ITEM 1. BUSINESS
GENERAL
Airlease Ltd., A California Limited Partnership (the "Partnership" or "Airlease"), was formed in 1986. The General Partner of the Partnership (the "General Partner") is Airlease Management Services, Inc., a Delaware corporation. Until October 31, 1996 the General Partner was a wholly owned subsidiary of USL Capital Corporation ("USL Capital"), which in turn was an indirect subsidiary of Ford Motor Company. On October 31, 1996, BA Leasing & Capital Corporation ("BA Leasing & Capital"), a wholly owned indirect subsidiary of BankAmerica Corporation, purchased the stock of the General Partner from USL Capital and the General Partner became a wholly owned subsidiary of BA Leasing & Capital. On September 29, 1999, BA Leasing & Capital merged into Banc of America Leasing and Capital, LLC, a Delaware limited liability company ("BALCAP"). BALCAP is also a wholly owned indirect subsidiary of BankAmerica Corporation. A total of 4,625,000 Depository Units representing limited partnership interests ("Units") in the Partnership are outstanding, of which 3,600,000 are held by the public and 1,025,000 are owned by BALCAP and its subsidiaries.
The Partnership invests in commercial aircraft and leases the aircraft to others, primarily airlines, pursuant to finance (full payout) or operating leases.
PRINCIPAL INVESTMENT OBJECTIVES
The business of the Partnership is to acquire and own, either directly or through joint ventures, aircraft and to lease such aircraft primarily to airlines. The Partnership's principal investment objectives are to generate income for quarterly cash distributions to Unitholders and to own a portfolio of leased aircraft. The Partnership's original intent was that until January 1, 2005, it would use a substantial portion of the cash derived from the sale, refinancing or other disposition of aircraft to purchase additional aircraft if attractive investment opportunities were available.
As previously reported, as part of a plan to mitigate the adverse financial effects of changes in tax law, in 1997 Unitholders authorized the General Partner to decide not to make new aircraft investments, to sell aircraft when attractive opportunities arise, to distribute the proceeds and to liquidate the Partnership when all assets are sold. The General Partner will consider whether it is in the best interest of Unitholders to cease making new aircraft investments as opportunities arise, in light of market conditions and the Partnership's competitive position. Based on its investment experience and its knowledge of the market, the General Partner believes that attractive investment opportunities like those made by the Partnership in the past probably will not be available. In the event that aircraft are sold and appropriate alternative investments are not available, the Partnership will distribute sale proceeds to Unitholders (after repaying debt and establishing appropriate reserves), and this would result in a further reduction of the Partnership's portfolio.
AIRCRAFT PORTFOLIO
The Partnership's aircraft portfolio consists of narrow-body (single-aisle) twin and tri-jet commercial aircraft which were acquired as used aircraft. Although the Partnership is permitted to do so, the Partnership does not own interests in aircraft which were acquired as new aircraft; nor does the Partnership own any wide-body aircraft, such as the Boeing 747 and MD-11, or any turboprop or prop-fan powered aircraft.
The following table describes the Partnership's aircraft portfolio at December 31, 2001:
At December 31, 2001, the book value of aircraft by lessee as a percent of total assets was
as follows: FedEx, 13.2%; CSI, 27% and off-lease aircraft, 40.6%. Revenues by lessee as a percentage of total revenue for 2001 and 2000, respectively, were as follows: US Airways, 55.4% and 76.8%; TWA/American Airlines, 17.2% and 17.4%; CSI, 4.9% and 0%; and FedEx, 5.7% and 5.9%.
At December 31, 2001, the Partnership's portfolio consisted of six Stage-III commercial aircraft. Two are leased to CSI Aviation Services, Inc., one to FedEx, and three are being marketed for lease.
In January 2001 TWA, a lessee of a seventh aircraft in the Partnership's portfolio, filed for bankruptcy. In April 2001, American Airlines assumed a modified TWA lease and in December 2001 Airlease sold the aircraft under the terms of a previously negotiated sale.
In April 2001 US Airways, at that time the lessee of five MD-82 aircraft, notified Airlease it would return these aircraft at end of lease on October 1, 2001. Two of the five aircraft were subsequently leased to CSI Aviation Services, Inc. ("CSI") and the other three aircraft are being marketed for lease.
CSI operates the two aircraft it leases in charter services for the United States Marshals Service ("USMS"). CSI has the right to terminate its leases with the Partnership on any date on which CSI's agreement with USMS terminates. The initial contract between CSI and USMS expires in October 2002. Unless earlier terminated, the leases will expire on October 31, 2006.
The Partnership also leases a 727-200 FH aircraft to FedEx. This lease is scheduled to terminate in 2006.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a further discussion of the Partnership's lessees.
The Partnership's lessees have the following fair market value renewal options: Fedex has the right to renew its lease for one six-month term at the current rent payable under the lease, and thereafter for four successive one year terms at a fair market value rental, and CSI has the right to renew its leases from one to five years to coincide with any renewal of its contract with the USMS.
COMPETITIVE POSITION OF THE PARTNERSHIP
The aircraft leasing industry has become increasingly competitive. In making aircraft investments, leasing aircraft to lessees, and seeking purchasers of aircraft, the Partnership competes with large leasing companies, aircraft manufacturers, airlines and other operators, equipment managers, financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft. Affiliates of the General Partner are engaged in many of these businesses and may be deemed to be in competition with the Partnership. There are many large
leasing companies which have the financial strength to borrow at very low rates and to obtain significant discounts when purchasing large quantities of aircraft. The lower capital and acquisition costs enjoyed by these large leasing companies permit them to offer airlines lower lease rates than smaller leasing companies can offer. The Partnership does not have the resources to purchase newer aircraft or to purchase aircraft at volume discounts and has only a limited ability to use tax deferrals in its pricing.
As previously reported to Unitholders, the Partnership's access to capital is limited. Since all Cash Available from Operations, as defined in the Limited Partnership Agreement, is distributed, there is no build up of equity capital, and acquisitions must be funded from proceeds available when aircraft are sold or from debt. Access to debt is limited because the Partnership's aircraft leased under long-term leases are generally used to collateralize existing borrowings. In general, the Partnership's pricing is uncompetitive for new acquisitions because of its limited sources and high cost of capital.
Because of these factors, finding new aircraft investments like those made by the Partnership in the past and that offer an appropriate balance of risk and reward has been difficult. During the past eight years the Partnership has made only two aircraft investments, both of which were possible because of special circumstances.
In 1996, 1997 and 2001, the Partnership sold interests in nine aircraft (a 50% interest in an aircraft on lease to Finnair, a one-third interest in six aircraft on lease to Continental, a 50% interest in one aircraft leased to Sun Jet International, Inc., and a 100% interest in an aircraft previously on lease to TWA and American Airlines). See "Disposition of Aircraft" below. However, because of the factors described above, the Partnership was unable to reinvest the proceeds in aircraft at an acceptable return, and the General Partner determined that the best use of the net proceeds was to distribute them to Unitholders. These sales and distributions have reduced the size of the Partnership's portfolio.
PARTICIPANTS IN LEASES
USL Capital originally participated equally with the Partnership in the aircraft on lease to FedEx and the aircraft sold in December 2001. In April 1993 the Partnership leased two aircraft (held jointly with USL Capital), which were previously off lease, to FedEx. In September 1993 the Partnership exchanged its 50% interest in the two aircraft for a 100% interest in one aircraft and pledged the aircraft and the lease as collateral to obtain funds to upgrade the aircraft from a Stage II passenger aircraft to a Stage III freighter. In January 1997, the Partnership purchased from USL Capital a 50% interest in the aircraft at that time on lease to TWA, and owned a 100% interest in that aircraft until it was sold in December 2001.
DESCRIPTION OF LEASES
The 727-200FH aircraft on lease to FedEx is leased pursuant to a full-payout (direct finance) lease, and the two MD-82 aircraft on lease to CSI are leased pursuant to operating leases. The two MD-82 aircraft on lease to CSI, together with the three off-lease aircraft, were previously leased to US Airways pursuant to full-payout leases. A sixth MD-82 aircraft was previously leased to TWA pursuant to a full-payout lease, and then to American Airlines pursuant to an operating lease, until the aircraft was sold in December 2001.
Generally, operating leases are for a shorter term than full-payout leases and, therefore, it is necessary to remarket the aircraft in order to recover the full investment. Full-payout leases are generally for a longer term and hence provide more predictable revenue than operating leases.
All of the Partnership's leases are net leases, which provide that the lessee will bear the direct operating costs a0nd the risk of physical loss of the aircraft; pay sales, use or other similar taxes relating to the lease or use of the aircraft; maintain the aircraft; indemnify the Partnership-lessor against any liability suffered by the Partnership as the result of any act or omission of the lessee or its agents; maintain casualty insurance in an amount equal to the specific amount set forth in the lease (which may be less than the fair value of the aircraft); and maintain liability insurance naming the Partnership as an additional insured with a minimum coverage which the General Partner deems appropriate. In general, substantially all obligations connected with the ownership and operation of the leased aircraft are assumed by the lessee and minimal obligations are imposed upon the Partnership. Default by a lessee may cause the Partnership to incur unanticipated expenses. See "Government Regulation" below.
Certain provisions of the Partnership's leases may not be enforceable upon a default by a lessee or in the event of a lessee's bankruptcy. The enforceability of leases will be subject to limitations imposed by Federal, California, or other applicable state law and equitable principles.
In order to encourage equipment financing to certain transportation industries, Federal bankruptcy laws traditionally have afforded special treatment to certain lenders or lessors who have provided such financing. Section 1110 ("Section 1110") of the United States Bankruptcy Code, as amended (the "Bankruptcy Code"), implements this policy by creating a category of aircraft lenders and lessors whose rights to repossession are substantially improved. If a transaction is eligible under Section 1110, the right of the lender or lessor to take possession of the equipment upon default is not affected by the automatic stay provisions of the Bankruptcy Code, unless within 60 days after commencement of a bankruptcy proceeding the trustee agrees to perform all obligations of the debtor under the agreement or lease and all defaults (except those relating to insolvency or insolvency proceedings) are cured within such 60-day period or 30 days after the default. One court has recently held that Section 1110 does not apply after the 60-day period, and thus the automatic stay may apply after such 60-day period.
On October 22, 1994, the President signed the Bankruptcy Reform Act of 1994 (the "Reform Act"). The Reform Act made several changes to Section 1110, such that it now protects
all transactions involving qualifying equipment, whether the transaction is a lease, conditional sale, purchase money financing or customary refinancing. For equipment first placed in service on or prior to the date of enactment, the requirement that the lender provide purchase money financing continues to apply, but there is a "safe harbor" definition for leases, so that Section 1110 benefits will be available to the lessor without regard to whether or not the lease is ultimately determined to be a "true" lease. This safe harbor is not the exclusive test so that other leases which do not qualify under the safe harbor, but which are true leases, will continue to be covered as leases by Section 1110. The Partnership may not be entitled to the benefits of Section 1110 upon insolvency of a lessee airline under all of its leases.
In the past, the Partnership had interests in aircraft leased to operators based outside the United States. It is possible that the Partnership's aircraft could be leased or subleased to foreign airlines. Aircraft on lease to such foreign operators are not registered in the United States and it is not possible to file liens on such foreign aircraft with the Federal Aviation Administration (the "FAA"). Further, in the event of a lessee default or bankruptcy, repossession and claims would be subject to laws other than those of the United States.
AIRCRAFT REMARKETING
On termination of a lease and return of the aircraft to the Partnership, the Partnership must remarket the aircraft to realize its full investment. Under the Amended and Restated Agreement of Limited Partnership, as amended ("Limited Partnership Agreement"), the remarketing of aircraft may be through a lease or sale. The terms and conditions of any such lease would be determined at the time of the re-lease, and it is possible (although not anticipated at this time) that the lease may not be a net lease. The General Partner will evaluate the risks associated with leases which are not net leases prior to entering into any such lease. The General Partner has not established any standards for lessees to which it will lease aircraft and, as a result, there is no investment restriction prohibiting the Partnership from doing business with any lessee, including "start-up" airlines. However, the General Partner will analyze the credit of a potential lessee and evaluate the aircraft's potential value prior to entering into any lease.
DISPOSITION OF AIRCRAFT
The Partnership's original intent was to dispose of all its aircraft by the year 2011, subject to prevailing market conditions and other factors. However, in 1997 unitholders authorized the General Partner not to make new investments, to sell aircraft when attractive opportunities arise, to distribute the proceeds and to liquidate the Partnership when all assets are sold. See "Principal Investment Objectives" above.
Underthe Limited Partnership Agreement, aircraft may be sold at any time whether or not the aircraft are subject to leases if, in the judgment of the General Partner, it is in the best interest of the Partnership to do so.
In March 1996, the Partnership sold its 50% interest in one MD-82 on lease to Finnair to
a third party for approximately $6.9 million, resulting in a net gain of approximately $556,000. The Partnership had acquired its interest in this aircraft in April 1992, for approximately $8.5 million. A portion of the sale proceeds were used to pay off the outstanding balance under a non-recourse loan which was collateralized by this aircraft and the balance, after retaining a reserve for liquidity purposes, was distributed to Unitholders.
The Partnership sold its one-third interest in six 737-200 aircraft on lease to Continental at lease expiration on December 31, 1996, at a sale price of approximately $3.1 million, resulting in a net gain of approximately $1.9 million. The proceeds were distributed to Unitholders in the first quarter of 1997.
On September 29, 1997 the Partnership sold its one-half ownership interest in a DC9-51 aircraft on lease to Sun Jet International, Inc. The sale price was $1.2 million, resulting in a gain of $393,000 even though the lessee had filed for bankruptcy in June 1997, and had ceased making the rent payments. The proceeds were distributed to Unitholders in the fourth quarter of 1997.
In December 2001 the Partnership sold its 100% interest in an MD-82 aircraft previously on lease to American Airlines, at a sale price of approximately $9 million, resulting in a net gain of approximately $965,000. The proceeds were distributed to Unitholders in the first quarter of 2002.
See "Competitive Position of the Partnership" above for a discussion of the General Partner's determination to distribute the proceeds of the sale of these aircraft to Unitholders.
The Partnership is permitted to sell aircraft to affiliates of the General Partner at the fair market value of the aircraft at the time of sale as established by an independent appraisal. The General Partner will receive a Disposition or Remarketing Fee for any such sale.
JOINT VENTURES/GENERAL ARRANGEMENTS
Under the Limited Partnership Agreement, the Partnership may enter into joint ventures with third parties to acquire or own aircraft. No such joint ventures presently exist. Generally, each party to a joint venture is jointly responsible for all debts and obligations incurred by the joint venture, and the joint venture will be treated as a single entity by third parties. If party to a joint venture, the Partnership may become liable to third parties for obligations of the joint venture in excess of those contemplated by the terms of the joint venture agreement. There can be no assurance that the Partnership will be able to obtain control in any joint ventures, or that, even with such control the Partnership will not be adversely affected by the decisions and actions of the co-venturers. The General Partner attempts to ensure that all such agreements will be fair and reasonable to the Partnership, although joint ventures with affiliates of the General Partner may involve potential conflicts of interest.
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.
In January 1999 the FAA issued an airworthiness directive setting payload weight limitations on the Boeing 727 aircraft which were converted from passenger to freight configuration. The directive requires extensive structural modifications to strengthen the aircraft's floor, if the aircraft is to continue to operate under the existing payload limits. If these modifications are not performed, the directive sets substantially reduced payload limits. This airworthiness directive applies to the aircraft on lease to FedEx. Under the lease covering this aircraft, FedEx is required to take the steps necessary to comply with airworthiness directives imposed during the lease term. However, airworthiness directives may affect the residual value of the aircraft or FedEx's decision to exercise fair market value renewal options under the lease.
AIRCRAFT NOISE
The FAA, through regulations, has categorized certain aircraft types as Stage I, Stage II and Stage III according to the noise level as measured at three designated points. Stage I aircraft create the highest measured noise levels. Stage I and Stage II aircraft are no longer allowed to operate from civil airports in the United States.
See "Aircraft Portfolio" above, for a description of the Partnership's aircraft portfolio. At December 31, 2001, all of the aircraft in the Partnership's portfolio were Stage III aircraft
ACQUISITION OF ADDITIONAL AIRCRAFT
In 1997 Unitholders authorized the General Partner to decide not to make new aircraft investments, to sell aircraft when attractive opportunities arise, to distribute the proceeds and to liquidate the Partnership when all assets are sold. See "Principal Investment Objectives" above.
Not withstanding the above, if the Partnership were to acquire additional aircraft, it could do so in many different forms, such as in sale/leaseback transactions, by purchasing interests in existing leases from other lessors, by making loans secured by aircraft or by acquiring or financing leasehold interests in aircraft. The Partnership is permitted to acquire aircraft from affiliates of the General Partner subject to limitations set forth in the Limited Partnership Agreement.
Prior to September 30, 1991, the General Partner and USL Capital ("Related Entities") were required to offer the Partnership a 50% participation interest in certain aircraft leasing investments made by Related Entities. After September 30, 1991 and while the General Partner was an affiliate of USL Capital, the General Partner and USL Capital could, but were not obligated to, offer investment opportunities to the Partnership. The Partnership was required to accept suitable opportunities provided that the General Partner and Related Entities made at least 20% (including their investment through ownership of Units and the General Partner's interest) of the total investment made by Related Entities and the Partnership in such transactions. In the event that the Partnership elected not to make or to make only a portion of an investment offered to it by an affiliate, the remaining investment could be made by affiliates of the General Partner or third parties.
The General Partner believes that since it is no longer affiliated with USL Capital, the limitation as to making investments with Related Entities should no longer apply and that the Partnership should be able to invest in any aircraft leasing transactions deemed suitable by the General Partner. In determining whether an investment is suitable for the Partnership, the General Partner will consider the following factors: the expected cash flow from the investment and whether existing Unitholders' investment will be diluted; the existing portfolio of the Partnership and the effect of the investment on the diversification of the Partnership's assets; the amount of funds available to finance the investment; the ability of the Partnership to obtain additional funds through debt financing, by issuing Units, or otherwise; the cost of such additional funds and the time needed to obtain such funds; the amount of time available to remove contingencies prior to making the investment; projected Federal income tax effect of the investment; projected residual value, if any; any legal or regulatory restrictions; and other factors deemed relevant by the General Partner.
The General Partner and its affiliates are not obligated to make any investment opportunity available to the Partnership, and if any of them are presented with a potential investment opportunity, it may be made by any of them without being offered to the Partnership. In addition, in determining which entity should invest in a particular transaction, it may be possible to structure the transaction in various ways to make the acquisition more or less suitable for the Partnership or for the General Partner or its affiliates.
FEDERAL INCOME TAXATION
The Partnership is considered a publicly traded partnership ("PTP") under the Revenue Act of 1987 with a special tax status, whereby it has not been subject to federal income taxation. This special tax status was scheduled to expire at the beginning of 1998. However, during 1997 federal and California tax laws were amended to provide that PTPs may elect to continue to be publicly traded and retain their Partnership tax status if they pay a federal tax of 3.5% and a California state tax of 1% on their applicable annual gross income beginning in January 1998. The Partnership made an election to pay this tax beginning in 1998.
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.
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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
UNITS OUTSTANDING
The Units are traded on the New York Stock Exchange under the symbol FLY. As of February 12, 2002, there were 869 unitholders of record.
MARKET PRICE
The following chart sets forth the high and low closing prices on the New York Stock Exchange and the trading volume for each of the quarters in the years ended December 31, 2001 and 2000.
Trading Volume Quarter Ended (in thousands) Unit Prices (high-low) - ------------- -------------- ----------------------
March 31, 2001 409 $13.05 - $11.56 June 30, 2001 630 $11.89 - $8.75 September 30, 2001 573 $10.35 - $4.26 December 31, 2001 640 $8.85 - $5.30
March 31, 2000 227 $12 - $10.63 June 30, 2000 239 $12.25 - $10.56 September 30, 2000 230 $13.13 - $11.56 December 31, 2000 291 $12.50 - $11.56
DISTRIBUTIONS TO UNITHOLDERS
CASH DISTRIBUTIONS
The Partnership makes quarterly cash distributions to Unitholders which are based on Cash Available from Operations (as defined in the Limited Partnership Agreement) and are partially tax sheltered. From time to time the Partnership also has made cash distributions from Cash Available from Sale or Refinancing (as defined in the Limited Partnership Agreement.) Information on the tax status of such payments, which is necessary in the preparation of individual tax returns, is prepared and mailed to Unitholders as quickly as practical after the close of each year. The size of the Partnership's portfolio and future aircraft sales will affect distributions.
Distributions declared during 2001 and 2000 were as follows:
Record Date Payment Date Per Unit ----------- ------------ --------
March 31, 2001 May 14, 2001 38 cents June 29, 2001 August 15, 2001 38 cents September 28, 2001 November 15, 2001 30 cents December 31, 2001 February 15, 2002 11 cents
March 31, 2000 May 15, 2000 45 cents June 30, 2000 August 15, 2000 45 cents September 29, 2000 November 15, 2000 45 cents December 29, 2000 February 15, 2001 45 cents
CASH AVAILABLE FROM OPERATIONS
The Partnership distributes all Cash Available from Operations (as defined in the Limited Partnership Agreement). The Partnership is authorized to make distributions from any source, including reserves and borrowed funds. Distributions of Cash Available from Operations are allocated 99% to Unitholders and 1% to the General Partner. The Partnership makes distributions each year of Cash Available from Operations generally on the fifteenth day of February, May, August and November to Unitholders of record on the last business day of the calendar quarter preceding payment.
CASH AVAILABLE FROM SALE OR REFINANCING
The Partnership's original intent was that Cash Available From Sale or Refinancing (as defined in the Limited Partnership Agreement) received prior to January 1, 2005 would be retained for use in the Partnership's business, provided that if the General Partner did not believe that attractive investment opportunities exist for the Partnership, the Partnership could distribute Cash Available from Sale or Refinancing. Any Cash Available from Sale or Refinancing received after January 1, 2005 was not to be reinvested but was to be distributed. However, in 1997, Unitholders authorized the General Partner to decide not to make new aircraft investments, to sell aircraft when attractive opportunities arise, to distribute the proceeds and to liquidate the Partnership when all assets are sold. See "BUSINESS--Principal Investment Objectives." For information as to the sales giving rise to distributions from Cash Available from Sales or Refinancing, see "BUSINESS--Disposition of Aircraft."
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.
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:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Partnership has included in this annual report certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the Partnership's business, operations and financial condition. The words or phrases "can be", "may affect", "may depend", "expect", "believe", "anticipate", "intend", "will", "estimate", "project" and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and the Partnership cautions you that any forward-looking information provided by or on behalf of the Partnership is not a guarantee of future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Partnership's control, in addition to those discussed in the Partnership's public filings and press releases, including (i) changes in the aircraft or aircraft leasing market, (ii) economic downturn in the airline industry, (iii) default by lessees under leases causing the Partnership to incur uncontemplated expenses or not to receive rental income as and when expected, (iv) the impact of the events of September 11, 2001 on the aircraft or aircraft leasing market and on the airline industry, (v) changes in interest rates and (vi) legislative or regulatory changes that adversely affect the value of aircraft. All such forward-looking statements are current only as of the date on which such statements were made. The Partnership does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership presently has one long-term debt facility. At December 31, 2001, the 7.4% non-recourse note collateralized by one aircraft leased to FedEx had an outstanding balance of $3.4 million. The facility matures in April 2006.
A 9.35% non-recourse loan facility collateralized by the aircraft that was leased to TWA and subsequently to American Airlines was terminated in December 2001, when the aircraft was sold. A long-term variable rate revolving loan facility collateralized by two aircraft on lease to US Airways expired on October 1, 2001, the end of the lease term.
Long-term borrowings at December 31, 2001 represented 2.78% of the original cost of the aircraft presently owned by the Partnership, including capital expenditures for upgrades. The terms of the Limited Partnership Agreement permit debt to be at a level not exceeding 50% of such cost.
Total scheduled debt service in 2002 is $0.9 million. Debt service will be paid from the rental payments received under the FedEx lease.
Net cash provided by operating activities was $4.1 million for 1999, $4.5 million for 2000, and $2.7 million for 2001. Aside from the cash flow activity associated with taxes payable, the net cash flow provided by operating activities showed a moderate decrease from 1999 to 2000. The decrease in 2001 as compared with 2000 was primarily due to reduced revenue as a result of the termination of the US Airways leases.
Total debt service on the fixed loans as a percentage of net cash provided by operating activities was 78%, 67%, and 123% for 1999, 2000 and 2001, respectively. However, cash flow from operating activities does not fully reflect cash receipts from lease payments. When the excess of rental receipts above finance lease income is added to cash flow from operating activities, the ratios become 26%, 29%, and 27%, respectively.
Cash distributions paid by the Partnership were $7.7 million ($1.64 per unit) in 1999, $8.2 million ($1.76 per unit) in 2000, and $7.1 million ($1.51 per unit) in 2001. There were no special cash distributions paid in 1999, 2000 or 2001. A special cash distribution of $7.0 million ($1.50 per unit) was declared in December 2001, but will be paid in 2002.
Pursuant to the Limited Partnership Agreement, the Partnership distributes all Cash Available from Operations net of expenses and reserves. Since such distributions were in excess of earnings, Partnership equity declined from $51.1 million at December 31, 2000 to $40.3 million at December 31, 2001, and limited partner equity per unit declined from $10.95 to $8.62. From a limited partner perspective, the portion of the distribution in excess of net income constitutes a return of capital. Total cash distributions declared since inception of the Partnership have exceeded total net income by $10.16 per unit.
At December 31, 2001, the Partnership had cash on hand in the amount of $1.9 million (net of amounts payable to Unitholders on February 15, 2002). In the event that the Partnership's cash on hand is significantly reduced as a result of unanticipated expenses, including unanticipated maintenance and refurbishing expenses with respect to the three MD-82 aircraft currently off lease, cash distributions to Unitholders may be reduced.
RESULTS OF OPERATIONS
2000 VS. 1999 In 2000, all revenues were earned from aircraft subject to finance leases. The revenue reduction in 2000 as compared with 1999 is primarily due to the scheduled decline in finance lease income as the balances due from the lessees declined.
2001 VS. 2000 In 2001, revenues were earned from seven aircraft subject to finance and operating leases and from the gain on sale of one aircraft. The lease revenue reduction in 2001 as compared with 2000 is primarily due: to the scheduled decline in finance lease income as the balances due from the lessees declined, to the expiration of the lease with US Airways for five aircraft, three of
which remain off lease, and to the restructure of the TWA lease.
In 2001, five MD-82 aircraft leased to US Airways generated $3,363,000 in finance lease income prior to lease expiration. Two of the five aircraft were leased to CSI Aviation Services, Inc. ("CSI") in November 2001 under operating leases, which generated $296,000 in operating lease income. The remaining three aircraft were being held for lease as of December 31, 2001.
The finance lease of one MD-82 aircraft with TWA was assumed by American Airlines in April of 2001, and was reclassified as an operating lease. In 2001, the finance lease generated $293,000 in finance lease income, and the operating lease generated $750,000 in operating lease rental income (before depreciation expense). In December of 2001, the aircraft was sold, generating a gain on sale before remarketing fee of $965,000.
The lease of one 727-200FH aircraft to FedEx generated $346,000 in finance lease income.
For information regarding the percentage of total Partnership assets and revenues represented by aircraft owned and leased by the Partnership, see "BUSINESS - Aircraft Portfolio."
Interest expense decreased in 2001 by $359,000 as compared with 2000, as a result of declining debt balances.
Depreciation expense of $1,268,000 in 2001 related to aircraft subject to operating leases and to aircraft available for lease. No depreciation expense was recorded in 2000 as the Partnership's portfolio did not include any aircraft subject to operating lease or held for lease.
Management fees and tax on gross income increased in 2001 as compared with the prior year as a result of the sale of the MD-82 aircraft.
The increase in general and administrative expenses is primarily due to aircraft maintenance and refurbishing expenses incurred in the preparation of two MD-82 aircraft for delivery to CSI.
The lease with US Airways for five MD-82 aircraft was scheduled to terminate on October 1, 2001, but remains in effect pending satisfaction of aircraft return conditions relating to aircraft maintenance as specified in the lease. Under the lease, US Airways is obligated to pay rent for each aircraft on a prorated basis until the required maintenance has been completed and the aircraft has been returned. The lease requires the maintenance to be completed within 60 days of the expiration of the lease term.
In November 2001 the Partnership entered into an agreement with US Airways with respect to the two MD-82 aircraft now on lease to CSI, providing for US Airways to pay hold-over rent and to pay for certain agreed-upon maintenance work. US Airways made a cash
payment covering a portion of the rent and maintenance costs and delivered an unsecured note for the remaining amount. See Note 4 of Notes to Financial Statements.
The Partnership is currently in negotiation with US Airways concerning satisfaction of aircraft return conditions and payment of hold-over rent with respect to the remaining three aircraft leased by US Airways. The Partnership expects to enter into an agreement with US Airways with respect to these leases. To date, the Partnership has not taken legal action to enforce its rights under the leases as negotiations concerning the specific terms of US Airways' obligations are ongoing.
Any required maintenance work with respect to the three aircraft currently off lease that is not performed or paid for by US Airways, together with any refurbishing expenses incurred in preparation of these aircraft for delivery to future lessees, will result in additional expenses to the Partnership. Due to the ongoing negotiations with US Airways, management cannot establish the amount of such additional expenses, if any, although such expenses, if significant, could have a material adverse effect on the Partnership's results of operations or financial condition and result in reduced cash distributions to Unitholders.
IMPACT OF EVENTS OF SEPTEMBER 11, 2001
On September 11, 2001, four aircraft operated by United Airlines and American Airlines were hijacked and destroyed in terrorist attacks against the United States. Immediately after the attacks, the Federal Aviation Administration closed U.S. airspace for several days. In the months after the attacks, most major U.S.-based have announced significant reductions in worldwide capacity, and many have reduced or announced plans to reduce their fleets.
The Partnership believes that the events of September 11, 2001 have had an adverse effect on the market for lease and sale of used aircraft, as airlines are less likely to renew or enter into leases and may seek to sell aircraft surplus to meet their reduced needs. The reduced demand for aircraft is likely to have an adverse effect on the Partnership's ability to re-lease its three aircraft currently off lease, and to re-lease other aircraft as their leases terminate. The events of September 11, 2001 may also affect the ability of existing lessees to meet their obligations to the Partnership, and may have other adverse effects on the Partnership.
OUTLOOK
The market conditions for aircraft leasing have declined during 2001, in particular since September 11, 2001, as there has been a reduction in air-traffic demand, causing the supply of aircraft to exceed demand. It has been reported that there are more than 90 MD-81/82 aircraft available for sale or lease, approximately 15% of the MD-80 aircraft listed in operation. While there are signs of increases in air traffic from September 2001 levels which could lead to increased demand (among U.S. based airlines a reported 34% decline in year over year system-wide traffic for the month of September 2001 has improved to a 14% decline for the month of December 2001), it is widely believed that it will take time before the industry recovers fully.
Consequently, the Partnership is experiencing significant competitive pressure in marketing the three aircraft currently off lease, and management is not able to predict when these aircraft may be leased again or the terms of any such future leasing.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Partnership believes that as of December 31, 2001, it does not have any material interest rate risk exposures.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The Partnership has no directors or executive officers. Under the Limited Partnership Agreement, the General Partner has full power and authority in the management and control of the business of the Partnership, subject to certain provisions requiring the consent of the Limited Partners.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information about the directors and executive officers of the General Partner as of February 28, 2002. As used below, "BALCAP" refers both to BALCAP and to BA Leasing & Capital prior to its merger into BALCAP in September 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not pay or employ directly any directors or officers. Each of the officers of the General Partner is also an officer or employee of BALCAP and is not separately compensated by the General Partner or the Partnership for services on behalf of the Partnership. Thus, there were no deliberations of the General Partner's Board of Directors with respect to compensation of any officer or employee.
The Partnership reimburses the General Partner for fees paid to Directors of the General Partner who are not otherwise affiliated with the General Partner or its affiliates. In 2001, such unaffiliated directors were paid an annual fee of $14,500 plus $500 for each meeting attended.
The Partnership has not established any plans pursuant to which cash or non-cash compensation has been paid or distributed during the last fiscal year or is proposed to be paid or distributed in the future. The Partnership has not issued or established any options or rights relating to the acquisition of its securities or any plans therefor.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
As of February 28, 2002, the following persons were known to the Partnership to be beneficial owners of more than five percent of the Partnership's equity securities:
Name and Address Amount and Nature of Title of class Of beneficial owner Beneficial Ownership Percent of Class - -------------- ------------------- -------------------- ----------------
Depositary Units United States Airlease 231,250(1) 5% Holding, Inc. 555 California Street San Francisco, CA 94104
Depositary Units BALCAP 793,750(2) (3) 17.2% 555 California Street San Francisco, CA 94104
__________________
(1) United States Airlease Holding, Inc. ("Holding") reported that it had sole voting and dispositive power over these Units.
(2) BALCAP owns all of the outstanding stock of Holding. Therefore, BALCAP may be deemed also to be the indirect beneficial owner of the Units owned by Holding. In addition, BALCAP owns all the outstanding
stock of the General Partner. Therefore, BALCAP may be deemed to be the indirect beneficial owner of the General Partner's 1% General Partner interest. BALCAP is a wholly owned indirect subsidiary of BankAmerica Corporation. Therefore, BankAmerica Corporation and each BankAmerica Corporation subsidiary which is the direct or indirect parent of BALCAP may also be deemed to be the indirect beneficial owner of all Units and of the General Partner's 1% General Partner interest owned or deemed owned by BALCAP.
(3) BALCAP reported that it had sole voting and dispositive power over these Units.
UNIT OWNERSHIP BY MANAGEMENT
Set forth below is information regarding interests in the Partnership owned by each director of and all directors and executive officers, as a group, of the General Partner. Unless otherwise noted, each person has sole voting and investment power over all units owned.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a discussion of certain fees, expenses and reimbursements payable and paid to the General Partner and its affiliates by the Partnership, see Note 8 of Notes to Financial Statements. From time to time, the Partnership has borrowed funds from BALCAP or BA Leasing & Capital, including advances for expense payments. All such borrowings were unsecured and bore interest at a floating rate not exceeding the prime rate. At December 31, 2001 Airlease owed BALCAP $323,702 for such borrowings.
For a discussion of certain terms of the Limited Partnership Agreement regarding the Partnership's participation in aircraft leasing investments made by USL Capital and its Related Entities, see "BUSINESS-Acquisition of Additional Aircraft." For a discussion of aircraft formerly held jointly between the Partnership and USL Capital, see "BUSINESS- Participants in Leases."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements of the Partnership are included in this report as Appendix A: PAGE
Management's Responsibility for Financial Statements......... A-1
Report of Independent Auditors .............................. A-2
Financial Statements:
Statements of Income for the Years Ended December 31, 2001, 2000 and 1999 .......................................... A-3
Balance Sheets, as of December 31, 2001 and 2000........ A-4
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999..................................... A-5
Statements of Changes in Partners' Equity for the Years Ended December 31, 2001, 2000 and 1999........................ A-6
Notes to Financial Statements ............................... A-6
Financial statement schedules other than those listed above are omitted because the required information is included in the financial statements or the notes thereto or because of the absence of conditions under which they are required.
(b) The Partnership did not file any reports on Form 8-K during the last quarter of the fiscal year ended December 31, 2001.
(c) Exhibits required by Item 601 of Regulation S-K:
EXHIBIT NO. DESCRIPTION
3.1(1) Amended and Restated Agreement of Limited Partnership of Partnership.
3.2(1) Form of Certificate for Limited Partnership Units of Partnership.
3.3(1) Form of Depositary Agreement among Partnership, Chase-Mellon Shareholder Services (formerly Manufacturers Hanover Trust Company), the General Partner and Limited Partners and Assignees holding Depositary Receipts.
3.4(1) Form of Depositary Receipt for Units of Limited Partners' Interest in the Partnership
3.5 Amendments to Amended and Restated Partnership Agreement.
4.1(1) Form of Application for Transfer of Depositary Unit.
10.1(1) Trust Agreement, together with Trust Agreement Supplement No. 1-5, dated as of July 10, 1986, between the Registrant, Meridian Trust Company and the General Partner.
10.3(1) Lease Agreement, together with Lease Supplement Nos. 1-5, dated as of July 10, 1986, between Meridian Trust Company, not in its individual capacity but solely as Trustee, and Pacific Southwest Airlines. __________________
(1) Incorporated by reference to the Partnership's Registration Statement on Form S-1 (File No. 33-7985), as amended.
10.44(2) Aircraft Lease Agreement dated as of April 15, 1993 between Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) as Owner Trustee, Lessor, and Federal Express Corporation, Lessee with respect to one (1) Boeing 727-2D4 Aircraft, U.S. Registration No. 362PA (manufacture serial no. 21850).
10.49(3) Assignment and Assumption Agreement dated as of January 31, 1997 between USL Capital Corporation and the Registrant.
10.50(3) Lease, together with Lease Supplement No. 1, dated as of March 15, 1984 between DC-9T-III, Inc., as Lessor, and Trans World Airlines, Inc., as Lessee, with respect to one (1) McDonnell Douglas DC-9-82 Aircraft, as amended by Amendment Agreement dated as of December 15, 1986.
10.51(4) Loan agreement secured by two aircraft leased to US Airways dated as of December 22, 1997, amended and restated as of December 15, 1998, between Meridian Trust Company, as Trustee, as Borrower and Credit Lyonnais/PK AIRFINANCE, as Lender.
10.52(5) Assignment, Assumption and Amendment Agreement dated April 9, 2001 among Trans World Airlines, Inc., American Airlines, Inc., the registrant and First Security Bank, National Association, as Owner Trustee.
10.53 Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 806USAirframe.
10.54 Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 807USAirframe.
10.55 Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N806US (manufacture serial no. 48038).
10.56 Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N807US (manufacture serial no. 48039). _________________
(2) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2000.
(3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1996.
(4) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1998.
(5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March XX, 2002.
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP (Registrant)
By: Airlease Management Services, Inc., General Partner
By: /s/ DAVID B. GEBLER ______________________________________ David B. Gebler Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
For Airlease Management Services, Inc. ("AMSI"), General Partner
/s/ DAVID B. GEBLER March XX, 2002 ____________________________________________ David B. Gebler Chairman, Chief Executive Officer, President and Director of AMSI
/s/ ROBERT A. KEYES March XX, 2002 ____________________________________________ Robert A. Keyes Chief Financial Officer and Director of AMSI
/s/ RICHARD V. HARRIS March XX, 2002 ____________________________________________ Richard V. Harris Director of AMSI
/s/ K. THOMAS ROSE March XX, 2002 ____________________________________________ K. Thomas Rose Director of AMSI
The foregoing constitute a majority of the members of the Board of Directors of Airlease Management Services, Inc. (the General Partner).
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Airlease Management Services, Inc. ("AMSI"), the General Partner of the Partnership is responsible for the preparation of the Partnership's financial statements and the other financial information in this report. This responsibility includes maintaining the integrity and objectivity of the financial records and the presentation of the Partnership's financial statements in accordance with accounting principles generally accepted in the United States.
The General Partner maintains an internal control structure designed to provide, among other things, reasonable assurance that Partnership records include the transactions of its operations in all material respects and to provide protection against significant misuse or loss of Partnership assets. The internal control structure is supported by careful selection and training of financial management personnel, by written procedures that communicate the details of the control structure to the Partnership's activities, and by staff of operating control specialists of Banc of America Leasing and Capital, LLC., which owns 100% of the stock of AMSI, who conduct reviews of adherence to the Partnership's procedures and policies.
The Partnership's financial statements have been audited by Ernst & Young L.L.P., independent auditors for the years ended December 31, 2001 and 2000. Their audits were conducted in accordance with auditing standards generally accepted in the United States, which included consideration of the General Partner's internal control structure. The Report of Independent Auditors appears on page A-2.
The board of directors of the General Partner, acting through its Audit Committee composed solely of directors who are not employees of the General Partner, is responsible for overseeing the General Partner's fulfillment of its responsibilities in the preparation of the Partnership's financial statements and the financial control of its operations. The independent auditors have full and free access to the Audit Committee and meet with it to discuss their audit work, the Partnership's internal controls, and financial reporting matters.
/s/ DAVID B. GEBLER ____________________________________________ David B. Gebler Chairman, Chief Executive Officer and President Airlease Management Services, Inc.
/s/ ROBERT A. KEYES ____________________________________________ Robert A. Keyes Chief Financial Officer Airlease Management Services, Inc.
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REPORT OF INDEPENDENT AUDITORS
To the Partners of Airlease Ltd., A California Limited Partnership:
We have audited the accompanying balance sheets of Airlease Ltd. as of December 31, 2001 and 2000, and the related statements of income, changes in Partners'equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Airlease Ltd. at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP. _________________________ Ernst & Young LLP San Francisco, California February 8, 2002
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS
As of December 31, (IN THOUSANDS) 2001 2000 _____________________________________________________________________________
ASSETS
Cash and cash equivalent $ 9,432 $ 17 Finance leases - net 6,949 61,657 Operating leases - net 14,218 0 Aircraft held for lease 21,326 0 Notes receivable (interest and discount) 544 0 Prepaid expenses and other assets 60 162 __________________________ Total assets $ 52,529 $ 61,836 ==========================
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Distribution payable to partners $ 7,521 $ 2,102 Deferred income 509 0 Accounts payable and accrued liabilities 602 468 Taxes payable 223 139 Long-term notes payable 3,389 7,992 __________________________ Total liabilities 12,244 10,701 ==========================
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Limited partners (4,625,000 units outstanding) 39,883 50,624 General partner 402 511 __________________________ Total partners' equity 40,285 51,135 ==========================
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 52,529 $ 61,836 ==========================
See notes to financial statements
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NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Airlease Ltd., A California Limited Partnership (the "partnership") engages in the business of acquiring, either directly or through joint ventures, commercial jet aircraft, spare or separate engines and related rotable parts ("aircraft") and leasing such aircraft to domestic and foreign airlines and freight carriers. The general partner is Airlease Management Services, Inc., a wholly owned subsidiary of Banc of America Leasing and Capital, LLC. ("BALCAP"). BALCAP also holds 793,750 limited partnership units and United States Airlease Holding, Inc. ("Holding"), a wholly owned subsidiary of BALCAP, holds 231,250 limited partnership units. An additional 3,600,000 units are publicly held.
BASIS OF PRESENTATION - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS - The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
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FINANCE LEASES - Lease agreements, under which the partnership recovers substantially all its investment from the minimum lease payments are accounted for as finance leases. At lease commencement, the partnership records the lease receivable, estimated residual value of the leased aircraft, and unearned lease income. The original unearned income is equal to the receivable plus the residual value less the cost of the aircraft (including the acquisition fee paid to an affiliate of the general partner). The remaining unearned income is recognized as revenue over the lease term so as to approximate a level rate of return on the investment.
OPERATING LEASES - Leases that do not meet the criteria for finance leases are accounted for as operating leases. The partnership's undivided interests in aircraft subject to operating leases are recorded at carrying value of the aircraft at lease inception. Aircraft are depreciated over the related lease terms, generally five to nine years on a straight-line basis to an estimated salvage value, or over their estimated useful lives for aircraft held for lease, on a straight-line basis to an estimated salvage value.
NET INCOME PER LIMITED PARTNERSHIP UNIT is computed by dividing the net income allocated to the Limited Partners by the weighted average units outstanding (4,625,000).
LONG LIVED ASSETS - The Partnership accounts for its long-lived assets, including Operating Leases and Aircraft Held for Lease, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." Consistent with SFAS No. 121, the Company identifies and records impairment losses, as circumstances dictate, on long-lived assets used in operations when events and circumstances indicate that assets might be impaired and undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. If these conditions are present, the impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value. Fair value of an impaired asset is considered to be the amount at which the asset could be bought or sold by willing parties.
RECENT ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting Standards Board issued SFAS No 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets, including operating leases and aircraft held for lease. SFAS 144 supersedes SFAS 121 and the accounting and reporting provisions of APB Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS," for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 also amends Accounting Research Bulletin No. 51, "CONSOLIDATED FINANCIAL STATEMENTS," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS 144 is required to be applied starting with fiscal years beginning after December 15, 2001, with certain early adoption permitted. SFAS 144 retains the requirements of SFAS 121 whereby an impairment loss is recognized in an amount equal to the difference between the carrying value and the fair value if the carrying value of an asset is not recoverable based on undiscounted future cash flows. The Company will be required to adopt this statement no later than January 1, 2002 and
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management believes that it will not alter the timing nor magnitude of future impairment losses, if any, than would be recognized under the pre SFAS 144 authoritative accounting literature.
2. FINANCE LEASES
During 2001, the partnership owned seven aircraft, which were subject to finance leases. Five of the aircraft were leased to US Airways, Inc. until the lease expired October 1, 2001. In 2001, 2000, and 1999, leases with US Airways, Inc. resulted in finance lease revenues of $3,363,000, $5,175,000, and $5,873,000, respectively. After the return of the five aircraft, two were re-leased to a new lessee (CSI) subject to two operating lease agreements. The remaining three aircraft were being held for lease as of December 31, 2001.
The sixth aircraft was leased to Trans World Airlines (TWA) under a finance lease expiring in 2002. In April 2001, the lease was restructured and subsequently assumed by American Airlines, at which time it was reclassified as an operating lease. In December 2001, the aircraft was sold for a gain of $965,000. In 2001, 2000, and 1999 this lease generated finance lease income of $293,000, $1,172,000, and $1,310,000, respectively.
The seventh aircraft is leased to Federal Express Corporation (FedEx) under a 13-year finance lease which expires in 2006. In 2001, 2000, and 1999 this lease with FedEx resulted in finance lease income of $346,000, $389,000, and $431,000, respectively. As of December 31, 2001, this lease was the only finance lease on the Partnership's balance sheet.
The finance leases at December 31, 2001 and 2000, are summarized as follows (in thousands):
2001 2000 ---- ---- Receivable in installments $5,893 $22,044 Residual valuation 2,000 45,500 Unearned lease income (944) (5,887) ----- ------- NET INVESTMENT $6,949 $61,657 ====== =======
Residual valuation, which is reviewed annually, represents the estimated amount to be received from the disposition of aircraft after lease termination. If necessary, residual adjustments are made which result in an immediate charge to earnings and/or a reduction in earnings over the remaining term of the lease.
Finance lease receivables at December 31, 2001 are due in installments of $1,310,000 in each year from 2002 through 2005, and $653,000 in 2006.
3. OPERATING LEASES
During 2001, the Partnership had three aircraft that were subject to operating lease treatment. As mentioned above, two aircraft were leased to CSI and generated $296,000 in operating lease rental income in 2001.
The third aircraft was leased to American Airlines and generated $750,000 in operating lease rental income during 2001. The aircraft was sold in December 2001.
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The operating leases at December 31, 2001 and 2000 are summarized as follows (in thousands):
-------
Leased aircraft (at cost) $14,560 Accumulated depreciation (342) -------- NET INVESTMENT $14,218
There were no operating leases in 2000.
4. NOTES RECEIVABLE
In November 2001, the Partnership accepted a note receivable of $606,231 in exchange for past due rent obligations owed to the Partnership. The note accrues interest at a rate of 7% and provides for twelve equal monthly payments beginning in January 2003. The note was recorded at fair market value determined by discounting the future cash flows. Rental income associated with this note was deferred and will be recognized as the note is repaid.
5. AIRCRAFT HELD FOR LEASE
In October 2001, US Airways, Inc. returned five aircraft that had been on lease under a finance lease to the Partnership. Since their return from US Airways, two of these aircraft were re-leased under two operating lease agreements to another lessee prior to December 31, 2001, and are included in the Operating Leases-net in the accompanying balance sheet as of December 31, 2001. The other three aircraft had not been re-leased by the Partnership as of December 31, 2001 and the Partnership is in the process of marketing them for re-lease. These aircraft are classified as held for lease at December 31, 2001. The aircraft are being depreciated while held in inventory.
Each of the aircraft returned by US Airways, Inc. was recorded as of October 1, 2001, at its carrying amount under the terminated US Airways lease of $7,280,000 as this was less than the estimated fair value. Fair value was estimated based primarily on discounted cash flows assuming the aircraft would be re-leased. For the two aircraft, which had been re-leased, cash flows were based on the rents specified in the new lease plus an anticipated cash receipt from the ultimate sale of the aircraft. Cash flow estimates for the aircraft held for lease were based on estimated rents and residual values including an assumption as to the re-lease period. Other factors considered in estimating fair value were published valuations prepared by independent appraisal sources.
Since the events of September 11, 2001, sale and leasing activity for this type of aircraft has been very limited. If the Partnership is unable to lease the aircraft held for lease and is required to sell the aircraft in the near term, the amounts actually realized could differ materially from estimated fair value as calculated using the assumptions described in the preceding paragraph. In reporting periods subsequent to December 31, 2001, these aircraft will be assessed for impairment under FAS 144, when indicators of impairment are identified.
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6. LONG-TERM NOTES PAYABLE
As of December 31, 2001 and 2000 long-term notes payable included the following:
A 7.4% non-recourse loan facility collateralized by the aircraft leased to FedEx, due in semi-annual installments of $451,000 through April 2006. At December 31, 2001 and 2000, $3,389,000 and $4,001,000, were outstanding, respectively.
A 9.35% non-recourse loan facility collateralized by the aircraft that was leased to TWA and subsequently, American Airlines. In December 2001 the aircraft was sold and the loan balance of $565,000 was paid off.
A $7.5 million three-year revolving loan facility was obtained in February 1998. The facility was collateralized by two aircraft on lease to US Airways, Inc. The facility expired on September 30, 2001.
Based upon amounts outstanding at December 31, 2001, the minimum future principal payments on the outstanding fixed-rate long-term note payable are due as follows (in thousands):
2002 $ 659 2003 710 2004 764 2005 822 2006 434 ------ Total Long Term Debt $3,389 ------
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents carrying amounts and fair values of the partnership's financial instruments at December 31, 2001 and 2000. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The carrying amounts presented in the table are included in the balance sheet under the indicated captions.
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Long-term debt is estimated by discounting the future cash flows using rates that are assumed would be charged to the partnership for debt with similar terms and remaining maturities.
8. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES
In accordance with the Agreement of Limited Partnership, the general partner and its affiliates receive expense reimbursement, fees and other compensation for services provided to the partnership.
Amounts earned by the general partner and affiliates for the years ended December 31, 2001, 2000, and 1999, were as follows (in thousands):
2001 2000 1999 ---- ---- ---- Management fees $481 $551 $577 Disposition and remarketing fees 503 52 52 Reimbursement of other costs 79 79 79 Reimbursement of interest costs 10 8 7 ------ ---- ---- TOTAL $1,073 $690 $715 ====== ==== ====
The general partner was allocated its 1% share of the partnership net income and cash distributions. Holding and BALCAP, each a limited partner and an affiliate of the general partner, were also allocated their share of income and cash distributions.
9. FEDERAL INCOME TAX STATUS
The Partnership is considered a publicly traded partnership ("PTP") under the Revenue Act of 1987. Under that Act, the partnership was not subject to federal income tax as a partnership until 1998. Effective January 1, 1998, PTP's were required to choose to retain PTP status and be subjected to federal income tax as a corporation or to delist their units thereby removing themselves from the scope of the PTP rules. Faced with these alternatives, the Partnership initially recommended that its units be delisted.
In August and October 1997, respectively, federal and California tax laws were amended to provide PTP's a third alternative. Under these amended laws, PTP's are allowed to continue to be publicly traded during 1998 and subsequent years without becoming subject to corporate income tax if they elect to pay a 3.5% federal tax and a 1% California tax on their applicable gross income.
The board of directors of the General Partner unanimously concluded, after authorization from the unitholders and consideration of a number of factors, including the 1997 tax law changes and the benefits of liquidity, that is was in the best interests of the unitholders for the partnership to remain publicly traded at that time. Accordingly, in January 1998, the partnership made an election to pay the annual gross income tax at the partnership level.
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10. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING (UNAUDITED)
The aircraft on lease to US Airways, Inc. were purchased subject to a tax benefit transfer lease ("TBT") which provided for the transfer of Federal income tax ownership of these aircraft to a tax lessor until 1991. The transfer was accomplished by the sale, for tax purposes only, of the aircraft to the tax lessor for cash and a note and a leaseback of the aircraft for rental payments which equalled the payments on the note. The rental payments resulted in tax deductions and the interest was included in taxable income. In 1991, the TBT lease agreement terminated and the tax attributes transferred under the TBT lease reverted to the partnership.
The difference between the method of accounting for income tax reporting and the method of accounting used in the accompanying financial statements are as follows (in thousands except per unit amounts):
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11. SELECTED QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000 (in thousands, except per unit amounts):
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.5 Amendments to Amended and Restated Partnership Agreement.
10.53 Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 806USAirframe.
10.54 Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 807USAirframe.
10.55 Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N806US (manufacture serial no. 48038).
10.56 Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N807US (manufacture serial no. 48039).
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