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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
Commission File No. 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, Fourth Floor, San Francisco, CA 94104
____________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 765-1814
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE
Depositary Units Representing ON WHICH REGISTERED:
Limited Partnership Interests New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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.
Aggregate market value of Depositary Units, held by non-affiliates of
the registrant as of the close of business at March 12, 2002 was $21,539,100.00.
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.......................................................... 3
ITEM 2. PROPERTIES........................................................ 14
ITEM 3. LEGAL PROCEEDINGS................................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................... 15
ITEM 6. SELECTED FINANCIAL DATA........................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK....................................................... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................... 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 24
ITEM 11. EXECUTIVE COMPENSATION............................................ 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K.......................................................... 29
SIGNATURES.................................................................. 33
INDEX TO EXHIBITS....................................................A-13, A-14
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
PART I
ITEM 1. BUSINESS
GENERAL
Airlease Ltd., A California Limited Partnership (the "Partnership" or
"Airlease"), was formed in 1986. The General Partner of the Partnership (the
"General Partner") is Airlease Management Services, Inc., a Delaware
corporation. Until October 31, 1996 the General Partner was a wholly owned
subsidiary of USL Capital Corporation ("USL Capital"), which in turn was an
indirect subsidiary of Ford Motor Company. On October 31, 1996, BA Leasing &
Capital Corporation ("BA Leasing & Capital"), a wholly owned indirect subsidiary
of BankAmerica Corporation, purchased the stock of the General Partner from USL
Capital and the General Partner became a wholly owned subsidiary of BA Leasing &
Capital. On September 29, 1999, BA Leasing & Capital merged into Banc of America
Leasing and Capital, LLC, a Delaware limited liability company ("BALCAP").
BALCAP is also a wholly owned indirect subsidiary of BankAmerica Corporation. A
total of 4,625,000 Depository Units representing limited partnership interests
("Units") in the Partnership are outstanding, of which 3,600,000 are held by the
public and 1,025,000 are owned by BALCAP and its subsidiaries.
The Partnership invests in commercial aircraft and leases the aircraft to
others, primarily airlines, pursuant to finance (full payout) or operating
leases.
PRINCIPAL INVESTMENT OBJECTIVES
The business of the Partnership is to acquire and own, either directly or
through joint ventures, aircraft and to lease such aircraft primarily to
airlines. The Partnership's principal investment objectives are to generate
income for quarterly cash distributions to Unitholders and to own a portfolio of
leased aircraft. The Partnership's original intent was that until January 1,
2005, it would use a substantial portion of the cash derived from the sale,
refinancing or other disposition of aircraft to purchase additional aircraft if
attractive investment opportunities were available.
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As previously reported, as part of a plan to mitigate the adverse financial
effects of changes in tax law, in 1997 Unitholders authorized the General
Partner to decide not to make new aircraft investments, to sell aircraft when
attractive opportunities arise, to distribute the proceeds and to liquidate the
Partnership when all assets are sold. The General Partner will consider whether
it is in the best interest of Unitholders to cease making new aircraft
investments as opportunities arise, in light of market conditions and the
Partnership's competitive position. Based on its investment experience and its
knowledge of the market, the General Partner believes that attractive investment
opportunities like those made by the Partnership in the past probably will not
be available. In the event that aircraft are sold and appropriate alternative
investments are not available, the Partnership will distribute sale proceeds to
Unitholders (after repaying debt and establishing appropriate reserves), and
this would result in a further reduction of the Partnership's portfolio.
AIRCRAFT PORTFOLIO
The Partnership's aircraft portfolio consists of narrow-body (single-aisle)
twin and tri-jet commercial aircraft which were acquired as used aircraft.
Although the Partnership is permitted to do so, the Partnership does not own
interests in aircraft which were acquired as new aircraft; nor does the
Partnership own any wide-body aircraft, such as the Boeing 747 and MD-11, or any
turboprop or prop-fan powered aircraft.
The following table describes the Partnership's aircraft portfolio at
December 31, 2001:
__________________________________________________________________________________________________________________
Number & Current Purchase
type; year of Ownership Acquired by lease price (in Type Noise
Lessee Delivery Interest Partnership expiration millions) of lease compliance(1)
__________________________________________________________________________________________________________________
CSI 2 MD-82 100% 1986 2006 (2) $36.4 Direct Stage III
Aviation 1981 finance
FedEx 1 727-200FH 100% 1987 2006 $18.5(3) Direct Stage III
1979 finance
Held for 3 MD-82 100% 1986 N/A $54.6 N/A Stage III
Sale or lease 1981(2)
(1) See "Government Regulation-Aircraft Noise" below, for a description of laws and regulations governing
aircraft noise.
(2) CSI has the right to terminate the leases on any date on which CSI's agreement with the United States
Marshals Service terminates. Unless earlier terminated, the leases will expire in 2006.
(3) The purchase price includes $6.9 million of conversion costs for the upgrade of the aircraft from a Stage
II passenger to a Stage III freighter aircraft.
At December 31, 2001, the book value of aircraft by lessee as a percent of
total assets was
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as follows: FedEx, 13.2%; CSI, 27% and off-lease aircraft, 40.6%. Revenues by
lessee as a percentage of total revenue for 2001 and 2000, respectively, were as
follows: US Airways, 55.4% and 76.8%; TWA/American Airlines, 17.2% and 17.4%;
CSI, 4.9% and 0%; and FedEx, 5.7% and 5.9%.
At December 31, 2001, 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 being marketed for lease.
In January 2001 TWA, a lessee of a seventh aircraft in the Partnership's
portfolio, filed for bankruptcy. In April 2001, American Airlines assumed a
modified TWA lease and in December 2001 Airlease sold the aircraft under the
terms of a previously negotiated sale.
In April 2001 US Airways, at that time the lessee of five MD-82 aircraft,
notified Airlease it would return these aircraft at end of lease on October 1,
2001. Two of the five aircraft were subsequently leased to CSI Aviation
Services, Inc. ("CSI") and the other three aircraft are being marketed for
lease.
CSI operates the two aircraft it leases in charter services for the United
States Marshals Service ("USMS"). CSI has the right to terminate its leases with
the Partnership on any date on which CSI's agreement with USMS terminates. The
initial contract between CSI and USMS expires in October 2002. Unless earlier
terminated, the leases will expire on October 31, 2006.
The Partnership also leases a 727-200 FH aircraft to FedEx. This lease is
scheduled to terminate in 2006.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" for a further discussion of the Partnership's lessees.
The Partnership's lessees have the following fair market value renewal
options: Fedex has the right to renew its lease for one six-month term at the
current rent payable under the lease, and thereafter for four successive one
year terms at a fair market value rental, and CSI has the right to renew its
leases from one to five years to coincide with any renewal of its contract with
the USMS.
COMPETITIVE POSITION OF THE PARTNERSHIP
The aircraft leasing industry has become increasingly competitive. In
making aircraft investments, leasing aircraft to lessees, and seeking purchasers
of aircraft, the Partnership competes with large leasing companies, aircraft
manufacturers, airlines and other operators, equipment managers, financial
institutions and other parties engaged in leasing, managing, marketing or
remarketing aircraft. Affiliates of the General Partner are engaged in many of
these businesses and may be deemed to be in competition with the Partnership.
There are many large
5
leasing companies which have the financial strength to borrow at very low rates
and to obtain significant discounts when purchasing large quantities of
aircraft. The lower capital and acquisition costs enjoyed by these large leasing
companies permit them to offer airlines lower lease rates than smaller leasing
companies can offer. The Partnership does not have the resources to purchase
newer aircraft or to purchase aircraft at volume discounts and has only a
limited ability to use tax deferrals in its pricing.
As previously reported to Unitholders, the Partnership's access to capital
is limited. Since all Cash Available from Operations, as defined in the Limited
Partnership Agreement, is distributed, there is no build up of equity capital,
and acquisitions must be funded from proceeds available when aircraft are sold
or from debt. Access to debt is limited because the Partnership's aircraft
leased under long-term leases are generally used to collateralize existing
borrowings. In general, the Partnership's pricing is uncompetitive for new
acquisitions because of its limited sources and high cost of capital.
Because of these factors, finding new aircraft investments like those made
by the Partnership in the past and that offer an appropriate balance of risk and
reward has been difficult. During the past eight years the Partnership has made
only two aircraft investments, both of which were possible because of special
circumstances.
In 1996, 1997 and 2001, the Partnership sold interests in nine aircraft (a
50% interest in an aircraft on lease to Finnair, a one-third interest in six
aircraft on lease to Continental, a 50% interest in one aircraft leased to Sun
Jet International, Inc., and a 100% interest in an aircraft previously on lease
to TWA and American Airlines). See "Disposition of Aircraft" below. However,
because of the factors described above, the Partnership was unable to reinvest
the proceeds in aircraft at an acceptable return, and the General Partner
determined that the best use of the net proceeds was to distribute them to
Unitholders. These sales and distributions have reduced the size of the
Partnership's portfolio.
PARTICIPANTS IN LEASES
USL Capital originally participated equally with the Partnership in the
aircraft on lease to FedEx and the aircraft sold in December 2001. In April 1993
the Partnership leased two aircraft (held jointly with USL Capital), which were
previously off lease, to FedEx. In September 1993 the Partnership exchanged its
50% interest in the two aircraft for a 100% interest in one aircraft and pledged
the aircraft and the lease as collateral to obtain funds to upgrade the aircraft
from a Stage II passenger aircraft to a Stage III freighter. In January 1997,
the Partnership purchased from USL Capital a 50% interest in the aircraft at
that time on lease to TWA, and owned a 100% interest in that aircraft until it
was sold in December 2001.
6
DESCRIPTION OF LEASES
The 727-200FH aircraft on lease to FedEx is leased pursuant to a
full-payout (direct finance) lease, and the two MD-82 aircraft on lease to CSI
are leased pursuant to operating leases. The two MD-82 aircraft on lease to CSI,
together with the three off-lease aircraft, were previously leased to US Airways
pursuant to full-payout leases. A sixth MD-82 aircraft was previously leased to
TWA pursuant to a full-payout lease, and then to American Airlines pursuant to
an operating lease, until the aircraft was sold in December 2001.
Generally, operating leases are for a shorter term than full-payout leases
and, therefore, it is necessary to remarket the aircraft in order to recover the
full investment. Full-payout leases are generally for a longer term and hence
provide more predictable revenue than operating leases.
All of the Partnership's leases are net leases, which provide that the
lessee will bear the direct operating costs a0nd the risk of physical loss of
the aircraft; pay sales, use or other similar taxes relating to the lease or use
of the aircraft; maintain the aircraft; indemnify the Partnership-lessor against
any liability suffered by the Partnership as the result of any act or omission
of the lessee or its agents; maintain casualty insurance in an amount equal to
the specific amount set forth in the lease (which may be less than the fair
value of the aircraft); and maintain liability insurance naming the Partnership
as an additional insured with a minimum coverage which the General Partner deems
appropriate. In general, substantially all obligations connected with the
ownership and operation of the leased aircraft are assumed by the lessee and
minimal obligations are imposed upon the Partnership. Default by a lessee may
cause the Partnership to incur unanticipated expenses. See "Government
Regulation" below.
Certain provisions of the Partnership's leases may not be enforceable upon
a default by a lessee or in the event of a lessee's bankruptcy. The
enforceability of leases will be subject to limitations imposed by Federal,
California, or other applicable state law and equitable principles.
In order to encourage equipment financing to certain transportation
industries, Federal bankruptcy laws traditionally have afforded special
treatment to certain lenders or lessors who have provided such financing.
Section 1110 ("Section 1110") of the United States Bankruptcy Code, as amended
(the "Bankruptcy Code"), implements this policy by creating a category of
aircraft lenders and lessors whose rights to repossession are substantially
improved. If a transaction is eligible under Section 1110, the right of the
lender or lessor to take possession of the equipment upon default is not
affected by the automatic stay provisions of the Bankruptcy Code, unless within
60 days after commencement of a bankruptcy proceeding the trustee agrees to
perform all obligations of the debtor under the agreement or lease and all
defaults (except those relating to insolvency or insolvency proceedings) are
cured within such 60-day period or 30 days after the default. One court has
recently held that Section 1110 does not apply after the 60-day period, and thus
the automatic stay may apply after such 60-day period.
On October 22, 1994, the President signed the Bankruptcy Reform Act of 1994
(the "Reform Act"). The Reform Act made several changes to Section 1110, such
that it now protects
7
all transactions involving qualifying equipment, whether the transaction is a
lease, conditional sale, purchase money financing or customary refinancing. For
equipment first placed in service on or prior to the date of enactment, the
requirement that the lender provide purchase money financing continues to apply,
but there is a "safe harbor" definition for leases, so that Section 1110
benefits will be available to the lessor without regard to whether or not the
lease is ultimately determined to be a "true" lease. This safe harbor is not the
exclusive test so that other leases which do not qualify under the safe harbor,
but which are true leases, will continue to be covered as leases by Section
1110. The Partnership may not be entitled to the benefits of Section 1110 upon
insolvency of a lessee airline under all of its leases.
In the past, the Partnership had interests in aircraft leased to operators
based outside the United States. It is possible that the Partnership's aircraft
could be leased or subleased to foreign airlines. Aircraft on lease to such
foreign operators are not registered in the United States and it is not possible
to file liens on such foreign aircraft with the Federal Aviation Administration
(the "FAA"). Further, in the event of a lessee default or bankruptcy,
repossession and claims would be subject to laws other than those of the United
States.
AIRCRAFT REMARKETING
On termination of a lease and return of the aircraft to the Partnership,
the Partnership must remarket the aircraft to realize its full investment. Under
the Amended and Restated Agreement of Limited Partnership, as amended ("Limited
Partnership Agreement"), the remarketing of aircraft may be through a lease or
sale. The terms and conditions of any such lease would be determined at the time
of the re-lease, and it is possible (although not anticipated at this time) that
the lease may not be a net lease. The General Partner will evaluate the risks
associated with leases which are not net leases prior to entering into any such
lease. The General Partner has not established any standards for lessees to
which it will lease aircraft and, as a result, there is no investment
restriction prohibiting the Partnership from doing business with any lessee,
including "start-up" airlines. However, the General Partner will analyze the
credit of a potential lessee and evaluate the aircraft's potential value prior
to entering into any lease.
DISPOSITION OF AIRCRAFT
The Partnership's original intent was to dispose of all its aircraft by the
year 2011, subject to prevailing market conditions and other factors. However,
in 1997 unitholders authorized the General Partner not to make new investments,
to sell aircraft when attractive opportunities arise, to distribute the proceeds
and to liquidate the Partnership when all assets are sold. See "Principal
Investment Objectives" above.
Underthe Limited Partnership Agreement, aircraft may be sold at any time
whether or not the aircraft are subject to leases if, in the judgment of the
General Partner, it is in the best interest of the Partnership to do so.
In March 1996, the Partnership sold its 50% interest in one MD-82 on lease
to Finnair to
8
a third party for approximately $6.9 million, resulting in a net gain of
approximately $556,000. The Partnership had acquired its interest in this
aircraft in April 1992, for approximately $8.5 million. A portion of the sale
proceeds were used to pay off the outstanding balance under a non-recourse loan
which was collateralized by this aircraft and the balance, after retaining a
reserve for liquidity purposes, was distributed to Unitholders.
The Partnership sold its one-third interest in six 737-200 aircraft on
lease to Continental at lease expiration on December 31, 1996, at a sale price
of approximately $3.1 million, resulting in a net gain of approximately $1.9
million. The proceeds were distributed to Unitholders in the first quarter of
1997.
On September 29, 1997 the Partnership sold its one-half ownership interest
in a DC9-51 aircraft on lease to Sun Jet International, Inc. The sale price was
$1.2 million, resulting in a gain of $393,000 even though the lessee had filed
for bankruptcy in June 1997, and had ceased making the rent payments. The
proceeds were distributed to Unitholders in the fourth quarter of 1997.
In December 2001 the Partnership sold its 100% interest in an MD-82
aircraft previously on lease to American Airlines, at a sale price of
approximately $9 million, resulting in a net gain of approximately $965,000. The
proceeds were distributed to Unitholders in the first quarter of 2002.
See "Competitive Position of the Partnership" above for a discussion of the
General Partner's determination to distribute the proceeds of the sale of these
aircraft to Unitholders.
The Partnership is permitted to sell aircraft to affiliates of the General
Partner at the fair market value of the aircraft at the time of sale as
established by an independent appraisal. The General Partner will receive a
Disposition or Remarketing Fee for any such sale.
JOINT VENTURES/GENERAL ARRANGEMENTS
Under the Limited Partnership Agreement, the Partnership may enter into
joint ventures with third parties to acquire or own aircraft. No such joint
ventures presently exist. Generally, each party to a joint venture is jointly
responsible for all debts and obligations incurred by the joint venture, and the
joint venture will be treated as a single entity by third parties. If party to a
joint venture, the Partnership may become liable to third parties for
obligations of the joint venture in excess of those contemplated by the terms of
the joint venture agreement. There can be no assurance that the Partnership will
be able to obtain control in any joint ventures, or that, even with such control
the Partnership will not be adversely affected by the decisions and actions of
the co-venturers. The General Partner attempts to ensure that all such
agreements will be fair and reasonable to the Partnership, although joint
ventures with affiliates of the General Partner may involve potential conflicts
of interest.
9
BORROWING POLICIES
Under the Limited Partnership Agreement, the Partnership may borrow funds
or assume financing in an aggregate amount equal to less than 50% of the higher
of the cost or fair market value at the time of the borrowing of all aircraft
owned by the Partnership. The Partnership may exceed such 50% limit for
short-term borrowing so long as the General Partner uses its best efforts to
comply with such 50% limit within 120 days from the date such indebtedness is
incurred or if the borrowed funds are necessary to prevent foreclosure on any
Partnership asset. There is no limitation on the amount of such short-term
indebtedness. The General Partner is authorized to borrow for working capital
purposes and to make distributions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources"
and Note 6 of Notes to Financial Statements.
MANAGEMENT OF AIRCRAFT PORTFOLIO
Aircraft management services are provided by the General Partner and its
affiliates. The fees and expenses for these services are reviewed annually and
are subject to approval by the Audit Committee of the Partnership. See Note 8 of
Notes to Financial Statements.
REGISTRATION OF AIRCRAFT; UNITED STATES PERSON
Under the Federal Aviation Act, as amended (the "FAA Act"), the operation
of an aircraft not registered with the Federal Aviation Administration (the
"FAA") in the United States is generally unlawful. Subject to certain limited
exceptions, an aircraft may not be registered under the FAA Act unless it is
owned by a "citizen of the United States" or a "resident alien" of the United
States. In order to attempt to ensure compliance with the citizenship
requirements of the FAA Act, the Limited Partnership Agreement requires that all
Unitholders (and all transferees of Units) be United States citizens or resident
aliens within the meaning of the FAA Act.
10
GOVERNMENT REGULATION
GENERAL
The ownership and operation of aircraft in the United States are strictly
regulated by the FAA, which imposes certain minimum restrictions and economic
burdens upon the use, maintenance and ownership of aircraft. The FAA Act and FAA
regulations contain strict provisions governing various aspects of aircraft
ownership and operation, including aircraft inspection and certification,
maintenance, equipment requirements, general operating and flight rules, noise
levels, certification of personnel and record keeping in connection with
aircraft maintenance. FAA policy has given high priority to aviation safety, and
a primary objective of FAA regulations is that an aircraft be maintained
properly during its service life. FAA regulations establish standards for
repairs, periodic overhauls and alterations and require that the owner or
operator of an aircraft establish an airworthiness inspection program to be
carried out by certified mechanics qualified to perform aircraft repairs. Each
aircraft in operation is required to have a Standard Airworthiness Certificate
issued by the FAA.
MAINTENANCE
The Partnership, as the beneficial owner of aircraft, bears the ultimate
responsibility for compliance with certain federal regulations. However, under
all of the Partnership's aircraft leases, the lessee has the primary obligation
to ensure that at all times the use, operation, maintenance and repair of the
aircraft are in compliance with all applicable governmental rules and
regulations and that the Partnership/lessor is indemnified from loss by the
lessee for breach of any of these lessee responsibilities. Changes in government
regulations after the Partnership's acquisition of aircraft may increase the
cost to, and other burdens on, the Partnership of complying with such
regulations.
The General Partner monitors the physical condition of the Partnership's
aircraft and periodically inspects them to attempt to ensure that the lessees
comply with their maintenance and repair obligations under their respective
leases. Maintenance is further regulated by the FAA which also monitors
compliance. At lease termination, the lessees are required to return the
aircraft in airworthy condition. The Partnership may incur unanticipated
maintenance expenses if a lessee were to default under a lease and the
Partnership were to take possession of the leased aircraft without such
maintenance having been completed. If the lessee defaulting is in bankruptcy,
the General Partner will file a proof of claim for the required maintenance
expenses in the lessee's bankruptcy proceedings and attempt to negotiate payment
and reimbursement of a portion of these expenses. The bankruptcy of a lessee
could adversely impact the Partnership's ability to recover maintenance expense.
From time to time, aircraft manufacturers issue service bulletins and the
FAA issues airworthiness directives. These bulletins and directives provide
instructions to aircraft operators in the maintenance of aircraft and are
intended to prevent the occurrence of accidents arising
11
from flaws discovered during maintenance or as the result of aircraft incidents.
Compliance with airworthiness directives is mandatory.
A formal program to control corrosion in all aircraft is included in the
FAA mandatory requirements for maintenance for each type of aircraft. These FAA
rules and proposed rules evidence the current approach to aircraft maintenance
developed by the manufacturers and supported by the FAA in conjunction with an
aircraft industry group. The Partnership may be required to pay for these FAA
requirements if a lessee defaults or if necessary to re-lease or sell the
aircraft.
In January 1999 the FAA issued an airworthiness directive setting payload
weight limitations on the Boeing 727 aircraft which were converted from
passenger to freight configuration. The directive requires extensive structural
modifications to strengthen the aircraft's floor, if the aircraft is to continue
to operate under the existing payload limits. If these modifications are not
performed, the directive sets substantially reduced payload limits. This
airworthiness directive applies to the aircraft on lease to FedEx. Under the
lease covering this aircraft, FedEx is required to take the steps necessary to
comply with airworthiness directives imposed during the lease term. However,
airworthiness directives may affect the residual value of the aircraft or
FedEx's decision to exercise fair market value renewal options under the lease.
AIRCRAFT NOISE
The FAA, through regulations, has categorized certain aircraft types as
Stage I, Stage II and Stage III according to the noise level as measured at
three designated points. Stage I aircraft create the highest measured noise
levels. Stage I and Stage II aircraft are no longer allowed to operate from
civil airports in the United States.
See "Aircraft Portfolio" above, for a description of the Partnership's
aircraft portfolio. At December 31, 2001, all of the aircraft in the
Partnership's portfolio were Stage III aircraft
ACQUISITION OF ADDITIONAL AIRCRAFT
In 1997 Unitholders authorized the General Partner to decide not to make
new aircraft investments, to sell aircraft when attractive opportunities arise,
to distribute the proceeds and to liquidate the Partnership when all assets are
sold. See "Principal Investment Objectives" above.
Not withstanding the above, if the Partnership were to acquire additional
aircraft, it could do so in many different forms, such as in sale/leaseback
transactions, by purchasing interests in existing leases from other lessors, by
making loans secured by aircraft or by acquiring or financing leasehold
interests in aircraft. The Partnership is permitted to acquire aircraft from
affiliates of the General Partner subject to limitations set forth in the
Limited Partnership Agreement.
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Prior to September 30, 1991, the General Partner and USL Capital ("Related
Entities") were required to offer the Partnership a 50% participation interest
in certain aircraft leasing investments made by Related Entities. After
September 30, 1991 and while the General Partner was an affiliate of USL
Capital, the General Partner and USL Capital could, but were not obligated to,
offer investment opportunities to the Partnership. The Partnership was required
to accept suitable opportunities provided that the General Partner and Related
Entities made at least 20% (including their investment through ownership of
Units and the General Partner's interest) of the total investment made by
Related Entities and the Partnership in such transactions. In the event that the
Partnership elected not to make or to make only a portion of an investment
offered to it by an affiliate, the remaining investment could be made by
affiliates of the General Partner or third parties.
The General Partner believes that since it is no longer affiliated with USL
Capital, the limitation as to making investments with Related Entities should no
longer apply and that the Partnership should be able to invest in any aircraft
leasing transactions deemed suitable by the General Partner. In determining
whether an investment is suitable for the Partnership, the General Partner will
consider the following factors: the expected cash flow from the investment and
whether existing Unitholders' investment will be diluted; the existing portfolio
of the Partnership and the effect of the investment on the diversification of
the Partnership's assets; the amount of funds available to finance the
investment; the ability of the Partnership to obtain additional funds through
debt financing, by issuing Units, or otherwise; the cost of such additional
funds and the time needed to obtain such funds; the amount of time available to
remove contingencies prior to making the investment; projected Federal income
tax effect of the investment; projected residual value, if any; any legal or
regulatory restrictions; and other factors deemed relevant by the General
Partner.
The General Partner and its affiliates are not obligated to make any
investment opportunity available to the Partnership, and if any of them are
presented with a potential investment opportunity, it may be made by any of them
without being offered to the Partnership. In addition, in determining which
entity should invest in a particular transaction, it may be possible to
structure the transaction in various ways to make the acquisition more or less
suitable for the Partnership or for the General Partner or its affiliates.
FEDERAL INCOME TAXATION
The Partnership is considered a publicly traded partnership ("PTP") under
the Revenue Act of 1987 with a special tax status, whereby it has not been
subject to federal income taxation. This special tax status was scheduled to
expire at the beginning of 1998. However, during 1997 federal and California tax
laws were amended to provide that PTPs may elect to continue to be publicly
traded and retain their Partnership tax status if they pay a federal tax of 3.5%
and a California state tax of 1% on their applicable annual gross income
beginning in January 1998. The Partnership made an election to pay this tax
beginning in 1998.
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EMPLOYEES
The Partnership has no employees. See "DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT - General" below. Employees of the General Partner provide
services on behalf of the Partnership.
ITEM 2. PROPERTIES
The Partnership does not own any real property, and shares office space in
the offices of BALCAP and its affiliates.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
UNITS OUTSTANDING
The Units are traded on the New York Stock Exchange under the symbol FLY.
As of February 12, 2002, there were 869 unitholders of record.
MARKET PRICE
The following chart sets forth the high and low closing prices on the New
York Stock Exchange and the trading volume for each of the quarters in the years
ended December 31, 2001 and 2000.
Trading Volume
Quarter Ended (in thousands) Unit Prices (high-low)
- ------------- -------------- ----------------------
March 31, 2001 409 $13.05 - $11.56
June 30, 2001 630 $11.89 - $8.75
September 30, 2001 573 $10.35 - $4.26
December 31, 2001 640 $8.85 - $5.30
March 31, 2000 227 $12 - $10.63
June 30, 2000 239 $12.25 - $10.56
September 30, 2000 230 $13.13 - $11.56
December 31, 2000 291 $12.50 - $11.56
DISTRIBUTIONS TO UNITHOLDERS
CASH DISTRIBUTIONS
The Partnership makes quarterly cash distributions to Unitholders which are
based on Cash Available from Operations (as defined in the Limited Partnership
Agreement) and are partially tax sheltered. From time to time the Partnership
also has made cash distributions from Cash Available from Sale or Refinancing
(as defined in the Limited Partnership Agreement.) Information on the tax status
of such payments, which is necessary in the preparation of individual tax
returns, is prepared and mailed to Unitholders as quickly as practical after the
close of each year. The size of the Partnership's portfolio and future aircraft
sales will affect distributions.
15
Distributions declared during 2001 and 2000 were as follows:
Record Date Payment Date Per Unit
----------- ------------ --------
March 31, 2001 May 14, 2001 38 cents
June 29, 2001 August 15, 2001 38 cents
September 28, 2001 November 15, 2001 30 cents
December 31, 2001 February 15, 2002 11 cents
March 31, 2000 May 15, 2000 45 cents
June 30, 2000 August 15, 2000 45 cents
September 29, 2000 November 15, 2000 45 cents
December 29, 2000 February 15, 2001 45 cents
CASH AVAILABLE FROM OPERATIONS
The Partnership distributes all Cash Available from Operations (as defined
in the Limited Partnership Agreement). The Partnership is authorized to make
distributions from any source, including reserves and borrowed funds.
Distributions of Cash Available from Operations are allocated 99% to Unitholders
and 1% to the General Partner. The Partnership makes distributions each year of
Cash Available from Operations generally on the fifteenth day of February, May,
August and November to Unitholders of record on the last business day of the
calendar quarter preceding payment.
CASH AVAILABLE FROM SALE OR REFINANCING
The Partnership's original intent was that Cash Available From Sale or
Refinancing (as defined in the Limited Partnership Agreement) received prior to
January 1, 2005 would be retained for use in the Partnership's business,
provided that if the General Partner did not believe that attractive investment
opportunities exist for the Partnership, the Partnership could distribute Cash
Available from Sale or Refinancing. Any Cash Available from Sale or Refinancing
received after January 1, 2005 was not to be reinvested but was to be
distributed. However, in 1997, Unitholders authorized the General Partner to
decide not to make new aircraft investments, to sell aircraft when attractive
opportunities arise, to distribute the proceeds and to liquidate the Partnership
when all assets are sold. See "BUSINESS--Principal Investment Objectives." For
information as to the sales giving rise to distributions from Cash Available
from Sales or Refinancing, see "BUSINESS--Disposition of Aircraft."
16
TAX ALLOCATIONS
Allocations for tax purposes of income, gain, loss deduction, credit and
tax preference are made on a monthly basis to Unitholders who owned Units on the
first day of each month. Thus, for example, if an aircraft were sold at a gain,
that gain would be allocated to Unitholders who owned Units on the first day of
the month in which the sale occurred. If proceeds from this sale were
distributed to Unitholders, such proceeds would be distributed to Unitholders
who owned Units on the record date for such distribution, which, because of
notice requirements, likely would not occur in the same month as the sale. In
addition, a Unitholder who transfers his or her Units after the commencement of
a quarter but prior to the record date for that quarter will be allocated a
share of tax items for the first two months of that quarter without any
corresponding distribution of Cash Available from Operations for, among other
things, payment of any resulting tax.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data and other data
concerning the Partnership for each of the last five years:
For years ended December 31,
(In thousands except per-unit amounts) 2001 2000 1999 1998 1997
- ---------------------------------------------- ------- ------- ------- ------- -------
OPERATING RESULTS
Lease and other income $ 5,102 $ 6,736 $ 7,614 $ 8,400 $ 9,210
Gain on disposition of aircraft 965 -- -- -- 393
------- ------- ------- ----------- -------
Total revenues 6,067 6,736 7,614 8,400 9,603
------- ------- ------- ----------- -------
Interest expense 550 909 1,270 1,704 2,028
Depreciation expense 1,268 -- -- -- 273
Other expenses 1,742 1,082 1,088 1,123 1,820
Tax on gross income 884 548 548 699 0
------- ------- ------- ----------- -------
Total expenses 4,444 2,539 2,906 3,526 4,121
------- ------- ------- ----------- -------
Net income $ 1,623 $ 4,197 $ 4,708 $ 4,874 $ 5,482
------- ------- ------- ----------- -------
Net income per unit(1) $ 0.35 $ 0.90 $ 1.01 $ 1.04 $ 1.17
Cash distributions declared per unit(2) $ 2.67 $ 1.80 $ 1.64 $ 1.64 $ 2.02
FINANCIAL POSITION
Total assets $52,529 $61,836 $67,787 $75,813 $82,859
Long-term obligations $3,389 $ 7,992 $10,092 $14,505 $19,115
Total partners' equity $40,285 $51,135 $55,347 $58,301 $61,089
Limited partners' equity per unit $ 8.62 $ 10.95 $ 11.85 $ 12.48 $ 13.08
(1) After allocation of the 1% General Partner's interest.
(2) Includes special cash distributions of $1.50 per unit in 2001, and $.22 per unit in 1997.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Partnership has included in this annual 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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership presently has one long-term debt facility. At December 31,
2001, the 7.4% non-recourse note collateralized by one aircraft leased to FedEx
had an outstanding balance of $3.4 million. The facility matures in April 2006.
A 9.35% non-recourse loan facility collateralized by the aircraft that was
leased to TWA and subsequently to American Airlines was terminated in December
2001, when the aircraft was sold. A long-term variable rate revolving loan
facility collateralized by two aircraft on lease to US Airways expired on
October 1, 2001, the end of the lease term.
Long-term borrowings at December 31, 2001 represented 2.78% 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.
Total scheduled debt service in 2002 is $0.9 million. Debt service will be
paid from the rental payments received under the FedEx lease.
19
Net cash provided by operating activities was $4.1 million for 1999, $4.5
million for 2000, and $2.7 million for 2001. Aside from the cash flow activity
associated with taxes payable, the net cash flow provided by operating
activities showed a moderate decrease from 1999 to 2000. The decrease in 2001 as
compared with 2000 was primarily due to reduced revenue as a result of the
termination of the US Airways leases.
Total debt service on the fixed loans as a percentage of net cash provided
by operating activities was 78%, 67%, and 123% for 1999, 2000 and 2001,
respectively. However, cash flow from operating activities does not fully
reflect cash receipts from lease payments. When the excess of rental receipts
above finance lease income is added to cash flow from operating activities, the
ratios become 26%, 29%, and 27%, respectively.
Cash distributions paid by the Partnership were $7.7 million ($1.64 per
unit) in 1999, $8.2 million ($1.76 per unit) in 2000, and $7.1 million ($1.51
per unit) in 2001. There were no special cash distributions paid in 1999, 2000
or 2001. A special cash distribution of $7.0 million ($1.50 per unit) was
declared in December 2001, but will be paid in 2002.
Pursuant to the Limited Partnership Agreement, the Partnership distributes
all Cash Available from Operations net of expenses and reserves. Since such
distributions were in excess of earnings, Partnership equity declined from $51.1
million at December 31, 2000 to $40.3 million at December 31, 2001, and limited
partner equity per unit declined from $10.95 to $8.62. From a limited partner
perspective, the portion of the distribution in excess of net income constitutes
a return of capital. Total cash distributions declared since inception of the
Partnership have exceeded total net income by $10.16 per unit.
At December 31, 2001, the Partnership had cash on hand in the amount of
$1.9 million (net of amounts payable to Unitholders on February 15, 2002). In
the event that the Partnership's cash on hand is significantly reduced as a
result of unanticipated expenses, including unanticipated maintenance and
refurbishing expenses with respect to the three MD-82 aircraft currently off
lease, cash distributions to Unitholders may be reduced.
RESULTS OF OPERATIONS
2000 VS. 1999
In 2000, all revenues were earned from aircraft subject to finance leases.
The revenue reduction in 2000 as compared with 1999 is primarily due to the
scheduled decline in finance lease income as the balances due from the lessees
declined.
2001 VS. 2000
In 2001, revenues were earned from seven aircraft subject to finance and
operating leases and from the gain on sale of one aircraft. The lease revenue
reduction in 2001 as compared with 2000 is primarily due: to the scheduled
decline in finance lease income as the balances due from the lessees declined,
to the expiration of the lease with US Airways for five aircraft, three of
20
which remain off lease, and to the restructure of the TWA lease.
In 2001, five MD-82 aircraft leased to US Airways generated $3,363,000 in
finance lease income prior to lease expiration. Two of the five aircraft were
leased to CSI Aviation Services, Inc. ("CSI") in November 2001 under operating
leases, which generated $296,000 in operating lease income. The remaining three
aircraft were being held for lease as of December 31, 2001.
The finance lease of one MD-82 aircraft with TWA was assumed by American
Airlines in April of 2001, and was reclassified as an operating lease. In 2001,
the finance lease generated $293,000 in finance lease income, and the operating
lease generated $750,000 in operating lease rental income (before depreciation
expense). In December of 2001, the aircraft was sold, generating a gain on sale
before remarketing fee of $965,000.
The lease of one 727-200FH aircraft to FedEx generated $346,000 in finance
lease income.
For information regarding the percentage of total Partnership assets and
revenues represented by aircraft owned and leased by the Partnership, see
"BUSINESS - Aircraft Portfolio."
Interest expense decreased in 2001 by $359,000 as compared with 2000, as a
result of declining debt balances.
Depreciation expense of $1,268,000 in 2001 related to aircraft subject to
operating leases and to aircraft available for lease. No depreciation expense
was recorded in 2000 as the Partnership's portfolio did not include any aircraft
subject to operating lease or held for lease.
Management fees and tax on gross income increased in 2001 as compared with
the prior year as a result of the sale of the MD-82 aircraft.
The increase in general and administrative expenses is primarily due to
aircraft maintenance and refurbishing expenses incurred in the preparation of
two MD-82 aircraft for delivery to CSI.
The lease with US Airways for five MD-82 aircraft was scheduled to
terminate on October 1, 2001, but remains in effect pending satisfaction of
aircraft return conditions relating to aircraft maintenance as specified in the
lease. Under the lease, US Airways is obligated to pay rent for each aircraft on
a prorated basis until the required maintenance has been completed and the
aircraft has been returned. The lease requires the maintenance to be completed
within 60 days of the expiration of the lease term.
In November 2001 the Partnership entered into an agreement with US Airways
with respect to the two MD-82 aircraft now on lease to CSI, providing for US
Airways to pay hold-over rent and to pay for certain agreed-upon maintenance
work. US Airways made a cash
21
payment covering a portion of the rent and maintenance costs and delivered an
unsecured note for the remaining amount. See Note 4 of Notes to Financial
Statements.
The Partnership is currently in negotiation with US Airways concerning
satisfaction of aircraft return conditions and payment of hold-over rent with
respect to the remaining three aircraft leased by US Airways. The Partnership
expects to enter into an agreement with US Airways with respect to these leases.
To date, the Partnership has not taken legal action to enforce its rights under
the leases as negotiations concerning the specific terms of US Airways'
obligations are ongoing.
Any required maintenance work with respect to the three aircraft currently
off lease that is not performed or paid for by US Airways, together with any
refurbishing expenses incurred in preparation of these aircraft for delivery to
future lessees, will result in additional expenses to the Partnership. Due to
the ongoing negotiations with US Airways, management cannot establish the amount
of such additional expenses, if any, although such expenses, if significant,
could have a material adverse effect on the Partnership's results of operations
or financial condition and result in reduced cash distributions to Unitholders.
IMPACT OF EVENTS OF SEPTEMBER 11, 2001
On September 11, 2001, four aircraft operated by United Airlines and
American Airlines were hijacked and destroyed in terrorist attacks against the
United States. Immediately after the attacks, the Federal Aviation
Administration closed U.S. airspace for several days. In the months after the
attacks, most major U.S.-based have announced significant reductions in
worldwide capacity, and many have reduced or announced plans to reduce their
fleets.
The Partnership believes that the events of September 11, 2001 have had an
adverse effect on the market for lease and sale of used aircraft, as airlines
are less likely to renew or enter into leases and may seek to sell aircraft
surplus to meet their reduced needs. The reduced demand for aircraft is likely
to have an adverse effect on the Partnership's ability to re-lease its three
aircraft currently off lease, and to re-lease other aircraft as their leases
terminate. The events of September 11, 2001 may also affect the ability of
existing lessees to meet their obligations to the Partnership, and may have
other adverse effects on the Partnership.
OUTLOOK
The market conditions for aircraft leasing have declined during 2001, in
particular since September 11, 2001, as there has been a reduction in
air-traffic demand, causing the supply of aircraft to exceed demand. It has been
reported that there are more than 90 MD-81/82 aircraft available for sale or
lease, approximately 15% of the MD-80 aircraft listed in operation. While there
are signs of increases in air traffic from September 2001 levels which could
lead to increased demand (among U.S. based airlines a reported 34% decline in
year over year system-wide traffic for the month of September 2001 has improved
to a 14% decline for the month of December 2001), it is widely believed that it
will take time before the industry recovers fully.
22
Consequently, the Partnership is experiencing 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Partnership believes that as of December 31, 2001, it does not have any
material interest rate risk exposures.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and Notes to Financial Statements described in
Item 14(a) are set forth in Appendix A and are filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The Partnership has no directors or executive officers. Under the Limited
Partnership Agreement, the General Partner has full power and authority in the
management and control of the business of the Partnership, subject to certain
provisions requiring the consent of the Limited Partners.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information about the directors and executive
officers of the General Partner as of February 28, 2002. As used below, "BALCAP"
refers both to BALCAP and to BA Leasing & Capital prior to its merger into
BALCAP in September 1999.
POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
- --------------------- --------------------- --- ------------------------------------------
David B. Gebler Chairman of the 52 Mr. Gebler is a Managing Director of Bank of America
Board, President, National Association ("Bank of America") and of
Chief Executive BALCAP. He has been with BALCAP since September
Officer and a 1996. From 1993 to September 1996 he was Senior Vice
Director President of the Transportation and Industrial
Financing business unit of USL Capital. Mr. Gebler has
since 1989 and a Director since 1990, and has been
Chairman and CEO since September 1996. Mr. Gebler holds
a bachelor degree in mathematics from Clarkson University
and graduate degrees in Engineering and Management from
the University of Michigan.
Richard V. Harris Director 53 Mr. Harris is Managing Director and Head of Global
Leasing of Bank of America, and Chairman and President
of BALCAP. He was elected President and CEO in 1982,
adding the title of Chairman in 1988. He has been a
Director of the General Partner since October 1996.
Other assignments at Bank of America have included
responsibilities for Project Finance and Asset-Backed
Finance along with Leasing. Prior to assuming his
present responsibilities, Mr. Harris held both
transactional and marketing management positions at
BankAmerica Leasing. Mr. Harris holds a B.S.E.E.
degree in Electrical Engineering from Brigham Young
24
University and a Master of Business Administration
degree also from BYU.
William A. Hasler Director 60 Mr. Hasler has been the Co-Chief Executive Officer of
Aphton Corporation , a biopharmaceutical company,
since July 1998 and a Director of the General Partner
since 1995. From August 1991 to June 1998 he was the
Dean of the Haas School of Business at the University
of California at Berkeley. From 1984 to 1991, he was
vice chairman and director of KPMG Peat Marwick and
was responsible for its worldwide consulting
business. He is a member of the board of governors of
The Pacific Stock Exchange and of the board of
directors of Selectron Corp., Schwab Funds, Mission
West, Tenera, Walker Interactive, and Aphton
Corporation. He is a graduate of Pomona College and
earned his MBA from Harvard .
Leonard Marks, Jr. Director 80 Mr. Marks retired as Executive Vice President of
Castle & Cooke, Inc. in 1985. Prior to that time, he
was also President of the real estate and diversified
activities group of that company. Mr. Marks has been
a Director of the General Partner since 2001, and
previously was a Director to the General Partner from
1986 to 1997. For many years, Mr. Marks was an
assistant professor of Finance at the Harvard Business
School and a professor of Finance at the Stanford
Business School. He was Assistant Secretary of the
United States Air Force from 1964 to 1968. Mr. Marks
holds a Ph.D in Business Administration from Harvard
University.
Richard P. Powers Director 61 Mr. Powers is a Financial Consultant and Private
Investor. Frorm 1996 to 2000 he was an Executive Vice
President of Finance and Administration of Eclipse
Surgical Technologies, Inc., a medical device company,
since 1996 and a Director of the General Partner since
1996. From 1981 to 1994, he was with Syntex
Corporation, a pharmaceutical company, serving as
Senior Vice President and Chief Financial Officer of
that company from 1986 to 1994. From 1994 to 1996 he
served as consultant to various companies, including
advising and assisting in the sale of Syntex
Corporation to Roche Corporation in 1994. Mr. Powers
holds a Bachelor of Science degree in Accounting from
Canisius College and a Masters in Business
Administration from the University of Rochester.
K. Thomas Rose Director 56 Mr. Rose has been Managing Director, Credit of BALCAP
since 1992. He has been a Director of the General
Partner since October 1996. Prior to his present
responsibilities, Mr. Rose was with Security Pacific
Leasing Corporation as Executive Vice President -
Lease Services since 1973. Mr. Rose holds a B.A. from
California State University, Fullerton and a Juris
Doctorate degree from Golden Gate University, School
of Law.
Robert A. Keyes Chief Financial 49 Mr. Keyes has been Senior Vice President and Senior
Officer and a Finance Manager of BALCAP since December 2000. Prior
Director to assuming his present responsibilities at BALCAP,
Mr. Keyes was with Citicorp Bankers Leasing as Vice
President and Head of Operations from 1997 to 2000. From
1990 to 1997 Mr. Keyes was with USL Capital Corporation
(former parent of the General Partner) as Vice President
and Corporate Controller. While at USL Capital, Mr.
Keyes served as Chief Financial Officer and as a Director
of the General Partner. From 1980 to 1990 Mr. Keyes held
various Finance positions with Wells Fargo Leasing
Corporation, including Senior Vice President and Chief
Financial Officer. Mr. Keyes holds a Bachelor of
Science degree in Economics from Bates College and a
Masters in Business Administration and Accounting from
Rutgers University.
25
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not pay or employ directly any directors or officers.
Each of the officers of the General Partner is also an officer or employee of
BALCAP and is not separately compensated by the General Partner or the
Partnership for services on behalf of the Partnership. Thus, there were no
deliberations of the General Partner's Board of Directors with respect to
compensation of any officer or employee.
The Partnership reimburses the General Partner for fees paid to Directors
of the General Partner who are not otherwise affiliated with the General Partner
or its affiliates. In 2001, such unaffiliated directors were paid an annual fee
of $14,500 plus $500 for each meeting attended.
The Partnership has not established any plans pursuant to which cash or
non-cash compensation has been paid or distributed during the last fiscal year
or is proposed to be paid or distributed in the future. The Partnership has not
issued or established any options or rights relating to the acquisition of its
securities or any plans therefor.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
As of February 28, 2002, the following persons were known to the
Partnership to be beneficial owners of more than five percent of the
Partnership's equity securities:
Name and Address Amount and Nature of
Title of class Of beneficial owner Beneficial Ownership Percent of Class
- -------------- ------------------- -------------------- ----------------
Depositary Units United States Airlease 231,250(1) 5%
Holding, Inc.
555 California Street
San Francisco, CA 94104
Depositary Units BALCAP 793,750(2) (3) 17.2%
555 California Street
San Francisco, CA 94104
__________________
(1) United States Airlease Holding, Inc. ("Holding") reported that it had
sole voting and dispositive power over these Units.
(2) BALCAP owns all of the outstanding stock of Holding. Therefore, BALCAP
may be deemed also to be the indirect beneficial owner of the Units
owned by Holding. In addition, BALCAP owns all the outstanding
26
stock of the General Partner. Therefore, BALCAP may be deemed to be the
indirect beneficial owner of the General Partner's 1% General Partner
interest. BALCAP is a wholly owned indirect subsidiary of BankAmerica
Corporation. Therefore, BankAmerica Corporation and each BankAmerica
Corporation subsidiary which is the direct or indirect parent of BALCAP
may also be deemed to be the indirect beneficial owner of all Units and
of the General Partner's 1% General Partner interest owned or deemed
owned by BALCAP.
(3) BALCAP reported that it had sole voting and dispositive power over
these Units.
UNIT OWNERSHIP BY MANAGEMENT
Set forth below is information regarding interests in the Partnership owned
by each director of and all directors and executive officers, as a group, of the
General Partner. Unless otherwise noted, each person has sole voting and
investment power over all units owned.
Name of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent of Class
-------------- ---------------- -------------------- ----------------
Depositary Units David B. Gebler 700(1) (2)
Depositary Units William A. Hasler 8,700 (2)
Depositary Units Leonard Marks Jr. 750 (2)
All directors and executive 10,150 (2)
officers as a group
__________________
(1) Includes 200 Units held by Mr. Gebler as custodian for a minor child as
to which Mr. Gebler has shared voting and dispositive power and as to
which beneficial ownership is disclaimed.
(2) Represents less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a discussion of certain fees, expenses and reimbursements payable and
paid to the General Partner and its affiliates by the Partnership, see Note 8 of
Notes to Financial Statements. From time to time, the Partnership has borrowed
funds from BALCAP or BA Leasing & Capital, including advances for expense
payments. All such borrowings were unsecured and bore interest at a floating
rate not exceeding the prime rate. At December 31, 2001 Airlease owed BALCAP
$323,702 for such borrowings.
27
For a discussion of certain terms of the Limited Partnership Agreement
regarding the Partnership's participation in aircraft leasing investments made
by USL Capital and its Related Entities, see "BUSINESS-Acquisition of Additional
Aircraft." For a discussion of aircraft formerly held jointly between the
Partnership and USL Capital, see "BUSINESS- Participants in Leases."
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements of the Partnership are
included in this report as Appendix A:
PAGE
Management's Responsibility for Financial Statements......... A-1
Report of Independent Auditors .............................. A-2
Financial Statements:
Statements of Income for the Years Ended December 31, 2001,
2000 and 1999 .......................................... A-3
Balance Sheets, as of December 31, 2001 and 2000........ A-4
Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999..................................... A-5
Statements of Changes in Partners' Equity for the Years Ended
December 31, 2001, 2000 and 1999........................ A-6
Notes to Financial Statements ............................... A-6
Financial statement schedules other than those listed above
are omitted because the required information is included in
the financial statements or the notes thereto or because of
the absence of conditions under which they are required.
(b) The Partnership did not file any reports on Form 8-K during
the last quarter of the fiscal year ended December 31, 2001.
29
(c) Exhibits required by Item 601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION
3.1(1) Amended and Restated Agreement of Limited Partnership of
Partnership.
3.2(1) Form of Certificate for Limited Partnership Units of
Partnership.
3.3(1) Form of Depositary Agreement among Partnership, Chase-Mellon
Shareholder Services (formerly Manufacturers Hanover Trust
Company), the General Partner and Limited Partners and
Assignees holding Depositary Receipts.
3.4(1) Form of Depositary Receipt for Units of Limited Partners'
Interest in the Partnership
3.5 Amendments to Amended and Restated Partnership Agreement.
4.1(1) Form of Application for Transfer of Depositary Unit.
10.1(1) Trust Agreement, together with Trust Agreement Supplement
No. 1-5, dated as of July 10, 1986, between the Registrant,
Meridian Trust Company and the General Partner.
10.3(1) Lease Agreement, together with Lease Supplement Nos. 1-5, dated
as of July 10, 1986, between Meridian Trust Company, not in its
individual capacity but solely as Trustee, and Pacific
Southwest Airlines.
__________________
(1) Incorporated by reference to the Partnership's Registration Statement on
Form S-1 (File No. 33-7985), as amended.
30
10.44(2) Aircraft Lease Agreement dated as of April 15, 1993 between
Taurus Trust Company, Inc. (formerly Trust Company for USL,
Inc.) as Owner Trustee, Lessor, and Federal Express
Corporation, Lessee with respect to one (1) Boeing 727-2D4
Aircraft, U.S. Registration No. 362PA (manufacture serial no.
21850).
10.49(3) Assignment and Assumption Agreement dated as of January 31,
1997 between USL Capital Corporation and the Registrant.
10.50(3) Lease, together with Lease Supplement No. 1, dated as of March
15, 1984 between DC-9T-III, Inc., as Lessor, and Trans World
Airlines, Inc., as Lessee, with respect to one (1) McDonnell
Douglas DC-9-82 Aircraft, as amended by Amendment Agreement
dated as of December 15, 1986.
10.51(4) Loan agreement secured by two aircraft leased to US Airways
dated as of December 22, 1997, amended and restated as of
December 15, 1998, between Meridian Trust Company, as Trustee,
as Borrower and Credit Lyonnais/PK AIRFINANCE, as Lender.
10.52(5) Assignment, Assumption and Amendment Agreement dated April 9,
2001 among Trans World Airlines, Inc., American Airlines, Inc.,
the registrant and First Security Bank, National Association,
as Owner Trustee.
10.53 Certificate of Redelivery and Agreement dated as of November
26, 2001, 2001 between First Union National Bank, not in its
individual capacity but solely as Owner Trustee, and US
Airways, Inc., with respect to one MD-82 Aircraft, U.S.
Registration No. 806USAirframe.
10.54 Certificate of Redelivery and Agreement dated as of November
26, 2001, 2001 between First Union National Bank, not in its
individual capacity but solely as Owner Trustee, and US
Airways, Inc., with respect to one MD-82 Aircraft, U.S.
Registration No. 807USAirframe.
10.55 Aircraft Lease Agreement dated as of November 21, 2001, between
First Union National Bank (formerly Meridian Trust Company),
not in its individual capacity but solely as Owner Trustee, and
CSI Aviation Services, Inc., Lessee with respect to one (1)
MD-82 Aircraft, U.S. Registration No. N806US (manufacture
serial no. 48038).
10.56 Aircraft Lease Agreement dated as of November 21, 2001, between
First Union National Bank (formerly Meridian Trust Company),
not in its individual capacity but solely as Owner Trustee, and
CSI Aviation Services, Inc., Lessee with respect to one (1)
MD-82 Aircraft, U.S. Registration No. N807US (manufacture
serial no. 48039).
_________________
(2) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 2000.
31
(3) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1996.
(4) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1998.
(5) Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
32
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 on March XX, 2002.
AIRLEASE LTD., A CALIFORNIA LIMITED
PARTNERSHIP
(Registrant)
By: Airlease Management Services, Inc.,
General Partner
By: /s/ DAVID B. GEBLER
______________________________________
David B. Gebler
Chairman, Chief Executive Officer and
President
33
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 in
the capacities and on the dates indicated.
For Airlease Management
Services, Inc. ("AMSI"), General Partner
/s/ DAVID B. GEBLER March XX, 2002
____________________________________________
David B. Gebler
Chairman, Chief Executive Officer, President
and Director of AMSI
/s/ ROBERT A. KEYES March XX, 2002
____________________________________________
Robert A. Keyes
Chief Financial Officer and Director of AMSI
/s/ RICHARD V. HARRIS March XX, 2002
____________________________________________
Richard V. Harris
Director of AMSI
/s/ K. THOMAS ROSE March XX, 2002
____________________________________________
K. Thomas Rose
Director of AMSI
The foregoing constitute a majority of the members of the Board of Directors of
Airlease Management Services, Inc. (the General Partner).
34
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Airlease Management Services, Inc. ("AMSI"), the General Partner of the
Partnership is responsible for the preparation of the Partnership's financial
statements and the other financial information in this report. This
responsibility includes maintaining the integrity and objectivity of the
financial records and the presentation of the Partnership's financial statements
in accordance with accounting principles generally accepted in the United
States.
The General Partner maintains an internal control structure designed to provide,
among other things, reasonable assurance that Partnership records include the
transactions of its operations in all material respects and to provide
protection against significant misuse or loss of Partnership assets. The
internal control structure is supported by careful selection and training of
financial management personnel, by written procedures that communicate the
details of the control structure to the Partnership's activities, and by staff
of operating control specialists of Banc of America Leasing and Capital, LLC.,
which owns 100% of the stock of AMSI, who conduct reviews of adherence to the
Partnership's procedures and policies.
The Partnership's financial statements have been audited by Ernst & Young
L.L.P., independent auditors for the years ended December 31, 2001 and 2000.
Their audits were conducted in accordance with auditing standards generally
accepted in the United States, which included consideration of the General
Partner's internal control structure. The Report of Independent Auditors appears
on page A-2.
The board of directors of the General Partner, acting through its Audit
Committee composed solely of directors who are not employees of the General
Partner, is responsible for overseeing the General Partner's fulfillment of its
responsibilities in the preparation of the Partnership's financial statements
and the financial control of its operations. The independent auditors have full
and free access to the Audit Committee and meet with it to discuss their audit
work, the Partnership's internal controls, and financial reporting matters.
/s/ DAVID B. GEBLER
____________________________________________
David B. Gebler
Chairman, Chief Executive Officer and President
Airlease Management Services, Inc.
/s/ ROBERT A. KEYES
____________________________________________
Robert A. Keyes
Chief Financial Officer
Airlease Management Services, Inc.
A-1
REPORT OF INDEPENDENT AUDITORS
To the Partners of Airlease Ltd.,
A California Limited Partnership:
We have audited the accompanying balance sheets of Airlease Ltd. as of December
31, 2001 and 2000, and the related statements of income, changes in
Partners'equity, and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 management, 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 Airlease Ltd. at December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP.
_________________________
Ernst & Young LLP
San Francisco, California
February 8, 2002
A-2
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the years ended
December 31,
(In thousands except per unit amount) 2001 2000 1999
___________________________________________________________________________________________
REVENUES
Finance lease income $ 4,002 $ 6,736 $ 7,614
Operating lease rentals 1,046 0 0
Gain on sale of equipment 965 0 0
Other income 54 0 0
_____________________________________
Total revenues 6,067 6,736 7,614
_____________________________________
EXPENSES
Interest 550 909 1,270
Depreciation - aircraft 1,268 0 0
Management fee - general partner 984 603 629
Investor reporting 365 316 339
General and administrative 393 163 120
Tax on gross income 884 548 548
_____________________________________
Total expenses 4,444 2,539 2,906
_____________________________________
NET INCOME $ 1,623 $ 4,197 $ 4,708
_____________________________________
NET INCOME ALLOCATED TO:
GENERAL PARTNER $ 16 $ 42 $ 47
_____________________________________
Limited partners $ 1,607 $ 4,155 $ 4,661
_____________________________________
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.35 $ 0.90 $ 1.01
_____________________________________
See notes to financial statements
A-3
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS
As of December 31,
(IN THOUSANDS) 2001 2000
_____________________________________________________________________________
ASSETS
Cash and cash equivalent $ 9,432 $ 17
Finance leases - net 6,949 61,657
Operating leases - net 14,218 0
Aircraft held for lease 21,326 0
Notes receivable (interest and discount) 544 0
Prepaid expenses and other assets 60 162
__________________________
Total assets $ 52,529 $ 61,836
==========================
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Distribution payable to partners $ 7,521 $ 2,102
Deferred income 509 0
Accounts payable and accrued liabilities 602 468
Taxes payable 223 139
Long-term notes payable 3,389 7,992
__________________________
Total liabilities 12,244 10,701
==========================
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Limited partners (4,625,000 units outstanding) 39,883 50,624
General partner 402 511
__________________________
Total partners' equity 40,285 51,135
==========================
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 52,529 $ 61,836
==========================
See notes to financial statements
A-4
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended December 31,
(In thousands) 2001 2000 1999
____________________________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,623 $ 4,197 $ 4,708
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in operating lease depreciation 1,268 0 0
Increase in deferred income 509 0 0
Gain on sale of equipment (965) 0 0
Increase in accounts payable and accrued liabilities 134 39 36
Decrease in prepaid expenses and other assets 94 114 85
Increase/(decrease) in taxes payable 84 135 (695)
_____________________________________
Net cash provided by operating activities 2,747 4,485 4,134
_____________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Rental receipts in excess of earned finance and operating lease income 9,869 5,852 7,934
Proceeds from sale of equipment 9,000 0 0
Increase in notes receivable (544) 0 0
_____________________________________
Net cash provided by investing activities 18,325 5,852 7,934
_____________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit repayment-net (1,765) (18) (2,474)
Repayment of long-term notes payable (2,838) (2,082) (1,939)
Distributions paid to partners (7,054) (8,222) (7,662)
_____________________________________
Net cash used by financing activities (11,657) (10,322) (12,075)
_____________________________________
Increase/(decrease) in cash and cash equivalents 9,415 15 (7)
Cash at beginning of year 17 2 9
_____________________________________
Cash and cash equivalents at end of year $ 9,432 $ 17 $ 2
_____________________________________
Additional information:
Cash paid for interest $ 510 $ 858 $1,187
_____________________________________
See notes to financial statements
A-5
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the years ended December 31, 2000, 1999, and 1998
General Limited
(In thousands except per unit amounts) Partner Partners Total
___________________________________________________________________________________________
Balance, December 31, 1998 583 57,718 58,301
Net Income - 1999 47 4,661 4,708
Distributions to partners declared
($1.64 per limited partnership unit) (77) (7,585) (7,662)
___________________________________________________________________________________________
Balance, December 31, 1999 553 54,794 55,347
Net Income - 2000 42 4,155 4,197
Distributions to partners declared
($1.80 per limited partnership unit) (84) (8,325) (8,409)
___________________________________________________________________________________________
Balance, December 31, 2000 511 50,624 51,135
Net Income - 2001 16 1,607 1,623
Distributions to partners declared
($2.67 per limited partnership unit) (125) (12,348) (12,474)
___________________________________________________________________________________________
BALANCE, DECEMBER 31, 2001 $402 $39,883 $40,285
___________________________________________________________________________________________
See notes to financial statements
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Airlease
Ltd., A California Limited Partnership (the "partnership") engages in the
business of acquiring, either directly or through joint ventures, commercial jet
aircraft, spare or separate engines and related rotable parts ("aircraft") and
leasing such aircraft to domestic and foreign airlines and freight carriers. The
general partner is Airlease Management Services, Inc., a wholly owned subsidiary
of Banc of America Leasing and Capital, LLC. ("BALCAP"). BALCAP also holds
793,750 limited partnership units and United States Airlease Holding, Inc.
("Holding"), a wholly owned subsidiary of BALCAP, holds 231,250 limited
partnership units. An additional 3,600,000 units are publicly held.
BASIS OF PRESENTATION - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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.
CASH EQUIVALENTS - The Partnership considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
A-6
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.
NET INCOME 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).
LONG LIVED ASSETS - 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. 121, "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF." Consistent with SFAS No. 121, the Company identifies and records impairment
losses, as circumstances dictate, on long-lived assets used in operations when
events and circumstances indicate that assets might be impaired and undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of the assets. If these conditions are present, the impairment loss is
measured as the amount by which the carrying amount of the asset exceeds the
fair value. Fair value of an impaired asset is considered to be the amount at
which the asset could be bought or sold by willing parties.
RECENT ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting
Standards Board issued SFAS No 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets, including operating leases and
aircraft held for lease. SFAS 144 supersedes SFAS 121 and the accounting and
reporting provisions of APB Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS
REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY,
UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS," for the disposal of
a segment of a business (as previously defined in that Opinion). SFAS 144 also
amends Accounting Research Bulletin No. 51, "CONSOLIDATED FINANCIAL STATEMENTS,"
to eliminate the exception to consolidation for a subsidiary for which control
is likely to be temporary. SFAS 144 is required to be applied starting with
fiscal years beginning after December 15, 2001, with certain early adoption
permitted. SFAS 144 retains the requirements of SFAS 121 whereby 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 Company will be required to adopt
this statement no later than January 1, 2002 and
A-7
management believes that it will not alter the timing nor magnitude of future
impairment losses, if any, than would be recognized under the pre SFAS 144
authoritative accounting literature.
2. FINANCE LEASES
During 2001, the partnership owned seven aircraft, which were subject to finance
leases. Five of the aircraft were leased to US Airways, Inc. until the lease
expired October 1, 2001. In 2001, 2000, and 1999, leases with US Airways, Inc.
resulted in finance lease revenues of $3,363,000, $5,175,000, and $5,873,000,
respectively. After the return of the five aircraft, two were re-leased to a new
lessee (CSI) subject to two operating lease agreements. The remaining three
aircraft were being held for lease as of December 31, 2001.
The sixth aircraft was leased to Trans World Airlines (TWA) under a finance
lease expiring in 2002. In April 2001, the lease was restructured and
subsequently assumed by American Airlines, at which time it was reclassified as
an operating lease. In December 2001, the aircraft was sold for a gain of
$965,000. In 2001, 2000, and 1999 this lease generated finance lease income of
$293,000, $1,172,000, and $1,310,000, respectively.
The seventh aircraft is leased to Federal Express Corporation (FedEx) under a
13-year finance lease which expires in 2006. In 2001, 2000, and 1999 this lease
with FedEx resulted in finance lease income of $346,000, $389,000, and $431,000,
respectively. As of December 31, 2001, this lease was the only finance lease on
the Partnership's balance sheet.
The finance leases at December 31, 2001 and 2000, are summarized as follows (in
thousands):
2001 2000
---- ----
Receivable in installments $5,893 $22,044
Residual valuation 2,000 45,500
Unearned lease income (944) (5,887)
----- -------
NET INVESTMENT $6,949 $61,657
====== =======
Residual valuation, which is reviewed annually, represents the estimated amount
to be received from the disposition of aircraft after lease termination. If
necessary, residual adjustments are made which result in an immediate charge to
earnings and/or a reduction in earnings over the remaining term of the lease.
Finance lease receivables at December 31, 2001 are due in installments of
$1,310,000 in each year from 2002 through 2005, and $653,000 in 2006.
3. OPERATING LEASES
During 2001, the Partnership had three aircraft that were subject to operating
lease treatment. As mentioned above, two aircraft were leased to CSI and
generated $296,000 in operating lease rental income in 2001.
The third aircraft was leased to American Airlines and generated $750,000 in
operating lease rental income during 2001. The aircraft was sold in December
2001.
A-8
The operating leases at December 31, 2001 and 2000 are summarized as follows (in
thousands):
2001
-------
Leased aircraft (at cost) $14,560
Accumulated depreciation (342)
--------
NET INVESTMENT $14,218
There were no operating leases in 2000.
4. NOTES RECEIVABLE
In November 2001, the Partnership accepted a note receivable of $606,231 in
exchange for past due rent obligations owed to the Partnership. The note accrues
interest at a rate of 7% and provides for twelve equal monthly payments
beginning in January 2003. The note was recorded at fair market value determined
by discounting the future cash flows. Rental income associated with this note
was deferred and will be recognized as the note is repaid.
5. AIRCRAFT HELD FOR LEASE
In October 2001, US Airways, Inc. returned five aircraft that had been on lease
under a finance lease to the Partnership. Since their return from US Airways,
two of these aircraft were re-leased under two operating lease agreements to
another lessee prior to December 31, 2001, and are included in the Operating
Leases-net in the accompanying balance sheet as of December 31, 2001. The other
three aircraft had not been re-leased by the Partnership as of December 31, 2001
and the Partnership is in the process of marketing them for re-lease. These
aircraft are classified as held for lease at December 31, 2001. The aircraft are
being depreciated while held in inventory.
Each of the aircraft returned by US Airways, Inc. was recorded as of October 1,
2001, at its carrying amount under the terminated US Airways lease of $7,280,000
as this was less than the estimated fair value. Fair value was estimated based
primarily on discounted cash flows assuming the aircraft would be re-leased. For
the two aircraft, which had been re-leased, cash flows were based on the rents
specified in the new lease plus an anticipated cash receipt from the ultimate
sale of the aircraft. Cash flow estimates for the aircraft held for lease were
based on estimated rents and residual values including an assumption as to the
re-lease period. Other factors considered in estimating fair value were
published valuations prepared by independent appraisal sources.
Since the events of September 11, 2001, sale and leasing activity for this type
of aircraft has been very limited. If the Partnership is unable to lease the
aircraft held for lease and is required to sell the aircraft in the near term,
the amounts actually realized could differ materially from estimated fair value
as calculated using the assumptions described in the preceding paragraph. In
reporting periods subsequent to December 31, 2001, these aircraft will be
assessed for impairment under FAS 144, when indicators of impairment are
identified.
A-9
6. LONG-TERM NOTES PAYABLE
As of December 31, 2001 and 2000 long-term notes payable included the following:
A 7.4% non-recourse loan facility collateralized by the aircraft
leased to FedEx, due in semi-annual installments of $451,000
through April 2006. At December 31, 2001 and 2000, $3,389,000 and
$4,001,000, were outstanding, respectively.
A 9.35% non-recourse loan facility collateralized by the aircraft
that was leased to TWA and subsequently, American Airlines. In
December 2001 the aircraft was sold and the loan balance of
$565,000 was paid off.
A $7.5 million three-year revolving loan facility was obtained in
February 1998. The facility was collateralized by two aircraft on
lease to US Airways, Inc. The facility expired on September 30,
2001.
Based upon amounts outstanding at December 31, 2001, the minimum future
principal payments on the outstanding fixed-rate long-term note payable are due
as follows (in thousands):
2002 $ 659
2003 710
2004 764
2005 822
2006 434
------
Total Long Term Debt $3,389
------
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents carrying amounts and fair values of the
partnership's financial instruments at December 31, 2001 and 2000. The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
2001 2001 2000 2000
(In thousands) Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
Long-term debt (Note 6) $3,389 $3,543 $7,992 $7,983
The carrying amounts presented in the table are included in the balance sheet
under the indicated captions.
A-10
Long-term debt is estimated by discounting the future cash flows using rates
that are assumed would be charged to the partnership for debt with similar terms
and remaining maturities.
8. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES
In accordance with the Agreement of Limited Partnership, the general partner and
its affiliates receive expense reimbursement, fees and other compensation for
services provided to the partnership.
Amounts earned by the general partner and affiliates for the years ended
December 31, 2001, 2000, and 1999, were as follows (in thousands):
2001 2000 1999
---- ---- ----
Management fees $481 $551 $577
Disposition and remarketing fees 503 52 52
Reimbursement of other costs 79 79 79
Reimbursement of interest costs 10 8 7
------ ---- ----
TOTAL $1,073 $690 $715
====== ==== ====
The general partner was allocated its 1% share of the partnership net income and
cash distributions. Holding and BALCAP, each a limited partner and an affiliate
of the general partner, were also allocated their share of income and cash
distributions.
9. FEDERAL INCOME TAX STATUS
The Partnership is considered a publicly traded partnership ("PTP") under the
Revenue Act of 1987. Under that Act, the partnership was not subject to federal
income tax as a partnership until 1998. Effective January 1, 1998, PTP's were
required to choose to retain PTP status and be subjected to federal income tax
as a corporation or to delist their units thereby removing themselves from the
scope of the PTP rules. Faced with these alternatives, the Partnership initially
recommended that its units be delisted.
In August and October 1997, respectively, federal and California tax laws were
amended to provide PTP's a third alternative. Under these amended laws, PTP's
are allowed to continue to be publicly traded during 1998 and subsequent years
without becoming subject to corporate income tax if they elect to pay a 3.5%
federal tax and a 1% California tax on their applicable gross income.
The board of directors of the General Partner unanimously concluded, after
authorization from the unitholders and consideration of a number of factors,
including the 1997 tax law changes and the benefits of liquidity, that is was in
the best interests of the unitholders for the partnership to remain publicly
traded at that time. Accordingly, in January 1998, the partnership made an
election to pay the annual gross income tax at the partnership level.
A-11
10. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING (UNAUDITED)
The aircraft on lease to US Airways, Inc. were purchased subject to a tax
benefit transfer lease ("TBT") which provided for the transfer of Federal income
tax ownership of these aircraft to a tax lessor until 1991. The transfer was
accomplished by the sale, for tax purposes only, of the aircraft to the tax
lessor for cash and a note and a leaseback of the aircraft for rental payments
which equalled the payments on the note. The rental payments resulted in tax
deductions and the interest was included in taxable income. In 1991, the TBT
lease agreement terminated and the tax attributes transferred under the TBT
lease reverted to the partnership.
The difference between the method of accounting for income tax reporting and the
method of accounting used in the accompanying financial statements are as
follows (in thousands except per unit amounts):
2001 2000 1999
---- ---- ----
Net income per financial statements: $1,623 $ 4,197 $ 4,708
Increases/(decreases) resulting from:
3.5% Gross Income Tax - non deductible 721 544 544
Gain on sale of equipment 6,487 0 0
Lease rents earned less finance lease income 7,114 8,810 7,934
Operating lease finance book depreciation 1,268 0 0
------- ------- -------
Depreciation and amortization (628) (1,840) (2,605)
------- ------- -------
Income per income tax method 16,586 11,711 10,581
Allocable to general partner (165) (117) (106)
------- ------- -------
TAXABLE INCOME ALLOCABLE TO LIMITED PARTNERS $16,421 $11,594 $10,475
Taxable income per limited partnership unit after giving effect to taxable
income allocable to general partner (amount based on a unit
owned from October 10, 1986) $ 3.55 $ 2.51 $ 2.26
Partners' equity per financial statements $40,285 $51,135 $55,347
Gain on sale of equipment 6,487 0 0
Operating lease depreciation 1,268 0 0
Cumulative increases resulting from:
Lease rents less earned finance lease income 71,325 64,211 55,401
Deferred underwriting discounts and commissions,
and organization costs 5,361 5,361 5,361
Accumulated depreciation and amortization (54,279) (66,125) (64,285)
TBT interest income less TBT rental expense (54,030) (54,030) (54,030)
------- ------- -------
PARTNERS' EQUITY PER INCOME TAX METHOD $16,417 $ 552 $(2,206)
A-12
11. SELECTED QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000 (in thousands, except per unit amounts):
2001 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
Total Revenues $1,550 $1,490 $1,428 $1,599
Net Income/(Loss) $ 923 $ 746 $ 735 $(781)
Net Income/(Loss) Per Limited Partnership Unit $0.20 $0.16 $0.16 $(0.17)
Unit Trading Data:
Unit Prices (high-low) on NYSE $13.05-$11.56 $11.89-$8.75 $10.35-$4.266 $8.85-$5.306
Unit Trading Volumes on NYSE 409 630 573 640
2000 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
Total Revenues $1,771 $1,712 $1,657 $1,596
Net Income $1,097 $1,066 $1,035 $1,002
Net Income Per Limited Partnership Unit $0.23 $0.23 $0.22 $0.21
Unit Trading Data:
Unit Prices (high-low) on NYSE $12-$10.63 $12.25-$10.56 13.13-$11.566 $12.50 -$11.56
Unit Trading Volumes on NYSE 227 239 230 291
A-13
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.5 Amendments to Amended and Restated Partnership Agreement.
10.53 Certificate of Redelivery and Agreement dated as of November 26,
2001, 2001 between First Union National Bank, not in its
individual capacity but solely as Owner Trustee, and US Airways,
Inc., with respect to one MD-82 Aircraft, U.S. Registration No.
806USAirframe.
10.54 Certificate of Redelivery and Agreement dated as of November 26,
2001, 2001 between First Union National Bank, not in its
individual capacity but solely as Owner Trustee, and US Airways,
Inc., with respect to one MD-82 Aircraft, U.S. Registration No.
807USAirframe.
10.55 Aircraft Lease Agreement dated as of November 21, 2001, between
First Union National Bank (formerly Meridian Trust Company), not
in its individual capacity but solely as Owner Trustee, and CSI
Aviation Services, Inc., Lessee with respect to one (1) MD-82
Aircraft, U.S. Registration No. N806US (manufacture serial no.
48038).
10.56 Aircraft Lease Agreement dated as of November 21, 2001, between
First Union National Bank (formerly Meridian Trust Company), not
in its individual capacity but solely as Owner Trustee, and CSI
Aviation Services, Inc., Lessee with respect to one (1) MD-82
Aircraft, U.S. Registration No. N807US (manufacture serial no.
48039).
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