UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
Commission file number 1-9259
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
_________________________________________________________________
(Exact name of small business issuer 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
________________________________________________
(Issuer's telephone number, including area code)
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
I N D E X
Page No.
Part I - Financial Information:
Item 1. Financial Statements
Balance Sheets --
March 31, 2003 and December 31, 2002...................3
Statements of Operations --
Three months ended March 31, 2003 and 2002.............4
Statements of Cash Flows
Three months ended March 31, 2003 and 2002.............5
Notes to Financial Statements............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............8
Item 3. Controls and Procedures..................................9
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K........................10
Signatures..............................................11
Certifications..........................................12
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS
March 31,
2003 December 31,
(In thousands except unit data) (Unaudited) 2002 *
________________________________________________________________________________
ASSETS
Cash and cash equivalents $ 2,542 $ 2,569
Finance leases - net 6,007 5,939
Operating leases - net 12,315 12,753
Aircraft held for lease 8,300
8,500
Prepaid expenses and other assets 48 50
________ ________
Total assets $ 29,212 $ 29,811
======== ========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Distribution payable to partners $ 234 $ 234
Accounts payable and accrued liabilities 259 345
Maintenance reserves 898 748
Taxes payable 29 0
Long-term notes payable 2,729 2,729
________ ________
Total liabilities 4,149 4,056
________ ________
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Limited partners (4,625,000 units outstanding) 24,812 25,497
General partner (46,717 units outstanding) 251 258
________ ________
Total partners' equity 25,063 25,755
________ ________
Total liabilities and partners' equity $ 29,212 $ 29,811
======== ========
See accompanying notes to the financial statements
* The amounts are derived from the December 31, 2002, audited financial
statements
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
Three Months Ended
(Unaudited; in thousands March 31,
except per unit amounts) 2003 2002
_____________________________________________________________________
REVENUES
Finance lease income $ 69 $ 80
Operating lease rentals 400 750
Other income 7 29
_______ _______
Total revenues 476 859
_______ _______
EXPENSES
Interest 53 54
Depreciation 638 856
Management fee - general partner 67 97
Investor reporting 85 112
General and administrative 29 29
Aircraft maintenance and refurbishing 33 91
Tax on gross income 29 42
_______ _______
Total expenses 934 1,281
_______ _______
Net loss $ (458) $ (422)
======= =======
Net loss Allocated To:
General Partner $ (4) $ (4)
======= =======
Limited Partners $ (454) $ (418)
======= =======
Net loss per limited partnership unit $ (0.10) $ (0.09)
======= =======
See accompanying notes to the financials statements
4
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
(Unaudited; in thousands) 2003 2002
_____________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (458) $ (422)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 638 856
Decrease in accounts payable and accrued liabilities (87) (464)
Increase in maintenance reserves 150 308
Increase/(decrease) in taxes payable 29 (166)
Decrease in prepaid expenses and other assets 3 3
_______ _______
Net cash provided by operating activities 275 115
_______ _______
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in operating lease rents receivable 0 177
Earned finance lease in excess of rental receipts (68) (80)
_______ _______
Net cash (used in)/provided by investing activities (68) 97
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid to partners (234) (7,521)
_______ _______
Net cash and cash equivalents used in financing activities (234) (7,521)
_______ _______
Decrease in cash and cash equivalents (27) (7,309)
Cash and cash equivalents at beginning of period 2,569 9,432
_______ _______
Cash at end of period $ 2,542 $ 2,123
======= =======
ADDITIONAL INFORMATION
Interest paid $ 2 $ 1
======= =======
See accompanying notes to the financials statements
5
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited condensed financial
statements of Airlease Ltd., A California Limited Partnership (the Partnership)
reflect all adjustments (consisting only of normal recurring adjustments) that
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, 2002, 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, 2002,
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,
2002.
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.
MAINTENANCE RESERVES - On certain operating leases the Partnership requires the
lessees to pay aircraft maintenance reserves. The reserves will be applied
toward the aircraft's future maintenance requirements. Reserves are collected
for engines, airframe, and other aircraft components. The amount of the reserves
is based on flight hours.
LONG LIVED ASSETS IMPAIRMENT - The Partnership accounts for its long-lived
assets, including Operating Leases and Aircraft Held for Lease, in accordance
with Statement of Financial Accounting Standards ("SFAS") No 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets".
SFAS 144, was issued in October 2001 and addresses how and when to measure
impairment on long-lived assets and how to account for long-lived assets that an
entity plans to dispose of either through sale, abandonment, exchange, or
distribution to owners. Under SFAS 144, an impairment loss is 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 undiscounted future
cash flows.
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 leasing the three aircraft currently off
lease, and management is not able to predict when the aircraft may be leased
again or the terms of any such future leasing. Nevertheless, management has
prepared an impairment evaluation in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" and does not believe an impairment charge is required as of
March 31, 2003, because the anticipated future cash flows from leasing and
ultimately selling the aircraft are expected to exceed net book value. Further,
6
given the difficulties the Partnership has encountered in marketing the aircraft
for lease, management may in the future conclude that it is in the Partnership's
best interest to sell the aircraft. However, no formal plan of disposal has been
recommended to or approved by the Board of Directors. Based on current market
conditions, if the aircraft are sold, it is likely that the sale proceeds would
be less than book value and that the Partnership would suffer a loss on sale.
In addition, the two aircraft on lease to CSI are leased on a month-to-month
basis. Management is not able to predict when these leases will terminate, or,
if they are terminated, when the aircraft may be leased again. If the leases
with CSI were to terminate, management's best estimate is that the Partnership
would be able to recover net book value through a combination of lease rentals
and sales proceeds, however, if the Partnership's assumptions regarding renewal
lease rates and terms are not realized, the Partnership could record an
impairment charge with respect to these aircraft.
NET LOSS PER LIMITED PARTNERSHIP UNIT - Net loss per limited partnership unit is
computed by dividing the net loss allocated to the Limited Partners by the
weighted average limited partner units outstanding (4,625,000).
RECLASSIFICATION - Certain reclassifications have been made to the prior year's
financial statements to conform to the current year's presentation.
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ITEM 2. 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 March 31, 2003,
the 7.4% non-recourse note collateralized by one aircraft leased to FedEx
corporation ("FedEx" had an outstanding balance of $2.7 million. The facility
matures in April 2006.
At March 31, 2003, long-term borrowings of $2.7 million represented 2.6% 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.
The cash distribution paid in the first three months of 2003 was $0.05 per
limited partnership unit, representing the regular fourth quarter 2002
distribution.
In March 2003, the Partnership declared a first-quarter 2003 cash distribution
of $0.05 per unit totaling approximately $234,000 payable on May 15, 2003 to
unitholders of record on March 31, 2003. As a result of this distribution, and
the Partnership loss for the first quarter of 2003, Partnership equity declined
to $25.1 million at March 31, 2003 from $25.8 million at December 31, 2002, and
limited partner equity per unit declined to $5.36 from $5.51. The 2003 first
quarter cash distribution constitutes a return of capital. The 2002
first-quarter cash distribution was $0.11 per unit.
RESULTS OF OPERATIONS
The Partnership reported a loss of $458,000 in the first quarter ended March 31,
2003, compared with last year's first quarter loss of $422,000. Revenues for the
first quarter of 2003 were $476,000, compared with last year's first quarter
revenues of $859,000.
The revenue reductions are primarily due to lower operating lease rental income
associated with the two aircraft on lease to CSI Aviation Services, Inc.
("CSI"), as the leases were extended in the fourth quarter of 2002 at a reduced
monthly rental rate that reflects current market conditions; and the scheduled
decline in finance lease income in 2003 associated with the aircraft leased to
FedEx.
Expenses for the first three months of 2003 were $934,000, a decrease of
$347,000 from $1,281,000 for the comparable 2002 period. The decrease in
expenses is primarily due to lower depreciation expenses as a result of a
smaller depreciable base associated with the three off-lease aircraft. The
depreciable base of the three off-lease aircraft was reduced in the third
quarter of 2002 as a result of an impairment charge of approximately $11.1
million that reduced the value of the aircraft. In addition, management fees and
taxes were lower due to a smaller asset base and lower revenues.
PORTFOLIO MATTERS
At March 31, 2003, the Partnership's portfolio consisted of six Stage-III
commercial aircraft. Two are leased to CSI, one to FedEx, and three are
off-lease.
The leases of the two aircraft leased to CSI were due to expire on March 1,
2003. CSI and the Partnership entered into a new agreement extending the leases
on a month-to-month basis at a monthly rate of $60,000 per aircraft.
The Partnership also leases a 727-200 FH aircraft to FedEx. This lease is
scheduled to terminate in 2006.
8
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 leasing the three aircraft currently off
lease, and management is not able to predict when the aircraft may be leased
again or the terms of any such future leasing. Nevertheless, management has
prepared an impairment evaluation in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" and does not believe an impairment charge is required as of
March 31, 2003, because the anticipated future cash flows from leasing and
ultimately selling the aircraft are expected to exceed net book value. Further,
given the difficulties the Partnership has encountered in marketing the aircraft
for lease, management may in the future conclude that it is in the Partnership's
best interest to sell the aircraft. However, no formal plan of disposal has been
recommended to or approved by the Board of Directors. Based on current market
conditions, if the aircraft are sold, it is likely that the sale proceeds would
be less than book value and that the Partnership would suffer a loss on sale.
In addition, the two aircraft on lease to CSI are leased on a month-to-month
basis. Management is not able to predict when these leases will terminate, or,
if they are terminated, when the aircraft may be leased again. If the leases
with CSI were to terminate, management's best estimate is that the Partnership
would be able to recover net book value through a combination of lease rentals
and sales proceeds, however, if the Partnership's assumptions regarding renewal
lease rates and terms are not realized, the Partnership could record an
impairment charge with respect to these aircraft.
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 public filings and press releases, 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, additional terrorist
threats or attacks, and war or other military involvement by the U.S. or others
in Iraq or other regions, 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. 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 of the 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.
9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits:
(a) 10.57 Lease Supplement Number Three dated April 9, 2003,
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
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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
May 12, 2003 By: /s/ DAVID B. GEBLER
Date _________________________________
David B. Gebler
Chairman, Chief Executive Officer
and President
May 12, 2003 By: /s/ ROBERT A. KEYES
Date _______________________
Robert A. Keyes
Chief Financial Officer
11
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-QSB 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 issuer as of, and for, the periods presented in this
quarterly report;
4. The issuer'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 issuer and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the issuer, 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 issuer'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 issuer's other certifying officers and I have disclosed, based on
our most recent evaluation, to the issuer's auditors and the audit
committee of issuer's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer'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 issuer's
internal controls; and
6. The issuer'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: May 12, 2003 /s/ DAVID B. GEBLER
_____________________________________
David B. Gebler
Chairman, Chief Executive Officer and
President
12
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-QSB 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 issuer as of, and for, the periods presented in this
quarterly report;
4. The issuer'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
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the issuer, 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 issuer'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 issuer's other certifying officers and I have disclosed, based on
our most recent evaluation, to the issuer's auditors and the audit
committee of issuer's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer'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 issuer's
internal controls; and
6. The issuer'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: May 12, 2003 /s/ ROBERT A. KEYES
_______________________
Robert A. Keyes
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
10.57 Lease Supplement Number Three dated April 9, 2003, 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
14