UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
Commission file number 1-9259
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
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(Exact name of small business issuer as specified in its charter)
CALIFORNIA 94-3008908
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(State of Organization) (I.R.S. Employer Identification No.)
555 CALIFORNIA STREET, 4TH FLOOR, SAN FRANCISCO, CA. 94104
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(Address of principal executive offices) (Zip Code)
(415) 765-1814
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(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. Condensed Financial Statements (Unaudited)
Condensed Balance Sheets --
March 31, 2004 and December 31, 2003...........................3
Condensed Statements of Operations --
Three months ended March 31, 2004 and 2003.....................4
Condensed Statements of Changes of Partners' Equity Accounts
Three months ended March 31, 2004 and 2003.....................5
Condensed Statements of Cash Flows
Three months ended March 31, 2004 and 2003.....................6
Notes to Condensed Financial Statements..........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................10
Item 3. Controls and Procedures.........................................12
Part II - Other Information:
Item 1. Legal Proceedings...............................................13
Item 6. Exhibits and Reports on Form 8-K................................13
Signatures......................................................14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
MARCH 31,
2004 DECEMBER 31,
(IN THOUSANDS EXCEPT UNIT DATA) (UNAUDITED) 2003 *
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ASSETS
Cash and cash equivalents $ 3,459 $ 4,288
Accounts Receivable 31 -
Investments - available for sale - 43
Finance leases - net - 3,718
Operating leases - net - 2,250
Aircraft held for sale (1) 727-200 3,200 -
Aircraft held for sale (2) MD-82 2,232 -
Aircraft held for sale (1) MD-81 - 1,200
Prepaid expenses and other assets 29 33
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Total assets $ 8,951 $ 11,532
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LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Distribution payable to partners $ 1,448 $ 1,448
Accounts payable to General Partner and Affiliates 62 238
Accounts payable and accrued liabilities 278 112
Aircraft sale security deposit - 200
Maintenance reserves 1,187 1,425
Taxes payable 75 -
Current portion of long-term notes payable 764 764
Long-term notes payable 1,256 1,256
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Total liabilities 5,070 5,443
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COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Limited partners (4,625,000 units outstanding) 3,843 6,029
General partner (46,717 units outstanding) 38 60
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Total partners' equity 3,881 6,089
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Total liabilities and partners' equity $ 8,951 $ 11,532
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See accompanying notes to the condensed financial statements
* The amounts are derived from the December 31, 2003, audited financial
statements
3
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
(UNAUDITED; IN THOUSANDS MARCH 31,
EXCEPT PER UNIT AMOUNTS) 2004 2003
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REVENUES
Finance lease income $ 43 $ 69
Operating lease rentals 248 400
Other income (3) 7
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Total revenues 288 476
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EXPENSES
Interest 40 53
Depreciation 18 638
Management fees and disposition and
remarketing fees - General Partner 89 67
Investor reporting 95 85
General and administrative 164 29
Aircraft maintenance and refurbishing 6 33
Impairment charge on aircraft 561 -
Tax on gross income 75 29
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Total expenses 1,048 934
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Net loss $ (760) $ (458)
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Net loss Allocated To:
General Partner $ (8) $ (4)
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Limited Partners $ (752) $ (454)
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Net loss per limited partnership unit $ (0.16) $ (0.10)
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See accompanying notes to the condensed financials statements
4
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CHANGES IN PARTNERS' EQUITY ACCOUNTS
THREE MONTHS ENDED MARCH 31, 2004
GENERAL LIMITED TOTAL
(UNAUDITED; IN THOUSANDS) PARTNER PARTNERS PARTNERSHIP
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Balance, January 1, 2003 $ 258 $ 25,497 $ 25,755
Net Loss (4) (454) (458)
Declared Distributions (3) (231) (234)
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Balance, March 31, 2003 $ 251 $ 24,812 $ 25,063
======= ======== =========
Balance, January 1, 2004 $ 60 $ 6,029 $ 6,089
Net Loss (8) (752) (760)
Declared Distributions (14) (1,434) (1,448)
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Balance, March 31, 2004 $ 38 $ 3,843 $ 3,881
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See accompanying notes to the condensed financial statements
5
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED; IN THOUSANDS) 2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (760) $ (458)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation 18 638
Loss on the sale of stock 12 -
Changes in assets and liabilities:
Decrease in prepaid expenses and other assets 4 3
Increase (decrease) in accounts payable and accrued liabilities 166 (79)
Decrease in accounts payable to General Partner and Affiliates (176) (8)
Decrease (increase) in maintenance reserves (238) 150
Impairment charge on aircraft 561 -
Increase in taxes payable 75 29
-- --
Net cash (used in) provided by operating activities (338) 275
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of aircraft 1,000 -
Rental receipts in excess of finance and operating lease income (43) (68)
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Net cash (used in) provided by investing activities 957 (68)
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CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid to partners (1,448) (234)
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Net cash used in financing activities (1,448) (234)
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Decrease in cash and cash equivalents (829) (27)
Cash and cash equivalents at beginning of period 4,288 2,569
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Cash and cash equivalents at end of period $ 3,459 $ 2,542
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ADDITIONAL INFORMATION
Interest paid $ 157 $ 2
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Reclassification of operating leases - net to aircraft held for sale $ 2,232 $ -
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Reclassification of finance lease - net to aircraft held for sale $ 3,200 $ -
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Aircraft sale security deposit applied against aircraft purchase price $ 200 $ -
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See accompanying notes to the condensed financials statements
6
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. 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, 2003, 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-KSB for the year ended December 31,
2003. 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, 2003.
DECISION TO SELL ASSETS AND DISSOLVE - On March 17, 2004, the Board of Directors
of the General Partner, acting in response to a recommendation made by a special
committee of independent directors of its Board of Directors (the "Special
Committee"), directed the General Partner to cease making new aircraft
investments, sell the Partnership's remaining assets as attractive sale
opportunities arise, distribute sale proceeds (after repaying debt and
establishing appropriate reserves) to Unitholders after disposition, and
dissolve the Partnership when all assets are sold. The General Partner also has
amended the Amended and Restated Agreement of Limited Partnership of the
Partnership, as amended (the "Limited Partnership Agreement"), to give effect to
this directive.
In 1997, the Unitholders of the Partnership authorized the General Partner to
take these actions. Since that time, the General Partner had deferred taking
such actions and continued to operate the Partnership while considering, from
time to time, alternative investments. However, the General Partner has not made
new investments in aircraft, primarily due to the weak aircraft leasing market.
For a variety of reasons, including the General Partner's belief that
significant improvement in this market is not forthcoming in the near term for
the Partnership's aircraft, the General Partner determined, on the basis of the
Special Committee's determination, that Unitholders likely will realize greater
value from a dissolution of the Partnership compared to continued operation of
the Partnership. Accordingly, the General Partner intends to exercise fully and
promptly the authority granted to it previously by the Unitholders to sell
assets, distribute net proceeds and dissolve the Partnership. To that end, the
General Partner has been actively seeking buyers for the Partnership's aircraft.
MD-82S SALE
Pursuant to the Board's directive and the authority granted to the General
Partner by the unitholders to sell the Partnership's remaining assets as
attractive sale opportunities arise, the General Partner, on May 10, 2004, sold
to Jetran International Ltd. the two MD-82 aircraft previously on lease to CSI
for $1.3 million and $1.4 million, respectively, for a total of $2.7 million in
cash and recognized a gain in the second quarter of $468,000.
FEDEX AIRCRAFT NEGOTIATIONS
The General Partner is currently in negotiations with FedEx Corporation
("FedEx") to sell to FedEx the aircraft currently on lease to FedEx. While there
can be no assurance that these negotiations will result in execution of a
purchase and sale agreement and sale of the aircraft to FedEx, the General
Partner expects to sell the aircraft to FedEx in May 2004 for a sale price of
approximately $2,545,000 (representing $3,200,000 reduced by the April 2004 rent
payment of approximately $655,000). Since the sale price is expected to be lower
than the book value of the lease as of March 31, 2004, an impairment charge of
$561,000 was recorded in the first quarter of 2004.
7
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.
INVESTMENT SECURITIES - Investment securities available for sale include 6,975
shares of US Airways Class A common stock received in December 2003 in partial
settlement of a claim against US Airways for past due lease payments and damages
resulting from US Airways' failure to return three aircraft in the condition
prescribed in the lease agreement. These shares are reported at market value,
with unrealized gains and losses, net of taxes, reported as a component of
cumulative other comprehensive income (loss) in partners' equity. Unrealized
gains and losses other-than-temporary impairments related to investment
securities are determined using specific identification. Investment securities
are regularly reviewed for impairment based on criteria that include the extent
to which cost exceeds market value, the duration of the market decline and the
financial health of and specific prospects of the issuer of the investment
security. On March 30, 2004, the Partnership sold its 6,975 shares of Common A
stock with a settlement date of April 2, 2004. The net sale price of the stock
was $31,177, which is included as accounts receivable as of March 31, 2004.
Since the sale price is lower than the investment book value, a loss on sale of
$12,208 was recorded in the first quarter of 2004 and as a component of other
income in the income statement.
AIRCRAFT HELD FOR SALE - Due to the decision by the Partnership's board of
directors to sell all of the aircraft in the Partnership's portfolio, the
B727-200 FH aircraft, which is subject to a finance lease expiring in April of
2006 was reclassified as aircraft held for sale. In addition, the two operating
leases of the MD-82 aircraft that are leased to CSI with an expiration date of
May 10, 2004 have also been reclassified as aircraft held for sale. Since the
MD-82 aircraft have been sold in May 2004, depreciation expense will no longer
be recorded commencing April 1, 2004.
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. During the first quarter of 2004, $300,000 of these
reserves was used to pay for such maintenance. As a result of the sale of the
sale of the two MD-82 aircraft in the month of May 2004, any remaining
maintenance reserves will be recognized as income in the second quarter of 2004.
LONG-LIVED ASSETS - The Partnership accounts for its long-lived assets,
including Operating Leases and Aircraft Held for Lease and assets held for sale,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144
"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS".
SFAS No. 144 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. Assets
held for sale are carried at estimated fair value, less estimated disposal
costs.
8
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. In
the fourth quarter of 2003, the residual value of the 727-200FH aircraft on
lease to Federal Express Corporation ("FedEx") was reviewed. The review
indicated that the estimate of residual value had declined, and such decline was
judged to be other than temporary. As a result, the booked residual was reduced
from $2,000,000 to $700,000. This new valuation resulted in an immediate charge
to 2003 earnings in the amount of $1,168,000, and a reduction of $132,000 in
earnings over the remaining term of the lease. The General Partner is currently
in negotiations with FedEx to sell to FedEx the aircraft it is currently
leasing. While there can be no assurance that these negotiations will result in
execution of a purchase and sale agreement and sale of the aircraft to FedEx,
the General Partner expects to sell the aircraft to FedEx in May 2004 for a sale
price of approximately $2,545,000 (representing $3,200,000 reduced by the April
2004 rent payment of approximately $655,000). Since the sale price is expected
to be lower than the book value of the lease as of March 31, 2004, an impairment
charge of $561,000 was recorded in the first quarter of 2004.
During 2003, management prepared quarterly impairment evaluations on the two
aircraft currently on lease to CSI. The evaluations indicated that the carrying
value of the aircraft was not recoverable based on the undiscounted future cash
flows to be generated by the aircraft. An impairment charge was recorded in June
2003 in the amount of $1,576,000 per aircraft. A second impairment charge was
recorded in December 2003 in the amount of $2,858,000 per aircraft as a result
of additional declines in estimated values and changes to probability
assumptions applied to projected cash flows from the aircraft. The book value
per aircraft after the impairment charges was $1,125,000, which was further
reduced by $9,000 of depreciation expense during the 1st quarter of 2004.
Pursuant to the Board's directive and the authority granted to the General
Partner by the unitholders to sell the Partnership's remaining assets as
attractive sale opportunities arise, the General Partner, on May 10, 2004, sold
to Jetran International Ltd. the two MD-82 aircraft previously on lease to CSI
Aviation Services, Inc. ("CSI") for $1.3 million and $1.4 million, respectively,
for a total of $2.7 million. A gain of $468,000 was recognized upon the sale of
these two aircraft during the second quarter of 2004.
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).
2. CASH DISTRIBUTIONS - In March 2004, the Partnership declared a regular
first-quarter 2004 cash distribution of $0.05 per unit totaling approximately
$234,000. The Partnership also declared a special cash distribution of $0.26 as
a result of the sale on January 26, 2004 of one MD-81 off-lease aircraft. Both,
the regular and the special cash distributions are payable on May 14, 2004 to
unitholders of record on March 31, 2004. As a result of these distributions, and
the Partnership loss in the first quarter of 2004, Partnership equity declined
to $3.9 million at March 31, 2004 from $6.1 million at December 31, 2003, and
limited partner equity per unit declined to $0.83 from $1.30. The 2004
first-quarter cash distributions constitute a return of capital. The 2003
first-quarter regular cash distribution was also $0.05 per unit.
The cash distributions paid in the first three months of 2004 totaled
$1,448,232, of which $14,482 was allocated to the General Partner and $1,433,750
was allocated to the limited partners, or $0.31 per limited partnership unit,
representing the regular fourth quarter 2003 distribution of $0.05 per unit, and
a special cash distribution of $0.26 from the sale of one MD-81 off-lease
aircraft.
3. PORTFOLIO TRANSACTIONS
AIRCRAFT SALE - On August 12, 2003, the Partnership entered into an agreement
with OLSF, LLC ("OLSF") to sell three off-lease MD-81 aircraft in intervals of
120 days, with the first aircraft being delivered on that date. The purchase
price per aircraft was $1,200,000. In September of 2003, the agreement with OLSF
was amended to accelerate the sale and delivery of the second aircraft to
September 26, 2003. A deposit of $200,000 previously paid to the Partnership and
included on the balance sheet as an aircraft sale security deposit as of
December 31, 2003, was credited against the $1,200,000 purchase price of the
third aircraft, which was sold and delivered on January 26, 2004.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DECISION TO SELL ASSETS AND DISSOLVE
On March 17, 2004, the Board of Directors of the General Partner, acting in
response to a recommendation made by a special committee of independent
directors of its Board of Directors, directed the General Partner to cease
making new aircraft investments, sell the Partnership's remaining assets as
attractive sale opportunities arise, distribute sale proceeds (after repaying
debt and establishing appropriate reserves) to unitholders of the Partnership
after disposition, and dissolve the Partnership when all assets are sold. The
General Partner also amended the Partnership's Limited Partnership Agreement to
give effect to this directive. In 1997, the unitholders of the Partnership
authorized the General Partner to take these actions.
Pursuant to the Board's directive and the authority granted to the General
Partner by the unitholders to sell the Partnership's remaining assets as
attractive sale opportunities arise, the General Partner, on May 10, 2004, sold
to Jetran International Ltd. the two MD-82 aircraft previously on lease to CSI
Aviation Services, Inc. ("CSI") for $1.3 million and $1.4 million, respectively,
for a total of $2.7 million in cash and recognized a gain of $468,000. The
General Partner is currently in negotiations with FedEx Corporation ("FedEx") to
sell to FedEx the aircraft it is currently leasing. While there can be no
assurance that these negotiations will result in execution of a purchase and
sale agreement and sale of the aircraft to FedEx, the General Partner expects to
sell the aircraft to FedEx in May 2004 for a sale price of approximately
$2,545,000 (representing $3,200,000 reduced by the April 2004 rent payment of
approximately $655,000). Since the sale price is expected to be lower than the
book value of the lease as of March 31, 2004, an impairment charge of $561,000
was recorded in the first quarter of 2004.
RESULTS OF OPERATIONS
The Partnership reported a loss of $760,000 in the first quarter ended March 31,
2004, compared with last year's first quarter loss of $458,000. Revenues for the
2004 first quarter were $288,000 compared with last year's first quarter
revenues of $476,000.
The increase in net loss for the first three months of 2004 as compared with the
same period of last year results from a decrease in revenues and an increase in
expenses.
The revenue reductions are primarily due to lower operating lease rental income
associated with the two aircraft on lease to CSI, and the scheduled decline in
finance lease income in 2004 associated with the aircraft leased to FedEx.
Expenses for the first three months of 2004 were $1,048,000, an increase of
$115,000 from $934,000 for the comparable 2003 period. The increase in expenses
is primarily due to the impairment charge of $561,000 on the FedEx aircraft
recorded in the first quarter of 2004, and by higher general and administrative
expenses and taxes on gross income, partially offset by lower depreciation
expenses. Depreciation expenses in 2004 were $18,000 compared with $638,000 in
the first quarter of 2003. The decrease in depreciation expenses is due to a
significantly lower depreciation rate on the two CSI MD-82 aircraft, as the
carrying value of the aircraft was substantially written down in 2003, and to
the sale of the three off-lease MD-81 aircraft.
Higher 2004 general and administrative expenses are primarily due to legal
expenses incurred in connection with the review of the Board of Directors of the
proposed sale of the remaining aircraft and dissolution of the Partnership and
other strategic alternatives.
Higher 2004 taxes on gross income are primarily due to taxes associated with the
sale of one off-lease aircraft in the first quarter of 2004.
PORTFOLIO MATTERS
At March 31, 2003, the Partnership's portfolio consisted of three Stage-III
commercial aircraft. Two were leased to CSI, and one was leased to FedEx.
10
The lease for two aircraft to CSI terminated on May 10, 2004, and the aircraft
were sold on that date. Prior to that date, CSI operated the two aircraft under
a contract for charter services to the United States Marshals Service ("USMS").
In March 2003, the CSI leases were extended on a month-to-month basis at a
monthly rental rate of $60,000 per aircraft. In September 2003, the CSI leases
were amended to provide for a reduced lease rate of $45,000 per aircraft, so
long as CSI is leasing both aircraft, and a lease rate of $60,000 per aircraft
if CSI is leasing only one of the two aircraft. CSI's contract with USMS was
expected to terminate in January 2004. In January 2004, the leases on the two
aircraft were extended to May 2004 to coincide with USMS's extension of its
contract with CSI. The lease extension provided for a monthly rental of $100,000
per month per aircraft. However, the Partnership was required to contribute
$150,000 per aircraft toward the FAA required airframe maintenance referred to
as a C-Check. These maintenance expenses were charged against the maintenance
reserves in the first quarter of 2004. In addition, the Partnership was required
to provide a $50,000 per month rent credit per aircraft for the three-month
period commencing February 10, 2004. As a result, the maintenance expenses and
rent credit fully offset the rental income during this three-month lease term.
The lease for a 727-200 FH aircraft to FedEx is scheduled to terminate in 2006.
The General Partner expects to sell this aircraft in May 2004.
OUTLOOK
As a result of the sale on May 10, 2004 of the two MD-82 aircraft previously on
lease to CSI and the expected sale in May 2004 of the aircraft currently on
lease to FedEx, the Partnership will no longer own any aircraft and will not be
expected to have any material net cash flow from operations. The General Partner
cannot predict when net proceeds from the sale of the aircraft will be
distributed to unitholders or the aggregate amount of such net proceeds
available for distribution, both of which will depend upon a number of factors,
including the exact timing of the sale of the FedEx aircraft, the amount of cash
required to settle outstanding liabilities and contingencies, the amount of
necessary cash reserves, and the expenses associated with selling assets and
dissolving the Partnership.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership presently has one long-term debt facility. At March 31, 2004,
the 7.4% non-recourse note collateralized by one aircraft leased to FedEx had an
outstanding balance of $2.0 million. This outstanding balance is 4.0% of the
original cost of all aircraft owned by the Partnership as of March 31, 2004,
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. The loan is expected to
be re-paid upon the sale of the aircraft to FedEx
In March 2004, the Partnership declared a regular first-quarter 2004 cash
distribution of $0.05 per unit totaling approximately $234,000. The Partnership
also declared a special cash distribution of $0.26 per unit as a result of the
sale on January 26, 2004 of one MD-81 off-lease aircraft. Both the regular and
the special cash distributions are payable on May 14, 2004 to unitholders of
record on March 31, 2004. As a result of these distributions, and the
Partnership loss in the first three-months of 2004, Partnership equity declined
to $3.9 million at March 31, 2004 from $6.1 million at December 31, 2003, and
limited partner equity per unit declined to $0.83 from $1.30. Both the regular
and the special 2004 cash distribution constitute a return of capital. The 2003
first-quarter regular cash distribution was also $0.05 per unit.
The cash distributions paid in the first three months of 2004 totaled
$1,448,232, of which $14,482 was allocated to the General Partner and $1,433,750
was allocated to the limited partners, or $0.31 per limited partnership unit,
representing the regular fourth quarter 2003 distribution of $0.05 per unit, and
a special cash distribution of $0.26 from the sale of one MD-81 off-lease
aircraft.
11
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, and war, acts of terrorism,
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.
12
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 quarterly report, have concluded that the Partnership's
disclosure of the controls and procedures are effective to ensure that
information required to be disclosed by the Partnership in this quarterly report
is accumulated and communicated to the Partnership's management to allow timely
decisions regarding required disclosure.
(b) No 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 1. LEGAL PROCEEDINGS
In June 2002, the Partnership commenced litigation against US Airways seeking to
recover damages for US .Airways' failure to return three aircraft leased to US
Airways in the condition prescribed in the lease following lease expiration on
October 1, 2001 and to pay rent due on such aircraft. US Airways subsequently
filed for bankruptcy, and the owner trustee for the Partnership (the "Owner
Trustee") filed a proof of claim in the bankruptcy case in the amount of $13.0
million with respect to the aircraft. In September 2003, the Owner Trustee and
US Airways entered into a stipulation providing for the allowance of an
unsecured claim in the bankruptcy case in the amount of $9.3 million. In its
Disclosure Statement dated January 17, 2003, filed as part of its proposed plan
of reorganization, US Airways projected that it would pay between 1.2% and 1.8%
on unsecured claims. In December 2003, the Partnership received a partial
distribution from US Airways in the form of company Class A Common stock and
Warrants redeemable for Class A Preferred stocks. The Partnership received 6,975
shares of Class A Common stock, which were valued as of December 31, 2003 at
$43,385 ($6.22 per share) and warrants for 4,278 of Class A Preferred stock. No
value was recorded on the Preferred stock since the per share strike price of
$7.42 was higher than the closing stock price of $6.22 at December 31, 2003. On
March 30, 2004, the Partnership sold its 6,975 shares of Common A stock with a
settlement date of April 2, 2004. The net sale price of the stock was $31,177.
Since the sale price is lower than the investment book value, a loss on sale of
$12,208 was recorded in the first quarter of 2004 and included in other income
in the income statement.
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
(b) On January 29, 2004, the Partnership filed a report on Form
8-K dated January 26, 2004, disclosing under Item 2 the
completion of the sale by the Partnership of the third of
three off-lease MD-81 aircraft and related assets to OLSF,
L.L.C.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
By: Airlease Management Services, Inc.
General Partner
MAY 11, 2004 By: /s/ DAVID B. GEBLER
------------------ ----------------------------------------
Date David B. Gebler
Chairman, Chief Executive Officer
and President
MAY 11, 2004 By: /s/ ROBERT A. KEYES
------------------ --------------------------------------
Date Robert A. Keyes
Chief Financial Officer
14
EXHIBIT INDEX
Exhibit Number Description
(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
(b) On January 29, 2004, the Partnership filed a report on Form
8-K dated January 26, 2004, disclosing under Item 2 the
completion of the sale by the Partnership of the third of
three off-lease MD-81 aircraft and related assets to OLSF,
L.L.C.