UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
Commission file number 1-9259
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
______________________________________________________
(Exact name of registrant as specified in its charter)
California 94-3008908
_______________________ ____________________________________
(State of Organization) (I.R.S. Employer Identification No.)
555 California Street, 4th floor, San Francisco, CA. 94104
____________________________________________________ __________
(Address of principal executive offices) (Zip Code)
(415) 765-1814
____________________________________________________
(Registrant's telephone number, including area code)
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 [ ]
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
I N D E X
Page No.
Part I - Financial Information:
Item 1. Financial Statements
Balance Sheets --
September 30, 2002 and December 31, 2001..................3
Statements of Operations --
Three and nine months ended September 30, 2002 and 2001...4
Statements of Cash Flows
Nine months ended September 30, 2002 and 2001.............5
Notes to Financial Statements...............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............7
Item 3. Quantitative and Qualitative Disclosures about Market Risk..8
Item 4. Controls and Procedures.....................................9
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K............................9
Signatures.............................................10
Certifications.........................................11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS
SEPTEMBER 30,
2002 DECEMBER 31,
(IN THOUSANDS EXCEPT UNIT DATA) (UNAUDITED) 2001
________________________________________________________________________________
ASSETS
Cash and cash equivalents $ 2,574 $ 9,432
Finance leases - net 6,524 6,949
Operating leases - net 13,190 14,218
Aircraft held for lease 8,700 21,326
Notes receivable 0 544
Prepaid expenses and other assets 66 60
________ ________
Total assets $ 31,054 $ 52,529
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Distribution payable to partners $ 233 $ 7,521
Deferred income 0 509
Accounts payable and accrued liabilities 967 602
Taxes payable 91 223
Long-term notes payable 3,065 3,389
________ ________
Total liabilities 4,356 12,244
________ ________
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Limited partners (4,625,000 units outstanding) 26,431 39,883
General partner 267 402
________ ________
Total partners' equity 26,698 40,285
________ ________
Total liabilities and partners' equity $ 31,054 $ 52,529
======== ========
3
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
(UNAUDITED; IN THOUSANDS SEPTEMBER 30, SEPTEMBER 30,
EXCEPT PER UNIT AMOUNTS) 2002 2001 2002 2001
_____________________________________________________________________________________________________
REVENUES
Finance lease income $ 75 $ 1,149 $ 230 $ 3,920
Operating lease rentals 750 270 2,250 516
Other income 8 9 45 32
- - -- --
Total revenues 833 1,428 2,525 4,468
________ _______ _________ _______
EXPENSES
Interest 60 132 175 455
Depreciation 856 160 2,568 305
Management fee - general partner 94 139 287 427
Investor reporting 92 87 289 280
General and administrative 110 36 194 89
Tax on gross income 42 139 127 508
Aircraft maintenance and refurbishing 26 0 91 0
Impairment charges on aircraft 11,086 0 11,086 0
Bad debt expense 34 0 34 0
-- - -- -
Total expenses 12,400 693 14,851 2,064
________ _______ _________ _______
Net (Loss)/Income $(11,567) $ 735 $(12,326) $ 2,404
======== ======= ======== =======
Net (Loss)/Income Allocated To:
General Partner $ (116) $ 7 $ (123) $ 24
======== ======= ========= =======
Limited Partners $(11,451) $ 728 $(12,203) $ 2,380
======== ======= ========= =======
Net (Loss)/Income Per Limited
Partnership Unit $ (2.48) $ 0.16 $ (2.64) $ 0.51
======== ======= ========= =======
4
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED; IN THOUSANDS) 2002 2001
_______________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss)/Income $(12,326) $ 2,404
Adjustments to reconcile net (loss)/income to net cash provided
by operating activities:
Depreciation 2,568 305
Increase in accounts payable and accrued liabilities 365 168
Decrease in taxes payable (132) (122)
Decrease/(Increase) in prepaid expenses and other assets (6) 86
Increase in accounts receivable 0 (90)
Bad debt Expense 34 0
Impairment charges on aircraft 11,086 0
________ _______
Net cash provided by operating activities 1,589 2,751
________ _______
CASH FLOWS FROM INVESTING ACTIVITIES
Rental receipts in excess of earned finance lease income 425 6,333
________ _______
Net cash provided by investing activities 425 6,333
________ _______
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments under lines of credit, net 0 (1,765)
Repayment of long-term notes payable (324) (1,675)
Distributions paid to partners (8,548) (5,652)
________ _______
Net cash used by financing activities (8,872) (9,092)
________ _______
Decrease in cash and cash equivalents (6,858) (8)
Cash and cash equivalents at beginning of period 9,432 17
________ _______
Cash and cash equivalents at end of period $ 2,574 $ 9
======== =======
ADDITIONAL INFORMATION
Interest paid $ 134 $ 353
======== =======
5
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of the Partnership, necessary to fairly
state the results for the interim periods. The results of operations for such
interim periods are not necessarily indicative of results of operations for a
full year. The December 31, 2001 balance sheet included herein is derived from
the audited financial statements included in the Partnership's Annual Report and
incorporated by reference in the Form 10-K for the year ended December 31, 2001,
but does not include all disclosures required by generally accepted accounting
principles. The statements should be read in conjunction with the Organization
and Significant Accounting Policies and other notes to financial statements
included in the Partnership's Annual Report for the year ended December 31,
2001.
CASH EQUIVALENTS - The Partnership considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
FINANCE LEASES - Lease agreements, under which the Partnership recovers
substantially all its investment from the minimum lease payments are accounted
for as finance leases. At lease commencement, the partnership records the lease
receivable, estimated residual value of the leased aircraft, and unearned lease
income. The original unearned income is equal to the receivable plus the
residual value less the cost of the aircraft (including the acquisition fee paid
to an affiliate of the general partner). The remaining unearned income is
recognized as revenue over the lease term so as to approximate a level rate of
return on the investment.
OPERATING LEASES - Leases that do not meet the criteria for finance leases are
accounted for as operating leases. The Partnership's undivided interests in
aircraft subject to operating leases are recorded at carrying value of the
aircraft at lease inception. Aircraft are depreciated over the related lease
terms, generally five to nine years on a straight-line basis to an estimated
salvage value, or over their estimated useful lives for aircraft held for lease,
on a straight-line basis to an estimated salvage value.
LONG LIVED ASSETS IMPAIRMENT - The Partnership accounts for the impairment of
its long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS". SFAS requires that an impairment loss be recognized in an
amount equal to the difference between the carrying value and the fair value if
the carrying value of an asset is not recoverable based on the estimated
undiscounted future cash flows. In the third quarter of 2002, the three
off-lease MD-81 aircraft were considered impaired as defined by SFAS No. 144 as
a result of the Partnership's continued inability to lease these aircraft. The
Partnership recorded an impairment charge of $3,695,000 per aircraft. The new
book value per aircraft after the impairment charge is $2,900,000. The fair
values of the aircraft were determined by discounting the estimated future cash
flows.
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT - Net Income/(loss) Per Limited
Partnership Unit is computed by dividing the net income allocated to the Limited
Partners by the weighted average units outstanding (4,625,000).
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership presently has one long-term debt facility. At September 30,
2002, the 7.4% non-recourse note collateralized by one aircraft leased to FedEx
had an outstanding balance of $3.1 million. The facility matures in April 2006.
At September 30, 2002, long-term borrowings of $3.1 million represented 2.9% of
the original cost of the aircraft presently owned by the Partnership, including
capital expenditures for upgrades. The terms of the Limited Partnership
Agreement permit debt to be at a level not exceeding 50% of such cost.
Cash distributions paid in the first nine months of 2002 were $1.83 per limited
partnership unit, representing the regular first and second quarter 2002
distributions of $0.11 per unit each, the regular 2001 fourth-quarter cash
distribution of $0.11 per unit, and a special distribution of $1.50 per unit as
a result of the sale of one MD-82 aircraft in December 2001.
In September 2002, the Partnership declared a third-quarter 2002 cash
distribution of $0.05 per unit totaling $233,586 payable on November 15, 2002 to
unitholders of record on October 4, 2002. As a result of this distribution and
the first and second quarter 2002 distributions, and the Partnership loss for
the first nine-months period of 2002, Partnership equity declined to $26.7
million at September 30, 2002 from $40.3 million at December 31, 2001, and
limited partner equity per unit declined to $5.71. The 2002 third quarter cash
distribution constitutes a return of capital. The 2001 third-quarter cash
distribution was $0.30 per unit.
RESULTS OF OPERATIONS
The Partnership reported a loss of $11,567,000 in the third quarter ended
September 30, 2002, compared with last year's third quarter earnings of
$735,000. Revenues for the 2002 third quarter were $833,000, compared with last
year's third quarter revenues of $1,428,000.
Net loss for the first nine months of 2002 was $12,326,000, compared with a net
income of $2,404,000 for the first nine months of 2001. Revenues for the
nine-month period were $2,525,000, compared with $4,468,000 for the first nine
months of 2001.
The revenue reductions are primarily due to the expiration of the lease with US
Airways for five aircraft in the fourth quarter of 2001, three of which remain
off-lease; the sale of one aircraft in December 2001; and the scheduled decline
in finance lease income in 2002 associated with the aircraft leased to FedEx.
The decline in earnings results from an increase in expenses, primarily due to
aircraft impairment charges and an increase in depreciation expense, and from
the reduced revenues.
Expenses for the first nine months of 2002 were $14,851,000, an increase of
$12,787,000 from $2,064,000 for the comparable 2001 period. The increase in
expenses is primarily due to aircraft impairment charges in the third quarter of
2002 of $11,086,000, as the three off-lease aircraft were marked to market, and
to depreciation expense of $2,568,000 for the first nine months of 2002 compared
to depreciation expense of $305,000 for the comparable 2001 period. The 2002
depreciation expense related to aircraft subject to operating leases and to
aircraft available for lease. Also, a note receivable from US Airways recorded
on the Partnership's books for $34,000 (net of discount and deferred income) was
written off as bad debt expense. The note was written off due to the uncertainty
of its collection in light of US Airways' recent bankruptcy filing. Interest
7
expense was lower in the first nine months of 2002 as a result of the reduction
in the Partnership's debt balances. Management fees and taxes were lower due to
a smaller asset base and lower revenues.
PORTFOLIO MATTERS
At September 30, 2002, the Partnership's portfolio consisted of six Stage-III
commercial aircraft. Two are leased to CSI Aviation Services, Inc., one to
FedEx, and three are off lease.
The leases of the two aircraft leased to CSI expired October 1, 2002. CSI and
the Partnership entered into a new agreement extending the leases for another
five months through March 1, 2003, at a reduced rent. In the 4th quarter of
2002, the Partnership expects to incur on these two aircraft, maintenance and
refurbishing expenses of approximately $219,000.
In the third quarter of 2002, impairment charges were recorded on each of the
three off-lease aircraft. As a result of the Partnership's continued inability
to lease these aircraft, they were considered impaired as defined by the
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". The book value per aircraft after the
impairment charge is $2,900,000.
In June 2002, the Partnership commenced litigation against U.S. Airways seeking
to recover damages for U.S. Airways' failure to return the three aircraft leased
to U.S. Airways following lease expiration on September 30, 2001 and to pay rent
due on the aircraft. U.S. Airways has since filed for bankruptcy. The outcome of
the litigation and bankruptcy are both uncertain and there can be no assurance
as to the amount or timing of any final settlement or award resulting from the
litigation.
OUTLOOK
The market conditions for aircraft leasing continue to be weak, as the supply of
aircraft exceeds demand. Consequently, the Partnership continues to experience
significant competitive pressure in marketing the three aircraft currently off
lease, and management is not able to predict when these aircraft may be leased
again or the terms of any such future leasing.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
The Partnership has included in this quarterly report certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 concerning the Partnership's business, operations and financial
condition. The words or phrases "can be", "may affect", "may depend", "expect",
"believe", "anticipate", "intend", "will", "estimate", "project" and similar
words and phrases are intended to identify such forward-looking statements. Such
forward-looking statements are subject to various known and unknown risks and
uncertainties and the Partnership cautions you that any forward-looking
information provided by or on behalf of the Partnership is not a guarantee of
future performance. Actual results could differ materially from those
anticipated in such forward-looking statements due to a number of factors, some
of which are beyond the Partnership's control, in addition to those discussed in
the Partnership's other press releases and public filings, including (i) changes
in the aircraft or aircraft leasing market, (ii) economic downturn in the
airline industry, (iii) default by lessees under leases causing the Partnership
to incur uncontemplated expenses or not to receive rental income as and when
expected, (iv) the impact of the events of September 11, 2001 on the aircraft or
aircraft leasing market and on the airline industry, (v) changes in interest
rates and (vi) legislative or regulatory changes that adversely affect the value
of aircraft. All such forward-looking statements are current only as of the date
on which such statements were made. The Partnership does not undertake any
obligation to publicly update any forward-looking statement to reflect events or
circumstances after the date on which any such statement is made or to reflect
the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The General Partner believes there has been no material change in the
Partnership's exposure to market risk from that discussed in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 2001.
8
ITEM 4. CONTROLS AND PROCEDURES
(a) The Chief Executive Officer and the Chief Financial Officer of the
General Partner of the Partnership, after evaluating the effectiveness of the
Partnership's disclosure controls and procedures as of a date within 90 days
before the filing date of this quarterly report, have concluded that the
Partnership's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Partnership in this quarterly report
is accumulated and communicated to the Partnership's management to allow timely
decisions regarding required disclosure.
(b) No significant changes were made in the Partnership's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits:
(a) 10.57 Lease Supplement Number Two dated October 9,2002,
among Wachovia Bank, National Association, as successor to
First Union National Bank, not in its individual capacity
but solely as Trustee, the Partnership and CSI Aviation
Services, Inc.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) On August 28, 2002, the Partnership filed a report on Form
8-K dated August 26, 2002, disclosing under Item 5 the
expected delisting of the Partnership's limited partnership
units by the New York Stock Exchange and the commencement of
trading on the OTC Bulletin Board on September 9, 2002.
9
SIGNATURES
Pursuant to the requirements 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.
AIRLEASE LTD., A CALIFORNIA LIMITED
PARTNERSHIP
By: Airlease Management Services, Inc.
General Partner
NOVEMBER 7, 2002 By: /s/ DAVID B. GEBLER
________________ _______________________________________
Date David B. Gebler
Chairman, Chief Executive Officer
and President
NOVEMBER 7, 2002 By: /s/ ROBERT A. KEYES
________________ _______________________________________
Date Robert A. Keyes
Chief Financial Officer
CERTIFICATIONS
I, David B. Gebler, Chairman, Chief Executive Officer and President of Airlease
Management Services, Inc., the General Partner of Airlease Ltd., A California
Limited Partnership, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Airlease Ltd., A
California Limited Partnership;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 7, 2002 /s/ DAVID B. GEBLER
____________________________
David B. Gebler
Chairman, Chief Executive
Officer and President
11
I, Robert A. Keyes, Chief Financial Officer of Airlease Management Services,
Inc., the General Partner of Airlease Ltd., A California Limited Partnership,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Airlease Ltd., A
California Limited Partnership;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 7, 2002 /s/ ROBERT A. KEYES
_______________________
Robert A. Keyes
Chief Financial Officer
12
EXHIBIT INDEX
Exhibit Number Description
10.57 Lease Supplement Number Two dated October 9, 2002, among
Wachovia Bank, National Association, as successor to First
Union National Bank, not in its individual capacity but
solely as Trustee, the Partnership and CSI Aviation
Services, Inc.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
13