UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): February 28, 2001
POLARIS AIRCRAFT INCOME FUND III
(Exact name of registrant as specified in its charter)
California 33-10122 94-3023671
(State or Other Jurisdiction (Commission (IRS Employer
of Organization) File Number) Identification No.)
201 High Ridge Road
Stamford, Connecticut 06927
(Address of principal executive offices)
(203) 357-3776
(Registrant's telephone number, including area code)
Item 5. Other Events
Polaris Aircraft Income Fund III, a California Limited Partnership (the
"Partnership") owns ten McDonnell Douglas DC-9-30 aircraft (the "Aircraft") that
are leased to Trans World Airlines, Inc. ("TWA"). All ten of these leases are
scheduled to expire on November 27, 2004 (collectively, the "Current Leases").
TWA has possession of all ten of the leased aircraft, and prior to March 12,
2001 had not made its required monthly rental payments of $85,000 per Aircraft
per month since December 27, 2000. On March 12, 2001, TWA cured lease payment
defaults under 7 of the 10 leases pursuant to Section 1110 of the Federal
Bankruptcy Code (the "Bankruptcy Code"). The Current Leases account for 100% of
the Partnership's rental revenue and the Aircraft had net book values
aggregating approximately $20.3 million as of September 30, 2000 (prior to any
adjustment for the impairment loss to be recognized as a result of the events
described herein). The Partnership holds cash reserves aggregating approximately
$11.0 million. The Partnership has outstanding debt of approximately $205,000 at
December 31, 2000, which is the remaining balance of the debt that the
Partnership incurred in 1996 and 1997 in order to finance the installation of
hushkits in each of the ten Aircraft (the "Hushkit Debt").
TWA Bankruptcy Filing
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On January 10, 2001, TWA filed a voluntary petition in the United
States Bankruptcy Court of the District of Delaware (the "Bankruptcy Court") for
reorganization relief under Chapter 11 of the Bankruptcy Code. One day prior to
filing its bankruptcy petition, TWA entered into an Asset Purchase Agreement
(the "Purchase Agreement") with American Airlines, Inc. ("American") that
provided for the sale to American of substantially all of TWA's assets. Under
the terms of the Purchase Agreement, American's acquisition of TWA's assets is
subject to a number of conditions and is contingent upon American being the
prevailing bidder in an auction to be supervised by the Bankruptcy Court. The
Purchase Agreement provides that American may specify which contracts of TWA
(including aircraft leases) American wishes to acquire. In addition to entering
into the Purchase Agreement with American, TWA also obtained a commitment from
American to fund up to $325,000,000 in debtor-in-possession financing which was
approved by the Bankruptcy Court. TWA is managing all of its property as
debtor-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy
Code. The Bankruptcy Court approved the sale to American on March 12, 2001 and
also approved additional debtor-in-possession financing being provided by
American.
The filing for reorganization relief under Chapter 11 gives TWA a right
to assume or reject the executory contracts to which it is a party, including
the Current Leases. Pursuant to Section 1110 of the Bankruptcy Code, TWA may
continue to use the Aircraft for sixty days after the filing of its bankruptcy
petition, regardless of whether it assumes or rejects any of the Current Leases,
but, after such sixty day period, TWA must redeliver each Aircraft to the
Partnership on demand unless TWA (i) cures all outstanding defaults under the
Current Lease applicable to such Aircraft within the periods prescribed by
Section 1110 and (ii) continues to perform its obligations as provided under the
terms of the applicable Current Lease. Section 1110 of the Bankruptcy Code
provides that a lessor and lessee may mutually agree to extend the sixty day
time period as well as to make other modifications to a lease. A rejection of a
Current Lease by TWA or TWA's failure to cure as required by Section 1110 would
entitle the Partnership to demand a return of the Aircraft leased thereunder and
file a claim for damages against TWA in the bankruptcy proceeding as an
unsecured creditor.
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American's Proposal
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On February 28, 2001, American presented the General Partner of the
Partnership ("General Partner") with a draft letter of intent reflecting a
proposal to take assignment of eleven of the fourteen Current Leases on modified
terms and conditions. The proposal by American is subject, among other things,
to American being successful in its bid to acquire substantially all the assets
of TWA, including receipt of all necessary governmental approvals required for
American to complete that acquisition. The modified terms and conditions
proposed by American are substantially less favorable to the Partnership than
the terms and conditions specified in the Current Leases. In particular, rather
than returning the Aircraft at the currently scheduled expiry date under the
Current Leases, American would return each Aircraft at the time when such
Aircraft requires a heavy maintenance check of the airframe, provided that
American would agree that the aggregate average number of months for which all
seven Aircraft are on lease to American would not be less than 19 months from
and after March 12, 2001. In addition, American would reduce the rental rate for
each of the Aircraft to $40,000 per month. Further, at lease expiry, American
would be required to return each airframe in a "serviceable" condition, rather
than being required to meet the more stringent maintenance requirements of the
Current Leases. Finally, American would be required to return the installed
engines on each Aircraft with a target level of average cycle life remaining to
replacement for all life limited parts of 25%. If the average cycle life
remaining on the installed engines on an Aircraft is below the 25% target level,
a financial adjustment would be payable by American to the Partnership (but no
payment would be owed by the Partnership to American if cycle life remaining at
return exceeds the target level).
Under American's proposal, TWA would assume the Current Leases for the
seven Aircraft American wishes to lease (the "Assumed Leases"), but would not
assume the Current Leases for the remaining three Aircraft (the "Rejected
Leases"). TWA would be required to cure all payment defaults under the Assumed
Leases and pay rentals at the $85,000 per month contract rate until such time as
such leases are assigned to American; however, American's proposal provides that
American would be, effective upon assignment, entitled to a rental credit
equaling the amount of rent paid by TWA in excess of the $40,000 per month rate
for the period from and after March 12, 2001.
General Partner's Decision to Accept
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The General Partner has evaluated American's proposal to take an
assignment of the Assumed Leases and has determined that accepting such a
proposal would be in the best interests of the Partnership.
The General Partner's determination to accept American's proposal was
based upon consideration of two key factors. First, the General Partner believes
that American's proposal will yield a more favorable return to the Partnership
than repossessing the Aircraft from TWA and attempting to lease or sell the
Aircraft (likely at scrap value). In coming to this conclusion, the Partnership
considered the following: (i) each Aircraft is over 30 years old and has low
specification Pratt & Whitney JT8D-9A engines, which limits their marketability;
(ii) there are but a small number of aircraft operators currently using DC-9
aircraft, which means there is only a limited potential market for re-leasing or
selling the Aircraft; (iii) the cost of transitioning the Aircraft from the
maintenance program employed by TWA to the maintenance program used by another
operator, if the Aircraft were to be re-leased, would be substantial and would
likely require a significant additional investment in these Aircraft by the
Partnership; and (iv) to date, the General Partner's attempts to obtain bids to
purchase the Aircraft have not yielded any prospects for purchase at prices
above scrap value. Second, due to American's credit standing, the General
Partner has concluded that American is capable of meeting its obligations under
its proposal.
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Based on this determination, the General Partner is proceeding to
negotiate definitive documentation with American and TWA reflecting the terms of
American's proposal. If American's proposal proceeds on the basis outlined
above, the General Partner would repay from cash reserves, the remaining
principal balance on the Hushkit Debt. The General Partner would also seek to
recover possession of the three Aircraft under the Rejected Leases and market
such Aircraft for sale.
Because American's proposal to the Partnership is subject to several
important conditions and contingencies, including, among others, receipt of
approval from the Bankruptcy Court, American being successful in its bid to
purchase substantially all of the assets of TWA, and American receiving all
regulatory approvals required to consummate that purchase, there can be no
assurance that the transactions contemplated by such proposal will be completed
or that the terms of the proposal will not be changed in one or more material
respects prior to completion.
Effect of TWA Bankruptcy
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The TWA bankruptcy is expected to have a material adverse effect on the
Partnership's results of operations and financial position. Assuming that the
transaction with American is completed on the terms described above, aggregate
rentals to be received by the Partnership in 2001 will be reduced from
approximately $10.2 million to approximately $4.1 million, and the average lease
term for the eleven Aircraft that remain on lease will be reduced from 47 to 21
months remaining at December 31, 2000. Three of the Partnership's Aircraft,
which would have been expected to generate aggregate rentals in 2001 under the
terms of the Current Leases of approximately $3.0 million, are now expected to
be marketed for sale at scrap value (which the General Partner believes will be
materially less than the aggregate rental amount).
The amount and timing of the Partnership's distributions of cash
available for allocation depends upon many factors, including whether the
transaction with American is consummated and the timing of the rental payments
to be made by TWA prior to such consummation. The General Partner has determined
that the amount of cash available for distribution for the quarter ending March
31, 2001 will not be materially different from the corresponding quarter in
2000, but the General Partner expects the amount of cash available for
distribution for the subsequent quarters in 2001 to be materially less.
As a result of the TWA bankruptcy and the modified lease terms proposed
by American, the Partnership is required to review the carrying value of the
Aircraft pursuant to applicable accounting literature including SFAS 121. Any
downward adjustment in the estimated residual value or decrease in the projected
remaining economic life of any of the Aircraft will dictate an increase in
depreciation expense over the projected economic life of such Aircraft. Further,
if the projected net cash flow for any of the 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 such Aircraft,
an impairment loss must be recorded. Although the General Partner has not
completed its review, it is expected that revised assumptions regarding future
cash flows to be derived from the Aircraft and projected lease terms will result
in the Partnership recording an impairment loss in a material amount as of
December 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
POLARIS AIRCRAFT INCOME FUND III
(Registrant)
By: Polaris Investment Management Corporation,
General Partner
Date: March 23, 2001 By: /S/Keith Helming
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Name: Keith Helming
Title: Chief Financial Officer
of Polaris Investment Management
Corporation, General Partner of
the Registrant
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