10-Q 1 form10q.txt FORM 10-Q DATED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 Commission file number 1-9259 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP ----------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 94-3008908 --------------------------------- ------------------------------------ (State of Organization) (I.R.S. Employer Identification No.) 555 CALIFORNIA STREET, 4TH FLOOR, SAN FRANCISCO, CA. 94104 ---------------------------------------------------- ------- (Address of principal executive offices) (Zip Code) (415) 765-1814 --------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP =============================================== I N D E X Page No. Part I - Financial Information: Item 1. Financial Statements (Unaudited) Balance Sheets -- September 30, 2001 and December 31, 2000......................3 Statements of Income -- Three and nine months ended September 30, 2001 and 2000.......4 Statements of Cash Flows Nine months ended September 30, 2001 and 2000.................5 Notes to Financial Statements...................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................7 Item 3. Quantitative and Qualitative Disclosures about Market Risk......9 Part II - Other Information: Item 6. Exhibits and Reports on Form 8-K...............................10 Signatures.....................................................11

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP =============================================== ~~STATEMENTS~~BALANCE OFSHEETS ~~INCOME~~SEPTEMBER ~~THREE~~30, ~~MONTHS~~2001 ~~ENDED~~DECEMBER ~~SIX~~31, ~~MONTHS ENDED~~ (~~UNAUDITED;~~ IN THOUSANDS ~~JUNE 30, JUNE 30, _______________________________________________________________________________________~~ EXCEPT ~~PER~~ UNIT ~~AMOUNTS~~DATA) ~~2001~~(UNAUDITED) 2000 ~~2001 2000 REVENUES Finance lease income $ 1,235 $ 1,712 $ 2,771 $ 3,483 Operating lease rentals 246 0 246 0 Other income 9 0 23 0~~ ------- ------- ------- ------- ~~Total revenues 1,490 1,712 3,040 3,483~~ ------- ------- ------- ------- ~~EXPENSES Interest 149 238 323 501 Depreciation~~ - ~~operating leases 145 0 145 0 Management fee~~ - ~~general partner 142 152 288 305 Investor reporting 87 79 193 158 General and administrative 37 41 53 83 Tax on gross income 184 137 369 274~~ ------- ------- ------- ------- ~~Total expenses 744 647 1,371 1,321~~ ------- ------------- ASSETS Cash $ 9 $ 17 Finance leases - net 46,885 61,657 Operating leases - net 8,224 0 Prepaid expenses and other assets 76 162 -------- --------- ~~Net~~Total ~~Income~~assets $ ~~746 $ 1~~55,~~066~~194 $ 161,~~669~~836 ~~$ 2,162~~ ======= =~~======~~ ======= ==~~=====~~ ~~Net~~LIABILITIES ~~Income~~AND ~~Allocated~~PARTNERS' ~~To:~~EQUITY ~~General~~LIABILITIES ~~Partner~~Distribution $payable 7to partners $ 111,402 $ 2,102 Accounts payable and accrued liabilities 636 468 Taxes payable 17 $139 22Long-term ~~=======~~notes ~~=======~~payable ~~=======~~4,553 ~~=======~~7,992 ~~Limited~~-------- ~~Partners~~--------- $Total ~~739~~liabilities $6,608 110,~~055~~701 $-------- 1--------- COMMITMENTS AND CONTINGENCIES PARTNERS' EQUITY Limited partners (4,~~652~~625,000 $units 2outstanding) 48,~~140~~100 ~~=======~~50,624 ~~=======~~General ~~=======~~partner ~~=======~~486 ~~Net~~511 ~~Income~~-------- ~~Per~~--------- ~~Limited~~Total ~~Partnership~~partners' ~~Unit~~equity $48,586 ~~0.16~~51,135 $-------- ~~0.23~~--------- Total liabilities and partners' equity $ ~~0.36~~55,194 $ ~~0.46~~61,836 ======= =~~======~~ ======= ==~~=====~~ ----------------------------------------------------- SEE NOTES TO CONDENSED FINANCIAL STATEMENTS

AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP =============================================== STATEMENTS OF ~~CASH~~INCOME ~~FLOWS~~THREE ~~SIX~~ MONTHS ENDED ~~JUNE~~NINE ~~30,~~MONTHS ENDED (UNAUDITED; IN THOUSANDS) ~~2001~~SEPTEMBER ~~2000~~30, ~~__________________________________________________________________________________________~~SEPTEMBER ~~CASH~~30, ~~FLOWS~~----------------------------------------------------------------------------------------------------- ~~FROM~~EXCEPT ~~OPERATING~~PER ~~ACTIVITIES~~UNIT ~~Net~~AMOUNTS) ~~Income~~2001 $2000 ~~1,669~~2001 $2000 ~~2,162~~REVENUES ~~Adjustments~~Finance tolease ~~reconcile net~~ income to$1,149 ~~net~~$1,657 ~~cash~~$3,920 ~~provided~~$5,140 ~~by operating activities:~~ Operating lease ~~depreciation~~rentals ~~145~~270 0 ~~Increase/(Decrease)~~516 in0 ~~accounts~~Other ~~payable~~income ~~and~~9 ~~accrued~~0 ~~liabilities~~32 ~~334 (105) Decrease in taxes payable (136) (3) Increase in accounts receivable (90)~~ 0 ~~Decrease~~- in- ~~prepaid~~-- ~~expenses~~- ~~and~~Total ~~other~~revenues ~~assets~~1,428 571,657 574,468 5,140 ------- ------- ~~Net cash provided by operating activities 1,979 2,111~~ ------- ------- ~~CASH~~EXPENSES ~~FLOWS~~Interest ~~FROM~~132 ~~INVESTING~~217 ~~ACTIVITIES~~455 ~~Rental~~718 ~~receipts~~Depreciation in- ~~excess~~operating ~~of earned finance~~ lease ~~income~~160 ~~4,522~~0 ~~4,291~~305 ~~-------~~0 ~~-------~~Management ~~Net~~fee ~~cash provided by investing activities 4,522 4,291~~ -~~------~~ ~~-------~~general ~~CASH~~partner ~~FLOWS~~139 ~~FROM~~150 ~~FINANCING~~427 ~~ACTIVITIES~~455 ~~Borrowings/(repayments)~~Investor ~~under~~reporting ~~lines~~87 of79 ~~credit,~~280 ~~net~~237 ~~(1,765)~~General ~~(1,353)~~and ~~Repayment~~administrative of36 ~~long-term~~40 ~~notes~~89 ~~payable~~123 ~~(791)~~Tax ~~(1,018)~~on ~~Distributions~~gross ~~paid~~income to139 ~~partners~~137 ~~(3,877)~~508 ~~(4,017)~~411 ------ ------ ------ ------ ~~Net~~Total ~~cash~~expenses ~~used~~693 by623 ~~financing activities (6~~2,~~433)~~064 (61,~~388)~~944 ------ ------ ------ ------ ~~Increase~~Net ~~(decrease)~~Income in$ ~~cash~~735 68$1,035 14$2,404 ~~Cash~~$3,196 at====== ~~beginning~~====== of====== ~~period~~====== 17Net 2Income ~~-------~~Allocated ~~-------~~To: ~~Cash~~General atPartner ~~end~~$ of7 ~~period~~$ 10 $ 8524 $ 1632 ====== ====== ====== ====== ~~ADDITIONAL~~Limited ~~INFORMATION~~Partners ~~Interest~~$ ~~paid~~728 $1,025 ~~310~~$2,380 $3,164 ~~477~~====== ====== ====== ====== Net Income Per Limited Partnership Unit $ 0.16 $ 0.22 $ 0.51 $ 0.68 ====== ====== ====== ====== ----------------------------------------------------- SEE NOTES TO CONDENSED FINANCIAL STATEMENTS

5 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP =============================================== NOTES TO FINANCIAL STATEMENTS (Unaudited) SEPTEMBER 30, 2001 1. SIGNIFICANT ACCOUNTING POLICIES ------------------------------- BASIS OF PRESENTATION - The accompanying unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of the Partnership's management, necessary for a fair presentation of the financial position and results of operations for the presented periods. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The December 31, 2000 balance sheet included herein is taken from the audited financial statements included in the Partnership's Annual Report and incorporated by reference in the Form 10-K for the year ended December 31, 2000. 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, 2000. 2. NET INCOME PER LIMITED PARTNERSHIP UNIT --------------------------------------- Net Income Per Limited Partnership Unit is computed by dividing the net income allocated to the Limited Partners by the weighted average of the units outstanding (4,625,000). 3. INCOME TAXES ------------ In January 1998, the Partnership made an election to pay an annual combined federal and state tax at the Partnership level of 4.5% tax on its applicable gross income beginning January 1, 1998. The election was made in order to avoid a limitation on the public trading of the Partnership's units. 6 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP =============================================== MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Partnership presently has two long-term debt facilities. At September 30, 2001, the following amounts were outstanding: $3.7 million on a 7.4% non-recourse note collateralized by one aircraft leased to FedEx and a $0.9 million on a 9.35% non-recourse note collateralized by one aircraft on lease to American Airlines. At September 30, 2001, long-term borrowings of $4.6 million represented 3.7% 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. Cash distributions paid in the first nine months of 2001 were $1.21 per limited partnership unit, representing the regular 2000 fourth-quarter cash distribution of $0.45 per unit and the regular 2001 first and second quarter cash distributions of $0.38 per unit each. In September 2001, the Partnership declared a third-quarter 2001 cash distribution of $0.30 per unit totaling $1,401,515 payable on November 15, 2001, to unitholders of record on September 28, 2001. Since this distribution and the first and second quarter 2001 distributions were in excess of earnings, Partnership equity declined to $48.6 million at September 30, 2001 from $51.1 million at December 31, 2000, and limited partner equity per unit declined to $10.40. The portion of the distribution in excess of net income constitutes a return of capital. The 2000 third-quarter cash distribution was $0.45 per unit. RESULTS OF OPERATIONS --------------------- The Partnership earned $735,000 in the third quarter ended September 30, 2001, a decrease of $300,000 from last year's third quarter earnings of $1,035,000. Revenues for the 2001 third quarter were $1,428,000, compared with last year's third quarter revenues of $1,657,000. Net income for the first nine months of 2001 was $2,404,000, a decrease of $792,000 compared with $3,196,000 for the first nine months of 2000. Revenues for the nine-month period were $4,468,000, compared with $5,140,000 for the first nine months of 2000. The decline in the year to date net income is primarily due to lower net lease income resulting from the scheduled decline in finance lease income in 2001, as the balances due from the lessees continued to decline, and from the lower rent received under the lease that was assumed by American Airlines from TWA in April 2001. Expenses for the first nine months of 2001 were $2,064,000, an increase of $120,000 from $1,944,000 for the comparable 2000 period. The increase in expenses is primarily due to an operating lease depreciation expense of $305,000 associated with the American Airlines lease, and an increase in tax payments, partially offset by lower interest expense. In 2000, no operating lease depreciation was recorded, as the lease assumed by American Airlines in April 2001 was previously classified as a finance lease. 7 PORTFOLIO MATTERS ----------------- As of September 30, 2001 the Partnership's portfolio consisted of six MD 82s aircraft (five to be returned by US Airways and one on lease to American Airlines), and one 727-200 FH aircraft (on lease to FedEx). The finance lease with US Airways for five MD-82 aircraft was scheduled to terminate on October 1, 2001. However, the lease remains in effect as an operating lease while certain maintenance work on the aircraft is being performed as required by the lease agreement. In addition, the Partnership is in negotiation with US Airways concerning satisfaction of the aircraft return conditions stipulated in the lease. Until the aircraft is returned in accordance with the lease, US Airways is required to pay rent on a prorated basis. In the meantime, the Partnership continues to market these aircraft for sale or new leases, and it presently is in discussions to lease a number of these aircraft, but no definitive agreements have been reached at this time. Since quarterly distributions are made from cash available from operations, if the aircraft are not sold or leased when the aircraft are returned, quarterly distributions and net income will be adversely impacted. The Partnership is in the process of selling one aircraft in the portfolio and expects the sale to close in December of 2001. The Partnership believes that the events of September 11 have had an adverse effect on the general market for purchase and lease of used aircraft, thereby adversely affecting the Partnership's ability to sell or re-lease aircraft as they come off lease, including the aircraft to be returned by US Airways. The events of September 11 may also affect the ability of existing lessees to meet their obligations to the Partnership, and may have other adverse effects on the Partnership. As the leases for the aircraft in the Partnership's portfolio near their maturity, distributions will depend more on the market value of the aircraft than on the rental payment obligation from existing lessees. In the current market, it is more likely that aircraft at lease end will be re-leased rather than sold. Although Airlease in the past has sold aircraft at prices in excess of book value or re-leased aircraft to others, aircraft values depend on supply and demand, economic conditions, and other factors. Consequently, the Partnership cannot precisely predict the values that will be ultimately attained, especially given the uncertainties in today's weakened market. 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 other press releases and public filings, 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. 8 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 weeks that have the attacks, most of the major U.S. based airlines have announced significant reductions in worldwide capacity, and many have announced plans to accelerate the retirement of certain types of aircraft or to defer the delivery of new aircraft. 9 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) The Partnership did not file any reports on Form 8-K during the quarter ended September 30, 2001. 10 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 NOVEMBER 9, 2001 By: /S/ DAVID B. GEBLER ---------------------- -------------------------------------------- Date David B. Gebler Chairman, Chief Executive Officer and President NOVEMBER 9, 2001 By: /S/ ROBERT A. KEYES ---------------------- -------------------------------------------- Date Robert A. Keyes Chief Financial Officer 11

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