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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, 2002
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: NONE
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE
N/A ON WHICH REGISTERED:
N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Depository Units Representing Limited Partnership Interests
(Title of Class)
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.
Indicate by check mark whether the registrant is an accelerated filer
(as designated in Exchange Act Rule 12b-2). YES [ ] NO [X]
Aggregate market value of Depositary Units, held by non-affiliates of
the registrant as of the close of business at March 10, 2003 was $2,871,880.00.
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS.......................................................... 4
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
ITEM 14. CONTROLS AND PROCEDURES........................................... 28
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K.......................................................... 29
SIGNATURES.................................................................. 33
CERTIFICATIONS.............................................................. 34
INDEX TO EXHIBITS...........................................................A-12
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
PART I
ITEM 1. BUSINESS
GENERAL
Airlease Ltd., A California Limited Partnership (the
"Partnership"), engages in the business of acquiring, either directly or through
joint ventures, commercial jet aircraft, and leasing such aircraft or parts
thereof to domestic and foreign airlines and freight carriers. The general
partner of the Partnership (the "General Partner") is Airlease Management
Services, Inc. From 1999 to June 2002, the General Partner was a wholly owned
subsidiary of Banc of America Leasing and Capital, LLC, a Delaware limited
liability company ("BALCAP"), in turn a wholly owned subsidiary of Bank of
America National Assocation ("BANA"). In June 2002, BALCAP transferred its stock
of the General Partner to BANA and the General Partner became a wholly owned
subsidiary of BANA. BALCAP also holds 793,750 limited partnership units and
United States Airlease Holding, Inc. ("Holding"), also a wholly owned subsidiary
of BANA, holds 231,250 limited partnership units. An additional 3,600,000 units
are publicly held.
PRINCIPAL INVESTMENT OBJECTIVES
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.
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, 2002:
______________________________________________________________________________________________________
Number & Current
type; year of Ownership Acquired by lease Noise
Lessee Delivery Interest Partnership expiration Type of lease compliance(1)
______________ _____________ _________ ___________ __________ _____________ _____________
CSI Aviation 2 MD-82 100% 1986 2003 Operating Stage III
1981
FedEx 1 727-200FH 100% 1987 2006 Direct finance Stage III
1979
Held for lease 3 MD-81 100% 1986 N/A N/A Stage III
1981
(1) See "Government Regulation-Aircraft Noise" below, for a description of laws and regulations governing
aircraft noise.
______________________________________________________________________________________________________
At December 31, 2002, the book value of aircraft by lessee as a percent
of total assets was as follows: FedEx, 19.9%; CSI, 42.8%; and off-lease
aircraft, 28.5%. Revenues by lessee as a percentage of total revenue for 2002
and 2001, respectively, were as follows: US Airways, 0% and 55.4%; TWA/American
Airlines, 0% and 17.2%; CSI, 88.2% and 4.9%; and FedEx, 9.9% and 5.7%.
At December 31, 2002, the Partnership's portfolio consisted of six
Stage-III commercial aircraft. Two are leased to CSI Aviation Services, Inc.
("CSI"), one to FedEx, and three are being marketed for lease.
The leases of the two aircraft leased to CSI expired October 1, 2002.
CSI and the Partnership entered into an agreement extending the leases for
another five months through March 1, 2003, at a monthly rental rate of $70,000
per aircraft. In March 2003, the Partnership reached an agreement with CSI to
extend the leases on the two aircraft on a month-to-month basis, at a reduced
monthly rental rate. The Partnership expects the renewed leases to be of short
duration.
In the third quarter of 2002, the book value of the three off-lease
aircraft was written down to $2,900,000 per aircraft. The reduction in book
value reflects the continued decline in used aircraft values and the write-downs
were recorded in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets".
In June 2002, the Partnership commenced litigation against U.S. Airways
seeking to recover damages for U.S. Airways' failure to return three aircraft
leased to U.S. Airways in the condition prescribed in the lease following lease
expiration on October 1, 2001 and to pay rent due on the aircraft. U.S. Airways
has since filed for bankruptcy. The Partnership has filed a proof of claim in
the bankruptcy case in the amount of $13 million. The outcome of the litigation
and bankruptcy are both uncertain and there can be no assurance as to the amount
or timing of any final settlement or award resulting from the litigation. In its
Disclosure Statement dated January 17, 2003, filed as part of its proposed plan
of reorganization, US Airways projects that it will pay between 1.2 percent and
1.8 percent on unsecured claims. If US Airways' projections prove to be
accurate, Airlease could receive up to $234,000 in settlement. At December 31,
2002, the Partnership had not recorded a contingent gain for any possible
settlement.
The Partnership also leases a 727-200 FH aircraft to Federal Express
Corporation ("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.
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 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 nine 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.
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
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 and 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 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.
Under the 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 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.
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.
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 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.
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, 2002, 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.
Notwithstanding 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.
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.
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
In June 2002, the Partnership commenced litigation against U.S. Airways
in the Superior Court of California in the County of Los Angeles, seeking to
recover damages for U.S. Airways' failure to return three aircraft leased to
U.S. Airways in the conditions prescribed in the lease following lease
expiration on October 1, 2001 and to pay rent due on the aircraft. U.S. Airways
has since filed for bankruptcy. The Partnership has filed a proof of claim in
the bankruptcy case in the amount of $13 million.
See "BUSINESS - AIRCRAFT PORTFOLIO" above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
UNITS OUTSTANDING
Since September 9, 2002, the Units have been trading on the OTC
Bulletin Board ("OTCBB") under the symbol AIRL. Prior to that date, the Units
were traded on the New York Stock Exchange ("NYSE") under the symbol FLY. The
units were delisted from the NYSE because the Partnership ceased to meet the
NYSE's continued listing criteria. As of February 24, 2003, there were 781
Unitholders of record.
MARKET PRICE
The following chart sets forth the high and low closing prices on the
New York Stock Exchange or the high and low bid information as reported on the
over-the-counter market and the trading volume for each of the quarters in the
years ended December 31, 2002 and 2001. Over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
Trading Volume
Quarter Ended (in thousands) Unit Prices (high-low)
__________________ ______________ ______________________
March 31, 2002 378 $6.60 - $4.95
June 30, 2002 361 $5.99 - $3.03
September 30, 2002 438 $3.30 - $1.50
December 31, 2002 678 $1.25 - $0.61
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
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,
whether the aircraft is leased and future aircraft sales will affect
distributions.
Distributions declared during 2002 and 2001 were as follows:
Record Date Payment Date Per Unit
__________________ _________________ ________
March 29, 2002 May 15, 2002 11 cents
June 28, 2002 August 15, 2002 11 cents
October 4, 2002 November 15, 2002 5 cents
December 31, 2002 February 14, 2003 5 cents
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
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."
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.
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) 2002 2001 2000 1999 1998
_______________________________________________________________________________________________
OPERATING RESULTS
Lease and other income $ 3,027 $ 5,102 $ 6,736 $ 7,614 $ 8,400
Gain on disposition of aircraft -- 965 -- -- --
___________________________________________________
Total revenues 3,027 6,067 6,736 7,614 8,400
___________________________________________________
Interest expense 231 550 909 1,270 1,704
Depreciation expense 3,206 1,268 -- -- --
Other expenses 1,397 1,742 1,082 1,088 1,123
Impairment charge on aircraft 11,086 -- -- -- --
Tax on gross income 142 884 548 548 699
___________________________________________________
Total expenses 16,062 4,444 2,539 2,906 3,526
___________________________________________________
Net income/(loss) $(13,035) $ 1,623 $ 4,197 $ 4,708 $ 4,874
___________________________________________________
Net income/(loss) per unit(1) $ (2.79) $ 0.35 $ 0.90 $ 1.01 $ 1.04
Cash distributions declared per unit(2) $ 0.32 $ 2.67 $ 1.80 $ 1.64 $ 1.64
For years ended December 31,
(In thousands except per-unit amounts) 2002 2001 2000 1999 1998
_______________________________________________________________________________________________
FINANCIAL POSITION
Total assets $ 29,811 $52,529 $ 61,836 $ 67,787 $ 75,813
Long-term obligations $ 2,729 $ 3,389 $ 7,992 $ 10,092 $ 14,505
Total partners' equity $ 25,755 $40,285 $ 51,135 $ 55,347 $ 58,301
Limited partners' equity per unit $ 5.51 $ 8.62 $ 10.95 $ 11.85 $ 12.48
(1) After allocation of the 1% General Partner's interest.
(2) Includes special cash distributions of $1.50 per unit in 2001.
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, and war or other military involvement by the U.S. or others Iraq or
other regions, on the aircraft or aircraft leasing market and on the airline
industry, (v) changes in interest rates and (vi) legislative or regulatory
changes that adversely affect the value of aircraft. All such forward-looking
statements are current only as of the date on which such statements were made.
The Partnership does not undertake any obligation to publicly update any
forward-looking statement to reflect events or circumstances after the date on
which any such statement is made or to reflect the occurrence of unanticipated
events.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's financial release FR-60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies," the Partnership has
identified the most critical accounting principles upon which its financial
reporting depends. It determined the critical principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments. The Partnership identified its most critical accounting policies to
be those related to lease revenue recognition, depreciation policies, and
valuation of aircraft. These accounting policies are stated in the notes to the
financial statements and in relevant sections in this discussion and analysis.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership presently has one long-term debt facility. At December
31, 2002, the 7.4% non-recourse note collateralized by one aircraft leased to
FedEx had an outstanding balance of $2.7 million. The facility matures in April
2006.
Long-term borrowings at December 31, 2002 represented 2.57% of the
original cost of the aircraft presently owned by the Partnership, including
capital expenditures for upgrades.
Total scheduled debt service in 2003 is $0.9 million. Debt service will
be paid from the rental payments received under the FedEx lease.
Net cash provided by operating activities was $4.5 million for 2000,
$2.7 million for 2001, and $1.6 million for 2002. The decrease in 2002 was
primarily due to having three aircraft off-lease for all of 2002. The decrease
in 2001 as compared with 2000 was primarily due to reduced revenue as a result
of the termination on October 1, 2001 of the US Airways leases.
Total debt service on the fixed loan as a percentage of net cash
provided by operating activities was 67%, 123%, and 57% for 2000, 2001 and 2002,
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 29%, 27%, and 35%, respectively.
Regular cash distributions paid by the Partnership were $8.2 million
($1.76 per unit) in 2000, $7.1 million ($1.51 per unit) in 2001, and $1.8
million ($0.38 per unit) in 2002. There were no special cash distributions paid
in 2000 or 2001. A special cash distribution of $7.0 million ($1.50 per unit)
was declared in December 2001, and was paid in the first quarter of 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, and because of the
Partnership's net loss in 2002, Partnership equity declined from $40.3 million
at December 31, 2001 to $25.8 million at December 31, 2002, and limited partner
equity per unit declined from $8.62 to $5.51. Included in the equity decline are
the non-cash aircraft impairment charges of $11.1 million or $2.37 per unit
recorded in 2002.
At December 31, 2002, the Partnership had cash on hand in the amount of
$2.3 million (net of amounts payable to unitholders on February 14, 2003). 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-81 aircraft currently off
lease or the two aircraft leased by CSI following their lease expirations, cash
distributions to unitholders may be reduced or eliminated.
RESULTS OF OPERATIONS
2002 vs. 2001
Net loss in 2002 was $13,035,000, compared with a net income of
$1,623,000 in 2001. The decline in earnings results from an increase in
expenses, primarily due to aircraft impairment charges and an increase in
depreciation expense, and from reduced revenues.
In 2002, revenues were earned from only three of the six aircraft in
the Partnership's portfolio. The remaining three aircraft were off-lease
throughout the year. Two of the leased aircraft were leased to CSI and the other
was leased to Federal Express.
Revenues in 2002 were $3,027,000 compared with $6,067,000 in 2001. The
revenue reductions were primarily due to the expiration of the lease with US
Airways for five aircraft in the fourth quarter of 2001, three of which remain
off-lease as of December 31, 2002; the sale of one aircraft in December 2001;
and the scheduled decline in finance lease income in 2002 associated with the
aircraft leased to Federal Express.
Expenses in 2002 were $16,062,000, an increase of $11,618,000 from
$4,444,000 for the comparable 2001 period. The increase in expenses was
primarily due to the aircraft impairment charges in the third quarter of 2002 of
$11,086,000, as the three off-lease aircraft were deemed impaired under
Statement of Financial Accounting Standards ("SFAS") 144, and to depreciation
expense of $3,206,000 in 2002 compared to depreciation expense of $1,268,000 for
the comparable 2001 period. The 2002 depreciation expense related to aircraft
subject to operating leases and to aircraft available for lease. A note
receivable from US Airways recorded on the Partnership's books in 2001 for
$34,000 (net of discount and deferred income) was written off as a loss. The
note was written off as a result of US Airways' bankruptcy filing, in August
2002, and the uncertainty of collection. Interest expense was lower in 2002 as a
result of the reduction in the Partnership's debt balances. Management fees and
taxes were lower due to a smaller asset base and lower revenues.
Maintenance expenses and any refurbishing expenses incurred with
respect to the three aircraft currently off lease or the two aircraft currently
on lease to CSI in preparation of these aircraft for delivery to future lessees
will result in additional expenses to the Partnership. Management cannot
estimate the amount of such additional expenses, 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.
For information regarding the percentage of total Partnership assets
represented by aircraft owned and leased by the Partnership, see "Aircraft
Portfolio."
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 was primarily due to the
scheduled decline in finance lease income as the balances due from the lessees
declined, the expiration of the lease with US Airways for five aircraft, three
of which remain off lease, and 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 their return upon 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
(before depreciation expense). 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.
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. However, US Airways failed to satisfy the aircraft
return conditions relating to aircraft maintenance as specified in the lease
agreement. Under the lease, US Airways was 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 required 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 leased 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 payment covering a portion of the rent and
maintenance costs and delivered an unsecured note for the remaining amount. The
note was written off as a result of US Airways' bankruptcy filing, in August
2002, and the uncertainty of collection, resulting in a charge to bad debt
expense of $34,000. See Note 4 of the Notes to Financial Statements.
Outlook
The market conditions for aircraft leasing continue to be weak, as the
supply of aircraft exceeds demand. Consequently, the Partnership continues to
experience significant competitive pressure in marketing the three aircraft
currently off lease. Management is not able to predict when these three
aircraft, or the two aircraft on lease to CSI following lease expiration, may be
leased again or the terms of any such future leasing.
Although the market conditions are not favorable, the airline industry
is cyclical. We experienced an imbalance between supply and demand in the early
1990's and over time, the imbalance adjusted. While circumstances are very
difficult today, we remain committed to our objective of generating value from
the Airlease aircraft portfolio while returning this value to unitholders
through distributions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Partnership believes that as of December 31, 2002, it does not have
any material interest rate risk exposures.
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, 2003. As used
below, "BALCAP" refers both to BALCAP and to BA Leasing and Capital prior to its
BALCAP in September 1999.
POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
_____________________ _____________________ ___ _______________________________________________________
David B. Gebler Chairman of the 53 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
been President of the General Partner 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.
William A. Hasler Director 61 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 81 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 62 Mr. Powers is a Financial Consultant and Private
Investor. From 1996 to 2000 he was an Executive Vice
President of Finance and Administration of Eclipse
Surgical Technologies, Inc., a medical device
company. He has been 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 57 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 50 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.
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 2002, 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, 2003, 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 Holding, Inc. 231,250(1) (2) 5%
555 California Street
San Francisco, CA 94104
Depositary Units BALCAP 793,750(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) Bank of America National Association ("BANA") owns all of the outstanding
stock of Holding and the membership interests of BALCAP. Therefore, BANA may be
deemed also to be the indirect beneficial owner of the Units owned by Holding
and by BALCAP. In addition, BANA owns all the outstanding stock of the General
Partner. Therefore, BANA may be deemed to be the indirect beneficial owner of
the General Partner's 1% General Partner interest. BANA 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 BANA may also be deemed to be the indirect beneficial owner
of all Units and of the General Partner's 1% General Partner interest deemed
owned by BANA.
(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, 2002 Airlease owed
BALCAP $170,413 for such borrowings.
ITEM 14. CONTROLS AND PROCEDURES
(a) The Chief Executive Officer and the Chief Financial Officer of the
General Partner of the Partnership, after evaluating the effectiveness of the
Partnership's disclosure controls and procedures as of a date within 90 days
before the filing date of this annual report, have concluded that the
Partnership's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Partnership in this annual report is
accumulated and communicated to the Partnership's management to allow timely
decisions regarding required disclosure.
(b) No significant changes were made in the Partnership's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART IV
ITEM 15. 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, 2002, 2001 and 2000 ............... A-3
Balance Sheets, as of December 31, 2002
and 2001........................................ A-4
Statements of Cash Flows for the Years
Ended December 31, 2002, 2001 and 2000.......... A-5
Statements of Changes in Partners' Equity
for the Years Ended December 31, 2002, 2001
and 2000........................................ 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, 2002.
(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(2) 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.
(2) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 2001.
10.44(3) 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).
10.52(4) 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(2) 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(2) 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(2) 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(2) 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).
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
__________________
(2) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 2001.
(3) Incorporated by reference to the Partnership's Annual Report on Form
10-K for the year ended December 31, 2000.
(4) Incorporated by reference to the Partnership's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001.
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 25, 2003.
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
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 25, 2003
____________________________________________
David B. Gebler
Chairman, Chief Executive Officer, President
and Director of AMSI
/s/ ROBERT A. KEYES March 25, 2003
____________________________________________
Robert A. Keyes
Chief Financial Officer and Director of AMSI
/s/ K. THOMAS ROSE March 25, 2003
____________________________________________
K. Thomas Rose
Director of AMSI
/s/ WILLIAM A. HASLER March 25, 2003
____________________________________________
William A. Hasler
Director of AMSI
/s/ LEONARD MARKS, JR. March 25, 2003
____________________________________________
Leonard Marks, Jr.
Director of AMSI
/s/ RICHARD P. POWERS March 25, 2003
____________________________________________
Richard P. Powers
Director of AMSI
The foregoing constitute a majority of the members of the Board of Directors of
Airlease Management Services, Inc. (the General Partner).
CERTIFICATIONS
I, David B. Gebler, Chairman, Chief Executive Officer and President of Airlease
Management Services, Inc., the General Partner of Airlease Ltd., A California
Limited Partnership, certify that:
1. I have reviewed this annual report on Form 10-K of Airlease Ltd., A
California Limited Partnership;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 25, 2003 /s/ DAVID B. GEBLER
_________________________________
David B. Gebler
Chairman, Chief Executive Officer
and President
I, Robert A. Keyes, Chief Financial Officer of Airlease Management Services,
Inc., the General Partner of Airlease Ltd., A California Limited Partnership,
certify that:
1. I have reviewed this annual report on Form 10-K of Airlease Ltd., A
California Limited Partnership;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Eevaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 25, 2003 /s/ ROBERT A. KEYES
_______________________
Robert A. Keyes
Chief Financial Officer
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 conformity 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 (a
wholly owned subsidiary of Bank of America National Association, which also 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 LLP,
independent auditors for the years ended December 31, 2002 and 2001. Their
audits were conducted in accordance with auditing standards generally accepted
in the United States. The Independent Auditor's Report 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.
REPORT OF INDEPENDENT AUDITORS
To the Partners of Airlease Ltd.,
A California Limited Partnership:
We have audited the accompanying balance sheets of Airlease Ltd. (the
"Partnership") as of December 31, 2002 and 2001, and the related statements of
operations, changes in partners'equity, and cash flows for each of the three
years in the period ended December 31, 2002. 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,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & Young LLP
_________________________
Ernst & Young LLP
San Francisco, California
January 31, 2003
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the years ended
December 31,
(In thousands except per unit amounts) 2002 2001 2000
___________________________________________________________________________________
REVENUES
Finance lease income $ 300 $ 4,002 $ 6,736
Operating lease rentals 2,670 1,046 0
Gain on sale of aircraft 0 965 0
Other income 57 54 0
________________________________
Total revenues 3,027 6,067 6,736
________________________________
EXPENSES
Interest 231 550 909
Depreciation - aircraft 3,206 1,268 0
Management fee - general partner 355 984 603
Investor reporting 425 365 316
General and administrative 269 167 163
Tax on gross income 142 884 548
Aircraft maintenance 314 226 0
Impairment charge on aircraft 11,086 0 0
Bad debt expense 34 0 0
________________________________
Total expenses 16,062 4,444 2,539
________________________________
NET INCOME/(LOSS) $(13,035) $ 1,623 $ 4,197
________________________________
NET INCOME/(LOSS) ALLOCATED TO:
GENERAL PARTNER $ (130) $ 16 $ 42
________________________________
Limited partners $(12,905) $ 1,607 $ 4,155
________________________________
NET INCOME/(LOSS) PER LIMITED PARTNERSHIP UNIT $ (2.79) $ 0.35 $ 0.90
________________________________
See notes to financial statements
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS
As of December 31,
(IN THOUSANDS EXCEPT UNITS OUTSTANDING) 2002 2001
_________________________________________________________________________
ASSETS
Cash and cash equivalents $ 2,569 $ 9,432
Finance leases - net 5,939 6,949
Operating leases - net 12,753 14,218
Aircraft held for lease - net 8,500 21,326
Notes receivable (interest and discount) 0 544
Prepaid expenses and other assets 50 60
______________________
Total assets $ 29,811 $ 52,529
______________________
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Distribution payable to partners $ 234 $ 7,521
Deferred income 0 509
Accounts payable and accrued liabilities 1,093 602
Taxes payable 0 223
Long-term note payable 2,729 3,389
______________________
Total liabilities 4,056 12,244
______________________
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Limited partners (4,625,000 units outstanding) 25,498 39,883
General partner (46,717 units outstanding) 257 402
______________________
Total partners' equity 25,755 40,285
______________________
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 29,811 $ 52,529
======================
See notes to financial statements
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the years ended December 31,
(In thousands) 2002 2001 2000
___________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $(13,035) $ 1,623 $ 4,197
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation - aircraft 3,206 1,268 0
Increase in deferred income 0 509 0
Bad debt expense 34 0 0
Gain on sale of aicraft 0 (965) 0
Increase in accounts payable and accrued liabilities 492 134 39
Decrease in prepaid expenses and other assets 10 94 114
Impairment charge on aircraft 11,086 0 0
Increase/(decrease) in taxes payable (224) 84 135
___________________________________
Net cash provided by operating activities 1,569 2,747 4,485
___________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Rental receipts in excess of earned finance and operating
lease income 1,010 9,869 5,852
Proceeds from sale of equipment 0 9,000 0
Increase in notes receivable 0 (544) 0
___________________________________
Net cash provided by investing activities 1,010 18,325 5,852
___________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit repayment-net 0 (1,765) (18)
Repayment of long-term notes payable (660) (2,838) (2,082)
Distributions paid to partners (8,782) (7,054) (8,222)
___________________________________
Net cash used by financing activities (9,442) (11,657) (10,322)
___________________________________
Increase/(decrease) in cash and cash equivalents (6,863) 9,415 15
Cash at beginning of year 9,432 17 2
___________________________________
Cash and cash equivalents at end of year $ 2,569 $ 9,432 $ 17
___________________________________
Additional information:
Cash paid for interest $ 244 $ 510 $ 858
___________________________________
See notes to financial statements
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the years ended December 31,
2002, 2001, and 2000
General Limited
(In thousands except per unit amounts) Partner Partners Total
_______________________________________________________________________________
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
Net Loss - 2002 (130) (12,905) (13,035)
Distributions to partners declared
($0.32 per limited partnership unit) (15) (1,480) (1,495)
_______________________________________________________________________________
BALANCE, DECEMBER 31, 2002 $ 257 $ 25,498 $ 25,755
_______________________________________________________________________________
See notes to financial statements
NOTES TO FINANCIAL STATEMENTS
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,
and leasing such aircraft or parts thereof to domestic and foreign airlines and
freight carriers. The general partner of the Partnership (the "General Partner")
is Airlease Management Services, Inc. From 1999 to June 2002, the General
Partner was a wholly owned subsidiary of Banc of America Leasing and Capital,
LLC, a Delaware limited liability company ("BALCAP"), in turn a wholly owned
subsidiary of Bank of America National Assocation ("BANA"). In June 2002, BALCAP
transferred its stock of the General Partner to BANA and the General Partner
became a wholly owned subsidiary of BANA. BALCAP also holds 793,750 limited
partnership units and United States Airlease Holding, Inc. ("Holding"), also a
wholly owned subsidiary of BANA, 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.
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/(LOSS) PER LIMITED PARTNERSHIP UNIT is computed by dividing the net
income/(loss) 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 144 "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS".
SFAS 144, was issued in October 2001 and addresses how and when to measure
impairment on long-lived assets and how to account for long-lived assets that an
entity plans to dispose of either through sale, abandonment, exchange, or
distribution to owners. The statement's provisions supersede SFAS 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF", which addressed asset impairment, and certain provisions of APB
Opinion 30 related to reporting the effects of the disposal of a business
segment and requires expected future operating losses from discontinued
operations to be recorded in the period in which the losses are incurred rather
than the measurement date. Under SFAS 144, more dispositions may qualify for
discontinued operations treatment in the income statement. 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. (See Note 5).
2. FINANCE LEASES
During 2002, the Partnership owned one aircraft, which was subject to a finance
lease. The aircraft is leased to Federal Express Corporation (FedEx) under a
13-year finance lease which expires in 2006. In 2002, 2001, and 2000 this lease
with FedEx resulted in finance lease income of $300,000, $346,000, and $389,000,
respectively. As of December 31, 2002, this lease was the only finance lease on
the Partnership's balance sheet.
The finance leases at December 31, 2002 and 2001, are summarized as follows (in
thousands):
2002 2001
_______ _______
Receivable in installments $ 4,582 $ 5,893
Residual valuation 2,000 2,000
Unearned lease income (643) (944)
_______ _______
Net Investment $ 5,939 $ 6,949
======= =======
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, 2002 are due in installments of
$1,310,000 in each year from 2003 through 2005, and $652,000 in 2006.
3. OPERATING LEASES
During 2002, the Partnership had two aircraft that were subject to operating
lease treatment. The two aircraft were leased to CSI Aviation Services, Inc.
(CSI) and generated $2,670,000 and $269,000 in operating lease rental income in
2002 and 2001, respectively. Future minimum rental payments amount under the
leases with CSI is $280,000 for the period ending March 1, 2003.
The operating leases at December 31, 2002 and 2001 are summarized as follows (in
thousands):
2002 2001
_______ _______
Leased aircraft (at cost) $14,560 $14,560
Accumulated depreciation (1,807) (342)
_______ _______
Net Investment $12,753 $14,218
======= =======
4. NOTE RECEIVABLE
In November 2001, the Partnership accepted a note receivable of $606,231 from US
Airways in exchange for past due rent obligations owed to the Partnership on two
of the five leased aircraft. 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 was to be
recognized as the note was repaid. The entire note was written off, as a result
of US Airways' bankruptcy filing, in August 2002 and the uncertainty of
collection, resulting in a charge to bad debt expense of $34,000.
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, 2002. The other
three aircraft had not been re-leased by the Partnership as of December 31, 2002
and the Partnership is marketing them for re-lease. These aircraft are
classified as held for lease at December 31, 2002. The aircraft are being
depreciated while held in inventory. In the third quarter of 2002, the three
off-lease MD-81 aircraft were considered impaired as defined by SFAS No. 144 as
a result of the Partnership's continued inability to lease these aircraft and
the decline in projected rental rates for this type of aircraft. In the third
quarter of 2002, the Partnership recorded an impairment charge of approximately
$3,695,000 per aircraft. Values of the aircraft were determined by discounting
the estimated future cash flows.
2002 2001
_______ _______
Leased aircraft (at cost) $21,840 $21,840
Impairment charges (11,086) 0
Accumulated depreciation (2,254) (514)
_______ _______
Net Investment $ 8,500 $21,326
======= =======
6. LONG-TERM NOTE PAYABLE
As of December 31, 2002 and 2001, the Partnership had one long-term note
payable, a 7.4% non-recourse loan facility collateralized by the aircraft leased
to FedEx, due in semi-annual installments of principle and interest of $451,000
through April 2006. At December 31, 2002 and 2001, $2,729,000 and $3,389,000,
were outstanding, respectively.
Based upon amounts outstanding at December 31, 2002, the minimum future
principal payments on the outstanding fixed-rate long-term note payable are due
as follows (in thousands):
2003 $ 710
2004 764
2005 822
2006 433
_______
Total Long Term Debt $ 2,729
=======
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents carrying amounts and fair values of the
Partnership's financial instruments at December 31, 2002 and 2001. 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.
2002 2002 2001 2001
(In thousands) Carrying Amount Fair Value Carrying Amount Amount Fair Value
_______________ __________ ______________________ __________
Long-term notes payable
Long-term debt (Note 5)
(Note 6) $2,729 $2,762 $3,389 $3,543
The carrying amounts presented in the table are included in the balance sheets
under the indicated captions.
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, 2002, 2001, and 2000, were as follows (in thousands):
2002 2001 2000
____ ____ ____
Management fees $303 $481 $551
Disposition and remarketing fees 52 503 52
Reimbursement of other costs 79 79 79
Reimbursement of interest costs 2 10 8
____ ______ ____
TOTAL $436 $1,073 $690
==== ====== ====
The General Partner was allocated its 1% share of the Partnership net
income/(loss) and cash distributions. Holding and BALCAP, each a limited partner
and an affiliate of the General Partner, were also allocated their share of
income/(loss) and cash distributions. As of December 31, 2002 and 2001, the
Partnership had accounts payable to the General Partner or its affiliates of
approximately $170,000 and $324,000 respetively.
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.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001 (in thousands, except per unit amounts):
2002 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
____ _____________ ____________ ____________ ___________
Total Revenues $ 859 $ 833 $ 833 $ 502
Net Income/(Loss) $ (422) $ (337) $(11,567) $ (709)
Net Income/(Loss) Per Limited
Partnership Unit $(0.09) $(0.07) $ (2.48) $(0.15)
Unit Trading Data:
Unit Prices (high-low) on NYSE/OTCBB $6.60-$4.95 $5.99-$3.03 $3.30-$1.50 $1.25-$0.61
Unit Trading Volumes on NYSE/OTCBB 378 361 438 678
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-$4.26 $8.85-$5.30
Unit Trading Volumes on NYSE 409 630 573 640
INDEX TO EXHIBITS
Exhibit No. Description
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer