairment losses on aircraft to be held and used by
the Partnership aggregating approximately $12.5 million and $1.8 million, or
$24.95 and $3.51 per limited Partnership unit, as increased depreciation expense
in 1996 and 1995, respectively. In 1996, the impairment loss was the result of
several significant factors. As a result of industry and market changes, a more
extensive review of the Partnership's aircraft was completed in the fourth
quarter of 1996 which resulted in revised assumptions of future cash flows
including reassessment of projected re-lease terms and potential future
maintenance costs. As discussed in Note 11, the Partnership accepted an offer to
purchase eight of the Partnership's remaining aircraft subject to each
aircraft's existing lease. This offer constitutes an event that required the
Partnership to review the aircraft carrying value pursuant to SFAS 121. In
determining this additional impairment loss, the Partnership estimated the fair
value of the aircraft based on the purchase price reflected in the offer, less
the estimated costs and expenses of the proposed sale. The partnership recorded
an impairment loss to the extent that the carrying value exceeded the fair
value. Management believes the assumptions related to fair value of impaired
assets represents the best estimates based on reasonable and supportable
assumptions and projections. It should be noted that there can be no assurance
that the contemplated sale transaction will be consummated. The contemplated
transaction remains subject to execution of definitive documentation and various
other contingencies.
4. TWA Reorganization
The Partnership renegotiated the TWA leases after TWA defaulted under its leases
with the Partnership during 1991. The renegotiated agreement stipulated that the
Partnership share in the cost of certain Airworthiness Directives after TWA
successfully reorganized. Pursuant to this cost-sharing agreement, since TWA
emerged from its reorganization proceedings in 1993, expenses totaling $4.55
million ($1.95 million in 1993 and $2.6 million in 1994) have been offset
against rental payments. Under the terms of this agreement, TWA may offset up to
an additional $1.95 million against rental payments, subject to annual
limitations, over the remaining lease terms.
In October 1994, TWA notified its creditors, including the Partnership, of
another proposed restructuring of its debt. Subsequently, GECAS negotiated a
standstill arrangement, as set forth in a letter agreement dated December 16,
1994 (the Deferral Agreement), with TWA for the 46 aircraft that are managed by
GECAS, 13 of which are owned by the Partnership. As required by its terms, the
Deferral Agreement (which has since been amended as discussed below) was
approved by PIMC on behalf of the Partnership with respect to the Partnership's
aircraft.
The Deferral Agreement provided for (i) a moratorium on the rents due to the
Partnership in November 1994 and on 75% of the rents due to the Partnership from
December 1994 through March 1995, and (ii) all of the deferred rents, together
with interest thereon, to be repaid in monthly installments beginning in May
1995 and ending in December 1995. The repayment schedule was subsequently
accelerated upon confirmation of TWA's bankruptcy plan. The Partnership did not
recognize either the $1,137,500 rental amount deferred in 1994 or the $1,462,500
rental amount deferred during the first quarter of 1995 as rental revenue until
the deferred rents were received. The deferred rents were paid in full by
October 1995.
31
In consideration for the partial rent moratorium described above, TWA agreed to
make a lump sum payment of $1,000,000 to GECAS for the TWA lessors for whom
GECAS provides management services and who agreed to the Deferral Agreement. The
Partnership received $157,568 in January 1995 as its pro-rata share of such
payment by TWA. This amount was recognized as other revenue in the accompanying
1995 statement of operations. While TWA has committed to an uninterrupted flow
of lease payments, there can be no assurance that TWA will continue to honor its
obligations in the future.
In order to resolve certain issues that arose after the execution of the
Deferral Agreement, TWA and GECAS entered into a letter agreement dated June 27,
1995, pursuant to which they agreed to amend certain provisions of the Deferral
Agreement (as so amended, the Amended Deferral Agreement). The effect of the
Amended Deferral Agreement, which was approved by PIMC with respect to the
Partnership's aircraft, is that TWA, in addition to agreeing to repay the
deferred rents to the Partnership, agreed (i) to a fixed payment amount (payable
in warrants, the number of which was determined by formula) in consideration for
the aircraft owners' agreement to defer rent under the Deferral Agreement, and,
(ii) to the extent the market value of the warrants is less than the payment
amount, to supply maintenance services to the aircraft owners having a value
equal to such deficiency. The payment amount was determined by subtracting
certain maintenance reimbursements owed to TWA by certain aircraft owners,
including the Partnership, from the aggregate amount of deferred rents.
The Partnership received warrants to purchase 159,919 shares of TWA Common Stock
from TWA in November 1995. The Partnership exercised the warrants on December
29, 1995 for the strike price of $0.01 per share. The fair market value of the
TWA stock at December 31, 1995 of $1,659,160, which was determined based on
quoted market prices, is reflected in the accompanying December 31, 1995 balance
sheet. The Partnership sold the TWA Common Stock by February 1996, net of broker
commissions, for $1,698,057 and recognized a gain on trading securities of
$38,898 in 1996.
5. TWA Lease Extension
GECAS, on behalf of the Partnership, negotiated with TWA for the acquisition of
noise-suppression devices, commonly known as "hushkits", for 10 of the 13
Partnership aircraft currently on lease to TWA, as well as other aircraft owned
by affiliates of PIMC and leased to TWA. The 10 aircraft that received hushkits
were designated by TWA. The hushkits recondition the aircraft so as to meet
Stage 3 noise level restrictions. Installation of the 10 hushkits on the
Partnership's aircraft was completed in November 1996 and the leases for these
10 aircraft were extended for a period of eight years until November 2004.
The aggregate cost of the hushkit reconditioning was $15,930,822, or
approximately $1.6 million per aircraft, which was capitalized by the
Partnership. The Partnership paid $3.0 million of the aggregate hushkit cost and
the balance of $12,930,822 was financed by the engine/hushkit manufacturer over
a 6-year period at an interest rate of approximately 10% per annum. The balance
of the note payable at December 31, 1996 was $12,907,278.
The rent payable by TWA under the leases was increased by an amount sufficient
to cover the monthly debt service payments on the hushkits and fully repay,
during the term of the TWA leases, the amount borrowed. The loan from the
engine/hushkit manufacturer is non-recourse to the Partnership and secured by a
security interest in the lease receivables.
6. Continental Lease Modification
The aircraft leases with Continental were modified after Continental filed for
Chapter 11 bankruptcy protection in December 1990. The modified agreement
32
stipulates that the Partnership pay 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 share of such costs may be capitalized
and depreciated over the remaining lease terms, subject to the capitalized cost
policy as described in Note 1. The Partnership approved invoices aggregating
$1,698,106 for interior modifications on the Partnership's aircraft. The
Partnership financed the aggregate amount of these invoices to Continental from
1992 through 1995 to be repaid by Continental with interest over the remaining
lease terms of the aircraft. This note was paid in full during 1996.
The agreement with Continental 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 and for a period of three months, beginning in
November 1992, aggregating $9,917,500 (the Deferred Amount). The Partnership
recorded a note receivable and an allowance for credit losses equal to the total
of the deferred rents and prior accrued interest, the net of which is reflected
in the accompanying balance sheets. The note receivable and corresponding
allowance for credit losses are reduced by the principal portion of payments
received. In addition, the Partnership recognizes rental revenue and interest
revenue in the period the deferred rental payments are received.
The allowances for credit losses on the principal and prior interest portions
due were $160,571 and $1,993,095 as of December 31, 1996 and 1995, respectively.
The unrecognized Deferred Amounts as of December 31, 1996 and 1995 were $159,582
and $1,941,522, respectively. In accordance with the aforementioned agreement,
Continental began making supplemental payments for the Deferred Amount plus
interest on July 1, 1992. During 1996, 1995 and 1994, the Partnership received
supplemental payments of $1,942,267, $2,200,465 and $2,999,666, respectively, of
which $1,781,940, $1,729,060 and $2,211,440 was recognized as rental revenue in
1996, 1995 and 1994, respectively.
7. Disassembly of Aircraft
In an attempt to maximize the economic return from three of the remaining four
McDonnell Douglas DC-9- 10 aircraft formerly leased to Midway (Note 3) and the
six Boeing 727-100 aircraft formerly leased to Continental (Note 6), the
Partnership entered into an agreement with Soundair, Inc. (Soundair) for the
disassembly and sale of these aircraft. Disassembly of the McDonnell Douglas
DC-9-10s began in January 1993 and disassembly of the Boeing 727-100s began in
December 1994.
The nine aircraft were recorded as aircraft inventory in the Partnership's
balance sheets. During 1994, the Partnership recorded a downward adjustment to
the inventory value of $144,000 to reflect the then current estimate of net
realizable aircraft inventory value. This adjustment is reflected as increased
depreciation expense in the 1994 statement of operations.
The Partnership recognized the estimated cost of disassembly of approximately
$50,000 per aircraft in 1993, and is receiving the proceeds from the sale of
such parts net of overhaul expenses if necessary, and commission paid to
Soundair. During 1995, the Partnership paid $214,113 aircraft disassembly costs
for the six Boeing 727-100s. During 1996, 1995 and 1994, the Partnership applied
net proceeds from the sale of aircraft inventory of $902,733, $1,915,820 and
$748,740, respectively against aircraft inventory, reducing the net book value
of the Partnership's aircraft inventory to zero. Payments received by the
Partnership of $206,781 in excess of the aircraft inventory net book value were
recorded as gain on sale of aircraft inventory during 1996.
33
8. 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.
In 1996, 1995 and 1994, the Partnership paid management fees to PIMC of
$752,014, $809,328 and $746,684, respectively. Management fees payable to
PIMC were $17,500 and $23,000 at December 31, 1996 and 1995, respectively.
b. Reimbursement of certain out-of-pocket expenses incurred in connection
with the management of the Partnership and supervision of its assets. In
1996, 1995 and 1994, the Partnership reimbursed PIMC for expenses of
$396,504, $521,705 and $483,077, respectively. Reimbursements totaling
$68,505 and $107,584 were payable to PIMC at December 31, 1996 and 1995,
respectively.
c. A 10% interest to PIMC 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 to PIMC 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 will 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 subordination threshold has not been met.
9. 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 financial statements.
The net differences between the tax basis and the reported amounts of the
Partnership's assets and liabilities at December 31, 1996 and 1995 are as
follows:
Reported Amounts Tax Basis Net Difference
---------------- --------- --------------
1996: Assets $67,014,686 $40,308,934 $26,705,752
Liabilities 13,525,522 13,121,491 404,031
1995: Assets $82,001,364 $49,382,724 $32,618,640
Liabilities 736,449 $ 359,814 376,635
34
10. Reconciliation of Book Net Income (Loss) to Taxable Net Income (Loss)
The following is a reconciliation between net income (loss) per limited
partnership unit reflected in the financial statements and the information
provided to limited partners for federal income tax purposes:
For the years ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Book net income (loss) per limited partnership unit $(17.25) $13.39 $(5.36)
Adjustments for tax purposes represent differences
between book and tax revenue and expenses:
Rental revenue (3.65) (4.94) (0.23)
Management fee expense 0.16 0.28 0.04
Depreciation 16.36 (4.96) (8.47)
Gain or loss on sale of aircraft -- -- 1.57
Capitalized costs -- -- 5.25
Basis in inventory (0.62) (1.35) (1.17)
Other revenue and expense items (0.48) (0.01) (1.29)
----- ----- -----
Taxable net income (loss) per limited partnership unit $(5.48) $ 2.41 $(9.66)
===== ===== =====
The differences between net income and loss for book purposes and net income and
loss for tax purposes result from the temporary differences of certain revenue
and deductions.
For book purposes, rental revenue is generally recorded as it is earned. For tax
purposes, certain temporary differences exist in the recognition of revenue. For
tax purposes, management fee expense is accrued in the same year as the tax
basis rental revenue.
The Partnership computes depreciation using the straight-line method for
financial reporting purposes and generally an accelerated method for tax
purposes. 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 book
depreciation expense. As a result, the current year book depreciation expense is
greater than the tax depreciation expense. These differences in depreciation
methods result in book to tax differences on the sale of aircraft. In addition,
certain costs were capitalized for tax purposes and expensed for book purposes.
For book purposes, aircraft held in inventory are reflected at the lower of
depreciable cost or estimated net realizable value. Differences in book and tax
revenue and loss from inventory result from the differences in the book and tax
carrying value of the inventory.
11. Subsequent Event
Proposed Sale of Aircraft - The Partnership has received, and the General
Partner (upon recommendation of its servicer) has determined that it would be in
the best interests of the Partnership to accept an offer to purchase 8 of the
Partnership's 18 aircraft (the "Aircraft") and certain of its notes receivables
by a special purpose company (the "Purchaser"). The Purchaser is managed by
Triton Aviation Services, Ltd., a privately held aircraft leasing company (the
"Purchaser's Manager") which was formed in 1996. Each Aircraft is to be sold
subject to the existing leases, and as part of the transaction the Purchaser
assumes all obligations relating to maintenance reserves and security deposits,
if any, relating to such leases. At the same time cash balances related to
maintenance reserves and security deposits, if any, will be transferred to the
Purchaser.
35
The total proposed purchase price (the "Purchase Price") to be paid by the
Purchaser in the contemplated transaction would be $10,947,000 which would be
allocable to the Aircraft and to certain notes receivable by the Partnership.
The Purchaser proposes to pay $1,233,289 of the Purchase Price in cash at the
closing and the balance of $9,713,711 would be paid by delivery of a promissory
note ( the "Promissory Note") by the Purchaser. The Promissory Note would be
repaid in equal quarterly installments over a period of seven years bearing
interest at a rate of 12% per annum with a balloon principal payment at the end
of year seven. The Purchaser would have the right to voluntarily prepay the
Promissory Note in whole or in part at any time without penalty. In addition,
the Promissory Note would be subject to mandatory partial prepayment in certain
specified instances.
Under the terms of the contemplated transaction, the Aircraft, including any
income or proceeds therefrom and any reserves or deposits with respect thereto,
constitute the sole source of payments under the Promissory Note. No security
interest over the Aircraft or the leases would be granted in favor of the
Partnership, but the equity interests in the Purchaser would be pledged to the
Partnership. The Purchaser would have the right to sell the Aircraft, or any of
them, without the consent of the Partnership, except that the Partnership's
consent would be required in the event that the proposed sale price is less than
the portion of the outstanding balance of the Promissory Note which is allocable
to the Aircraft in question and the Purchaser does not have sufficient funds to
make up the difference. The Purchaser would undertake to keep the Aircraft and
leases free of any lien, security interest or other encumbrance other than (i)
inchoate materialmen's liens and the like, and (ii) in the event that the
Purchaser elects to install hushkits on any Aircraft, secured debt to the extent
of the full cost of such hushkit. The Purchaser will be prohibited from
incurring indebtedness other than (i) the Promissory Note; (ii) deferred taxes
not yet due and payable; (iii) indebtedness incurred to hushkit Aircraft owned
by the Purchaser and, (iv) demand loans from another SPC (defined below) at a
market rate of interest.
It is also contemplated that each of Polaris Aircraft Income Fund II, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund VI would sell certain aircraft assets to separate special purpose
companies under common management with the Purchaser (collectively, together
with the Purchaser, the "SPC's") on terms similar to those set forth above.
Under the terms of the contemplated transaction, Purchaser's Manager would
undertake to make available a working capital line to the Purchaser of up to
approximately $956,000 to fund operating obligations of the Purchaser. This
working capital line is to be guaranteed by Triton Investments, Ltd., the parent
of the Purchaser's Manager and such guarantor will provide the Partnership with
a copy of its most recent balance sheet showing a consolidated net worth (net of
minority interests) of at least $150-million. Furthermore, each of the SPC's,
including the Purchaser, is to enter into a management agreement with
Purchaser's Manager pursuant to which Purchaser's Manager would provide all
normal and customary management services including remarketing, sales and
repossession, if necessary. Provided that the Purchaser is not in default in
making payments due under the Promissory Note to the Partnership, the Purchaser
would be permitted to dividend to its equity owners an amount not to exceed
approximately $26,000 per month. The Purchaser may distribute additional
dividends to the equity owners to the extent of the working capital advances
made by the Purchaser's Manager provided that the working capital line available
to the Purchaser will be deemed increased to the extent of such dividends.
The Purchaser would be deemed to have purchased the Aircraft effective as of
April 1, 1997 notwithstanding the actual closing date. The Purchaser would have
the right to receive all income and proceeds, including rents and notes
receivables, from the Aircraft accruing from and after April 1, 1997, and the
Promissory Note would commence bearing interest as of April 1, 1997.
The Partnership has agreed to consult with Purchaser's Manager before taking any
significant action pertaining to the Aircraft after the effective date of the
purchase offer. The Purchaser also has the right to make all significant
decisions regarding the Aircraft from and after the date of completion of
36
definitive documentation legally binding the Purchaser and the Partnership to
the transaction,, even if a delay occurs between the completion of such
documentation and the closing of the title transfer to the Purchaser.
In the event the Partnership receives and elects to accept an offer for all (but
not less than all) of the assets to be sold by it to the Purchaser on terms
which it deems more favorable, the Purchaser has the right to (i) match the
offer, or (ii) decline to match the offer and be entitled to compensation in an
amount equal to 1 1/2% of the Purchaser's proposed Purchase Price.
The Partnership adopted, effective January 1, 1996, SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." That statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The purchase offer constitutes a change in
circumstances which, pursuant to SFAS No. 121, requires the Partnership to
review the Aircraft for impairment. As previously discussed in Note 3, the
Partnership has determined that an impairment loss must be recognized. In
determining the amount of the impairment loss, the Partnership estimated the
"fair value" of the Aircraft based on the proposed Purchase Price reflected in
the contemplated transaction , less the estimated costs and expenses of the
proposed sale. The Partnership is deemed to have an impairment loss to the
extent that the carrying value exceeded the fair value. Management believes the
assumptions related to the fair value of impaired assets represent the best
estimates based on reasonable and supportable assumptions and projections.
It should be noted that there can be no assurance that the contemplated sale
transaction will be consummated. The contemplated transaction remains subject to
execution of definitive documentation and various other contingencies.
37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
38
PART III
Item 10. Directors and Executive Officers of the Registrant
Polaris Aircraft Income Fund III, A California Limited Partnership (PAIF-III or
the Partnership) has no directors or officers. Polaris Holding Company (PHC) and
its subsidiaries, including Polaris Aircraft Leasing Corporation (PALC) and
Polaris Investment Management Corporation (PIMC), the general partner of the
Partnership (collectively Polaris), restructured their operations and businesses
(the Polaris Restructuring) in 1994. In connection therewith, PIMC entered into
a services agreement dated as of July 1, 1994 (the Services Agreement) with GE
Capital Aviation Services, Inc. (the Servicer or GECAS), a Delaware corporation
which is a wholly owned subsidiary of General Electric Capital Corporation, a
New York corporation (GE Capital). GE Capital has been PHC's parent company
since 1986. As subsidiaries of GE Capital, the Servicer and PIMC are affiliates.
The officers and directors of PIMC are:
Name PIMC Title
---- ----------
Eric M. Dull President; Director
Marc A. Meiches Vice President; Chief Financial Officer
Richard J. Adams Vice President; Director
Norman C. T. Liu Vice President; Director
Edward Sun Vice President
Richard L. Blume Vice President; Secretary
Robert W. Dillon Vice President; Assistant Secretary
Substantially all of these management personnel will devote only such portion of
their time to the business and affairs of PIMC as deemed necessary or
appropriate.
Mr. Dull, 36, assumed the position of President and Director of PIMC effective
January 1, 1997. Mr. Dull previously was a Director of PIMC from March 31, 1995
to July 31, 1995. Mr. Dull holds the position of Executive Vice President -
Portfolio Management of GECAS, having previously held the position of Senior
Vice President - Underwriting Risk Management of GECAS. Prior to joining GECAS,
Mr. Dull held various positions with Transportation and Industrial Funding
Corporation (TIFC).
Mr. Meiches, 44, assumed the position of Vice President and Chief Financial
Officer of PIMC effective October 9, 1995. Mr. Meiches presently holds the
positions of Executive Vice President and Chief Financial Officer of GECAS.
Prior to joining GECAS, Mr. Meiches has been with General Electric Company (GE)
and its subsidiaries since 1978. Since 1992, Mr. Meiches held the position of
Vice President of the General Electric Capital Corporation Audit Staff. Between
1987 and 1992, Mr. Meiches held Manager of Finance positions for GE Re-entry
Systems, GE Government Communications Systems and the GE Astro-Space Division.
Mr. Adams, 63, assumed the position of 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.
Adams presently holds the position of Senior Vice President - Aircraft
Marketing, North America, of GECAS. Effective July 1, 1994, Mr. Adams held the
positions of Vice President and Director of PIMC.
Mr. Liu, 39, assumed the position of Vice President of PIMC effective May 1,
1995 and has assumed the position of Director of PIMC effective July 31, 1995.
39
Mr. Liu presently holds the position of Executive Vice President - Marketing and
Structured Finance of GECAS, having previously held the position of Executive
Vice President - Capital Funding and Portfolio Management of GECAS. Prior to
joining GECAS, Mr. Liu was with General Electric Capital Corporation for nine
years. He has held management positions in corporate Business Development and in
Syndications and Leasing for TIFC. Mr. Liu previously held the position of
managing director of Kidder, Peabody & Co., Incorporated.
Mr. Sun, 47, assumed the position of Vice President of PIMC effective May 1,
1995. Mr. Sun presently holds the position of Senior Vice President - Structured
Finance of GECAS. Prior to joining GECAS, Mr. Sun held various positions with
TIFC since 1990.
Mr. Blume, 55, assumed the position of Secretary of PIMC effective May 1, 1995
and Vice President of PIMC effective October 9, 1995. Mr. Blume presently holds
the position of Executive Vice President and General Counsel of GECAS. Prior to
joining GECAS, Mr. Blume was counsel at GE Aircraft Engines since 1987.
Mr. Dillon, 55, assumed the position of Vice President - Aviation Legal and
Insurance Affairs, effective April 1989. Previously, he served as General
Counsel of PIMC and PALC effective January 1986. Effective July 1, 1994, Mr.
Dillon held the positions of Vice President and Assistant Secretary of PIMC. Mr.
Dillon presently holds the position of Senior Vice President and Managing
Counsel of GECAS.
Certain Legal Proceedings:
On October 27, 1992, a class action complaint entitled Weisl, Jr. et al. v.
Polaris Holding Company, et al. 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, plaintiffs filed a motion for class
certification. On March 1, 1993, defendants filed motions to dismiss the
complaint on numerous grounds, including failure to state a cause of action and
statute of limitations. On July 20, 1994, the court entered an order dismissing
almost all of the claims in the complaint and amended complaint. Certain claims,
however, remain pending. Plaintiffs filed a notice of appeal on September 2,
1994. On April 25, 1996, the Appellate Division for the First Department
affirmed the trial court's order which had dismissed most of plaintiffs' claims.
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, Polaris
Investment Management Corporation and Polaris Depositary Company. Plaintiffs
seek class action certification on behalf of a class of investors in Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and Polaris Aircraft
Income Fund 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 units in such Polaris Aircraft Income
Funds. Among other things, plaintiffs assert that the defendants sold interests
in such Polaris Aircraft Income Funds while "omitting and failing to disclose
the material facts questioning the economic efficacy of" such Polaris Aircraft
Income Funds. Plaintiffs seek rescission or damages, in addition to interest,
costs, and attorneys' fees. On April 5, 1993, defendants filed a motion to stay
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
40
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 lower court's 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.
The Partnership is not named as a defendant in this action.
On or around May 14, 1993, a purported class action entitled 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 Polaris Aircraft Income Funds I - VI by nine investors in such
Polaris Aircraft Income Funds. The complaint 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 complaint 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 April 18, 1995, this action was transferred
to the Multi-District Litigation described below. The Partnership is not named
as a defendant in this action.
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 the
Partnership, Polaris Aircraft Income Fund I and Polaris Aircraft Income Fund II.
The complaint names as defendants Polaris Holding Company, its affiliates and
others. Each of the Partnership, Polaris Aircraft Income Fund I and Polaris
Aircraft Income Fund II is named as a nominal defendant. The complaint alleges,
among other things, that defendants mismanaged the Partnership and the other
Polaris Aircraft Income Funds, engaged in self-dealing transactions that were
detrimental to the Partnership and the other Polaris Aircraft Income Funds and
failed to make required disclosure in connection with the sale of the units in
the Partnership and the other Polaris Aircraft Income Funds. 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
August 11, 1994, the court denied in part and granted in part defendants'
motions to dismiss. Specifically, the court denied the motions as to the claims
for breach of fiduciary duty, but dismissed plaintiffs' claim for constructive
fraud with leave to replead. On October 7, 1994, defendants filed a notice of
appeal. On November 15, 1994, defendants submitted an answer to the remaining
causes of action. On July 7, 1995, defendants filed briefs in support of their
appeal from that portion of the trial court's order denying the motion to
dismiss. On March 14, 1996, the appellate court reversed the trial court's order
denying the motion to dismiss, and dismissed the complaint.
On June 8, 1994, a consolidated complaint captioned In re Prudential Securities
Inc. Limited Partnerships Litigation was filed in the United States District
Court for the Southern District of New York, purportedly consolidating cases
that had been transferred from other federal courts by the Judicial Panel on
Multi- District Litigation. The consolidated complaint names as defendants
Prudential entities and various other sponsors of limited partnerships sold by
Prudential, including Polaris Holding Company, one of its former officers,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation
and Polaris Securities Corporation. The complaint alleges that the Prudential
41
defendants created a scheme for the sale of approximately $8-billion of limited
partnership interests in 700 assertedly high-risk limited partnerships,
including the Partnership, to approximately 350,000 investors by means of false
and misleading offering materials; that the sponsoring organizations (including
the Polaris entities) participated with the Prudential defendants with respect
to, among other things, the partnerships that each sponsored; and that all of
the defendants conspired to engage in a nationwide pattern of fraudulent conduct
in the marketing of all limited partnerships sold by Prudential. The complaint
alleges violations of the federal Racketeer Influenced and Corrupt Organizations
Act and the New Jersey counterpart thereof, fraud, negligent misrepresentation,
breach of fiduciary duty and breach of contract. The complaint seeks rescission,
unspecified compensatory damages, treble damages, disgorgement of profits
derived from the alleged acts, costs and attorneys fees. On October 31, 1994,
Polaris Investment Management Corporation and other Polaris entities filed a
motion to dismiss the consolidated complaint on the grounds of, inter alia,
statute of limitations and failure to state a claim. The Partnership is not
named as a defendant in this action. Prudential Securities, Inc., on behalf of
itself and its affiliates has made an Offer of Settlement. A class has been
certified for purposes of the Prudential Settlement and notice to the class has
been sent. Any questions concerning Prudential's Offer of Settlement should be
directed to 1-800-327-3664, or write to the Claims Administrator at:
Prudential Securities Limited Partnerships
Litigation Claims Administrator
P.O. Box 9388
Garden City, New York 11530-9388
On June 5, 1996, the Court certified a class with respect to claims against
Polaris Holding Company, one of its former officers, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, and Polaris Securities
Corporation. The class is comprised of all investors who purchased securities in
any of Polaris Aircraft Income Funds I through VI during the period from January
1985 until January 29, 1991, regardless of which brokerage firm the investor
purchased from. Excepted from the class are those investors who settled in the
SEC/Prudential settlement or otherwise opted for arbitration pursuant to the
settlement and any investor who has previously released the Polaris defendants
through any other settlement. On June 10, 1996, the Court issued an opinion
denying summary judgment to Polaris on plaintiffs' Section 1964(c) and (d) RICO
claims and state causes of action, and granting summary judgment to Polaris on
plaintiffs' Section 1964(a) RICO claims and the New Jersey State RICO claims. On
August 5, 1996, the Court signed an order providing for notice to be given to
the class members. The trial, which was scheduled for November 11, 1996, has not
proceeded, and no new trial date has been set.
A further litigation captioned Romano v. Ball et. al, an action by Prudential
Insurance Company policyholders against many of the same defendants (including
Polaris Investment Management Corporation and Polaris Aircraft Leasing
Corporation), has also been commenced by policy holders of the Prudential
Insurance Company as a purported derivative action on behalf of the Prudential
Insurance Company. The complaint alleges claims under the federal Racketeer
Influenced and Corrupt Organizations Act, as well as claims for waste,
mismanagement and intentional and negligent misrepresentation, and seeks
unspecified compensatory, treble and punitive damages. The case, which was being
coordinated with In re Prudential, has been settled and the action dismissed
pursuant to a court order dated December 18, 1996.
On or about February 13, 1995, an action entitled Adams, et al. v. Prudential
Securities, Inc. et al. was filed in the Court of Common Pleas, Stark County,
Ohio. The action names Prudential Securities, Inc., Prudential Insurance Company
of America, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Aircraft Leasing Corporation, Polaris Holding Company,
General Electric Capital Corporation, Polaris Aircraft Income Fund I, Polaris
Aircraft Income Fund IV, Polaris Aircraft Income Fund V and James Darr as
defendants. The complaint alleges that defendants committed common law fraud,
fraud in the inducement, negligent misrepresentation, negligence, breach of
fiduciary duty and civil conspiracy by misrepresenting and failing to disclose
material facts in connection with the sale of limited partnership units in
Polaris Aircraft Income Fund I, Polaris Aircraft Income Fund IV, and Polaris
42
Aircraft Income Fund V. Plaintiffs seek, among other things, rescission of their
investments in the Polaris Aircraft Income Funds, an award of compensatory
damages in an unspecified amount plus interest thereon, and punitive damages in
an unspecified amount. On or about March 15, 1995, this action was removed to
the United States District Court for the Northern District of Ohio, Eastern
Division. Subsequently, the Judicial Panel transferred this action to the
Multi-District Litigation filed in the United States District Court for the
Southern District of New York, discussed above. The Partnership is not named as
a defendant in this action.
On or about January 12, 1995, a class action complaint entitled Cohen, et al. v.
Kidder Peabody & Company, Inc., et al. was filed in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida, and on March
31, 1995 the case was removed to the United States District Court for the
Southern District of Florida. An amended class action complaint (the "amended
complaint"), which renamed this action Bashein, et al. v. Kidder, Peabody &
Company Inc., et al., was filed on June 13, 1995. The amended complaint names
Kidder Peabody & Company, Inc., General Electric Capital Corporation, General
Electric Financial Services, Inc., and General Electric Company as defendants.
The action purports to be on behalf of "approximately 20,000 persons throughout
the United States" who purchased units in Polaris Aircraft Income Funds III
through VI. The amended complaint sets forth various causes of action
purportedly arising in connection with the public offerings of the Partnership,
Polaris Aircraft Income Fund IV, Polaris Aircraft Income Fund V, and Polaris
Aircraft Income Fund VI. Specifically, plaintiffs assert claims for violation of
Sections 12(2) and 15 of the Securities Act of 1933, fraud, negligent
misrepresentation, breach of fiduciary duty, breach of third party beneficiary
contract, violation of NASD Rules of Fair Practice, breach of implied covenant,
and breach of contract. Plaintiffs seek compensatory damages, interest, punitive
damages, costs and attorneys' fees, as well as any other relief the court deems
just and proper. Defendants moved to dismiss the amended complaint on June 26,
1995. On October 2, 1995, the court denied the defendants' motion to dismiss.
While the motion to dismiss was pending, plaintiffs filed a motion for leave to
file a second amended complaint, which was granted on October 3, 1995.
Defendants thereafter filed a motion to dismiss the second amended complaint,
and defendants' motion was denied by Court Order dated December 26, 1995. On
February 12, 1996, defendants answered. This case was reassigned (from Hurley,
J. To Lenard, J.) on February 18, 1996, and on March 18, 1996, plaintiffs moved
for class certification. On the eve of class discovery, April 26, 1996,
plaintiffs moved for a voluntary dismissal of Counts I and II (claims brought
pursuant to the Securities Act of 1933) of the Second Amended Complaint and
simultaneously filed a motion to remand this action to state court for lack of
federal jurisdiction. Plaintiff's motion for voluntary dismissal of the federal
securities law claims and motion for remand were granted on July 10, 1996. The
Partnership is not named as a defendant in this action.
On or around April 13, 1995, a class action complaint entitled B & L Industries,
Inc., et al. v. Polaris Holding Company, et al. was filed in the Supreme Court
of the State of New York. The complaint names as defendants Polaris Holding
Company, Polaris Aircraft Leasing Corporation, Polaris Investment Management
Corporation, Polaris Securities Corporation, Peter G. Pfendler, Marc P.
Desautels, General Electric Capital Corporation, General Electric Financial
Services, Inc., General Electric Company, Prudential Securities Inc., and Kidder
Peabody & Company Incorporated. The complaint sets forth various causes of
action purportedly arising out of the public offerings of the Partnership and
Polaris Aircraft Income Fund IV. Plaintiffs allege claims of fraud, negligent
misrepresentation, breach of fiduciary duty, knowingly inducing or participating
in breach of fiduciary duty, breach of third party beneficiary contract,
violation of NASD Rules of Fair Practice, breach of implied covenant, and unjust
enrichment. Plaintiffs seek compensatory damages, interest, general,
consequential and incidental damages, exemplary and punitive damages,
disgorgement, rescission, costs, attorneys' fees, accountants' and experts'
fees, and other legal and equitable relief as the court deems just and proper.
On October 2, 1995, defendants moved to dismiss the complaint. On August 16,
1996, defendants filed a motion to dismiss plaintiffs' amended complaint. The
motion is returnable on July 17, 1997. The Partnership is not named as a
defendant in this action.
43
On or around September 27, 1995, a complaint entitled Martha J. Harrison v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and Prudential Securities Incorporated. Plaintiff alleges
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code concerning the inducement and solicitation of purchases
arising out of the public offering of Polaris Aircraft Income Fund IV. Plaintiff
seeks compensatory damages, attorney's fees, interest, costs and general relief.
The Partnership is not named as a defendant in this action.
On or around December 8, 1995, a complaint entitled Overby, et al. v. General
Electric Company, et al. was filed in the Civil District Court for the Parish of
Orleans, State of Louisiana. The complaint names as defendants General Electric
Company and General Electric Capital Corporation. Plaintiffs allege claim of
tort, breach of fiduciary duty, in tort, contract and quasi-contract, violation
of sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil
Code in connection with the public offering of the Partnership and Polaris
Aircraft Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees,
interest, costs and general relief. The Partnership is not named as a defendant
in this action.
In or around November 1994, a complaint entitled Lucy R. Neeb, et al. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
December 20, 1995, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company, General Electric
Capital Corporation and Smith Barney, Inc. Plaintiffs allege claims of tort,
breach of fiduciary duty, in tort, contract and quasi-contract, violation of
sections of the Louisiana Blue Sky Law and violation of the Louisiana Civil Code
in connection with the public offering of the Partnership and Polaris Aircraft
Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief. The Partnership is not named as a defendant in this
action.
In or about January of 1995, a complaint entitled Albert B. Murphy, Jr. v.
Prudential Securities, Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities Incorporated and Stephen Derby Gisclair. On or about
January 18, 1996, plaintiff filed a First Supplemental and Amending Petition
adding defendants General Electric Company and General Electric Capital
Corporation. Plaintiff alleges claims of tort, breach of fiduciary duty in tort,
contract and quasi-contract, violation of sections of the Louisiana Blue Sky Law
and violation of the Louisiana Civil Code in connection with the public offering
of the Partnership and Polaris Aircraft Income Fund IV. Plaintiffs seek
compensatory damages, attorneys' fees, interest, costs and general relief. The
Partnership is not named as a defendant in this action.
On or about January 22, 1996, a complaint entitled Mrs. Rita Chambers, et al. v.
General Electric Co., et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint names as defendants General
Electric Company and General Electric Capital Corporation. Plaintiffs allege
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code in connection with the public offering of Polaris Aircraft
Income Fund IV. Plaintiffs seek compensatory damages, attorneys' fees, interest,
costs and general relief. The Partnership is not named as a defendant in this
action.
In or around December 1994, a complaint entitled John J. Jones, Jr. v.
Prudential Securities Incorporated et al. was filed in the Civil District Court
for the Parish of Orleans, State of Louisiana. The complaint named as defendants
Prudential Securities, Incorporated and Stephen Derby Gisclair. On or about
March 29, 1996, plaintiffs filed a First Supplemental and Amending Petition
adding as additional defendants General Electric Company and General Electric
Capital Corporation. Plaintiff alleges claims of tort, breach of fiduciary duty
in tort, contract and quasi-contract, violation of sections of the Louisiana
44
Blue Sky Law and violation of the Louisiana Civil Code concerning the inducement
and solicitation of purchases arising out of the public offering of Polaris
Aircraft Income Fund III. Plaintiff seeks compensatory damages, attorneys' fees,
interest, costs and general relief. The Partnership is not named as a defendant
in this action.
On or around February 16, 1996, a complaint entitled Henry Arwe, et al. v.
General Electric Company, et al. was filed in the Civil District Court for the
Parish of Orleans, State of Louisiana. The complaint named as defendants General
Electric Company and General Electric Capital Corporation. Plaintiffs allege
claims of tort, breach of fiduciary duty in tort, contract and quasi-contract,
violation of sections of the Louisiana Blue Sky Law and violation of the
Louisiana Civil Code concerning the inducement and solicitation of purchases
arising out of the public offering of Polaris Aircraft Income Funds III and IV.
Plaintiffs seek compensatory damages, attorneys' fees, interest, costs and
general relief. The Partnership is not named as a defendant in this action.
On or about April 9, 1996, a summons and First Amended Complaint entitled Sara
J. Bishop, et al. v. Kidder Peabody & Co., et al. was filed in the Superior
Court of the State of California, County of Sacramento, by over one hundred
individual plaintiffs who purchased limited partnership units in Polaris
Aircraft Income Funds III, IV, V and VI and other limited partnerships sold by
Kidder Peabody. The complaint names Kidder, Peabody & Co. Incorporated, KP
Realty Advisors, Inc., Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Financial Services, Inc., General
Electric Capital Corporation, General Electric Credit Corporation and DOES 1-100
as defendants. The complaint alleges violations of state common law, including
fraud, negligent misrepresentation, breach of fiduciary duty, and violations of
the rules of the National Association of Securities Dealers. The complaint seeks
to recover compensatory damages and punitive damages in an unspecified amount,
interest, and rescission with respect to the Polaris Aircraft Income Funds
III-VI and all other limited partnerships alleged to have been sold by Kidder
Peabody to the plaintiffs. On June 18, 1996, defendants filed a motion to
transfer venue from Sacramento to San Francisco County. The Court subsequently
denied the motion. The Partnership is not named as a defendant in this action.
Defendants filed an answer in the action on August 30, 1996.
On October 1, 1996, a complaint entitled Wilson et al. v. Polaris Holding
Company et al. was filed in the Superior Court of the State of California for
the County of Sacramento by over 500 individual plaintiffs who purchased limited
partnership units in one or more of Polaris Aircraft Income Funds I through VI.
The complaint names Polaris Holding Company, Polaris Aircraft Leasing
Corporation, Polaris Investment Management Corporation, Polaris Securities
Corporation, Polaris Jet Leasing, Inc., Polaris Technical Services, Inc.,
General Electric Company, General Electric Capital Services, Inc., General
Electric Capital Corporation, GE Capital Aviation Services, Inc. and DOES 1-100
as defendants. The Partnership has not been named as a defendant. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, negligence, breach of contract, and breach of fiduciary duty.
The complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest and rescission with respect to the Polaris Aircraft
Income Funds sold to plaintiffs. Defendants have filed an answer.
On or about May 7, 1996, a petition entitled Charles Rich, et al. v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. Plaintiffs allege claims of tort concerning the inducement and
solicitation of purchases arising out of the public offering of Polaris Aircraft
Income Funds III and IV. Plaintiffs seek compensatory damages, attorneys' fees,
interest, costs and general relief. The Partnership is not named as a defendant
in this action.
45
On or about March 4, 1996, a petition entitled Richard J. McGiven v. General
Electric Company and General Electric Capital Corporation was filed in the Civil
District Court for the Parish of Orleans, State of Louisiana. The complaint
names as defendants General Electric Company and General Electric Capital
Corporation. Plaintiff alleges claims of tort concerning the inducement and
solicitation of purchases arising out of the public offering of Polaris Aircraft
Income Fund V. Plaintiff seeks compensatory damages, attorneys' fees, interest,
costs and general relief. The Partnership is not named as a defendant in this
action.
On or about March 4, 1996, a petition entitled Alex M. Wade v. General Electric
Company and General Electric Capital Corporation was filed in the Civil District
Court for the Parish of Orleans, State of Louisiana. The complaint names as
defendants General Electric Company and General Electric Capital Corporation.
Plaintiff alleges claims of tort concerning the inducement and solicitation of
purchases arising out of the public offering of Polaris Aircraft Income Fund V.
Plaintiff seeks compensatory damages, attorneys' fees, interest, costs and
general relief. The Partnership is not named as a defendant in this action.
On or about October 15, 1996, a complaint entitled Joyce H. McDevitt, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recession with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about October 16, 1996, a complaint entitled Mary Grant Tarrer, et al.
v.Kidder Peabody & Co.,et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI and other limited
partnerships allegedly sold by Kidder Peabody. The complaint names Kidder,
Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, General Electric Credit Corporation
and DOES 1-100 as defendants. The complaint alleges violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest, and recision with respect to Polaris Aircraft
Income Funds I-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The Partnership is not named as a defendant
in this action.
On or about November 6, 1996, a complaint entitled Janet K. Johnson, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
46
On or about November 13, 1996, a complaint entitled Wayne W. Kuntz, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about November 26, 1996, a complaint entitled Thelma Abrams, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
On or about January 16, 1997, a complaint entitled Enita Elphick, et al. v.
Kidder Peabody & Co.,et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI and other limited
partnerships allegedly sold by Kidder Peabody. The complaint names Kidder,
Peabody & Co. Incorporated, KP Realty Advisors, Inc., Polaris Holding Company,
Polaris Aircraft Leasing Corporation, Polaris Investment Management Corporation,
Polaris Securities Corporation, Polaris Jet Leasing, Inc., Polaris Technical
Services, Inc., General Electric Company, General Electric Financial Services,
Inc., General Electric Capital Corporation, General Electric Credit Corporation
and DOES 1-100 as defendants. The complaint alleges violations of state common
law, including fraud, negligent misrepresentation, breach of fiduciary duty, and
violations of the rules of the National Association of Securities Dealers. The
complaint seeks to recover compensatory damages and punitive damages in an
unspecified amount, interest, and recission with respect to Polaris Aircraft
Income Funds I-VI and all other limited partnerships alleged to have been sold
by Kidder Peabody to the plaintiffs. The Partnership is not named as a defendant
in this action.
On or about February 14, 1997, a complaint entitled George Zicos, et al. v.
Polaris Holding Company, et al. was filed in the Superior Court of the State of
California, County of Sacramento, by individual plaintiffs who purchased limited
partnership units in Polaris Aircraft Income Funds I-VI. The complaint names
Polaris Holding Company, Polaris Aircraft Leasing Corporation, Polaris
Investment Management Corporation, Polaris Securities Corporation, Polaris Jet
Leasing, Inc., Polaris Technical Services, Inc., General Electric Company,
General Electric Financial Services, Inc., General Electric Capital Corporation,
General Electric Credit Corporation and DOES 1-100 as defendants. The complaint
alleges violations of state common law, including fraud, negligent
misrepresentation, breach of fiduciary duty, and violations of the rules of the
National Association of Securities Dealers. The complaint seeks to recover
compensatory damages and punitive damages in an unspecified amount, interest,
and recission with respect to Polaris Aircraft Income Funds I-VI. The
Partnership is not named as a defendant in this action.
Other Proceedings - Part I, Item 3 discusses certain other actions arising out
of certain public offerings, including that of the Partnership, to which both
the Partnership and its general partner are parties.
47
Disclosure pursuant to Section 16, Item 405 of Regulation S-K:
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 1995 all
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were met.
Item 11. Executive Compensation
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 $752,014 were paid to PIMC in 1996 in addition to a 10%
interest in all cash distributions as described in Note 8 to the financial
statements (Item 8).
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:
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 100%
Partner Management distributions, gross income in an
Interest Corporation amount equal to 9.09% of distributed
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.
48
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 21
Balance Sheets 22
Statements of Operations 23
Statements of Changes in Partners' Capital (Deficit) 24
Statements of Cash Flows 25
Notes to Financial Statements 26
2. Reports on Form 8-K.
None.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
27. Financial Data Schedule.
4. Financial Statement Schedules.
All financial statement schedules are omitted because they are not
applicable, not required or because the required information is
included in the financial statements or notes thereto.
49
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,
A California Limited Partnership
(REGISTRANT)
By: Polaris Investment
Management Corporation
General Partner
March 28, 1997 By: /S/ Eric M. Dull
- --------------------- -----------------------
Date Eric M. Dull, 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/Eric M. Dull President and Director of Polaris Investment March 28, 1997
- ------------------- Management Corporation, General Partner --------------
(Eric M. Dull) of the Registrant
/S/Marc A. Meiches Chief Financial Officer of Polaris Investment March 28, 1997
- ------------------- Management Corporation, General Partner --------------
(Marc A. Meiches) of the Registrant
/S/Richard J. Adams Vice President and Director of Polaris March 28, 1997
- ------------------- Investment Management Corporation, --------------
(Richard J. Adams) General Partner of the Registrant
50