UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
Commission file number 1-9259
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
California 94-3008908
_______________________ ____________________________________
(State of Organization) (I.R.S. Employer Identification No.)
555 California Street, 4th floor, San Francisco, CA. 94104
____________________________________________________ __________
(Address of principal executive offices) (Zip Code)
(415) 765-1814
________________________________________________
(Issuer's telephone number, including area code)
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
I N D E X
Page No.
Part I - Financial Information:
Item 1. Financial Statements (Unaudited)
Balance Sheets --
June 30, 2003 and December 31, 2002..................3
Statements of Operations --
Three and six months ended June 30, 2003 and 2002....4
Statements of Cash Flows
Six months ended June 30, 2003 and 2002..............5
Notes to Condensed Financial Statements................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........8
Item 3. Controls and Procedures................................9
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K......................10
Signatures............................................11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30,
2003 DECEMBER 31,
(IN THOUSANDS EXCEPT UNIT DATA) (UNAUDITED) 2002*
_____________________________________________________________________________________
ASSETS
Cash and cash equivalents $ 2,837 $ 2,569
Finance leases - net 5,419 5,939
Operating leases - net 8,726 12,753
Aircraft held for lease 3,600
8,500
Prepaid expenses and other assets 39 50
_______ _______
Total assets $20,621 $29,811
======= =======
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Distribution payable to partners $ 234 $ 234
Accounts payable and accrued liabilities 245 345
Maintenance reserves 1,118 748
Taxes payable 0 0
Long-term notes payable 2,381 2,729
_______ _______
Total liabilities 3,978 4,056
_______ _______
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Limited partners (4,625,000 units outstanding) 16,477 25,498
General partner (46,717 units outstanding) 166 257
_______ _______
Total partners' equity 16,643 25,755
_______ _______
Total liabilities and partners' equity $20,621 $29,811
======= =======
See accompanying notes to the condensed financial statements
* The amounts are derived from the December 31, 2002, audited financial statements
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED; IN THOUSANDS JUNE 30, JUNE 30,
_________________________________________________________________________________________________
EXCEPT PER UNIT AMOUNTS) 2003 2002 2003 2002
REVENUES
Finance lease income $ 63 $ 75 $ 132 $ 155
Operating lease rentals 360 750 760 1,500
Other income 10 8 17 37
________ _______ _______ ______
Total revenues 433 833 909 1,692
________ _______ _______ ______
EXPENSES
Interest 48 60 101 115
Depreciation 637 856 1,275 1,712
Management fee - general partner 65 96 132 193
Investor reporting 86 86 171 197
General and administrative 35 55 64 84
Tax on gross income 30 42 59 85
Impairment charge on aircraft 7,652 0 7,652 0
Aircraft maintenance and refurbishing 66 (26) 99 65
________ _______ _______ ______
Total expenses 8,619 1,170 9,553 2,451
________ _______ _______ ______
Net Loss $ (8,186) $ (337) $(8,644) $(759)
======== ======= ======= ======
Net Loss Allocated To:
General Partner $ (82) $ (4) $ (86) $ (8)
======== ======= ======= ======
Limited Partners $ (8,104) $ (333) $(8,558) $ (751)
======== ======= ======= ======
Net Loss Per Limited
Partnership Unit $ (1.75) $(0.07) $ (1.85) $(0.16)
======== ======= ======= ======
See accompanying notes to the condensed financials statements
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED; IN THOUSANDS) 2003 2002
___________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,644) $ (758)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Impairment charge on aircraft 7,652 0
Depreciation 1,275 1,712
Decrease in accounts payable and accrued liabilities (100) (321)
Increase in maintenance reserves 370 444
Increase/(decrease) in taxes payable 0 (139)
Decrease/(increase) in prepaid expenses and other assets 11 (26)
________ ________
Net cash provided by operating activities 564 912
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Rental receipts in excess of finance lease income 520 500
________ ________
Net cash provided by investing activities 520 500
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term notes payable (348) (324)
Distributions paid to partners (468) (8,035)
________ ________
Net cash used in financing activities (817) (8,359)
________ ________
Increase/(decrease) in cash and cash equivalents 268 (6,947)
Cash and cash equivalents at beginning of period 2,569 9,432
________ ________
Cash and cash equivalent at end of period $ 2,837 $ 2,485
======== ========
ADDITIONAL INFORMATION
Interest paid $ 104 $ 128
======== ========
See accompanying notes to the condensed financials statements
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES CONDENSED TO FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying unaudited condensed financial
statements of Airlease Ltd., A California Limited Partnership (the Partnership)
reflect all adjustments (consisting only of normal recurring adjustments) that
are, in the opinion of the Partnership, necessary to fairly state the results
for the interim periods. The results of operations for such interim periods are
not necessarily indicative of results of operations for a full year. The
December 31, 2002, balance sheet included herein is derived from the audited
financial statements included in the Partnership's Annual Report and
incorporated by reference in the Form 10-K for the year ended December 31, 2002.
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all disclosures
required by accounting principles generally accepted in the United States for
complete financial statements. The statements should be read in conjunction with
the Organization and Significant Accounting Policies and other notes to
financial statements included in the Partnership's Annual Report for the year
ended December 31, 2002.
CASH EQUIVALENTS - The Partnership considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
FINANCE LEASES - Lease agreements, under which the Partnership recovers
substantially all its investment from the minimum lease payments are accounted
for as finance leases. At lease commencement, the Partnership records the lease
receivable, estimated residual value of the leased aircraft, and unearned lease
income. The original unearned income is equal to the receivable plus the
residual value less the cost of the aircraft (including the acquisition fee paid
to an affiliate of the general partner). The remaining unearned income is
recognized as revenue over the lease term so as to approximate a level rate of
return on the investment.
OPERATING LEASES - Leases that do not meet the criteria for finance leases are
accounted for as operating leases. The Partnership's undivided interests in
aircraft subject to operating leases are recorded at carrying value of the
aircraft at lease inception, less any impairment charges. Aircraft are
depreciated over the related lease terms, generally five to nine years on a
straight-line basis to an estimated salvage value, or over their estimated
useful lives for aircraft held for lease, on a straight-line basis to an
estimated salvage value.
MAINTENANCE RESERVES - On certain operating leases the Partnership requires the
lessees to pay aircraft maintenance reserves. The reserves will be applied
toward the aircraft's future maintenance requirements. Reserves are collected
for engines, airframe, and other aircraft components. The amount of the reserves
is based on flight hours.
LONG LIVED ASSETS IMPAIRMENT - The Partnership accounts for its long-lived
assets, including Operating Leases and Aircraft Held for Lease, in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 144 "ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS".
SFAS No. 144, was issued in October 2001 and addresses how and when to measure
impairment on long-lived assets and how to account for long-lived assets that an
entity plans to dispose of either through sale, abandonment, exchange, or
distribution to owners. Under SFAS No. 144, an impairment loss is recognized in
an amount equal to the difference between the carrying value and the fair value
if the carrying value of an asset is not recoverable based on undiscounted
future cash flows.
On July 7, 2003, the Board of Directors of the General Partner of the
Partnership approved a plan to sell the three off-lease MD-81 aircraft. The
Partnership signed a purchase agreement with OLSF, LLC ("OLSF") to sell the
three aircraft in intervals of 120 days, with the first aircraft being delivered
on August 12, 2003. The purchase price per aircraft is $1,200,000. As a result
of the contractual sale of the aircraft being lower than its book value, the
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aircraft were written-down in the second quarter of 2003. The amount of the
write-down per aircraft of $1,500,000 was equal to the difference between the
carrying book value of $2,700,000 and the sale amount of $1,200,000.
In the second quarter of 2003, management prepared an impairment evaluation on
the two MD-82 aircraft currently on lease to CSI Aviation Services, Inc. on
month-to-month basis. The evaluation indicated that the aircraft were impaired
as defined by SFAS No. 144, and an impairment charge of $1,576,000 per aircraft
was recorded. The new book value per aircraft after the impairment charge is
$4,363,000. The fair values of these two MD-82 aircraft were determined by
discounting the estimated future cash flows from leasing activities.
In addition, the two aircraft on lease to CSI are leased on a month-to-month
basis. Management is not able to predict when these leases will terminate, or,
if they are terminated, when the aircraft may be leased again. If the leases
with CSI were to terminate, management's best estimate is that the Partnership
would be able to recover the net book value through a combination of lease
rentals and sales proceeds over the life of the aircraft, however, if the
Partnership's assumptions regarding renewal lease rates and terms are not
realized, the Partnership could record additional impairment charges with
respect to these aircraft.
NET LOSS PER LIMITED PARTNERSHIP UNIT - Net loss per limited partnership unit is
computed by dividing the net loss allocated to the Limited Partners by the
weighted average limited partner units outstanding (4,625,000).
RECLASSIFICATION - Certain reclassifications have been made to the prior year's
financial statements to conform to the current year's presentation.
CASH DISTRIBUTIONS - In June 2003, the Partnership declared a second-quarter
2003 cash distribution of $0.05 per unit totaling approximately $234,000 payable
on August 15, 2003 to unitholders of record on June 30, 2003. As a result of
this distribution and the first-quarter 2003 distribution, and the Partnership
loss in the first and second quarters of 2003, Partnership equity declined to
$16.6 million at June 30, 2003 from $25.8 million at December 31, 2002, and
limited partner equity per unit declined to $3.56 from $5.51. The 2003
second-quarter cash distribution constitutes a return of capital. The 2002
second-quarter cash distribution was $0.11 per unit.
The cash distributions paid in the first six months of 2003 totaled $468,000, or
$0.10 per limited partnership unit, representing the regular fourth quarter
2002, and the first quarter 2003, distributions.
SUBSEQUENT EVENT - On August 12, 2003, the Partnership entered into an agreement
with OLSF, LLC to sell the three off-lease MD-81 aircraft in intervals of 120
days. The first aircraft was sold and delivered on August 12, 2003. Subject to
satisfaction of customary closing conditions, the second aircraft is to be sold
and delivered 120 days thereafter, and the third aircraft is to be sold and
delivered 120 days after the sale and delivery of the second aircraft, unless
OLSF exercises an option to purchase either aircraft prior to that date or OLSF
and the Partnership mutually agree to a different date. The purchase price per
aircraft is $1,200,000, which is equal to the carrying book value for the
aircraft after giving effect to the impairment charges. The obligations of OLSF
to purchase the aircraft are guaranteed by GA Telesis Turbine Technologies, LLC.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership presently has one long-term debt facility. At June 30, 2003, the
7.4% non-recourse note collateralized by one aircraft leased to FedEx
corporation ("Fed Ex"), had an outstanding balance of $2.4 million. This
outstanding balance is 2.25% of the original cost of the aircraft presently
owned by the Partnership, including capital expenditures for upgrades. The terms
of the Limited Partnership Agreement permit debt to be at a level not exceeding
50% of such cost. The lease and debt facility mature in April 2006.
In June 2003, the Partnership declared a second-quarter 2003 cash distribution
of $0.05 per unit totaling approximately $234,000 payable on August 15, 2003 to
unitholders of record on June 30, 2003. As a result of this distribution and the
first-quarter 2003 distribution, and the Partnership loss in the first and
second quarters of 2003, Partnership equity declined to $16.6 million at June
30, 2003 from $25.8 million at December 31, 2002, and limited partner equity per
unit declined to $3.57 from $5.51. The 2003 second-quarter cash distribution
constitutes a return of capital. The 2002 second-quarter cash distribution was
$0.11 per unit.
The cash distributions paid in the first six months of 2003 totaled $468,000, or
$0.10 per limited partnership unit, representing the regular fourth quarter
2002, and first quarter 2003, distributions.
PORTFOLIO MATTERS
At June 30, 2003, the Partnership's portfolio consisted of six Stage-III
commercial aircraft. Two were leased to CSI, one was leased to FedEx, and three
were off-lease.
The leases of the two aircraft leased to CSI were due to expire on March 1,
2003. CSI and the Partnership entered into a new agreement extending the leases
on a month-to-month basis at a monthly rate of $60,000 per aircraft. The
Partnership continues to actively search for new potential lessees for these two
aircraft.
The lease for a 727-200 FH aircraft to FedEx is scheduled to terminate in 2006.
RESULTS OF OPERATIONS
The Partnership reported a loss of $8,186,000 in the second quarter ended June
30, 2003, compared with last year's second quarter loss of $337,000. Revenues
for the 2003 second quarter were $433,000, compared with last year's second
quarter revenues of $833,000. Net loss for the first six months of 2003 was
$8,644,000, compared with a net loss of $758,000 for the first six months of
2002. Revenues for the six-month period of 2003 were $909,000, compared with
$1,692,000 for the first six months of 2002.
The decline in earnings in the first half of 2003 results primarily from an
increase in expenses, primarily due to aircraft impairment charges, and from the
reduced revenues.
The revenue reductions are primarily due to lower operating lease rental income
associated with the two aircraft on lease to CSI Aviation Services, Inc.
("CSI"), and the scheduled decline in finance lease income in 2003 associated
with the aircraft leased to FedEx. The lease terms for the CSI leases were
extended in the fourth quarter of 2002 and again in the first quarter of 2003,
each time at a reduced monthly rental rate that reflects current market
conditions. The FedEx aircraft lease had a scheduled decline in finance lease
income of $23,000 in the first six months of 2003 as compared with the first six
months of 2002.
Expenses for the first six months of 2003 were $9,553,000, an increase of
$7,102,000 from $2,451,000 for the comparable 2002 period. The increase in
expenses is primarily due to aircraft impairment charges in the second quarter
of 2003 of $7,652,000. During the 2003 second quarter, the General Partner
evaluated the carrying values of the three off-lease aircraft and the two
8
aircraft on lease to CSI under SFAS No. 144 and determined that these five
aircraft were impaired. Accordingly, the carrying values were adjusted to
estimated fair values. The increase in expenses was partially offset by lower
interest expense in the first six months of 2003 as a result of the reduction in
the Partnership's debt balances, and by lower management fees and taxes due to a
smaller asset base and lower revenues.
SUBSEQUENT EVENT:
On August 12, 2003, the Partnership entered into an agreement with OLSF, LLC to
sell the three off-lease MD-81 aircraft in intervals of 120 days. The first
aircraft was sold and delivered on August 12, 2003. Subject to satisfaction of
customary closing conditions, the second aircraft is to be sold and delivered
120 days thereafter, and the third aircraft is to be sold and delivered 120 days
after the sale and delivery of the second aircraft, unless OLSF exercises an
option to purchase either aircraft prior to that date or OLSF and the
Partnership mutually agree to a different date. The purchase price per aircraft
is $1,200,000, which is equal to the carrying book value for the aircraft after
giving effect to the impairment charges. The obligations of OLSF to purchase the
aircraft are guaranteed by GA Telesis Turbine Technologies, LLC.
OUTLOOK
The market conditions for aircraft leasing continue to be weak, as the supply of
aircraft exceeds demand.
The two aircraft on lease to CSI are leased on a month-to-month basis.
Management is not able to predict when these leases will terminate, or, if they
are terminated, when the aircraft may be leased again. If the leases with CSI
were to terminate, management's best estimate is that the Partnership would be
able to recover net book value through a combination of lease rentals and sales
proceeds; however, if the Partnership's assumptions regarding renewal lease
rates and terms are not realized, the Partnership could record additional
impairment charges with respect to these aircraft.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
The Partnership has included in this quarterly report certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 concerning the Partnership's business, operations and financial
condition. The words or phrases "can be", "may affect", "may depend", "expect",
"believe", "anticipate", "intend", "will", "estimate", "project" and similar
words and phrases are intended to identify such forward-looking statements. Such
forward-looking statements are subject to various known and unknown risks and
uncertainties and the Partnership cautions you that any forward-looking
information provided by or on behalf of the Partnership is not a guarantee of
future performance. Actual results could differ materially from those
anticipated in such forward-looking statements due to a number of factors, some
of which are beyond the Partnership's control, in addition to those discussed in
the Partnership's public filings and press releases, including (i) changes in
the aircraft or aircraft leasing market, (ii) economic downturn in the airline
industry, (iii) default by lessees under leases causing the Partnership to incur
uncontemplated expenses or not to receive rental income as and when expected,
(iv) the impact of the events of September 11, 2001, additional terrorist
threats or attacks, and war or other military involvement by the U.S. or others
in Iraq or other regions, on the aircraft or aircraft leasing market and on the
airline industry, (v) changes in interest rates and (vi) legislative or
regulatory changes that adversely affect the value of aircraft. All such
forward-looking statements are current only as of the date on which such
statements were made. The Partnership does not undertake any obligation to
publicly update any forward-looking statement to reflect events or circumstances
after the date on which any such statement is made or to reflect the occurrence
of unanticipated events.
ITEM 3. CONTROLS AND PROCEDURES
(a) The Chief Executive Officer and the Chief Financial Officer of the
General Partner of the Partnership, after evaluating the effectiveness of the
Partnership's disclosure controls and procedures as of the end of the period
covered by this quarter report, have concluded that the Partnership's disclosure
of the controls and procedures are effective to ensure that information required
to be disclosed by the Partnership in this quarterly report is accumulated and
9
communicated to the Partnership's management to allow timely decisions regarding
required disclosure.
(b) No change was made in the Partnership's internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, the Partnership's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRLEASE LTD., A CALIFORNIA LIMITED
PARTNERSHIP
By: Airlease Management Services, Inc.
General Partner
AUGUST 13, 2003 By:
_______________ ___________________________________
Date
David B. Gebler
Chairman, Chief Executive Officer
and President
AUGUST 13, 2003 By:
_______________ ___________________________________
Date
Robert A. Keyes
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
______________ ___________
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002