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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[X] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Airlease Ltd., A California Limited Partnership
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(l)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Depositary Units Representing Limited Partners' Interests ("Units")
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(2) Aggregate number of securities to which transaction applies:
4,625,000
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
$15.93 (expected amount of cash to be distributed per Unit)
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$73,676,250.00
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(5) Total fee paid:
$14,735.25
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[X] Fee paid previously with preliminary materials:
wired to the Commission's lockbox at Mellon Bank
- --------------------------------------------------------------------------------
[X] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
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AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
555 CALIFORNIA STREET
SAN FRANCISCO, CALIFORNIA 94104
------------------------
CONSENT SOLICITATION STATEMENT FURNISHED IN CONNECTION
WITH THE SOLICITATION OF CONSENTS
------------------------
This Consent Solicitation Statement is furnished to holders of Depositary
Units representing limited partnership interests ("Units") in Airlease Ltd., A
California Limited Partnership (the "Partnership"), in connection with the
solicitation of consents to authorize the General Partner to amend the Limited
Partnership Agreement (i) to impose restrictions on transferability of the Units
to the extent necessary to avoid the Partnership being taxed as a corporation,
which restrictions, if imposed, would result in the Units being delisted from
trading on the New York Stock Exchange, and (ii) to provide that the Partnership
will not make new aircraft investments, will sell its aircraft as attractive
sale opportunities arise and will dissolve when all assets are sold; and if any
amendment or proposed amendment to partnership tax law is enacted or pending, to
authorize the General Partner to take such other actions which the General
Partner determines are in the best interests of the Partnership and the Limited
Partners and which are consistent with the intent of the proposal described in
this Consent Solicitation Statement, including amending the Limited Partnership
Agreement. These authorizations to the General Partner (collectively, the
"Proposal") comprise a single proposal, and consent to the Proposal will
constitute consent to the adoption of either or both of the amendments to the
Limited Partnership Agreement described above, including the resulting
liquidation and dissolution of the Partnership, and if any amendment or proposed
amendment to partnership tax law is enacted or pending, consent to such other
actions which the General Partner determines to be in the best interests of the
Partnership and the Limited Partners and to be consistent with the intent of the
Proposal. See "THE PROPOSAL."
This solicitation is made by Airlease Management Services, Inc., the general
partner of the Partnership (the "General Partner"). The General Partner is a
wholly owned subsidiary of BA Leasing & Capital Corporation, a California
corporation ("BALCAP"), which in turn is an indirect wholly owned subsidiary of
BankAmerica Corporation.
As previously reported to Unitholders, under current federal income tax law
the Partnership will be taxed as a corporation beginning on January 1, 1998 if
the Units continue to be publicly traded. If the Partnership were taxed as a
corporation, distributions to Unitholders would be reduced substantially. Two
alternatives are available to eliminate this second level of tax: (i) sell all
assets and dissolve the Partnership by December 31, 1997; or (ii) restrict
transferability of Units. After studying these alternatives and the alternative
of permitting the Partnership to be taxed as a corporation and taking into
account the Partnership's competitive position, the General Partner concluded
that selling all of the assets during 1997 would likely result in lower values
than if the assets could be sold over a longer period of time. The General
Partner recognized that a higher value from distributions could be achieved by
avoiding corporate taxation, and it determined that the best way to maximize
value to the Limited Partners would be to restrict transferability of the Units
and to sell the Partnership's assets over time as attractive opportunities
arise. This alternative avoids the second layer of tax by restricting
transferability of Units and reduces the period of illiquidity caused by the
transfer restrictions by providing that net sales proceeds be distributed to
Unitholders as aircraft are sold. SEE "SPECIAL FACTORS" FOR A DESCRIPTION OF THE
REASONS FOR THE PROPOSAL AND FOR A DISCUSSION OF FACTORS TO BE CONSIDERED BY
LIMITED PARTNERS IN DETERMINING WHETHER TO CONSENT TO THE PROPOSAL.
IF THE PROPOSAL IS APPROVED, Unitholders will continue to receive
distributions from cash available from operations and from aircraft sales
without the imposition of an additional tax. However, unless a change in
partnership tax law is enacted or is pending, the General Partner will impose
restrictions on transferability of the Units effective on or about December 17,
1997 and the Units will be delisted from trading on the New York Stock Exchange
at that time. Thereafter, there will be no public market for the Units. Under
provisions of tax law, there are services which may be available to facilitate
trading of a limited number of Units each year. However, there can be no
assurance that any such services will facilitate trading with respect to the
Units or as to the price at which Units may be sold using such a service. In the
absence of such a service, Unitholders may be unable to sell their Units. See
"THE PROPOSAL -- Restrictions on Unit Transferability." The Proposal also
authorizes the General Partner not to make any new aircraft investments for the
Partnership, to sell aircraft as attractive opportunities arise, to distribute
net sales proceeds to Unitholders after each disposition and to dissolve the
Partnership when all assets are sold. Although the Partnership cannot predict
when sales will be made, assuming that lessees comply with their lease
obligations, renewal options available under leases are not exercised and the
aircraft are sold at the end of their existing lease terms, 86% of the assets
would be sold within five years and the remainder by 2006. There can be no
assurance that these circumstances will occur or as to the price at which
aircraft may be sold. See "THE PROPOSAL -- Portfolio Runoff." If the Proposal is
approved, the General Partner will be authorized to amend the Limited
Partnership Agreement as described above without further consent of the
Unitholders.
Two bills are pending in Congress which, if enacted, would continue to tax
publicly traded partnerships, such as the Partnership, as partnerships but would
impose a tax on the gross income of such partnerships. No prediction can be made
as to whether or in what form such legislation may be enacted. Because of this
potential change in partnership tax law, if the Proposal is approved and if any
amendment or proposed amendment to partnership tax law is enacted or pending,
the General Partner will be authorized to take such other actions as it
determines to be in the best interests of the Partnership and the Limited
Partners and to be consistent with the intent of the Proposal. See "THE
PROPOSAL -- Potential Change in Tax Law."
For information as to the projected present value of future cash
distributions assuming the Proposal is approved and implemented and there is no
change in partnership tax law, see "SPECIAL FACTORS -- The Proposal -- Review of
Strategic Alternatives -- Restricting Unit Transfers and Portfolio Runoff."
IF THE PROPOSAL IS NOT APPROVED, the General Partner will not seek to delist
from the New York Stock Exchange. In this event, unless partnership tax law is
amended, the Partnership will be taxed as a corporation and distributions would
be reduced substantially. In addition, if the Proposal is not approved, the
General Partner will continue to operate the Partnership in accordance with the
Limited Partnership Agreement and will attempt to reinvest proceeds of aircraft
sales until January 1, 2005 (after such date, net sales proceeds are required to
be returned to Unitholders). However, the General Partner believes it is
unlikely that the Partnership will be able to make new investments at the
returns it has experienced in the past. Limited Partner approval may be required
in order for the Partnership to sell all or substantially all of its assets and
distribute the net proceeds, and thus if the Proposal is not approved the
Partnership may again be required to incur the expense of soliciting Limited
Partner consent in order to sell its assets and dissolve. See "SPECIAL
FACTORS -- Risks and Benefits to the Limited Partners If the Proposal Is Not
Consummated."
The General Partner believes that, taking into account taxation at the
partnership level and the Partnership's competitive position in the market, the
highest return to Unitholders with the least risk would be obtained through the
Proposal. The General Partner further believes that it is unlikely that any
other alternative, such as immediate sale of all Partnership assets or
permitting the Partnership to be taxed as a corporation, would result in higher
returns than the Proposal.
THIS PROPOSAL HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH PROPOSAL NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
June 24, 1997
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THIS CONSENT SOLICITATION STATEMENT CONTAINS CERTAIN FORWARD LOOKING STATEMENTS
WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF
THE PARTNERSHIP FOLLOWING THE CONSUMMATION OF THE PROPOSAL OR THE OTHER
STRATEGIC ALTERNATIVES AVAILABLE TO MAXIMIZE VALUE TO THE LIMITED PARTNERS
(COLLECTIVELY THE "ALTERNATIVES"), INCLUDING STATEMENTS RELATING TO: (A) THE
IMPACT ON REVENUES, EXPENSES AND CASH FLOW OF THE PROPOSAL OR ANOTHER
ALTERNATIVE UNDER CERTAIN ASSUMPTIONS; AND (B) FUTURE CASH DISTRIBUTIONS WHICH
WOULD BE PAYABLE AS A RESULT OF THE PROPOSAL OR ANOTHER ALTERNATIVE. SEE
"SPECIAL FACTORS -- THE PROPOSAL -- REVIEW OF STRATEGIC
ALTERNATIVES -- RESTRICTING UNIT TRANSFERS AND PORTFOLIO RUNOFF." THESE FORWARD
LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT MAY
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES:
(1) LESSEES MAY DEFAULT UNDER LEASES, CAUSING THE PARTNERSHIP TO INCUR
UNCONTEMPLATED EXPENSES OR NOT TO RECEIVE RENTAL INCOME AS AND WHEN EXPECTED;
(2) AIRCRAFT COULD BE SOLD FOR MORE OR LESS THAN APPRAISED RESIDUAL VALUES OR AT
TIMES OTHER THAN UPON ASSUMED LEASE TERMINATION DATES; (3) LESSEES MAY EXERCISE
RENEWAL OPTIONS UNDER THE LEASE WHICH COULD AFFECT THE PARTNERSHIP'S ABILITY TO
SELL AIRCRAFT ON THE ASSUMED DATES; (4) COMPETITIVE PRESSURE OR CHANGES IN THE
AIRCRAFT OR AIRCRAFT LEASING MARKET MAY BE GREATER THAN ESTIMATED; (5)
LEGISLATION OR REGULATORY CHANGES WHICH ADVERSELY AFFECT THE VALUE OF THE
AIRCRAFT MAY OCCUR; OR (6) CHANGES IN THE TAX LAW OR IN INTEREST RATES MAY
OCCUR. SEE "SPECIAL FACTORS -- THE PROPOSAL -- REVIEW OF STRATEGIC ALTERNATIVES"
AND "-- RISKS AND BENEFITS TO THE LIMITED PARTNERS IF THE PROPOSAL IS
CONSUMMATED."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY............................................................................... 1
The Partnership..................................................................... 1
Solicitation of Consents............................................................ 1
Vote Required; Record Date.......................................................... 2
Background for the Proposal; Review of Strategic Alternatives....................... 2
Background for the Proposal...................................................... 2
Review of Strategic Alternatives................................................. 3
Reasons for the Proposal............................................................ 3
The Proposal........................................................................ 4
General.......................................................................... 4
Restrictions on Unit Transferability............................................. 4
Portfolio Runoff................................................................. 5
Potential Change in Tax Law...................................................... 5
Amendments to Limited Partnership Agreement...................................... 6
Projected Future Cash Distributions.............................................. 6
Recommendation of the General Partner; Fairness of the Proposal..................... 7
Total Payments to Limited Partners and the General Partner.......................... 8
Conflicts of Interest............................................................... 8
Relationship of General Partner and BALCAP....................................... 8
Interests of General Partner and BALCAP in the Proposal.......................... 8
Ownership of Units by BALCAP..................................................... 8
Risks and Benefits to the Limited Partners If the Proposal Is Consummated........... 9
General.......................................................................... 9
Lack of Liquidity................................................................ 9
Potential Change in Tax Law...................................................... 9
Risks and Benefits to the Limited Partners If the Proposal Is Not Consummated....... 10
General.......................................................................... 10
Taxation of the Partnership...................................................... 11
Certain Federal Income Tax Consequences............................................. 11
Selected Financial Data............................................................. 13
INTRODUCTION.......................................................................... 14
Record Date; Consents; Revocation of Consents....................................... 15
Solicitation........................................................................ 16
Vote Required....................................................................... 16
No Rights to Appraisal of Unit Value................................................ 16
SPECIAL FACTORS....................................................................... 16
The Proposal........................................................................ 16
Background for the Proposal...................................................... 16
1995 Review of Alternatives...................................................... 18
Review of Strategic Alternatives................................................. 19
General........................................................................ 19
Immediate Sale................................................................. 20
Restricting Unit Transfers and Portfolio Runoff................................ 21
Corporate Taxation and Portfolio Runoff........................................ 22
Appraisals....................................................................... 24
Selection of Independent Appraisers............................................ 24
Summary of Appraisals.......................................................... 25
Comparison of Appraisals....................................................... 26
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Meetings of the Board of Directors and the Special Committee..................... 26
General........................................................................ 26
December 11, 1996 Board Meeting................................................ 26
February 12, 1997 Board Meeting................................................ 26
February 20, 1997 Special Committee Meeting.................................... 27
March 4, 1997 Special Committee Meeting........................................ 27
March 11, 1997 Special Committee Meeting....................................... 28
March 13, 1997 Meeting of the Board of Directors............................... 28
June 2, 1997 Meeting of the Special Committee and the Board.................... 28
Recommendation of the Special Committee and the Board; Fairness of the Proposal..... 29
Conflicts of Interest............................................................... 30
Relationship of General Partner and BALCAP....................................... 30
Interests of General Partner and BALCAP in the Proposal.......................... 30
Fees and Distributions If Proposal Is Consummated.............................. 30
Fees and Distributions If Proposal Is Not Consummated.......................... 30
Ownership of Units by BALCAP..................................................... 31
Total Payments to Limited Partners and the General Partner.......................... 31
Risks and Benefits to the Limited Partners If the Proposal Is Consummated........... 32
General.......................................................................... 32
Lack of Liquidity................................................................ 32
Potential Change in Tax Law...................................................... 32
Risks of Aircraft Leasing........................................................ 33
Risks and Benefits to the Limited Partners If the Proposal Is Not Consummated....... 34
General.......................................................................... 34
Taxation of the Partnership...................................................... 34
Risks of Aircraft Leasing........................................................ 35
Proposal Costs Incurred.......................................................... 35
Possible Benefits from Continuation of the Partnership's Business................ 35
THE PROPOSAL.......................................................................... 35
General............................................................................. 35
Restrictions on Unit Transferability................................................ 36
Portfolio Runoff.................................................................... 38
Potential Change in Tax Law......................................................... 39
Amendments to Limited Partnership Agreement......................................... 40
Projected Future Cash Distributions................................................. 40
Regulatory Requirements............................................................. 40
THE PARTNERSHIP....................................................................... 41
General............................................................................. 41
The BALCAP/USL Capital Transaction.................................................. 41
Principal Investment Objectives..................................................... 41
Aircraft Portfolio.................................................................. 42
Existing Participants in Leases..................................................... 43
Description of Leases............................................................... 43
Aircraft Remarketing................................................................ 44
Disposition of Aircraft............................................................. 44
Joint Ventures/General Arrangements................................................. 45
Borrowing Policies.................................................................. 45
Management of Aircraft Portfolio.................................................... 45
Registration of Aircraft; United States Person...................................... 45
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Government Regulation............................................................... 46
General.......................................................................... 46
Maintenance...................................................................... 46
Aircraft Noise................................................................... 47
Acquisition of Additional Aircraft.................................................. 47
Employees........................................................................... 48
Properties.......................................................................... 48
Legal Proceedings................................................................... 48
MARKET PRICE OF UNITS AND DISTRIBUTIONS TO UNITHOLDERS................................ 48
Units Outstanding................................................................... 48
Market Price........................................................................ 49
Distributions to Unitholders........................................................ 49
Cash Distributions............................................................... 49
Cash Available from Operations................................................... 50
Cash Available from Sale or Refinancing.......................................... 50
Tax Allocations.................................................................. 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 50
Liquidity and Capital Resources..................................................... 50
At December 31, 1996............................................................. 50
At March 31, 1997................................................................ 51
Results of Operations............................................................... 52
For the Three Years Ended December 31, 1996...................................... 52
For the Quarter Ended March 31, 1997............................................. 53
Plan to Restrict Transferability of Units and Cease Reinvestment.................... 53
MANAGEMENT............................................................................ 55
General............................................................................. 55
Directors and Executive Officers.................................................... 55
Executive Compensation.............................................................. 56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 57
Unit Ownership by Certain Beneficial Owners......................................... 57
Unit Ownership by Management........................................................ 57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 57
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................... 58
Partnership Tax Status.............................................................. 58
Transfer Restrictions............................................................... 59
Sales of Aircraft................................................................... 59
Passive Loss Limitation............................................................. 60
Distributions of Sale Proceeds...................................................... 61
Tax Allocations of Distributions.................................................... 61
Final Partnership Returns and Future Tax Issues..................................... 61
State Income Tax Considerations..................................................... 61
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES....................... FS-1
EXHIBITS
A Cash Flow Projections
B Appraisals
C Amendment to Limited Partnership Agreement
</TABLE>
iii
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Consent Solicitation Statement. This summary does not purport to be
complete and is qualified in its entirety by reference to the more detailed
information contained elsewhere in this Consent Solicitation Statement and the
Exhibits hereto. Limited Partners are urged to read this Consent Solicitation
Statement and the Exhibits hereto in their entirety.
THE PARTNERSHIP
Airlease Ltd., A California Limited Partnership (the "Partnership" or
"Airlease"), invests in commercial aircraft and leases the aircraft to others,
primarily airlines, pursuant to full payout or operating leases. The general
partner of the Partnership, Airlease Management Services, Inc., a Delaware
corporation (the "General Partner"), is a wholly owned subsidiary of BA Leasing
& Capital Corporation, a California corporation ("BALCAP"), which in turn is a
wholly owned indirect subsidiary of BankAmerica Corporation. The principal
executive offices of the Partnership are located at 555 California Street,
Fourth Floor, San Francisco, California 94104. See "THE PARTNERSHIP -- General."
SOLICITATION OF CONSENTS
The purpose of the solicitation of consents is to obtain the consent of
holders of Depositary Units representing limited partnership interests ("Units")
to authorize the General Partner to amend the Amended and Restated Agreement of
Limited Partnership, as amended, of the Partnership (the "Limited Partnership
Agreement") (i) to impose restrictions on transferability of the Units to the
extent necessary to avoid the Partnership being taxed as a corporation, which
restrictions, if imposed, would result in the Units being delisted from trading
on the New York Stock Exchange ("Restrictions on Unit Transferability"), and
(ii) to provide that the Partnership will not make new aircraft investments,
will sell its aircraft as attractive sale opportunities arise and will dissolve
when all assets are sold ("Portfolio Runoff"); and if any amendment or proposed
amendment to partnership tax law is enacted or pending, to authorize the General
Partner to take such other actions which the General Partner determines are in
the best interests of the Partnership and the Limited Partners and which are
consistent with the intent of the proposal described in this Consent
Solicitation Statement, including amending the Limited Partnership Agreement.
These authorizations to the General Partner (collectively, the "Proposal")
comprise a single proposal, and consent to the Proposal will constitute consent
to the adoption of either or both of the amendments to the Limited Partnership
Agreement described above, including the resulting liquidation and dissolution
of the Partnership, and if any amendment or proposed amendment to partnership
tax law is enacted or pending, consent to such other actions which the General
Partner determines to be in the best interests of the Partnership and the
Limited Partners and to be consistent with the intent of the Proposal. See "THE
PROPOSAL."
If the Proposal is approved, Unitholders will continue to receive
distributions from cash available from operations and from aircraft sales
without the imposition of an additional tax. However, unless a change in
partnership tax law is enacted or is pending, the General Partner will impose
Restrictions on Unit Transferability effective on or about December 17, 1997 and
the Units will be delisted from trading on the New York Stock Exchange at that
time. Thereafter, there will be no public market for the Units. Under provisions
of tax law, there are services which may be available to facilitate trading of a
limited number of Units each year. However, there can be no assurance that any
such services will facilitate trading with respect to the Units or as to the
price at which Units may be sold using such a service. In the absence of such a
service, Unitholders may be unable to sell their Units. See "THE
PROPOSAL -- Restrictions on Unit Transferability." The Proposal also authorizes
the General Partner not to make any new aircraft investments for the
Partnership, to sell aircraft as attractive opportunities arise, to distribute
net sales proceeds to Unitholders after each disposition and to dissolve the
Partnership when all assets are sold. Although the Partnership cannot predict
when sales will be made, assuming that lessees comply with their lease
obligations, renewal options available under certain leases are not exercised
and the aircraft were sold at the end of their existing lease terms, 86% of the
assets would be sold within five years and the remainder by 2006. There can be
no assurance that these circumstances will occur or as to the price at which
aircraft may be sold. See "THE
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<PAGE> 8
PROPOSAL -- Portfolio Runoff." If the Proposal is approved, the General Partner
will be authorized to amend the Limited Partnership Agreement as described above
without further consent of the Unitholders.
Two bills are pending in Congress which, if enacted, would continue to tax
publicly traded partnerships, such as the Partnership, as partnerships but would
impose a tax on the gross income of such partnerships. No prediction can be made
as to whether or in what form such legislation may be enacted. Because of this
potential change in partnership tax law, if the Proposal is approved and if any
amendment or proposed amendment to partnership tax law is enacted or pending,
the General Partner will be authorized to take such other actions as it
determines to be in the best interests of the Partnership and the Limited
Partners and to be consistent with the intent of the Proposal. See "THE
PROPOSAL -- Potential Change in Tax Law."
For information as to the projected present value of future cash
distributions assuming the Proposal is approved and implemented and there is no
change in partnership tax law, see "SPECIAL FACTORS -- The Proposal -- Review of
Strategic Alternatives -- Restricting Unit Transfers and Portfolio Runoff."
VOTE REQUIRED; RECORD DATE
Pursuant to the Limited Partnership Agreement, approval of the Proposal
requires the consent of Limited Partners of record who hold a majority of all
outstanding Units held by Limited Partners, including Units held by affiliates
of the General Partner. BALCAP owns directly or through wholly owned
subsidiaries 22.2% of the outstanding Units. BALCAP has advised the General
Partner that it intends to vote its Units in favor of the Proposal. The record
date for determining Limited Partners entitled to give written consent to the
Proposal is June 4, 1997. See "INTRODUCTION."
BACKGROUND FOR THE PROPOSAL; REVIEW OF STRATEGIC ALTERNATIVES
Background for the Proposal. The Partnership began operations in 1986, with
the principal investment objectives of generating income for quarterly cash
distributions to Unitholders and building a diversified portfolio of leased
aircraft. At that time the Partnership intended that until January 1, 2005, a
substantial portion of the cash derived from the sale, refinancing or other
disposition of aircraft would be used to purchase additional aircraft if
attractive investments were available. Thereafter the Partnership would enter a
disposition phase during which its aircraft portfolio would be sold and proceeds
distributed to Unitholders, with the plan that all assets would be sold and the
Partnership would be dissolved by January 1, 2012.
Since the Partnership's formation, significant changes in the tax law and
in the aircraft and aircraft leasing markets have occurred. First, as previously
reported to Unitholders, unless partnership tax law is amended, changes in the
federal income tax laws which occurred in 1987 will cause the Partnership to be
taxed as a corporation beginning on January 1, 1998 if the Units continue to be
traded on an established securities market or readily tradeable on a secondary
market (or the substantial equivalent thereof). If the Partnership were taxed as
a corporation: no deductions arising from partnership operations would be
allowable to the Unitholders; income of the Partnership would be taxable at
corporate rates; distributions to Unitholders would be taxable as dividends to
the extent of the Partnership's current or accumulated earnings and profits; and
distributions to Unitholders would be reduced substantially. The Partnership has
worked with industry groups to lobby for a legislative solution to this
taxation, but to date these efforts have been unsuccessful. However, two bills
are pending in Congress which, if enacted, would continue to tax publicly traded
partnerships, such as the Partnership, as partnerships but would impose a tax on
the gross income of such partnerships. See "THE PROPOSAL -- Potential Change in
Tax Law."
As the Partnership has advised Unitholders over the course of the
Partnership's existence, significant changes in the aircraft and aircraft
leasing markets have occurred since the inception of the Partnership. In the
past ten years, the supply of commercial jet aircraft has increased
substantially, but the demand has not always kept pace with supply causing
periods of overcapacity. Oversupply adversely impacts lessors, like the
Partnership, because it increases the competition among lessors to place and
retain aircraft on lease and lease rates decline. Similarly, opportunities for
gain on sale of aircraft are reduced. Although demand for aircraft has been
increasing in the last two years as many airlines have returned to profitability
and more recently lease
2
<PAGE> 9
rates appear to be improving, the airline industry tends to be cyclical,
indicating a potential return to less favorable conditions.
The aircraft leasing industry has become increasingly competitive. 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 new aircraft or to purchase aircraft at volume discounts.
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 most of the Partnership's
aircraft are being used to secure 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 investment opportunities that offer
an appropriate balance of risk and reward has been very difficult. During the
past five years the Partnership has made only two aircraft investments, both of
which were possible because of special circumstances which the General Partner
believes are unlikely to occur in the future.
In 1996, the Partnership sold interests in seven aircraft (a 50% interest
in an aircraft on lease to Finnair OY ("Finnair") and a one-third interest in
six aircraft on lease to Continental Airlines ("Continental")) at a profit.
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.
Because of the tax law which, unless amended, will impact the Partnership
in January 1998 and the competitive position of the Partnership described above,
in late 1996 the General Partner began a review of the strategic alternatives
available to the Partnership in order to maximize value to the Limited Partners.
See "SPECIAL FACTORS -- The Proposal -- Background for the Proposal."
Review of Strategic Alternatives. The principal alternatives considered and
analyzed by the General Partner were: (i) immediate sale of all aircraft and
dissolution of the Partnership; (ii) restricting transferability of the Units
(thereby preserving the Partnership's tax status as a partnership), ceasing to
reinvest in aircraft and distributing cash proceeds to Unitholders from sale of
aircraft as they come off lease; and (iii) not limiting transferability of the
Units (thereby subjecting the Partnership to corporate tax beginning in January
1998) and ceasing to reinvest under the same circumstances as described in
clause (ii) above. These alternatives were compared on the basis of estimated
present cash values which ultimately could be distributed to the Unitholders.
See "SPECIAL FACTORS -- The Proposal -- Review of Strategic Alternatives."
As part of the evaluation process, three appraisers, BK Associates, Inc.,
Avitas and GRA Aviation Specialists (collectively, the "Appraisers"), were
selected and retained by the General Partner, on behalf of the Partnership, to
separately appraise the fair market value of the aircraft on lease to US
Airways, Inc. ("USAir"), TransWorld Airlines ("TWA") and FedEx. See "SPECIAL
FACTORS -- The Proposal -- Appraisals."
REASONS FOR THE PROPOSAL
As described above under "Background for the Proposal," under current tax
law, unless transferability of the Units is restricted, the Partnership will be
subject to tax beginning on January 1, 1998 and distributions will be
substantially reduced. In addition, because of the Partnership's competitive
position, finding new investments opportunities that offer an appropriate
balance of risk and reward has been very difficult.
In light of these factors, the General Partner analyzed strategic
alternatives available to maximize value to the Limited Partners. Two
alternatives are available to eliminate the second level of tax: (i) sell all
assets and dissolve the Partnership by December 31, 1997; or (ii) restrict
transferability of Units. After studying
3
<PAGE> 10
these alternatives and the alternative of permitting the Partnership to be taxed
as a corporation and taking into account the Partnership's competitive position,
the General Partner concluded that selling all of the assets during 1997 would
likely result in lower values than if the assets could be sold over a longer
period of time. The General Partner recognized that a higher value from
distributions could be achieved by avoiding corporate taxation, and it
determined that the best way to maximize value to the Limited Partners would be
to restrict transferability of the Units and to sell the Partnership's assets
over time as attractive opportunities arise. This alternative avoids the second
layer of tax by restricting transferability of Units and reduces the period of
illiquidity caused by the transfer restrictions by providing that net sales
proceeds be distributed to Unitholders as aircraft are sold.
Taking into account the factors mentioned above, the General Partner
believes that the highest return to Unitholders with the least risk would be
obtained through the Proposal and no other alternative, such as immediate sale
of all Partnership assets or permitting the Partnership to be taxed as a
corporation, is likely to result in higher returns than the Proposal.
THE PROPOSAL
General. The Proposal provides for the Restrictions on Unit
Transferability, for Portfolio Runoff and for certain related amendments to the
Limited Partnership Agreement. In addition, if any amendment or proposed
amendment to partnership tax law is enacted or is pending, the Proposal
authorizes the General Partner to take such other actions (including amending
the Limited Partnership Agreement) which the General Partner determines are in
the best interests of the Partnership and the Limited Partners and are
consistent with the intent of the Restrictions on Unit Transferability and
Portfolio Runoff in light of any change or proposed change in partnership tax
law from the law in existence on June 1, 1997.
If the Proposal is approved, the General Partner will be authorized,
without further consent of the Limited Partners, to implement the Restrictions
on Unit Transferability and/or Portfolio Runoff (which includes the resulting
liquidation and dissolution of the Partnership). In addition, if the Proposal is
approved and if any amendment or proposed amendment to partnership tax law is
enacted or pending, the General Partner will also be authorized to take such
other actions as it determines to be in the best interests of the Partnership
and the Limited Partners and to be consistent with the intent of the
Restrictions on Unit Transferability and Portfolio Runoff in light of any change
or proposed change in partnership tax law from the law in existence on June 1,
1997.
Restrictions on Unit Transferability. Unless partnership tax law is
amended, changes in the federal income tax laws which occurred in 1987 will
cause the Partnership to be taxed as a corporation beginning on January 1, 1998
if the Units continue to be traded on an established securities market or if the
Units are readily tradeable on a secondary market (or the substantial equivalent
thereof). In order for the Partnership to avoid being taxed as a corporation,
the General Partner is proposing that it be authorized to impose Restrictions on
Unit Transferability in accordance with tax law on or about December 17, 1997.
The imposition of such restrictions will cause the New York Stock Exchange to
delist the Units from trading at that time. Until such delisting occurs,
Unitholders are free to purchase or sell Units without restriction.
On and after the date on which the Restrictions on Unit Transferability are
imposed, the General Partner will not admit any transferee of Units as a partner
or recognize any rights of a transferee of Units (including any right to receive
distributions or any right to an interest in capital or profits of the
Partnership) unless the transferee certifies in an application for transfer (the
"Transfer Application") to the Partnership that the transferee has acquired the
Units (a) by a "transfer not involving trading" within the meaning of Internal
Revenue Service Notice 88-75 (the "Notice"), (b) in compliance with the "two
percent" safe harbor described in the Notice or (c) in a qualified "matching
service" transaction described in the Notice. Furthermore, any transfer of Units
will be subject to a determination by the General Partner in its sole discretion
that such transfer will not cause the aggregate percentage of Units transferred
during the calendar year to exceed the allowable amount or otherwise cause the
Units to be treated as traded on an established securities market or readily
tradeable on a secondary market (or the substantial equivalent thereof) as
defined in Section 7704(b) of the Internal Revenue Code of 1986, as amended (the
"Code"). A legend to this effect will be printed on all Depositary Units
evidencing interests in the Partnership.
4
<PAGE> 11
As a result of these limitations, currently the maximum number of Units
that can be traded in any year (other than certain sales between family members,
upon death or distributions from qualified retirement plans) is approximately
7.78% of the outstanding Units, and most of these trades would need to be
conducted through a qualified matching service which imposes certain delays
before sales may be consummated. Accordingly, a Unitholder may not be able to
trade its Units, particularly if a Unitholder attempts to sell during the later
part of any calendar year after 1997.
There can be no assurance that any such service will facilitate trading
with respect to the Units or as to the price at which Units may be sold using
such a service. In the absence of such a service Unitholders may be unable to
sell or purchase Units. However, until the date Restrictions on Unit
Transferability are imposed which is anticipated to be on or about December 17,
1997, and assuming that the Partnership otherwise continues to qualify for
listing, Unitholders are free to sell or purchase Units on the New York Stock
Exchange. No assurance can be given as to future prices for Units bought or sold
on the New York Stock Exchange prior to delisting.
Portfolio Runoff. Because of the illiquidity for Unitholders which will
result from the Restrictions on Unit Transferability, if imposed, and because of
the Partnership's competitive position in the market, the General Partner is
proposing that it be authorized to implement Portfolio Runoff. This means that
the Partnership would not make any new aircraft investments, would sell aircraft
as attractive opportunities arise, would distribute net sales proceeds to
Unitholders after each disposition and would dissolve the Partnership when all
assets are sold. Although the Partnership cannot predict when sales will be
made, assuming that lessees comply with their lease obligations, renewal options
available under leases are not exercised and the aircraft were sold at the end
of their existing lease terms, 86% of the assets would be sold within five years
and the remainder by 2006. There can be no assurance that these circumstances
will occur or as to the price at which aircraft may be sold.
If the Proposal is approved and the General Partner imposes Restrictions on
Unit Transferability, the General Partner will take action consistent with
Portfolio Runoff. If the Proposal is approved but Restrictions on Unit
Transferability are not imposed, the General Partner will consider whether it is
in the best interests of the Limited Partners to cease making new aircraft
investments in light of market conditions and the Partnership's competitive
position. Based upon the Partnership's investment experience over the last
several years and its knowledge of the market, the General Partner anticipates
that it will take action consistent with Portfolio Runoff whether or not
Restrictions on Unit Transferability are imposed.
Promptly after sale of all aircraft, all cash then held by the Partnership,
after payment of remaining liabilities and any reserve necessary for contingent
liabilities, will be distributed to Unitholders and the Partnership will be
dissolved. At that time, the Partnership's registration pursuant to the
Securities and Exchange Act of 1934 and its obligation to file reports
thereunder will be terminated. See "THE PROPOSAL -- Portfolio Runoff."
Potential Change in Tax Law. Two bills are pending in Congress which
provide that publicly traded partnerships that were in existence on December 17,
1987, like the Partnership, could elect to continue to be taxed as partnerships
after December 31, 1997 even though the partnership interests are traded on an
established securities market, but that the electing partnerships would be
subject to an entity level tax on their gross income from the active conduct of
a trade or business. If either of these bills were enacted in its current form
and the Partnership elected to be subject to it, the Units could continue to be
listed on the New York Stock Exchange. Under one bill which is pending in the
House of Representatives, the tax rate would be 15%, and under the other bill
which is pending in the Senate, the tax rate would be 3.5%. Although it is not
clear how such tax would be calculated, under one reasonable interpretation the
tax would reduce the present value of future cash distributions per Unit from
the projected distributions for the Proposal by approximately $2.50-$3.00 (in
the case of the bill pending in the House of Representatives) and approximately
$0.50-$0.75 (in the case of the Senate bill). See "SPECIAL FACTORS -- Review of
Strategic Alternatives -- Restricting Unit Transferability and Portfolio
Runoff."
No prediction can be made as to whether or in what form such legislation
ultimately will be enacted. Similar bills have previously been introduced in
Congress but were not enacted. Furthermore, it is unknown whether California
would adopt any such federal income tax legislation, or enact similar
legislation, to prevent the Partnership from being taxed as a corporation for
California franchise tax purposes beginning January 1,
5
<PAGE> 12
1998 if the Units continue to be publicly traded. Any tax imposed at the
partnership level by California, whether on the gross income of the Partnership,
such as under the pending federal legislation, or which would tax the
Partnership as if it were a corporation, also would reduce the present value of
future cash distributions per Unit from the projected distributions for the
Proposal.
If amendments to partnership tax law are enacted or are pending which
provide advantages to the Partnership and the Limited Partners over the
provisions of existing tax law, the Proposal authorizes the General Partner to
take such other actions (including amending the Limited Partnership Agreement)
which the General Partner determines are in the best interests of the
Partnership and the Limited Partners and which are consistent with the intent of
the Restrictions on Unit Transferability and Portfolio Runoff in light of any
change or proposed change in partnership tax law from the law in existence on
June 1, 1997.
If any amendment or proposed amendment in partnership tax law has been
enacted or is pending, the General Partner will consider whether to impose
Restrictions on Unit Transferability or to take other actions which may be
beneficial to the Partnership and the Limited Partners, taking into account the
benefits of continued liquidity for the Limited Partners, any tax or cost to the
Partnership or the Limited Partners included in any such tax law amendment, and
such other matters which the General Partner may deem relevant in light of such
change or proposed change in tax law. The General Partner intends to value any
options which may be available in a manner consistent with the strategic
alternatives reviewed prior to approving the Proposal and in light of the likely
remaining term of the Partnership.
Although the General Partner has not made a final determination, if the tax
bill pending in the House of Representatives which imposes the 15% tax were
enacted in its current form, the General Partner believes it probably would not
cause the Partnership to be subject to this tax, and instead would impose the
Restrictions on Unit Transferability. The tax bill pending in the Senate is
significantly more favorable; however, the General Partner has not determined
whether, if this bill were enacted in its current form, it would cause the
Partnership to be subject to this tax or would instead impose Restrictions on
Unit Transferability.
If the Proposal is approved, the General Partner will be authorized to
impose Restrictions on Unit Transferability or take such other actions which are
consistent with the intent of the Proposal as described above if it determines
that such transfer restrictions or other actions are in the best interests of
the Partnership and the Limited Partners. If the General Partner does not impose
Restrictions on Unit Transferability as a result of a change in partnership tax
law and assuming the Partnership otherwise continues to qualify for listing, the
Units could continue to be listed on the New York Stock Exchange. Unless there
is an amendment or proposed amendment to partnership tax law which the General
Partner believes may be enacted, Restrictions on Unit Transferability will be
imposed effective on or about December 17, 1997.
Amendments to Limited Partnership Agreement. The Proposal authorizes the
General Partner to amend the Limited Partnership Agreement: (i) to impose
restrictions on transferability of Units described in "Restrictions on Unit
Transferability" above, and (ii) to provide that Cash Available from Sale or
Refinancing be distributed to Unitholders and that assets may be sold and the
Partnership dissolved without further approval by the Unitholders. The Proposal
authorizes the General Partner to adopt either or both of these amendments
without further consent of the Unitholders. In addition, if any amendment or
proposed amendment to partnership tax law is enacted or pending, the Proposal
authorizes the General Partner to take such other actions (including amending
the Limited Partnership Agreement) which the General Partner determines are in
the best interests of the Partnership and the Limited Partners and are
consistent with the intent of the Restrictions on Unit Transferability and
Portfolio Runoff in light of any change or proposed change in partnership tax
law from the law in existence on June 1, 1997. See "THE PROPOSAL -- Amendments
to Limited Partnership Agreement."
Projected Future Cash Distributions. For information as to the present
value of future cash distributions assuming the Proposal is approved and
implemented and there is no change in partnership tax law, see "SPECIAL
FACTORS -- The Proposal -- Review of Strategic Alternatives -- Restricting Unit
Transfers and Portfolio Runoff."
6
<PAGE> 13
RECOMMENDATION OF THE GENERAL PARTNER; FAIRNESS OF THE PROPOSAL
Pursuant to the Limited Partnership Agreement, management of the business
and affairs of the Partnership is the responsibility of the General Partner. The
decision making process with respect to the Proposal was conducted by the
General Partner acting through its Board of Directors (the "Board"). In order to
assure the recommendation to the Limited Partners was not affected by any
conflict of interest between the General Partner or BALCAP on the one hand and
the Limited Partners on the other, the Board appointed a special committee (the
"Special Committee") made up of directors who are independent of and
unaffiliated with BALCAP to provide an independent recommendation to the Board
with respect to the Proposal. The Special Committee and the Board each
determined that the best way to maximize value to Limited Partners is through
the Proposal and that the Proposal is fair to and in the best interest of the
Limited Partners.
In reaching these conclusions the Special Committee and the Board
considered a number of factors including the following:
(i) The effect of the change in tax law would be to substantially
reduce the cash available for future distributions. A higher value from
distributions could be achieved by avoiding corporate taxation. See
"SPECIAL FACTORS -- The Proposal -- Review of Strategic Alternatives" and
"-- Risks and Benefits to the Limited Partners if the Proposal is not
Adopted -- Taxation of the Partnership."
(ii) In general the Partnership's pricing is not competitive in making
new aircraft investments because its sources of capital are limited, its
cost of capital is high, and there is no buildup of equity as all Cash
Available from Operations, as defined in the Limited Partnership Agreement,
is returned to Unitholders. Consequently Airlease is at competitive
disadvantage for future business and it is unlikely to grow. See "SPECIAL
FACTORS -- The Proposal -- Background for the Proposal."
(iii) An immediate sale of all Partnership assets would avoid the
adverse impact of the second level of taxation, but would likely result in
lower values than if the assets could be sold over a greater period of
time. See "SPECIAL FACTORS -- The Proposal -- Review of Strategic
Alternatives -- Immediate Sale."
(iv) Restrictions on Unit Transferability would avoid the adverse
impact of the second level of taxation but would limit Unitholder
liquidity. However, the reduced liquidity may be offset somewhat by the
Proposal which provides that net sales proceeds be distributed to
Unitholders as aircraft are sold. This should shorten the period of
illiquidity, shorten the life of the Partnership and result in earlier than
planned dissolution.
(v) The tax law permits limited trading (currently up to 7.78% of the
outstanding Units annually) if certain qualified matching services are
used. Until the Restrictions on Unit Transferability are imposed on or
about December 17, 1997, Units are freely tradeable. Thus some ability to
purchase and sell Units should be available to Unitholders. See "THE
PROPOSAL -- Restrictions on Unit Transferability."
(vi) The range of values potentially payable to Unitholders under the
Proposal compared to net book value and market value of the Units.
(vii) The values potentially payable to Unitholders under the
alternatives to the Proposal, including Immediate Sale and Corporate
Taxation and Portfolio Runoff, are not expected to provide better returns
to Unitholders than under the Proposal. See "SPECIAL FACTORS -- The
Proposal -- Review of Strategic Alternatives."
(viii) BALCAP, which owns 22.2% of the Units, has stated that it would
vote in favor of the Proposal because it believes the Proposal is the best
alternative to maximize value to Unitholders. See "SPECIAL
FACTORS -- Conflicts of Interest -- Ownership of Units by BALCAP."
7
<PAGE> 14
TOTAL PAYMENTS TO LIMITED PARTNERS AND THE GENERAL PARTNER
The following table sets forth total contributions from and payments to
Limited Partners and the General Partner from the inception of the Partnership
to June 24, 1997.
<TABLE>
<CAPTION>
LIMITED PARTNERS GENERAL PARTNER
------------------------------------- ----------------------
AGGREGATE PER UNIT PERCENTAGE PERCENTAGE
AMOUNT AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- -------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Initial contribution(1)............... $ 87,082 $ 18.83 99% $ 880 1%
Total distributions received.......... $ 104,185 $ 22.53 99% $ 1,053 1%
Market Value of Units as of June 24,
1997(2)............................. $ 55,500 $ 12.00 100% $ 0(3) 0%(3)
Fees paid to General Partner:(4)...... $ 0 $ 0 0% $11,835 100%
</TABLE>
- ---------------
Notes:
(1) Contributions net of underwriting commissions and offering expenses.
(2) Based on the closing price of Units on the New York Stock Exchange.
(3) The General Partner's 1% interest in the Partnership is not represented by
Units and does not have a market value on the New York Stock Exchange.
(4) See "SPECIAL FACTORS -- Conflicts of Interest -- Interests of General
Partner and BALCAP in the Proposal -- Fees and Disbursements if Proposal is
Consummated" and Note 8 to Notes to Financial Statements.
CONFLICTS OF INTEREST
In considering the recommendation of the General Partner, Limited Partners
should consider the conflicts or potential conflicts of interest which are
presented by the Proposal, including the following matters:
Relationship of General Partner and BALCAP. The General Partner is a wholly
owned subsidiary of BALCAP. Certain officers and directors of BALCAP also serve
as officers and directors of the General Partner. This common control and
management presents potential conflicts of interest with respect to the
Proposal, including the discretion granted to the General Partner by the
Proposal. However, the Proposal was approved by the Special Committee consisting
of three directors of the General Partner who are independent of and
unaffiliated with BALCAP and it is anticipated that the exercise of any
discretion granted to the General Partner under the Proposal will be reviewed
and approved by the Special Committee. See "SPECIAL FACTORS -- Conflicts of
Interest -- Relationship of General Partner and BALCAP."
Interests of General Partner and BALCAP in the Proposal. If the Proposal is
approved and consummated in accordance with the assumptions set forth under
"SPECIAL FACTORS -- The Proposal -- Review of Strategic
Alternatives -- Restricting Unit Transfers and Portfolio Runoff," the General
Partner estimates the present value (using a discount rate of 9% per annum) of
fees payable to it under the Limited Partnership Agreement until the last
aircraft is sold and the Partnership is dissolved to be approximately $4
million. This same amount of approximately $4 million is estimated for such fees
if the Proposal is not approved and the Partnership becomes taxable as a
corporation and aircraft were sold on their Lease Termination Dates in
accordance with the assumptions set forth under "SPECIAL FACTORS -- The
Proposal -- Review of Strategic Alternative -- Corporate Taxation and Portfolio
Runoff." In addition, the General Partner has a 1% interest in the profits and
losses of the Partnership for which it paid 1% of total capital contributions to
the Partnership, and this general partnership interest will exist whether or not
the Proposal is consummated. See "SPECIAL FACTORS -- Conflicts of
Interest -- Interests of General Partner and BALCAP in the Proposal."
Ownership of Units by BALCAP. BALCAP owns directly or through its
subsidiaries 22.2% of the Units, which it purchased in September and October
1996 for $15.70 per Unit for a total cash investment in the Units of
$16,092,500. BALCAP has advised the General Partner that it intends to vote its
Units in favor of the Proposal. A vote of 22.2% in favor of the Proposal gives
the General Partner and its affiliates more influence over the Proposal than
would be the case if BALCAP did not own any Units.
8
<PAGE> 15
As an owner of Units, BALCAP has the same interest as unaffiliated Limited
Partners have in the cash distributions and results of operations of the
Partnership. However, because the Units owned by BALCAP are restricted
securities, BALCAP has limited liquidity in the Units currently and will not be
as adversely affected as other Unitholders by the lack of liquidity which will
result from the Restrictions on Unit Transferability. In addition, if the
Partnership were taxed as a corporation, BALCAP would be entitled to a dividends
received deduction (currently 70%) on dividend distributions made by the
Partnership. The dividend received deduction generally is available to
corporations with respect to dividends received on stock owned by the
corporation. Individuals are not entitled to such deduction, and thus, the
effect of a second level of taxation would be less adverse for BALCAP than for
individual and other Unitholders who are not entitled to the dividends received
deduction. See "SPECIAL FACTORS -- Conflicts of Interest -- Ownership of Units
by BALCAP."
RISKS AND BENEFITS TO THE LIMITED PARTNERS IF THE PROPOSAL IS CONSUMMATED
General. If the Proposal is approved and consummated as contemplated and
there is no change in partnership tax law, the General Partner does not expect
that the Partnership will be taxed as a corporation. If it is not so taxed, cash
distributions to Unitholders will not be reduced by the amount of such tax.
However, if the Proposal is approved and consummated and there is no change in
partnership tax law, transferability of the Units will be restricted. In the
absence of a trading market for the Units, the economic return to Unitholders
will depend upon future rental income from aircraft presently owned by the
Partnership, residual values of the aircraft which are realized upon sale, rates
of taxation applicable in future years and the amount and timing of cash
distributions by the Partnership, none of which can be predicted with certainty.
Unitholders will be subject to risks inherent in aircraft leasing until all
aircraft are sold. Significant changes in the market in which the Partnership
operates, primarily higher lease rates and lower debt rates, could result in the
Partnership's ability to locate attractive opportunities for reinvestment of
aircraft sales proceeds. If this occurred, the Unitholders could realize a
higher return if the Partnership were to continue to reinvest proceeds of sale
in new aircraft until January 1, 2005 than if the Partnership did not make new
aircraft investments. However, in light of Partnership's competitive position,
the General Partner does not expect that changes which would impact its
recommendation are likely to occur. See "SPECIAL FACTORS -- Risks and Benefits
to the Limited Partners of the Proposal as Consummated -- General" and "-- Risks
of Aircraft Leasing."
Lack of Liquidity. Upon delisting, there will be no public market for the
Units. The General Partner expects that a qualified matching service, which
matches buyers and sellers of securities of limited partnerships, an electronic
bulletin board, which posts price information, or a similar service will develop
to facilitate purchases and sales of Units. However, Internal Revenue Service
rules impose limitations on the aggregate number of Units which may be sold in
any year utilizing such a service. As a result of these limitations, currently
the maximum number of Units that can be traded in any year (other than certain
sales between family members, upon death or distributions from qualified
retirement plans) is approximately 7.78% of the outstanding Units, and most of
these trades would need to be conducted through a qualified matching service
which imposes certain delays before sales may be consummated. Accordingly, a
Unitholder may not be able to trade its Units, particularly if a Unitholder
attempts to sell during the later part of any calendar year after 1997.
There can be no assurance that any such services will exist or will
participate with respect to the Units or as to the price for Units traded
through such a service. In the absence of such a service or its participation,
Unitholders may be unable to liquidate their investment in the Units. However,
until the date Restrictions on Unit Transferability are imposed which is
anticipated to be on or about December 17, 1997, and assuming that the
Partnership otherwise continues to qualify for listing, Unitholders are free to
sell or purchase Units on the New York Stock Exchange. No assurance can be given
as to future prices for Units bought or sold on the New York Stock Exchange
prior to delisting. See "SPECIAL FACTORS -- Risks and Benefits to the Limited
Partners If the Proposal Is Consummated -- Lack of Liquidity."
Potential Change in Tax Law. Two bills are pending in Congress which, if
enacted, would continue to tax certain publicly traded partnerships as
partnerships but would impose a tax on the gross income of such partnerships. No
prediction can be made as to whether or in what form any such legislation may be
enacted. Because of this potential change in partnership tax law, the Proposal
authorizes the General Partner to take
9
<PAGE> 16
such other actions, including amending the Limited Partnership Agreement, which
the General Partner determines are in the best interests of the Partnership and
the Limited Partners and are consistent with the intent of the Proposal. See
"THE PROPOSAL -- Potential Change in Tax Law."
If the Proposal is approved and if any amendment or proposed amendment to
partnership tax law is enacted or pending, the General Partner will consider
whether to impose Restrictions on Unit Transferability or to take other actions
which may be beneficial to the Partnership and the Limited Partners, taking into
account the benefits of continued liquidity for the Limited Partners, any tax or
cost to the Partnership or the Limited Partners included in any such tax law
amendment, and such other matters which the General Partner may deem relevant in
light of such change or proposed change in tax law. If the Proposal is approved,
without further approval of the Limited Partners, the General Partner will be
authorized to impose Restrictions on Unit Transferability or take such other
actions which are consistent with the intent of the Proposal if it determines
that such transfer restrictions or other actions are in the best interests of
the Partnership and the Limited Partners.
The General Partner determined that it should seek Limited Partner approval
for the Proposal at the present time even though amendments to partnership tax
law are pending in Congress because it cannot predict when, whether or in what
form any such tax legislation will be enacted and the time during which the
Partnership must take action is very short. Unless the tax law is amended, the
Partnership will be taxed as a corporation commencing on January 1, 1998, and
this tax would substantially reduce distributions to Unitholders. Final
legislation enacted as a result of the pending tax bills, if any, may not be
enacted for some time, and it is important to allow sufficient time to obtain
any necessary Limited Partner consent. In addition, since the Partnership is a
California limited partnership with offices in California, the General Partner
must consider the effect of California tax law, and to date no legislation
similar to the pending federal tax bills has been introduced in the California
legislature. Obtaining Limited Partner approval now will provide the Partnership
with flexibility to respond to any change in tax law which may be beneficial to
the Partnership and the Limited Partners while preserving the ability of the
Partnership to avoid taxation as a corporation with the resulting reduction in
cash distributions.
The Proposal grants discretion to the General Partner to take actions
consistent with the intent of the Proposal which are in the best interests of
the Partnership and the Limited Partners if an amendment to the tax law is
enacted or pending. Since the General Partner cannot predict what form any such
legislation may take, it cannot predict what actions may be appropriate. Thus
there is a risk that actions could be taken which have not been specifically
described in this Consent Solicitation Statement. However, prior to taking any
such actions, the General Partner must determine that such actions are in the
best interest of the Partnership and the Limited Partners and are consistent
with the intent of the Proposal.
Unless an amendment to partnership tax law is enacted or is pending,
Restrictions on Unit Transferability will be imposed effective on or about
December 17, 1997. See "SPECIAL FACTORS -- Risks and Benefits to the Limited
Partners If the Proposal is Consummated -- Potential Change in Tax Law."
RISKS AND BENEFITS TO THE LIMITED PARTNERS IF THE PROPOSAL IS NOT CONSUMMATED
General. If the Proposal is not approved, the General Partner will continue
to operate the Partnership in accordance with the Limited Partnership Agreement
and attempt to reinvest aircraft sales proceeds until January 1, 2005. However,
because of the competitive position of the Partnership, the General Partner
believes it is unlikely that the Partnership will be able to make new
investments at the returns it has experienced in the past. Under the Limited
Partnership Agreement, Limited Partner approval may be required in order for the
Partnership to sell all or substantially all of its assets and distribute the
net proceeds to Unitholders. Accordingly, if the Proposal is not approved and
the Partnership is not able to make new investments, the Partnership again may
be required to incur the expense of soliciting Limited Partner consent in order
to sell its assets and dissolve.
If the Partnership continues to operate, the Units should continue to be
traded on the New York Stock Exchange and the Unitholders should continue to
have liquidity in the Units. Although the Partnership will attempt to cause the
Units to remain listed on the New York Stock Exchange, there can be no assurance
that
10
<PAGE> 17
the Units will continue to qualify for such listing or that the Partnership will
continue to meet the listing criteria of the exchange. However, if the Units are
publicly traded on any market and partnership tax law is not amended, the
Partnership will be taxed as a corporation beginning on January 1, 1998, and
cash distributions to Unitholders would be substantially reduced.
If the Partnership continues to operate and to seek to reinvest sales
proceeds until 2005, the value of the Units would depend upon overall economic
conditions and conditions in the stock market generally, future rental income
from present and future leases, availability of reinvestment opportunities when
aircraft sales proceeds become available, the residual value of the aircraft
portfolio upon its ultimate liquidation, rates of taxation and interest rates
applicable in future years and the amount and timing of cash distributions by
the Partnership, none of which can be predicted with certainty. Unitholders will
be subject to risks inherent in aircraft leasing until all aircraft are sold.
See "SPECIAL FACTORS -- Risks and Benefits to the Limited Partners If the
Proposal Is Not Consummated."
Taxation of the Partnership. If the Partnership were taxed as a
corporation: no deductions arising from Partnership operations would be
allowable to Unitholders; income of the Partnership would be taxable at
corporate rates; distributions to Unitholders would be taxable as dividends to
the extent of the Partnership's current or accumulated earnings and profits; and
distributions to Unitholders would be substantially reduced. For purposes of
comparing the strategic alternatives available to the Partnership, the General
Partner estimated the present value of future cash distributions assuming the
Partnership were taxed as a corporation. In performing such calculations it was
assumed that the Partnership's tax bases in its assets as of January 1, 1998
would be equal to approximately $12 million. Such amount represents the
approximate projected tax bases in the Partnership's assets as of January 1,
1998. See "SPECIAL FACTORS -- The Proposal -- Review of Strategic
Alternatives -- Corporate Taxation and Portfolio Runoff."
If a tax termination of the Partnership occurs, it could result in higher
tax bases than the assumed tax bases and less corporate level tax. Thus, a tax
termination could result in an increased present value of future cash
distributions. In general, a tax termination occurs if within a 12-month period
there has been a sale or exchange of 50% or more of the interests in a
partnership. The General Partner does not believe that a tax termination has
occurred prior to 1997. However, determining whether a tax termination has
occurred during 1997 is extremely difficult because the information necessary to
make such a determination is not readily accessible until the end of the year.
In the event that a tax termination of the Partnership occurred during 1997
and prior to May 9, 1997, the tax bases of the Partnership assets would be
"stepped up" to equal the tax bases of the Unitholders and the General Partner
in their Partnership interests at the time of such tax termination, which would
be substantially higher than the assumed tax bases of $12 million. The estimated
tax bases of the Unitholders and the General Partner in their Partnership
interests as of January 1, 1997 were equal to approximately $48.7 million.
Assuming that the Partnership's tax bases in its assets were "stepped up" to
$48.7 million, the present value of future cash distributions would be increased
by approximately $2.00 per Unit from the amounts set forth in the Corporate
Taxation and Portfolio Runoff Projections. The actual tax bases of the
Unitholders and the General Partner in their Partnership interests would be
different than the $48.7 million bases assumed because the tax bases would
depend upon the acquisition price of the Units, the income and deductions of the
Partnership between January 1, 1997 and the date of any tax termination and the
trading volume, prices, and Unitholders' tax bases of the Units sold between
January 1, 1997 and the date of any tax termination. See "SPECIAL FACTORS -- the
Proposal -- Review of Strategic Alternatives -- Corporate Taxation and Portfolio
Runoff."
If the Unitholders do not consent to the Proposal, the General Partner does
not believe that the Partnership will be able to obtain "stepped up" bases in
its assets greater than the approximate projected tax bases of $12 million.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Under Section 7704(b) of the Code, a "publicly traded partnership" is
generally taxable as a corporation for United States federal income tax
purposes. An exception to this general rule applies to certain partnerships
11
<PAGE> 18
(such as the Partnership) that were in existence on December 17, 1987. Unless
there is a change in tax law, the exception ceases to apply to taxable years of
a partnership beginning after December 31, 1997. Consequently, if the Units
remain listed on the New York Stock Exchange or are otherwise readily tradeable
on a secondary market (or the substantial equivalent thereof) after December 31,
1997, the Partnership will be taxable as a corporation. As of the first day the
Partnership is classified as a corporation, for federal income tax purposes it
would be deemed to transfer all its assets to a newly formed corporation; the
Unitholders generally would not recognize any gain or loss on such constructive
incorporation. If the Partnership is classified as a corporation: its income,
gains, deductions, losses and credits would not be passed through to the
Unitholders; it would be required to pay tax at corporate rates on its income;
its distributions to Unitholders would be taxable to Unitholders as dividends to
the extent of its current or accumulated earnings and profits; and such
distributions would not be deductible to the Partnership. However, certain
corporate Unitholders may be entitled to a dividends received deduction on
distributions treated as dividends. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
The purpose of the Restrictions on Unit Transferability is to permit the
Partnership to continue to be classified as a partnership for federal income tax
purposes after December 31, 1997. After the date that the Restrictions on Unit
Transferability are imposed (currently anticipated to occur on or about December
17, 1997), the Depositary Units evidencing interests in the Partnership will
contain a legend that provides:
The General Partner will not admit any transferee of Units as a
partner or recognize any rights of a transferee of Units (including
any right to receive distributions or any right to an interest in
capital or profits of the Partnership) unless the transferee certifies
in an application for transfer (the "Transfer Application") to the
Partnership that the transferee has acquired the Units (a) by a
"transfer not involving trading" within the meaning of Internal
Revenue Service Notice 88-75 (the "Notice"), (b) in compliance with
the "two percent" safe harbor described in the Notice or (c) in a
qualified "matching service" transaction described in the Notice.
Furthermore, any transfer of Units will be subject to a determination
by the General Partner in its sole discretion that such transfer will
not cause the aggregate percentage of Units transferred during the
calendar year to exceed the allowable amount or otherwise cause the
Units to be treated as traded on an established securities market or
readily tradeable on a secondary market (or the substantial equivalent
thereof) as defined in Section 7704(b) of the Internal Revenue Code of
1986, as amended.
The Partnership is considering requesting a ruling from the Internal
Revenue Service that it can, as an alternative to imposing transfer restrictions
consistent with the Notice, impose transfer restrictions consistent with
regulations promulgated under Section 7704 of the Code (the "Regulations"). Such
restrictions are somewhat less restrictive than those required by the Notice. If
such a ruling were obtained, references to the Notice in the foregoing legend
and the Transfer Application would be changed to refer to the Regulations. See
"THE PROPOSAL -- Restrictions on Unit Transferability."
Because of the Restrictions on Unit Transferability, the General Partner
does not expect the Units to be traded on an established securities market or
readily tradeable on a secondary market (or the substantial equivalent thereof).
The Restrictions on Unit Transferability itself should not result in any federal
income tax consequences to the Unitholders. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
After the General Partner imposes the restrictions on Unit transferability,
the Partnership generally will be required to withhold 7% of the amount of any
distribution made to Unitholders who are not residents of California if the
distribution represents California source income. A Unitholder whose
distribution is subject to withholding will be allowed a credit for any withheld
amount against such Unitholder's California income tax liability. If the
withheld amount exceeds a Unitholder's California income tax liability, the
Unitholder will be entitled to a refund for such excess withholding. A
Unitholder generally may be entitled to credit California income tax (whether
paid by withholding or otherwise) on California source income against tax owed
to the Unitholder's state of residence with respect to the same income. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- State Income Tax Considerations."
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<PAGE> 19
SELECTED FINANCIAL DATA
The following table sets forth selected financial data and other data
concerning the Partnership for, and as of the end of, each of the five years in
the period ended December 31, 1996 and the three months ended March 31, 1996 and
March 31, 1997. This data should be read in conjunction with the Financial
Statements, related notes and other financial information included elsewhere in
this Consent Solicitation Statement.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
(UNAUDITED) FOR THE YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER-UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Lease and other income............................. $ 2,358 $ 2,875 $10,747 $ 12,492 $ 12,538 $ 12,852 $ 12,375
Gain on disposition of aircraft, net............... -- 556 2,501 21 -- -- --
------- ------- ------- -------- -------- --------
Total Revenues............................. 2,358 3,431 13,248 12,513 12,538 12,852 12,375
------- ------- ------- -------- -------- --------
Interest Expense................................... 472 523 1,830 2,366 2,660 2,557 2,529
Depreciation expense............................... 71 443 1,500 2,129 2,146 2,426 2,921
Other expenses..................................... 648 294 1,266 1,196 1,401 1,786 1,259
------- ------- ------- -------- -------- --------
Total Expenses............................. 1,191 1,260 4,596 5,691 6,207 6,769 6,709
------- ------- ------- -------- -------- --------
Net income................................. $ 1,167 $ 2,171 $ 8,652 $ 6,822 $ 6,331 $ 6,083 $ 5,666
------- ------- ------- -------- -------- --------
Net income per Unit(1)............................. $ 0.25 $ 0.46 $ 1.85 $ 1.46 $ 1.36 $ 1.30 $ 1.21
Cash distributions declared per Unit(2)............ $ 0.45 $ 0.50 $ 3.28 $ 2.07 $ 1.85 $ 1.69 $ 1.66
FINANCIAL POSITION
Total Assets....................................... $90,751 $98,571 $85,130 $103,021 $107,542 $113,967 $112,337
Long-term obligations.............................. $23,307 $23,163 $14,071 $ 27,483 $ 29,525 $ 27,940 $ 30,861
Total partners' equity............................. $64,107 $71,549 $65,042 $ 71,712 $ 74,562 $ 76,874 $ 78,685
Limited Partners' equity per Unit(1)............... $ 13.72 $ 15.32 $ 13.92 $ 15.35 $ 15.96 $ 16.46 $ 16.84
Cumulative return of capital per Unit(1)........... 22.7% 18.3% 22.3% 18.6% 17.2% 16.0% 15.1%
</TABLE>
- ---------------
(1) After allocation of the 1% General Partner's interest.
(2) Includes special cash distribution of 10 cents per unit in 1995 and of $1.43
per unit in 1996, of which 63 cents was paid in January 1997.
13
<PAGE> 20
INTRODUCTION
This Consent Solicitation Statement is being furnished by Airlease Ltd., A
California Limited Partnership (the "Partnership" or "Airlease"), to holders of
Depositary Units representing limited partnership interests ("Units") in the
Partnership, in connection with the solicitation of consents by Airlease
Management Services, Inc., a Delaware corporation, the general partner of the
Partnership (the "General Partner"). Holders of Units ("Unitholders") who have
been admitted as limited partners ("Limited Partners") pursuant to the Amended
and Restated Agreement of Limited Partnership, as amended, of the Partnership
(the "Limited Partnership Agreement") as of the record date are entitled to one
vote for each Unit held by them.
The purpose of the solicitation of consents is to obtain the consent of the
Limited Partners to authorize the General Partner to amend the Limited
Partnership Agreement (i) to impose restrictions on transferability of the Units
to the extent necessary to avoid the Partnership being taxed as a corporation,
which restrictions, if imposed, would result in the Units being delisted from
trading on the New York Stock Exchange ("Restrictions on Unit Transferability"),
and (ii) to provide that the Partnership will not make new aircraft investments,
will sell its aircraft as attractive sale opportunities arise and will dissolve
when all assets are sold ("Portfolio Runoff"); and if any amendment or proposed
amendment to partnership tax law is enacted or pending, to authorize the General
Partner to take such other actions which the General Partner determines are in
the best interests of the Partnership and the Limited Partners and are
consistent with the intent of the proposal described in this Consent
Solicitation Statement, including amending the Limited Partnership Agreement.
These authorizations to the General Partner (collectively, the "Proposal")
comprise a single proposal, and consent to the Proposal will constitute consent
to the adoption of either or both of the amendments to the Limited Partnership
Agreement described above, including the resulting liquidation and dissolution
of the Partnership, and if any amendment or proposed amendment to partnership
tax law is enacted or pending, consent to such other actions which the General
Partner determines to be in the best interests of the Partnership and the
Limited Partners and to be consistent with the intent of the Proposal. See "THE
PROPOSAL."
As previously reported to Unitholders, under current federal income tax
laws the Partnership will be taxed as a corporation beginning on January 1, 1998
if the Units continue to be publicly traded. If the Partnership were taxed as a
corporation, distributions to Unitholders would be reduced substantially. Two
alternatives are available to eliminate this second level of tax: (i) sell all
assets and dissolve the Partnership by December 31, 1997; or (ii) restrict
transferability of Units. After studying these alternatives and the alternative
of permitting the Partnership to be taxed as a corporation and taking into
account the Partnership's competitive position, the General Partner concluded
that selling all of the assets during 1997 would likely result in lower values
than if the assets could be sold over a longer period of time. The General
Partner recognized that a higher value from distributions could be achieved by
avoiding corporate taxation, and it determined that the best way to maximize
value to the Limited Partners was to restrict transferability of the Units and
to sell the Partnership's assets over time as attractive opportunities arise.
This alternative avoids the second layer of tax by restricting transferability
of Units and reduces the period of illiquidity caused by the transfer
restrictions by providing that net sales proceeds be distributed to Unitholders
as aircraft are sold. See "SPECIAL FACTORS" for a description of the reasons for
the Proposal and for a discussion of factors to be considered by Limited
Partners in determining whether to consent to the Proposal.
If the Proposal is approved, Unitholders will continue to receive
distributions from Cash Available from Operations (as defined in the Limited
Partnership Agreement) and from aircraft sales without the imposition of an
additional tax. However, unless a change in partnership tax law is enacted or is
pending, the General Partner will impose Restrictions on Unit Transferability
effective on or about December 17, 1997 and the Units will be delisted from
trading on the New York Stock Exchange at that time. Thereafter, there will be
no public market for the Units. Under provisions of the tax law, there are
services which may be available to facilitate trading of a limited number of
Units each year. However, there can be no assurance that any such services will
facilitate trading with respect to the Units or as to the price at which Units
may be sold using such a service. In the absence of such a service, Unitholders
may be unable to sell their Units. See "THE PROPOSAL -- Restrictions on Unit
Transferability."
14
<PAGE> 21
The Proposal also authorizes the General Partner not to make any new
aircraft investments, to sell aircraft as attractive opportunities arise, to
distribute net sales proceeds to Unitholders after each disposition and to
dissolve the Partnership when all assets are sold. Although the Partnership
cannot predict when sales will be made, assuming that lessees comply with their
lease obligations, renewal options available under leases are not exercised and
the aircraft were sold at the end of their existing lease terms, 86% of the
assets would be sold within five years and the remainder by 2006. There can be
no assurance that these circumstances will occur or as to the price at which
aircraft may be sold. See "THE PROPOSAL -- Portfolio Runoff." If the Proposal is
approved, the General Partner will be authorized to impose Restrictions on Unit
Transferability and to sell aircraft and dissolve the Partnership without
further consent of the Unitholders.
Two bills are pending in Congress which, if enacted, would continue to tax
publicly traded partnerships, such as the Partnership, as partnerships but would
impose a tax on the gross income of such partnerships. No prediction can be made
as to whether or in what form such legislation may be enacted. Because of this
potential change in partnership tax law, if the Proposal is approved and if any
amendment or proposed amendment to partnership tax law is enacted or pending,
the General Partner will be authorized to take such other actions as it
determines to be in the best interests of the Partnership and the Limited
Partners and to be consistent with the intent of the Proposal. See "THE
PROPOSAL -- Potential Change in Tax Law."
For information as to the projected present value of future cash
distributions assuming the Proposal is approved and implemented and there is no
change in partnership tax law, see "SPECIAL FACTORS -- The Proposal -- Review of
Strategic Alternatives -- Restricting Unit Transfers and Portfolio Runoff."
The General Partner is a wholly owned subsidiary of BA Leasing & Capital
Corporation, a California corporation ("BALCAP"), which in turn is an indirect
wholly owned subsidiary of BankAmerica Corporation. The General Partner has
approved the consummation of the Proposal and recommends approval of the
Proposal by the Limited Partners. For a discussion of the factors considered by
the General Partner in approving the Proposal, see "SPECIAL
FACTORS -- Recommendation of the Special Committee and the Board; Fairness of
the Proposal" and "-- The Proposal -- Meetings of the Board of Directors and the
Special Committee."
The principal executive offices of the Partnership are located at 555
California Street, Fourth Floor, San Francisco, California, and its telephone
number is (415) 765-1814.
This Consent Solicitation Statement is first being mailed to Limited
Partners on or about July 3, 1997.
RECORD DATE; CONSENTS; REVOCATION OF CONSENTS
The General Partner has fixed the close of business on June 4, 1997 as the
record date (the "Record Date") for determining Limited Partners entitled to
give written consent to the Proposal (the "Consent"). Accordingly, only
Unitholders who are admitted to the Partnership as Limited Partners as of the
Record Date will be entitled to consent to the Proposal.
A Limited Partner may consent to the Proposal by properly completing the
consent card which accompanies this Consent Solicitation Statement (the "Consent
Card"). Consents will be solicited until August 28, 1997 (which date may be
extended at the sole discretion of the General Partner to a date on or before
October 31, 1997 if the General Partner determines that further time is required
to solicit additional Consents or to provide more information to Limited
Partners). A Consent Card shall be deemed to have been "returned" to the
Partnership on the date it is given personally to the Secretary or an Assistant
Secretary of the General Partner or deposited in the mail or other delivery
service, postage or delivery service fees prepaid. An addressed, postage paid
envelope is enclosed with the Consent Card. Consents may be revoked by a later
dated Consent Card which is received by the Partnership on or before the end of
the Consent solicitation period.
If a Limited Partner has any questions regarding completing and returning
Consent Cards or about the Partnership performance, he or she should call D.F.
King & Co., Inc., the solicitation agent, at 1-800-714-3133 (toll-free). In
accordance with the Limited Partnership Agreement, each Limited Partner is
entitled to cast a number of votes that is equal to the number of Units he or
she holds on the Record Date.
15
<PAGE> 22
SOLICITATION
In addition to soliciting Consents by mail, Consents may be solicited by
directors, officers and employees of the General Partner and its affiliates, who
will not receive additional compensation therefor, by personal interview,
telephone, telegram, facsimile, courier service, or similar means of
communication. In addition, the Partnership has retained D.F. King & Co., Inc.
as solicitation agent (the "Solicitation Agent"). The Solicitation Agent has
entered into a Solicitation Agent Agreement with the Partnership pursuant to
which the Solicitation Agent will solicit Consents to the Proposal from Limited
Partners. The Solicitation Agent will be paid a fee of $6,500 plus $3.00 per
telephone contact with a Unitholder and will be reimbursed for its out-of-pocket
expenses by the Partnership, and the Partnership has agreed to indemnify the
Solicitation Agent against certain liabilities. Under the terms of the
Solicitation Agent Agreement, the Solicitation Agent will administer the
delivery of information to the Limited Partners.
VOTE REQUIRED
Pursuant to the Limited Partnership Agreement, approval of the Proposal
requires the consent of Limited Partners of record who hold a majority of all
outstanding Units held by Limited Partners, including Units held by affiliates
of the General Partner. As of the Record Date, 4,625,000 Units were outstanding
and were held of record by 1,268 Limited Partners. Accordingly, the consent of
Limited Partners holding at least 2,312,501 Units is required to approve the
Proposal. Each Limited Partner is entitled to one vote for each Unit held in
his, her or its name on the Record Date. BALCAP owns directly or through wholly
owned subsidiaries 1,025,000 Units (22.2% of the outstanding Units), and
officers and directors of BankAmerica Corporation and of the General Partner own
an aggregate of 1,200 Units. BALCAP has advised the General Partner that it
intends to vote its Units in favor of the Proposal. See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
NO RIGHTS TO APPRAISAL OF UNIT VALUE
If Limited Partners owning a majority of the Units consent to the Proposal,
all Limited Partners will be bound by such Consents, including Limited Partners
who have not returned their Consents or who have not consented to the Proposal.
Limited Partners who do not consent to the Proposal are not entitled to any
rights of appraisal or similar rights of dissenting shareholders of a
corporation under California law in connection with the approval of the Proposal
or the consummation thereof.
Under California statutory and common law, the general partner of a limited
partnership has fiduciary duties of fairness and loyalty to the limited
partners. If any fiduciary duties have not been fulfilled, a damages remedy may
be available.
SPECIAL FACTORS
Before consenting to the Proposal, Limited Partners should carefully
consider certain factors concerning the Proposal.
THE PROPOSAL
BACKGROUND FOR THE PROPOSAL
The Partnership began operations in 1986, with the principal investment
objectives of generating income for quarterly cash distributions to Unitholders
and building a diversified portfolio of leased aircraft. At that time the
Partnership intended that until January 1, 2005, a substantial portion of the
cash derived from the sale, refinancing or other disposition of aircraft would
be used to purchase additional aircraft if attractive investments were
available. Thereafter the Partnership would enter a disposition phase during
which its aircraft portfolio would be sold and proceeds distributed to
Unitholders, with the plan that all assets would be sold and the Partnership
would dissolved by January 1, 2012.
16
<PAGE> 23
Since the Partnership's formation, significant changes in the tax law and
in the aircraft and aircraft leasing markets have occurred.
As previously reported to Unitholders, unless partnership tax law is
amended, changes in the federal income tax law which occurred in 1987 will cause
the Partnership to be taxed as a corporation beginning on January 1, 1998 if the
Units continue to be traded on an established securities market or readily
tradeable on a secondary market (or the substantial equivalent thereof).
Airlease was formed as a partnership rather than as a corporation in order to
avoid entity level taxation at the partnership level and in order that all or a
portion of cash distributions to Unitholders would be sheltered from tax through
the deductions available from Partnership operations and investments. If the
Partnership were taxed as a corporation: no deductions arising from Partnership
operations would be allowable to the Unitholders; income of the Partnership
would be taxable at corporate rates; distributions to Unitholders would be
taxable as dividends to the extent of the Partnership's current or accumulated
earnings and profits; and the amount of distributions to Unitholders would be
substantially reduced. Certain corporate Unitholders, however, may be entitled
to a dividends received deduction on such dividend distributions. While such a
deduction would lessen the adverse impact of the Partnership's being subject to
taxation as a corporation, the General Partner believes that few Unitholders
other than BALCAP are corporations. The Partnership has worked with industry
groups to lobby for a legislative solution to this taxation, but to date these
efforts have been unsuccessful. However, two bills are pending in Congress
which, if enacted, would continue to tax publicly traded partnerships, such as
the Partnership, as partnerships but would impose a tax on the gross income of
such partnerships. See "THE PROPOSAL -- Potential Change in Tax Law."
As the Partnership has advised Unitholders over the course of the
Partnership's existence, significant changes in the aircraft and aircraft
leasing markets have occurred since the inception of the Partnership. In the
past ten years, the supply of commercial jet aircraft has increased
substantially, but the demand has not always kept pace with the supply primarily
because of changes in the airline industry. In the late 1980's and early 1990's
competition in the airline industry led to airline restructurings and
consolidations. Airlease itself experienced the effect of this competition as
four of its lessees (Eastern Airlines, Pan American Airlines, Continental
Airlines, Inc. ("Continental") and TransWorld Airlines ("TWA")) filed for
bankruptcy during this period. In the wake of these restructurings, airlines
have been taking actions to increase utilization of their fleets to reduce the
need for additional aircraft.
These conditions have led to periods in which the supply of aircraft has
exceeded the demand. Oversupply adversely impacts lessors like the Partnership,
because it increases the competition among lessors to place and retain aircraft
on lease and lease rates decline. Similarly, opportunities for gain on sale of
aircraft are reduced. Although demand for aircraft has been increasing in the
last two years as many airlines have returned to profitability and more recently
lease rates appear to be improving, the airline industry tends to be cyclical,
indicating a potential return to less favorable conditions.
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 most of the Partnership's
aircraft are being used to secure existing
17
<PAGE> 24
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 investment opportunities that offer
an appropriate balance of risk and reward has been very difficult. During the
past five years the Partnership has made only two aircraft investments, both of
which were possible because of special circumstances which the General Partner
believes are unlikely to occur in the future. In 1992, the Partnership acquired
an interest in an aircraft on lease to Finnair OY ("Finnair"). This transaction
was possible because it was funded from an existing bank line which had been in
place since 1988 and had a very low borrowing rate. The General Partner believes
that such favorable borrowing rates currently are not available to the
Partnership. In January 1997, the Partnership acquired the remaining 50%
interest in an aircraft on lease to TWA. This transaction was available only
because the Partnership already owned a 50% interest in this aircraft and had
originally negotiated the right to match a purchase offered by a third party.
See "THE PARTNERSHIP -- The BALCAP/USL Capital Transaction."
In 1996, the Partnership sold interests in seven aircraft (a 50% interest
in the aircraft on lease to Finnair acquired in 1992 and a one-third interest in
six aircraft on lease to Continental) at a profit. See "THE
PARTNERSHIP -- Disposition of Aircraft." 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.
Because of the tax law which, unless amended, will impact the Partnership
in January 1998 and the competitive position of the Partnership described above,
in late 1996 the General Partner began a review of the strategic alternatives
available to the Partnership in order to maximize value to the Limited Partners.
1995 REVIEW OF ALTERNATIVES
In mid-1995, the General Partner reviewed the strategic issues facing the
Partnership, including the limited opportunity for new investments, the
Partnership's limited access to capital, and the then, potential, change in the
Partnership's tax status. The review noted that investment opportunities which
provide an acceptable return on investment to the Partnership generally are
limited. In addition, the review observed, the Partnership's structure does not
build equity because all Cash Available from Operations (as defined in the
Limited Partnership Agreement) must be distributed and thus, investments can
only be funded from the proceeds of debt or the proceeds from aircraft sales.
The review also noted that under the Limited Partnership Agreement, the General
Partner is not required to remain the general partner after October 1996 (10
years after the initial public offering).
The review noted that the alternatives available to the Partnership
consisted of (i) continuing the business of the Partnership as initially
anticipated, which would include making new investments if funding and
attractive investments were available, (ii) selling all assets immediately and
dissolving the Partnership, and (iii) selling the assets as they come off lease,
not reinvesting the proceeds and distributing the proceeds to Unitholders, thus
liquidating the Partnership over time. The General Partner developed projections
of the value of future cash distributions to Unitholders which indicated that
the value to Unitholders of either continuing to operate the Partnership or
selling the assets over time was higher than the value from an immediate sale.
After reviewing the analysis, the General Partner observed that under existing
market conditions there was little practical difference between continuing the
Partnership's business as initially intended and selling the portfolio over
time. This is because the Partnership did not then have and did not anticipate
that it would have sufficient funds to make investments (assuming that
attractive investment opportunities were available) until aircraft were sold or
until aircraft on lease to USAirways, Inc. (formerly USAir Inc.) ("USAir"),
could be refinanced in 1998. The review was completed in December 1995, and the
General Partner concluded that when funds are available the Partnership should
seek attractive investment opportunities, but that unless there were a major
change in the market, it was unlikely that such attractive investment
opportunities would arise. If attractive investment opportunities were not
available, the Partnership would make distributions to Unitholders. Conclusions
based on the review were described to Unitholders in the 1995 Annual Report. As
described above under "Background for the Proposal," during 1996 the
18
<PAGE> 25
Partnership sold interests in seven aircraft, but the General Partner determined
that attractive investment opportunities were not available and the net proceeds
were distributed to Unitholders.
REVIEW OF STRATEGIC ALTERNATIVES
GENERAL. Based on the factors described above in "Background for the
Proposal," the review of alternatives performed in 1995, and the apparent low
likelihood of legislative change which would extend the current rules for
taxation of the Partnership, the General Partner determined in late 1996 that it
should review in greater depth the strategic alternatives available in order to
maximize value to Limited Partners.
The principal alternatives considered and analyzed by the General Partner
were: (i) immediate sale of all aircraft and liquidation of the Partnership
("Immediate Sale"); (ii) restricting transferability of the Units (thereby
preserving the Partnership's tax status as a partnership), ceasing to reinvest
in aircraft and distributing cash proceeds to Unitholders from sale of aircraft
as they come off lease ("Restricting Unit Transfers and Portfolio Runoff"); and
(iii) not limiting transferability of Units (thereby subjecting the Partnership
to corporate tax beginning in January 1998) and ceasing to reinvest under the
same circumstances as described in Restricting Unit Transfers and Portfolio
Runoff above ("Corporate Taxation and Portfolio Runoff"). These alternatives
were compared on the basis of estimated present cash values of future funds
which ultimately could be distributed to the Unitholders. The General Partner
did not consider the alternative of continuing the business of the Partnership
and making new investments because the General Partner believes that due to
market conditions and competitive disadvantages it is unlikely that the
Partnership will be able to make attractive investments in the future.
In order to evaluate each alternative, the General Partner developed a
projected cash flow statement (the "Cash Flow Projections") which presents the
cash flow from the Partnership's existing portfolio of aircraft based on
scheduled rent payments over the remaining term of its existing leases and the
estimated residual value of each aircraft (the "Appraised Residual Value") as of
the date of termination of the lease to which such aircraft is subject (the
aircraft's "Lease Termination Date"). In the valuations prepared for the Board
prior to its December 11, 1996 and the February 12, 1997 meetings, the Appraised
Residual Value for each aircraft (other than the aircraft on lease to Sun Jet
International, Inc. ("Sun Jet")) was based on the average of the fair market
value assessment of such aircraft as set forth in compilations of aircraft
values published by third party appraisers. As described below under
"Appraisals," in February 1997 the General Partner, on behalf of the
Partnership, obtained three Appraisals for each aircraft (other than the
aircraft on lease to Sun Jet (the "Sun Jet Aircraft")). The General Partner
determined that the appraised values of the aircraft as set forth in the
Appraisals were consistent with the compilations, and the Appraised Residual
Values set forth in the Cash Flow Projections were updated to base such
Appraised Residual Values on the average of the three Appraisals. See
"Appraisals -- Comparison of Appraisals" below. The lease for the Sun Jet
Aircraft contains a fixed-price purchase option, and for that reason, the
Appraised Residual Value of the Sun Jet Aircraft is based on the fixed-price
purchase option as set forth in the lease.
The Cash Flow Projections also take into account expenses of the
Partnership, consisting of general and administrative expenses, fees payable to
the General Partner pursuant to the Limited Partnership Agreement, projected
debt service payments and the cost of soliciting Unitholder consent. The Cash
Flow Projections assume that additional debt would be obtained within the next
year to provide operating cash flow and be available to make distributions to
Unitholders, pending the ultimate sale of the aircraft portfolio. The General
Partner utilized the Cash Flow Projections to evaluate each of the strategic
alternatives set forth below.
The Cash Flow Projections assume, among other matters, that all scheduled
rent will be paid as and when due, that no lease will be renewed and that
aircraft will be sold on their respective Lease Termination Dates at their
Appraised Residual Value or at a specified percentage of their Appraised
Residual Values. All aircraft owned by the Partnership except the Sun Jet
Aircraft are subject to leases which provide renewal options to the lessee. See
"THE PARTNERSHIP -- Aircraft Portfolio" for information regarding each
aircraft's Lease Termination Date and applicable lessee renewal options. The
projected distributions to be declared from June 1, 1997 to December 31, 1997
assume that all scheduled rent will be paid as due, that the Sun Jet Aircraft
will be sold at the end of its lease for the fixed-price purchase option and
that no other aircraft will be
19
<PAGE> 26
sold during 1997. The projected distributions to be declared include a special
distribution of the net sale proceeds from the sale of the Sun Jet Aircraft of
$.07 per Unit and regular distributions of $.45 per Unit for each of the last
three quarters in 1997. Many circumstances could occur which would cause actual
results to differ materially from those contemplated by the Cash Flow
Projections and the projected distributions for 1997, including the following
circumstances: a lessee could default in its rental obligations; a lessee could
exercise renewal options under the lease; aircraft could be sold subject to
existing leases and prior to or after their respective Lease Termination Dates;
aircraft could be sold for more or less than the Appraised Residual Values as
set forth in the Cash Flow Projections; competitive pressure or changes in the
aircraft or aircraft leasing market may be greater than estimated; legislation
or regulatory changes which adversely affect the value of the aircraft may
occur; or changes in the tax law or interest rates may occur. The Cash Flow
Projections by their nature are projections based on estimates and assumptions
which are considered reasonable at a point in time. Changes in the estimates or
assumptions would affect the values projected to be realized, and no assurances
are given that the values set forth in the Cash Flow Projections or the
projected distributions during 1997 will be realized.
Sun Jet filed for bankruptcy on June 18, 1997. Sun Jet also failed to make
its June rental payment and has failed to maintain the aircraft in compliance
with the lease. Although the General Partner believes the Sun Jet Aircraft has
continuing value, no assurance can be given as to when the Partnership may
obtain return of this aircraft or as to when or at what price the aircraft could
be remarketed. Thus, no assurance can be given that the projected distributions
during 1997 attributable to the Sun Jet Aircraft will be realized. At March 31,
1997, the Sun Jet Aircraft represented about 1% of the Partnership's total
assets, and rentals under the Sun Jet lease represented about 4% of first
quarter revenues.
The financial information presented in the Cash Flow Projections and in the
Immediate Sale Projections, the Restricting Unit Transfers and Portfolio Runoff
Projections and the Corporate Taxation and Portfolio Runoff Projections, as
defined below, are not presented as income statements, balance sheets, and
statements of cash flow with footnotes prepared in accordance with generally
accepted accounting principles and therefore have not been prepared in
accordance with the standards for prospective financial information issued by
the American Institute of Certified Public Accountants ("AICPA"). The
Partnership's independent accountants, Coopers & Lybrand L.L.P. have not
examined, compiled or applied any procedures to such prospective financial
information and express no opinion or any assurance on their reasonableness or
achievability.
To determine a target discount rate, the General Partner reviewed the range
of interest rates for long-term debt of corporations with long-term credit
ratings similar to those of the Partnership's lessees. The long-term debt rating
by Standard & Poor's Rating Services ("S&P") or Moody's Investor Service, Inc.
("Moody's") for the Partnership lessees is as follows: USAir, CCC+ (S&P) and B3
(Moody's); and FedEx, BBB (S&P) and Baa2 (Moody's). Sun Jet and TWA have no debt
rating. Based on published interest rates for corporate bonds having a maturity
of one to ten years of corporations with debt ratings similar to those set forth
above, the General Partner estimated the weighted average yield for publicly
traded unsecured debt of the Partnership's lessees to be approximately 9%. It
was noted that if such debt were not publicly traded or were illiquid, investors
would tend to expect a somewhat higher yield to account for the illiquidity and
that if such debt were secured by aircraft (which is the case for rental
obligations of the Partnership's lessees) investors might expect a somewhat
lower yield to account for the added security.
IMMEDIATE SALE. This alternative assumed that all aircraft (other than the
Sun Jet Aircraft) would be sold as of December 31, 1997, that the Sun Jet
Aircraft would be sold in 1997 at the fixed price set forth in the lease, and
that the Partnership would be dissolved on December 31, 1997. Projected sale
proceeds were determined using a commercially available lease pricing system
developed by a third party and used by BALCAP and many other participants in the
leasing industry. The system determines a sale price based on projected cash
flows and a discount rate. The projected cash flows used for this analysis were
based on the same assumptions used in the Cash Flow Projections, except that
estimated expenses of sale, including prepayment premiums on early payment of
debt were included, residual values were assumed to be 50% or 75% of the
Appraised Residual Value as set forth in the Cash Flow Projections to reflect
the encumbrances of the present leases, and alternative discount rates of 9% and
12% were utilized. The General Partner's experience is that purchasers of
aircraft subject to lease will not pay an amount which assumes the full
20
<PAGE> 27
projected value of the aircraft at the end of the lease term when the lessees
have an option to purchase or to return the aircraft on termination of the
lease. All Aircraft owned by the Partnership except the Sun Jet Aircraft are
subject to leases which provide this option to the lessee. The Cash Flow
Projections, as modified to include the assumptions utilized in the Immediate
Sale Alternative are attached hereto as Exhibit A-1 (the "Immediate Sale
Projections"). Many circumstances could occur which would cause actual results
to differ materially from those contemplated by the Immediate Sale Projections,
including the circumstances described above under "Review of Strategic
Alternatives -- General." The Immediate Sale Projections by their nature are
projections based on estimates and assumptions which are considered reasonable
at a point in time. Changes in the estimates or assumptions would affect the
values set forth in the Immediate Sale Projections and in the chart below.
The following chart sets forth the estimated present value as of December
31, 1997 and as of June 1, 1997 of future cash distributions declared based on
the assumptions set forth in the Immediate Sale Projections and the assumptions
with respect to distributions during 1997 set forth above. The General Partner
believes that based upon its knowledge of the market, including its contacts
with the five aircraft leasing companies described below, institutional
purchasers would apply a discount rate in the range of 12% to the estimated cash
flows and would include in their pricing a residual value in the range of 50% to
75% of the Appraised Residual Values. Although the General Partner believes that
the values set forth in the boxes in the chart represent reasonable estimates of
values which would be obtained upon immediate sale of the portfolio, many
circumstances could occur which would cause actual results to differ materially
from the values set forth below and no assurances are given that such values
could or would be realized.
<TABLE>
<CAPTION>
IMMEDIATE SALE
-------------------------------------------------------------------------------------------
PROJECTED VALUE PER UNIT AS
PROJECTED VALUE PER UNIT AS OF
OF DECEMBER 31, 1997 JUNE 1, 1997(1)
----------------------------- -----------------------------
RESIDUAL RESIDUAL PROJECTED DISTRIBUTIONS RESIDUAL RESIDUAL
VALUE AT 50% VALUE AT 75% DECLARED VALUE AT 50% VALUE AT 75%
DISCOUNT OF APPRAISED OF APPRAISED FROM JUNE 1, 1997 TO OF APPRAISED OF APPRAISED
RATE VALUE VALUE DECEMBER 31, 1997 VALUE VALUE
- -------- ------------ ------------ ----------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
9% $10.36 $12.51 $1.42 $11.78 $13.93
-------
12% $ 9.39 $11.35 $1.42 $10.81 $12.77
-------
</TABLE>
- ---------------
(1) Projected value as of December 31, 1997 plus projected distributions from
June 1, 1997 to December 31, 1997.
The Partnership's independent accountants, Coopers & Lybrand L.L.P., have
not examined, compiled or applied any procedures to the prospective financial
information (projected value per unit) in accordance with standards established
by the AICPA and express no opinion or any assurance on their reasonableness or
achievability.
In order to test the results of its estimates utilizing the assumptions set
forth above, in February 1997 the General Partner, at the request of its Board,
contacted five aircraft leasing companies to obtain an indication of values each
would expect to pay for the Partnership's aircraft (excluding the Sun Jet
Aircraft) subject to existing leases. Each leasing company was provided with a
summary description of the assets, including the name of each lessee, the hours
and cycles of each aircraft, and the rent, term, renewal and purchase options
and return conditions for each lease. Their responses, while not binding offers
to purchase, were in the range of projected values set forth in the chart above.
However, most of these aircraft leasing companies advised the General Partner
that under their current investment guidelines (which include limitations as to
the amount of credit which may be extended to one customer and the customer's
credit condition) they were not able to purchase any additional obligations of
USAir or TWA. Based on its knowledge of the market, including its contacts with
these aircraft leasing companies, the General Partner believes it would be very
difficult to consummate sales of all of its aircraft at fair value prior to
December 31, 1997.
RESTRICTING UNIT TRANSFERS AND PORTFOLIO RUNOFF. This alternative assumed
that the Partnership would continue to be taxed as a flow through entity, would
cease reinvesting in aircraft, would distribute Cash Available from Operations
(as defined in the Limited Partnership Agreement) as it becomes available and
would distribute net cash proceeds from sale of aircraft on the applicable Lease
Termination Date. The projected cash flows used for this analysis were based on
the above assumptions and the assumptions used in
21
<PAGE> 28
the Cash Flow Projections, except that the sales proceeds of the aircraft were
assumed to be 75% or 100% of the Appraised Residual Values set forth in the Cash
Flow Projections and alternative discount rates of 6%, 8%, 9%, 10% or 12% were
utilized. The Cash Flow Projections, as modified to include the assumptions
utilized in the Restricting Unit Transfers and Portfolio Runoff are attached
hereto as Exhibit A-2 (the "Restricting Unit Transfers and Portfolio Runoff
Projections"). Many circumstances could occur which would cause, actual results
to differ materially from those contemplated by the Restricting Unit Transfers
and Portfolio Runoff Projections, including the circumstances described above
under "Review of Strategic Alternatives -- General." The Restricting Unit
Transfers and Portfolio Runoff Projections by their nature are projections based
on estimates and assumptions which are considered reasonable at a point in time.
Changes in the estimates or assumption would affect the values set forth in the
Restricting Unit Transfers and Portfolio Runoff Projections and in the chart
below.
The following chart sets forth the estimated present value as of December
31, 1997 and as of June 1, 1997 of future cash distributions declared based on
the Restricting Unit Transfers and Portfolio Runoff Projections and the
assumptions with respect to distributions during 1997 set forth above. The
General Partner believes that based on its knowledge of the market, and taking
into account the illiquidity to Unitholders which would result under this
alternative, a discount rate in the range of 9%-10% is reasonable and that
residual values in the range of 75%-100% of the Appraised Residual Values are
reasonable estimates of values which would be realized under normal market
conditions when aircraft are sold upon termination of a lease. Although the
General Partner believes that the values set forth in the boxes in the chart
represent a reasonable estimate of values which would be realized under this
alternative, many circumstances could occur which would cause actual results to
differ materially from the values set forth below and no assurances are given
that such values could or would be realized.
<TABLE>
<CAPTION>
RESTRICTING UNIT TRANSFERS AND PORTFOLIO RUNOFF
---------------------------------------------------------------------------------------------
PROJECTED VALUE PER UNIT AS PROJECTED VALUE PER UNIT AS OF
OF DECEMBER 31, 1997 JUNE 1, 1997(1)
------------------------------ ------------------------------
RESIDUAL RESIDUAL PROJECTED DISTRIBUTIONS RESIDUAL RESIDUAL
VALUE AT 75% VALUE AT 100% DECLARED VALUE AT 75% VALUE AT 100%
DISCOUNT OF APPRAISED OF APPRAISED FROM JUNE 1, 1997 TO OF APPRAISED OF APPRAISED
RATE VALUE VALUE DECEMBER 31, 1997 VALUE VALUE
- -------- ------------ ------------- ----------------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
6% $13.24 $ 15.51 $1.42 $14.66 $ 16.93
8% $12.43 $ 14.52 $1.42 $13.85 $ 15.94
-------
9% $12.06 $ 14.06 $1.42 $13.48 $ 15.48
10% $11.70 $ 13.62 $1.42 $13.12 $ 15.04
-------
12% $11.02 $ 12.80 $1.42 $12.44 $ 14.22
</TABLE>
- ---------------
(1) Projected value as of December 31, 1997 plus projected distributions from
June 1, 1997 to December 31, 1997.
The Partnership's independent accountants, Coopers & Lybrand L.L.P., have
not examined, compiled or applied any procedures to the prospective financial
information (projected value per unit) in accordance with standards established
by the AICPA and express no opinion or any assurance on their reasonableness or
achievability.
CORPORATE TAXATION AND PORTFOLIO RUNOFF. This alternative utilized the same
assumptions as the Restricting Unit Transfers and Portfolio Runoff alternative
except that it assumed that the Partnership would be taxed as a corporation
beginning January 1, 1998 and that administrative expenses would be lower
reflecting the elimination of the K-1 tax returns for limited partners. It was
assumed that the Partnership's tax bases in its assets as of January 1, 1998 is
equal to approximately $12 million. Such amount represents the approximate
projected tax bases in the Partnership's assets as of January 1, 1998. Taxable
income was reduced by deducting depreciation expenses based on these assumed tax
bases, and a tax rate of 35% (the highest current federal corporate income tax
rate and no state income tax) was applied to estimated taxable income. The Cash
Flow Projections, as modified to include the assumptions utilized in the
Corporate Taxation and Portfolio Runoff are attached hereto as Exhibit A-3 (the
"Corporate Taxation and Portfolio Runoff Projections"). The Corporate Taxation
and Portfolio Runoff Projections by their nature are projections based on
estimates and assumptions which are considered reasonable at a point in time.
Changes in the estimates or assumptions would affect the values set forth in the
Corporate Taxation and Portfolio Runoff Projections and
22
<PAGE> 29
in the chart below. Many circumstances could occur which would cause actual
results to differ materially from those contemplated by the Corporate Taxation
and Portfolio Projections, including the circumstances described in "Review of
Strategic Alternatives -- General" and the following matters relating to
taxation.
If a tax termination of the Partnership occurs, it could result in higher
tax bases than the assumed tax bases and less corporate level tax. Thus, a tax
termination could result in an increased present value of future cash
distributions. In general, a tax termination occurs if within a 12-month period
there has been a sale or exchange of 50% or more of the interests in a
partnership. Transfers of the same interest in a partnership during the 12-month
period are counted only once. Based upon the historical trading volume of the
Units, the General Partner does not believe that a tax termination of the
Partnership has occurred prior to 1997. However, determining whether a tax
termination has occurred during 1997 is extremely difficult because the
information necessary to make such a determination is not readily accessible
until the end of the year.
In the event that a tax termination of the Partnership occurred during 1997
and prior to May 9, 1997, the tax bases of the Partnership assets would be
"stepped up" to equal the tax bases of the Unitholders and the General Partner
in their Partnership interests at the time of such tax termination, which would
be substantially higher than the assumed tax bases set forth in the Corporate
Taxation and Portfolio Runoff Projections. The estimated tax bases of the
Unitholders and the General Partner in their Partnership interests as of January
1, 1997 were approximately equal to $48.7 million. Assuming that the
Partnership's tax bases in its assets were "stepped up" to $48.7 million, the
present value of future cash distributions would be increased by approximately
$2.00 per Unit from the amounts set forth in the Corporate Taxation and
Portfolio Runoff Projections. The actual tax bases of the Unitholders and the
General Partner in their Partnership interests would be different than the $48.7
million bases assumed because the tax bases would depend upon the acquisition
price of the Units, the income and deductions of the Partnership between January
1, 1997 and the date, if any, a tax termination occurred, and the trading
volume, prices, and Unitholders' tax bases of the Units sold between January 1,
1997 and the date, if any, on which a tax termination occurred.
Recently issued Treasury Regulations, effective for tax terminations
occurring on or after May 9, 1997, substantially changed the way in which the
asset bases of a partnership are determined in the event of a tax termination of
the partnership. Under such Treasury Regulations, a partnership's tax bases in
its assets would not be adjusted to equal the partners' bases in their
partnership interests on a tax termination. Accordingly, in the event that a tax
termination did not occur prior to May 9, 1997, the Partnership would be unable
to obtain "stepped up" bases in its assets as a result of a tax termination
occurring on or after May 9, 1997.
If the Unitholders do not consent to the Proposal, the General Partner does
not believe that the Partnership will be able to obtain "stepped up" bases in
its assets greater than the approximate projected tax bases of $12 million.
23
<PAGE> 30
The following chart sets forth the estimated present value per Unit as of
December 31, 1997 and as of June 1, 1997 of future cash distributions declared
based on the Corporate Taxation and Portfolio Runoff Projections and the
assumptions with respect to distributions during 1997 set forth above. The
General Partner believes that based on its knowledge of the market, and taking
into account that Unitholders would continue to have liquidity under this
alternative, a discount rate in the range of 9% is reasonable and that residual
values in the range of 75%-100% of the Appraised Residual Values are reasonable
estimates of values which would be realized under normal market conditions when
aircraft are sold upon termination of a lease. Although the General Partner
believes that the values set forth in the boxes in the chart represent a
reasonable estimate of values which would be realized under this alternative,
many circumstances could occur which would cause actual results to differ
materially from the values set forth below and no assurances are given that such
values could or would be realized.
<TABLE>
<CAPTION>
CORPORATE TAXATION AND PORTFOLIO RUNOFF
---------------------------------------------------------------------------------------------
PROJECTED VALUE PER UNIT AS PROJECTED VALUE PER UNIT AS OF
OF DECEMBER 31, 1997 JUNE 1, 1997(1)
------------------------------ ------------------------------
RESIDUAL RESIDUAL PROJECTED DISTRIBUTIONS RESIDUAL RESIDUAL
VALUE AT 75% VALUE AT 100% DECLARED VALUE AT 75% VALUE AT 100%
DISCOUNT OF APPRAISED OF APPRAISED FROM JUNE 1, 1997 TO OF APPRAISED OF APPRAISED
RATE VALUE(2) VALUE(2) DECEMBER 31, 1997 VALUE(2) VALUE(2)
- -------- ------------ ------------- ----------------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
6% $ 8.24 $9.72 $1.42 $ 9.66 $ 11.14
8% $ 7.75 $9.11 $1.42 $ 9.17 $ 10.53
-------
9% $ 7.52 $8.83 $1.42 $ 8.94 $ 10.25
-------
10% $ 7.30 $8.55 $1.42 $ 8.72 $ 9.97
12% $ 6.89 $8.05 $1.42 $ 8.31 $ 9.47
</TABLE>
- ---------------
(1) Projected value as of December 31, 1997 plus projected distributions from
June 1, 1997 to December 31, 1997.
(2) As described in the text preceding this chart, in the event that a tax
termination of the Partnership occurred in 1997 and the tax bases of the
assets were increased to $48.7 million, the projected values per Unit would
be increased by approximately $2.00 per Unit.
The Partnership's independent accountants, Coopers & Lybrand L.L.P., have
not examined, compiled or applied any procedures to the prospective financial
information (projected value per unit) in accordance with standards established
by the AICPA and express no opinion or any assurance on their reasonableness or
achievability.
APPRAISALS
SELECTION OF INDEPENDENT APPRAISERS. In October 1996, in connection with
the Partnership's proposed purchase of the 50% interest in the aircraft (the
"TWA Aircraft") on lease to TWA (see "THE PARTNERSHIP -- The BALCAP USL Capital
Transaction" and "-- Aircraft Portfolio"), the General Partner, on behalf of the
Partnership, obtained an appraisal of the TWA Aircraft from BK Associates, Inc.
("BK") as of October 1996 and as of its Lease Termination Date. In December 1996
as part of the strategic review process, the General Partner, on behalf of the
Partnership, retained BK to appraise the fair market value of the aircraft on
lease to USAir and FedEx (the "USAir Aircraft" and the "FedEx Aircraft,"
respectively) as of December 1996 and as of their respective Lease Termination
Dates. In February 1997 BK was requested to update each of such appraisals.
In February 1997, the General Partner on behalf of the Partnership selected
and retained Avitas and GRA Aviation Specialists, Inc. ("GRA") to separately
appraise the fair market value of the USAir Aircraft, the TWA Aircraft and the
FedEx Aircraft as of their respective Lease Termination Dates. BK, Avitas and
GRA (collectively, the "Appraisers") were selected on the basis of their
experience and expertise in evaluating aircraft similar to those in the
Partnership's aircraft portfolio, their knowledge of market demand for these
types of aircraft and their ability to provide an independent evaluation and in
a timely manner.
BK is an aircraft appraisal firm whose clients include domestic and foreign
airlines; aircraft, engine and aviation equipment manufacturers; corporate
aircraft operators; governmental agencies; and financial institutions. Avitas is
an aviation consulting firm which provides a broad range of services to aircraft
lessors and lenders, legal counsel, airlines, maintenance providers,
corporations and government entities. GRA performs
24
<PAGE> 31
appraisals and inspections of aircraft, engines and simulators, provides
analyses of aviation markets and gives advice in understanding, drafting and
negotiating aircraft leases and loans to clients which include banks, lessors,
manufacturers, arrangers, airlines and legal counsel.
For services in connection with the appraisals from BK, Avitas and GRA (the
"Appraisals"), the Partnership has agreed to pay BK, Avitas and GRA fees of
$1,775, $6,800 and $3,515, respectively. The Appraisers' compensation was in no
way contingent upon the outcome of the Appraiser's conclusions or the sale of
the Partnership's aircraft portfolio. The Appraisers reported that payments from
BALCAP and its affiliates accounted for 1.14% and 3.02% of BK's revenues in 1995
and 1996, respectively; less than 5% of Avitas' revenues in 1995 and 1996,
respectively; and less than 3% of GRA's revenues in 1996. GRA received no
payments from BALCAP and its affiliates in 1995.
SUMMARY OF APPRAISALS. The Appraisals were conducted to obtain independent
valuations of the fair market value of the aircraft portfolio and to assist the
General Partner in the evaluation of strategic alternatives available to the
Partnership with the goal of maximizing value to Unitholders.
Copies of the Appraisals from BK, Avitas and GRA which set forth the
matters considered and limitations on the review undertaken, are contained in
Exhibits B-1, B-2 and B-3, respectively, to this Consent Solicitation Statement
and should be read in their entirety. All references herein to any Appraisal are
qualified in their entirety by reference to such Exhibits. The Appraisals give
opinions as to the fair market value of the aircraft as of February, 1997 and as
of each aircraft's Lease Termination Date and are based on circumstances
existing as of February 1997, the date of the Appraisals. There can be no
assurance that the statements contained in the Appraisals will remain valid
between their date and the date of the ultimate sale of the aircraft. Moreover,
there can be no assurance that the aircraft would be sold on their respective
Lease Termination Dates. Although BK, Avitas and GRA are experienced Appraisers,
estimates of value are ultimately judgmental.
The Appraisers each independently evaluated the USAir Aircraft, the TWA
Aircraft and the FedEx Aircraft. The Appraisers valued the current market value
and residual value (the value at the Lease Termination Date) of such aircraft,
assuming that the aircraft were not subject to any lease. The Appraisers did not
review or evaluate the leases, the rental stream or the rights and obligations
under any of the leases. The Appraisers did not inspect the aircraft or the
maintenance records and instead relied upon information and an inspection report
summary provided by the Partnership. Each of the Appraisers assumed, among other
things, that (a) the aircraft were in good or average physical condition (or, in
the case of BK, average or better condition); (b) all required airworthiness
directives had been complied with; (c) the aircraft had been maintained in
accordance with applicable maintenance regulations and programs and recognized
industry standards; (d) the aircraft would be returned in the condition required
under the applicable lease; and (e) in the case of Avitas and GRA the
specifications and modifications status are comparable to other aircraft of
their type and age, and their utilization rate is similar to that of other
aircraft of their type and age.
Current market value is defined by each Appraisal as the most likely
trading price that may be generated for an aircraft under the market
circumstances which such Appraiser perceives to exist at the time in question.
The current market value assumes that the aircraft is valued for its highest,
best use, that the parties to the hypothetical sale transaction are willing,
able, prudent and knowledgeable and under no unusual pressure for a prompt sale
and that the transaction would be negotiated in an open and unrestricted market
on an arms-length basis for cash or equivalent consideration and given an
adequate amount of time for effective exposure to prospective buyers. The future
market value as of the Lease Termination Date is based on the same assumptions
as the current market value, except that BK also assumed that market conditions
in the future are at an approximate balance between supply and demand and GRA
also assumed that the future aircraft marketplace is in reasonable balance and
economic conditions are neutral. The fair market value at the Lease Termination
Date is expressed in the Appraisals in constant 1996 dollars after an allowance
for inflation set forth in the Appraisals. BK, Avitas and GRA assumed inflation
percentages of 3%, 3.5% and 3%, respectively.
Although the Appraisers evaluated the current market value of the USAir,
TWA and FedEx Aircraft, they assumed that these aircraft were not subject to
leases. Therefore the current fair market value assigned to
25
<PAGE> 32
these aircraft by the Appraisers are not directly relevant in determining
potential current values for an immediate sale of the aircraft portfolio.
Each Appraiser also commented on the current market for aircraft, and
Unitholders are encouraged to read the Appraisals for information as to the
Appraisers' view of the current aircraft market.
COMPARISON OF APPRAISALS. The following chart sets forth by lessee, the
appraised values as determined by BK, Avitas and GRA as of the applicable Lease
Termination Date and the book value of the aircraft as of such Lease Termination
Date as carried on the Partnership's books.
<TABLE>
<CAPTION>
AGGREGATE
BOOK VALUE
AIRLINE, TYPE LEASE AT LEASE
AND NUMBER TERMINATION TERMINATION
OF AIRCRAFT DATE DATE APPRAISAL AT LEASE TERMINATION DATE
---------------- ----------- ----------- --------------------------------------
($ MIL) ($ MIL)
BK AVITAS GRA AVERAGE
----- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
USAir September $36.4 $46.4 $ 45.5 $39.5 $43.8
MD-82(5) 2001
TWA March 2002 $ 7.1 $10.8 $ 11.2 $ 9.3 $10.4
MD-82(1)
FedEx April 2006 $ 2.0 $ 5.0 $ 3.0 $ 2.9 $ 3.6
727-200FH(1)
Total $45.5 $62.2 $ 59.7 $51.7 $57.8
</TABLE>
MEETINGS OF THE BOARD OF DIRECTORS AND THE SPECIAL COMMITTEE
GENERAL. Pursuant to the Limited Partnership Agreement, management of the
business and affairs of the Partnership is the responsibility of the General
Partner. The decision-making process relating to the Proposal has been conducted
by the General Partner through its Board of Directors (the "Board"). Until
February 12, 1997, the Board consisted of six members, four of whom were
officers of BALCAP and two of whom were independent of and unaffiliated with
BALCAP. At the February 12, 1997 meeting of the Board the number of directors
was increased to seven, and Richard P. Powers, who is independent of and
unaffiliated with BALCAP, was appointed to fill the vacancy. See "Conflicts of
Interest" below and "MANAGEMENT." At the February 12, 1997 Board Meeting, the
Board appointed a special committee (the "Special Committee") made up of
directors who are independent of and unaffiliated with BALCAP to provide an
independent recommendation to the Board with respect to the Proposal. See
"February 12, 1997 Board Meeting" below.
DECEMBER 11, 1996 BOARD MEETING. In its regularly scheduled quarterly
meeting on December 11, 1996 at which all directors except Messrs. Harris and
Hasler were present, the Board reviewed and discussed the strategic alternatives
available to the Partnership to maximize value to the Limited Partners. Prior to
the meeting written materials describing and analyzing the strategic
alternatives had been distributed to each director. The Board discussed these
alternatives, the process by which management had carried out its analysis of
the alternatives and the implications of proceeding with each alternative. See
"Review of Strategic Alternatives" above. The Board requested that management
consider whether certain additional information as to valuation of the portfolio
could be obtained. At the conclusion of the discussion, the Board agreed to
defer action on this matter until its next meeting scheduled to give directors
an opportunity to reflect on the issues discussed at the meeting and to give
management the opportunity to obtain additional valuation information.
FEBRUARY 12, 1997 BOARD MEETING. On February 12, 1997, the Board held a
special meeting to review and discuss the strategic alternatives available to
the Partnership in order to maximize value to the Limited Partners. All
directors except Mr. Marks were present. Written materials which updated the
materials reviewed and discussed at the December 11, 1996 meeting had been
distributed to directors in advance of the meeting. The Board reviewed and
discussed at length the strategic alternatives available to maximize value to
the Limited Partners, the process by which management had carried out its
analysis of these alternatives and the implications of proceeding with each
alternative, including the results of management's contact with
26
<PAGE> 33
leasing companies which could potentially purchase the aircraft. See "Background
for the Proposal," "Review of Strategic Alternatives" and "Appraisals" above and
"THE PROPOSAL."
At the conclusion of the discussion, the Board determined that it would be
in the best interests of the Limited Partners to establish a special committee
of the Board to investigate the strategic alternatives available to the
Partnership and to recommend to the full Board the actions that should be taken
in order to maximize value to the Limited Partners. A special committee (the
"Special Committee") consisting of Messrs. Marks, Hasler and Powers, none of
whom has any interest in or affiliation with BALCAP or its affiliates (other
than his position as a director of the General Partner) was established. The
Special Committee was authorized: to review and investigate the strategic
alternatives available to the Partnership in light of changes in the tax law and
the current position of the Partnership in order to maximize value to the
Limited Partners; to determine whether it would be in the best interest of the
Limited Partners to adopt the Proposal; and to review and consider such other
matters as the special committee may determine. The Special Committee was
authorized to request management to prepare and provide such further
information, studies or analyses as the Special Committee may request and to
retain, at the expense of the Partnership, legal counsel, financial advisors or
other experts to assist in its investigation. The Special Committee was directed
to report to the Board the results of its investigation and its determination of
the action which should be taken in order to maximize value to the Limited
Partners.
FEBRUARY 20, 1997 SPECIAL COMMITTEE MEETING. On February 20, 1997, the
Special Committee met. All members were present. The Special Committee retained
Howard, Rice, Nemerovski, Canady, Falk & Rabkin, a professional corporation, as
its counsel (the "Special Committee Counsel"), and Special Committee Counsel
were present at the meeting. The committee reviewed and discussed materials
which had been provided to the Board prior to the December and February meetings
of the Board. See "Background of the Proposal," "Review of Strategic
Alternatives" and "Appraisals" above. Prior to the Special Committee meeting,
these materials also had been provided to Special Committee Counsel. At the
request of the committee, Special Committee Counsel explained and the committee
reviewed and discussed the restrictions on transferability of the Units which
would be required in order to retain the Partnership's status as a partnership
for tax purposes. See "THE PROPOSAL -- Restrictions on Unit Transferability."
After further discussion, the committee requested that Special Committee Counsel
engage in discussions with management of the General Partner with respect to the
basis and assumptions utilized by management in preparing the valuations for
each of the strategic alternatives and the tax profile of Unitholders. The
committee noted that the General Partner had offered to make available to the
committee officers of BALCAP who are active in the valuation and remarketing of
aircraft to assist the committee in reviewing the value of the portfolio, and
the committee requested that these officers be invited to the next meeting of
the committee.
MARCH 4, 1997 SPECIAL COMMITTEE MEETING. On March 4, 1997, the Special
Committee met. All members and Special Committee Counsel were present. The
background valuation material which Special Committee Counsel had obtained from
management of the General Partner was provided to the committee, and the
committee reviewed and discussed these materials. Special Committee Counsel
reported that management of the General Partner had indicated that less than 4%
of Unitholders other than BALCAP appear to be corporations.
Pursuant to the committee's request two officers of BALCAP who are active
in aircraft valuation and remarketing joined the meeting. Mr. Gebler, the
chairman and chief executive officer of the General Partner, and counsel to the
General Partner also joined the meeting to hear the presentation of the BALCAP
officers. The BALCAP officers distributed written materials and discussed with
the committee appraisals of aircraft generally, including, qualification of
appraisers, definitions of value, return and maintenance condition of aircraft;
and each of the Appraisals (see "Appraisals" above); the description,
characteristics, and specifications of the Partnership's aircraft; and the
methodology and options for disposition of aircraft subject to lease and those
not subject to lease. The committee reviewed and discussed each of these matters
with the BALCAP officers, including the market for an immediate sale of the
Partnership's aircraft subject to existing leases. See "Review of Strategic
Alternatives -- Immediate Sale" above.
27
<PAGE> 34
The committee then reviewed and discussed with Special Committee Counsel
and with counsel to the General Partner the restrictions on transferability
which would need to be imposed on the Units, the options which may be available
to facilitate transfers of Units and the mechanics of a qualified matching
service. See "THE PROPOSAL -- Restrictions on Unit Transferability".
MARCH 11, 1997 SPECIAL COMMITTEE MEETING. On March 11, 1997, the Special
Committee met to review the strategic alternatives available to the Partnership
in order to maximize value to Limited Partners in light of the pending change in
the Partnership's tax status. All members and Special Committee Counsel were
present. Prior to the meeting, written materials from management of the General
Partner had been circulated to the Board (including members of the Special
Committee) in anticipation of the March 13, 1997 meeting of the Board. These
materials included updated financial information as to the strategic
alternatives and a draft of an information statement that would be provided to
Unitholders.
The committee reviewed and discussed at length the information statement,
the alternatives available to maximize value to the Limited Partners and the
benefits, disadvantages and risks of each alternative. After discussion, the
Special Committee adopted resolutions determining that of the three strategic
alternatives the best way to maximize value to Limited Partners is through the
Proposal and that the Proposal is fair to and in the best interest of the
Limited Partners and recommending that the Board take similar action. See
"Recommendation of the Special Committee and the Board; Fairness of the
Proposal" below.
MARCH 13, 1997 MEETING OF THE BOARD OF DIRECTORS. On March 13, 1997 the
Board of Directors met. All directors were present. Written materials which
updated materials previously reviewed and discussed at the February 12, 1997
meeting had been distributed to each director in advance of the meeting. The
materials included a draft of the information statement. The Board reviewed and
discussed the materials and the information statement. The Special Committee
reported to the Board that it had completed its review and that it had reached
the conclusions described in "March 11, 1997 Special Committee Meeting" above.
The Board reviewed and discussed the strategic alternatives available to
maximize value to Limited Partners and the benefits, disadvantages and risks of
each alternative and the conclusions of the Special Committee. At the conclusion
of the discussion, the Board accepted the recommendation of the Special
Committee, and adopted resolutions determining that the best way to maximize
value to Limited Partners is through the Proposal and that the Proposal is fair
to and in the best interest of the Limited Partners and resolving to recommend
that the Limited Partners approve the Proposal.
JUNE 2, 1997 MEETING OF THE SPECIAL COMMITTEE AND THE BOARD. On June 2,
1997, the Board and the Special Committee held a joint meeting. All directors
were present. Written materials, which included a draft of the Consent
Solicitation Statement, had been distributed to each director in advance of the
meeting. The Board and the Special Committee jointly reviewed and discussed the
materials and the Consent Solicitation Statement. After discussion, the Special
Committee and the Board each concluded that the change in tax regulations which
was adopted after their meetings in March 1997 has the effect of making the
corporate taxation alternative less attractive to the Partnership, and thus does
not affect the conclusions reached at those meetings. See "Review of Strategic
Alternatives -- Corporate Taxation and Portfolio Runoff" above. The Special
Committee and the Board also noted that they could not predict whether or in
what form any pending tax legislation will be enacted, and therefore could not
determine at this time whether it will be in the best interests of the
Partnership and the Limited Partners to impose Restrictions on Unit
Transferability or to take other actions which may be in the best interests of
the Limited Partners and the Partnership in light of any amendment or proposed
amendment to partnership tax law which is enacted or pending. The Special
Committee and the Board each unanimously concluded that the Proposal should give
the General Partner discretion to impose Restrictions on Unit Transferability
and, if any amendment or a proposed amendment to partnership tax law is enacted
or pending, to take such other actions which are in the best interests of the
Partnership and the Limited Partners and are consistent with the Proposal. See
"THE PROPOSAL -- Potential Change in Tax Law."
28
<PAGE> 35
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE PROPOSAL
In reaching the conclusions described above under "March 11, 1997 Special
Committee Meeting" and "March 13, 1997 Board Meeting", the Special Committee and
the Board considered the following factors:
(i) The familiarity of the Special Committee and the Board with the
business, results of operations, properties, financial condition,
competitive position and prospects of the Partnership. The directors noted
that this familiarity was enhanced by virtue of the fact that Mr. Marks, a
member of the Special Committee, has been a director of the General Partner
since its formation, that Mr. Gebler has been a director of the General
Partner for more than 6 years, that Messrs. Marks, Hasler and Gebler were
directors when the General Partner was owned by USL Capital Corporation
("USL Capital") and that Messrs. Harris, Rose and Walter have been active
in the aircraft leasing business for more than 15 years.
(ii) The impact of the change in tax law on the Partnership and the
Limited Partners. See "The Proposal -- Review of Strategic
Alternatives -- Corporate Taxation and Portfolio Runoff" above and "THE
PROPOSAL -- Restrictions on Unit Transferability."
(iii) The competitive position of the Partnership and its future
prospects, based upon, among other things, information collected and
analyses performed by management and reviewed by the Board and the Special
Committee in meetings in the fourth quarter of 1996 and the first quarter
of 1997, and information collected and reviewed by the Board in late 1995
when the General Partner was owned by USL Capital. See "The
Proposal -- Background for the Proposal" and "-- 1995 Review of
Alternatives" above.
(iv) The possible alternatives to the Proposal, including immediate
sale of all assets during 1997 and permitting the Partnership to be taxed
as a corporation, including the range of possible values to the Limited
Partners from each alternative, as well as the risk of achieving those
values. See "The Proposal -- Review of Strategic Alternatives" above. The
Special Committee and the Board each considered the benefits of immediate
sale of all assets, but in light of the results of management's contact
with potential purchasers of the aircraft for a sale of aircraft during
1997 and other factors, they believed that it was unlikely that sales at
the values set forth under the Immediate Sale Alternative could be
consummated during 1997 and that if the Partnership were compelled to
complete a sale prior to year end, the negotiating posture of the
Partnership in attempting to obtain the highest value for its portfolio
would be severely compromised. See "The Proposal -- Review of Strategic
Alternatives -- Immediate Sale" above.
(v) The Appraisals and the review and commentary on the Appraisals
provided to the Special Committee by the officers of BALCAP who are active
in aircraft valuation and remarketing. See "The Proposal -- Appraisals"
above and "March 4, 1997 Special Committee Meeting" above.
(vi) The lack of liquidity to Unitholders which will result from the
Proposal, and that this lack of liquidity is offset somewhat by the limited
trading that is permitted under applicable tax law and by the limited
markets which appear to be available to permit such trades and by the
decision to sell aircraft as attractive opportunities arise which should
shorten the period of illiquidity and provide distributions as aircraft are
sold. See "THE PROPOSAL -- Restrictions on Unit Transferability" and "The
Proposal -- Review of Strategic Alternatives -- Restrictions on Unit
Transferability and Portfolio Runoff" above.
(vii) The range of values potentially payable to Limited Partners as a
result of the Proposal and the relationship of such values to the net book
value and the market value of the Units and the relationship of such values
to values potentially payable to Limited Partners under alternatives to the
Proposal. See "The Proposal -- Review of Strategic Alternatives" above and
"MARKET PRICE OF UNITS AND DISTRIBUTIONS TO UNITHOLDERS -- Market Price".
(viii) The potential conflicts of interest which exist between the
General Partner and BALCAP on the one hand and the Limited Partners on the
other in respect of each alternative reviewed. However, the Board and the
Special Committee noted that the General Partner is not profiting from the
Proposal other than through fees otherwise payable to it under the terms of
the Limited Partnership Agreement, and BALCAP will not receive any
consideration under the Proposal other than its share of distributions
29
<PAGE> 36
payable to all Limited Partners. See "-- Conflicts of Interest -- Interests
of the General Partner and BALCAP in the Proposal" and "-- Ownership of
Units by BALCAP" above.
(ix) The fact that BALCAP owns 22.2% of the Units and has indicated
that it will vote its Units in favor of the Proposal, thus significantly
increasing the likelihood that the Proposal would be approved by Limited
Partners. BALCAP invested $16,092,500 in its Units in 1996 and has advised
the General Partner that it believes that the Proposal is the best
alternative to maximize value to Unitholders.
The Special Committee and the Board considered each of the factors listed
above during the course of their deliberations prior to reaching the decision
that the Proposal is the best alternative to maximize value to Limited Partners
and that the Proposal is fair to and in the best interest of the Limited
Partners. The Special Committee and the Board evaluated such factors in light of
their knowledge of the business and operations of the Partnership and their
business judgment. In view of the wide variety of factors considered in
connection with the evaluation of the alternatives, neither the Special
Committee nor the Board found it practicable to, and did not, quantify or
otherwise attempt to assign, except as indicated above, relative weights or
positive or negative labels to the specific factors considered in making their
respective determinations.
CONFLICTS OF INTEREST
In considering the recommendation of the General Partner, Limited Partners
should consider the conflicts or potential conflicts of interest which are
presented by the Proposal, including the following matters:
RELATIONSHIP OF GENERAL PARTNER AND BALCAP
The Partnership has no directors or executive officers. Under the Limited
Partnership Agreement, management of the Partnership is vested exclusively in
the General Partner. The General Partner is a wholly owned subsidiary of BALCAP.
Certain officers and directors of BALCAP also serve as officers and directors of
the General Partner. This common control and management presents certain
potential conflicts of interest with respect to the Proposal, including the
discretion granted to the General Partner under the Proposal. However, the
Proposal was approved by the Special Committee consisting of three directors of
the General Partner, all of whom are independent of and unaffiliated with BALCAP
and it is anticipated that the exercise of any discretion granted to the General
Partner under the Proposal will be reviewed and approved by the Special
Committee. See "-- The Proposal -- Meetings of the Board of Directors and the
Special Committee" and "-- Recommendation of the Special Committee and the
Board; Fairness of the Proposal" above, and "Interests of General Partner and
BALCAP in the Proposal" below.
INTERESTS OF GENERAL PARTNER AND BALCAP IN THE PROPOSAL
FEES AND DISTRIBUTIONS IF PROPOSAL IS CONSUMMATED. Pursuant to the Limited
Partnership Agreement, the General Partner is entitled to the following
compensation: (i) an Acquisition Fee equal to 1.5% of the first $50 million of
Aircraft Cost, as defined in the Limited Partnership Agreement, and 1% of
aircraft cost in excess of $50 million, (ii) a Management Fee payable monthly
equal to .0625% per month of the Partnership's net worth as of the beginning of
each month plus 1% of Net Revenues, as defined in the Limited Partnership
Agreement, for such month, and (iii) a Disposition or Remarketing Fee equal to
5% of sales proceeds or 4% of rental payments (where aircraft are remarketed
through lease rather than sale) when received. If the Proposal is approved and
aircraft are sold on their Lease Termination Dates in accordance with the
assumptions set forth above under "The Proposal -- Review of Strategic
Alternatives -- Restricting Unit Transfers and Portfolio Runoff," the General
Partner estimates the present value (using a discount rate of 9% per annum) of
such fees payable until the last aircraft is sold and the Partnership is
dissolved to be approximately $4 million. In addition, the General Partner has a
1% interest in the profits and losses of the Partnership for which it paid 1% of
total capital contributions to the Partnership, and this general partnership
interest will exist whether or not the Proposal is consummated.
FEES AND DISTRIBUTIONS IF PROPOSAL IS NOT CONSUMMATED. If the Proposal is
not approved and the Partnership becomes taxable as a corporation and aircraft
were sold on their Lease Termination Dates in accordance with the assumptions
set forth under "The Proposal -- Review of Strategic Alternatives -- Corporate
Taxation and Portfolio Runoff" the General Partner estimates the present value
(using a discount rate of 9% per annum) of such fees over the remaining life of
the Partnership to be approximately $4 million.
30
<PAGE> 37
The General Partner did not estimate the fees payable if the Proposal is not
approved and the Partnership continued to operate in accordance with the Limited
Partnership Agreement and were able to reinvest proceeds from sale of aircraft
in accordance with past practices until January 1, 2005 because the General
Partner believes it is unlikely that the Partnership will be able to make new
investments at rates similar to those which the Partnership has obtained in the
past. If such circumstances did occur however, the present value of such fees
would be higher than $4 million. The General Partner also would continue to hold
its 1% general partnership interest in the Partnership under any of these
alternatives.
OWNERSHIP OF UNITS BY BALCAP
BALCAP owns directly or through its subsidiaries 22.2% of the Units, which
it purchased in September and October 1996 for $15.70 per Unit for a total cash
investment in the Units of $16,092,500. BALCAP has advised the General Partner
that it intends to vote its Units in favor of the Proposal because it believes
that the Proposal provides the greatest projected return to Unitholders. A vote
of 22.2% in favor of the Proposal gives the General Partner and its affiliates
more influence over the Proposal than would be the case if BALCAP did not own
any Units. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
In addition, BALCAP is actively engaged in the aircraft leasing market, and thus
may have more knowledge and experience in this market than other Unitholders.
As an owner of Units, BALCAP has the same interest as unaffiliated Limited
Partners have in the cash distributions and results of operations of the
Partnership. However, for a number of reasons the Proposal may not have the same
effect on BALCAP as it has on other Unitholders. First, the Units owned by
BALCAP are restricted securities and cannot be transferred by BALCAP except if
the Units are registered or are sold in a transaction exempt from registration.
Thus, BALCAP has limited liquidity in the Units currently and will not be as
adversely affected as other Unitholders by the lack of liquidity which will
result from delisting of the Units. Second, the impact of aircraft sales for tax
or accounting purposes may be different for BALCAP than for other Unitholders
because of, among other things, its basis in the Units. In addition, if the
Proposal is not approved and the Partnership were taxed as a corporation, BALCAP
would be entitled to a dividends received deduction (currently 70%) on dividend
distributions made by the Partnership. The dividend received deduction generally
is available to corporations with respect to dividends received on stock owned
by the corporation. Individuals are not entitled to such deduction, and thus, if
the Proposal is not approved and the Partnership becomes taxable as a
corporation, the effect on BALCAP would be less adverse than the effect on
individuals and other Unitholders who are not entitled to the dividends received
deduction.
TOTAL PAYMENTS TO LIMITED PARTNERS AND THE GENERAL PARTNER
The following table sets forth total contributions from and payments to
Limited Partners and the General Partner from the inception of the Partnership
to June 24, 1997:
<TABLE>
<CAPTION>
LIMITED PARTNERS GENERAL PARTNER
------------------------------------- ----------------------
AGGREGATE PER UNIT PERCENTAGE PERCENTAGE
AMOUNT AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- -------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Initial contribution(1)............... $ 87,082 $ 18.83 99% $ 880 1%
Total distributions received.......... $ 104,185 $ 22.53 99% $ 1,053 1%
Market Value of Units as of June 24,
1997(2)............................. $ 55,500 $ 12.00 100% $ 0(3) 0%(3)
Fees paid to General Partner(4)....... $ 0 $ 0 0% $11,835 100%
</TABLE>
- ---------------
Notes:
(1) Contributions net of underwriting commissions and offering expenses.
(2) Based on the closing price of the Units on the New York Stock Exchange.
(3) The General Partner's 1% interest in the Partnership is not represented by
Units and does not have a market value on the New York Stock Exchange.
(4) See "Conflicts of Interest -- Interests of General Partner and BALCAP in the
Proposal -- Fees and Distributions if Proposal is Consummated" and Note 8 of
Notes to Financial Statements.
31
<PAGE> 38
RISKS AND BENEFITS TO THE LIMITED PARTNERS IF THE PROPOSAL IS CONSUMMATED
GENERAL
If the Proposal is approved and consummated as contemplated and there is no
change in partnership tax law, the General Partner does not expect that the
Partnership will be taxed as a corporation. If it is not so taxed, cash
distributions to Unitholders will not be reduced by the amount of such tax and
the deductions from Partnership operations and investments may be available to
Unitholders to partially shelter such cash distributions from tax. However, if
the Proposal is approved and consummated and there is no change in partnership
tax law, transferability of the Units will be restricted the Units will be
delisted from trading on the New York Stock Exchange. In the absence of a
trading market for the Units, the economic return to Unitholders will depend
upon future rental income from aircraft presently owned by the Partnership,
residual values of the aircraft which are realized upon sale, rates of taxation
and interest rates applicable in future years and the amount and timing of cash
distributions by the Partnership, none of which can be predicted with certainty.
Significant changes in the market in which the Partnership operates, primarily
higher lease rates and lower debt rates, could result in the Partnership's
ability to locate attractive opportunities for reinvestment of aircraft sales
proceeds. If this occurred, Unitholders could realize a higher return if the
Partnership were to continue to reinvest proceeds of sale in new aircraft until
January 1, 2005 than if the Partnership did not make new aircraft investments.
However, in light of the Partnership's competitive position, the General Partner
does not expect that changes which would impact its recommendation are likely to
occur.
LACK OF LIQUIDITY
Upon delisting, there will be no public market for the Units. The General
Partner expects that a qualified matching service, which matches buyers and
sellers of securities of limited partnerships, an electronic bulletin board,
which posts price information, or a similar service will develop to facilitate
purchases and sales of Units. However, Internal Revenue Service rules impose
limitations on the aggregate number of Units which may be sold in any year
utilizing such a service. As a result of these limitations, currently the
maximum number of Units that can be traded in any year (other than certain sales
between family members, upon death or distributions from qualified retirement
plans) is approximately 7.78% of the outstanding Units, and most of these trades
would need to be conducted through a qualified matching service which imposes
certain delays before sales may be consummated. Accordingly, a Unitholder may
not be able to trade its Units, particularly if a Unitholder attempts to sell
during the later part of any calendar year after 1997.
There can be no assurance that any such services will exist or will
participate with respect to the Units or as to the prices available through such
a service. In the absence of such a service or its participation, Unitholders
may be unable to liquidate their investment in the Units. However, until the
date Restrictions on Unit Transferability are imposed, which is anticipated to
be on or about December 17, 1997, and assuming that the Partnership otherwise
continues to qualify for listing, Unitholders are free to sell or purchase Units
on the New York Stock Exchange. No assurance can be given as to future prices
for Units bought or sold on the New York Stock Exchange prior to delisting. See
"THE PROPOSAL -- Restrictions on Unit Transferability."
POTENTIAL CHANGE IN TAX LAW
Two bills are pending in Congress which, if enacted, would continue to tax
certain publicly traded partnerships as partnerships but would impose a tax on
the gross income of such partnerships. No prediction can be made as to whether
or in what form any such legislation may be enacted. Because of this potential
change in partnership tax law, the Proposal authorizes the General Partner to
take such other actions, including amending the Limited Partnership Agreement,
which the General Partner determines are in the best interests of the
Partnership and the Limited Partners and are consistent with the intent of the
Proposal.
If the Proposal is approved and if any amendment or proposed amendment to
partnership tax law is enacted or pending, the General Partner will consider
whether to impose Restrictions on Unit Transferability or to take other actions
which may be beneficial to the Partnership and the Limited Partners, taking into
account the benefits of continued liquidity for the Limited Partners, any tax or
cost to the Partnership or the
32
<PAGE> 39
Limited Partners included in any such tax law amendment, and such other matters
which the General Partner may deem relevant in light of such change or proposed
change in tax law. If the Proposal is approved, without further approval of the
Limited Partners, the General Partner will be authorized to impose Restrictions
on Unit Transferability or take such other actions which are consistent with the
intent of the Proposal if it determines that such transfer restrictions or other
actions are in the best interests of the Partnership and the Limited Partners.
The General Partner determined that it should seek Limited Partner approval
for the Proposal at the present time even though amendments to partnership tax
law are pending in Congress because it cannot predict when, whether or in what
form any such tax legislation will be enacted and the time during which the
Partnership must take action is very short. Unless the tax law is amended, the
Partnership will be taxed as a corporation commencing on January 1, 1998, and
this tax would substantially reduce distributions to Unitholders. Final
legislation enacted as a result of the pending tax bill, if any, may not be
enacted for some time, and it is important to allow sufficient time to obtain
any necessary Limited Partner consent. In addition, since the Partnership is a
California limited partnership with offices in California, the General Partner
must consider the effect of California tax law, and to date no legislation
similar to the pending federal tax bills has been introduced in the California
legislature. Obtaining Limited Partner approval now will provide the Partnership
with flexibility to respond to any change in tax law which may be beneficial to
the Partnership and the Limited Partners while preserving the ability of the
Partnership to avoid taxation as a corporation with the resulting reduction in
cash distributions.
The Proposal grants discretion to the General Partner to take actions
consistent with the intent of the Proposal which are in the best interests of
the Partnership and the Limited Partners if an amendment to the tax law is
enacted or pending. Since the General Partner cannot predict what form any such
legislation may take, it cannot predict what actions may be appropriate. Thus
there is a risk that actions could be taken which have not been specifically
described in this Consent Solicitation Statement. However, prior to taking any
such actions, the General Partner must determine that such actions are in the
best interest of the Partnership and the Limited Partners and are consistent
with the intent of the Proposal.
Unless an amendment to partnership tax law is enacted or is pending,
Restrictions on Unit Transferability will be imposed effective on or about
December 17, 1997. See "THE PROPOSAL -- Potential Change in Tax Law."
RISKS OF AIRCRAFT LEASING
The Proposal contemplates that aircraft will be sold and the Partnership
dissolved earlier than its originally planned disposition phase and thus
presents a shorter investment horizon than if the Partnership continued to
operate until its originally anticipated dissolution in 2012. However, since the
Partnership will continue to operate until all assets are sold, risks inherent
in aircraft leasing, primarily the value of aircraft and creditworthiness of
lessees, will continue to exist. The ultimate return to Limited Partners will
depend upon a number of factors, including the timing and proceeds from aircraft
sales, the creditworthiness of lessees and other matters. No assurance can be
given as to when or at what price aircraft may be sold. The residual value of
aircraft depends upon many factors, most of which are beyond the control of the
Partnership or the General Partner. The principal factors affecting residual
value of aircraft are market conditions existing at the time of sale, which in
turn are influenced by overall economic conditions and inflation, the supply and
demand for used aircraft, the operating economics of a particular aircraft, the
compliance by a particular aircraft with government regulations, such as noise
regulations, and the cost of new replacement aircraft. Residual risk will
continue until all aircraft are sold.
In the past, the Partnership has sold aircraft at a gain over book value;
however, there can be no assurance that the past performance of the Partnership
in realizing such gains will be repeated. In addition, gain on sale depends upon
the difference between the book value of an aircraft and its sales price. Book
value is typically less than appraised value; thus a gain may be realized even
though an aircraft sold for less than its appraised value. For information as to
the book value and the appraised value of the Partnership's portfolio, see "The
Proposal -- Appraisals" above.
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RISKS AND BENEFITS TO THE LIMITED PARTNERS IF THE PROPOSAL IS NOT CONSUMMATED
GENERAL
If the Proposal is not approved, the General Partner will continue to
operate the Partnership in accordance with the Limited Partnership Agreement and
attempt to reinvest aircraft sales proceeds until January 1, 2005. However,
because of the competitive position of the Partnership, the General Partner
believes it is unlikely that the Partnership will be able to make new
investments with risks and returns it has experienced in the past. Under the
Limited Partnership Agreement, Limited Partner approval may be required in order
for the Partnership to sell all or substantially all of its assets and
distribute the net proceeds to Unitholders. Accordingly, if the Proposal is not
approved and the Partnership is not able to make new investments, the
Partnership may be required to incur the additional expense of soliciting
Limited Partner consent in order to sell its assets and dissolve.
If the Partnership continues to operate, the Units should continue to be
traded on the New York Stock Exchange and the Unitholders should continue to
have liquidity in the Units. Although the Partnership will attempt to cause the
Units to remain listed on the New York Stock Exchange, there can be no assurance
that the Units will continue to qualify for such listing or that the Partnership
will continue to meet the listing criteria of the exchange. However, if the
Units are publicly traded on any market and partnership tax law is not amended,
the Partnership will be taxed as a corporation beginning on January 1, 1998, and
cash distributions to Unitholders will be substantially reduced.
If the Partnership continues to operate and to seek to reinvest sales
proceeds until 2005, the value of the Units would depend upon overall economic
conditions and conditions in the stock market generally, future rental income
from present and future leases, availability of reinvestment opportunities when
aircraft sales proceeds become available, the residual value of the aircraft
portfolio upon its ultimate liquidation, rates of taxation and interest rates
applicable in future years and the amount and timing of cash distributions by
the Partnership, none of which can be predicted with certainty.
TAXATION OF THE PARTNERSHIP
If the Partnership were taxed as a corporation: no deductions arising from
Partnership operations would be allowable to Unitholders; income of the
Partnership would be taxable at corporate rates; distributions to Unitholders
would be taxable as dividends to the extent of the Partnership's current or
accumulated earnings and profits; and distributions to Unitholders would be
substantially reduced. For purposes of comparing the strategic alternatives
available to the Partnership, the General Partner estimated the present value of
future cash distributions assuming the Partnership were taxed as a corporation.
In performing such calculations it was assumed that the Partnership's tax bases
in its assets as of January 1, 1998 would be equal to approximately $12 million.
Such amount represents the approximate projected tax bases in the Partnership's
assets as of January 1, 1998, which assumes that there are no acquisitions or
dispositions of aircraft during the remaining portion of 1997. See "SPECIAL
FACTORS -- The Proposal -- Review of Strategic Alternatives -- Corporate
Taxation and Portfolio Runoff."
If a tax termination of the Partnership occurs, it could result in higher
tax bases than the assumed tax bases and less corporate level tax. Thus, a tax
termination could result in an increased present value of future cash
distributions. In general, a tax termination occurs if within a 12-month period
there has been a sale or exchange of 50% or more of the interests in a
partnership. The General Partner does not believe that a tax termination has
occurred prior to 1997. However, determining whether a tax termination has
occurred during 1997 is extremely difficult because the information necessary to
make such a determination is not readily accessible until the end of the year.
In the event that a tax termination of the Partnership occurred during 1997
and prior to May 9, 1997, the tax bases of the Partnership assets would be
"stepped up" to equal the tax bases of the Unitholders and the General Partner
in their Partnership interests at the time of such tax termination, which would
be substantially higher than the assumed tax bases of $12 million. The estimated
tax bases of the Unitholders and the General Partner in their Partnership
interests as of January 1, 1997 were equal to approximately $48.7 million.
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Assuming that the Partnership's tax bases in its assets were "stepped up" to
$48.7 million, the present value of future cash distributions would be increased
by approximately $2.00 per Unit from the amounts set forth in the Corporate
Taxation and Portfolio Runoff Projections. The actual tax bases of the
Unitholders and the General Partner in their Partnership interests would be
different than the $48.7 million bases assumed because the tax bases would
depend upon the acquisition price of the Units, the income and deductions of the
Partnership between January 1, 1997 and the date, if any, a tax termination
occurred, and the trading volume, prices, and Unitholders' tax bases of the
Units sold between January 1, 1997 and the date, if any, on which a tax
termination occurred. See "SPECIAL FACTORS -- The Proposal -- Review of
Strategic Alternatives -- Corporate Taxation and Portfolio Runoff."
If the Unitholders do not consent to the Proposal, the General Partner does
not believe that the Partnership will be able to obtain "stepped up" bases in
its assets greater than the approximate projected tax bases of $12 million.
RISKS OF AIRCRAFT LEASING
If the Partnership continues to operate until its originally planned
dissolution in 2012, the ultimate return to the Limited Partners would depend
upon a number of factors, including overall economic conditions and conditions
in the stock market, the timing and proceeds of sales of aircraft as well as the
creditworthiness of lessees and other matters. A significant factor in the
ultimate return to Limited Partners would be the residual value of the
Partnership's existing aircraft and the lease terms and residual value of
aircraft which are purchased in the future. Nearly all of these factors are
beyond the control of the Partnership and the General Partner. The Partnership
would be subject to the risks described in "Expected Risks and Benefits to the
Limited Partners if the Proposal is Consummated -- Risks of Aircraft Leasing"
above and, in addition, would be subject to the risks of continued reinvestment
and the terms of such reinvestment. These risks will continue until all
reinvestment has been completed and until all aircraft then subject to lease are
sold. Based on current market conditions, the General Partner believes that it
is unlikely that the Partnership will be able to make new investments with the
risks and returns it has experienced in the past and that reinvestment would
either present higher risks than currently exist in the aircraft portfolio or
lower rates of return than those existing in the Partnership's current
portfolio.
PROPOSAL COSTS INCURRED
Expenses incurred in connection with the Proposal, such as fees payable to
the Appraisers, legal fees and the cost of preparing and printing this Consent
Solicitation Statement, will be payable by the Partnership regardless of whether
the Proposal is consummated. The General Partner estimates that the total amount
of such expenses payable by the Partnership will be approximately $500,000.
POSSIBLE BENEFITS FROM CONTINUATION OF THE PARTNERSHIP'S BUSINESS
Significant changes in the market in which the Partnership operates,
primarily higher lease rates and lower debt rates could result in the
Partnership's ability to locate attractive opportunities for reinvestment of
aircraft sales proceeds. If this occurred, Unitholders could realize a higher
return if the Partnership were to continue to reinvest proceeds of sale in new
investments in aircraft until January 1, 2005 than if the Partnership did not
make new investments in aircraft. However, in light of the Partnership's
competitive position, the General Partner does not expect that changes which
would impact its recommendation are likely to occur.
THE PROPOSAL
GENERAL
The Proposal provides for the Restrictions on Unit Transferability, for
Portfolio Runoff and for certain related amendments to the Limited Partnership
Agreement. In addition, if any amendment or proposed amendment to partnership
tax law is enacted or is pending, the Proposal authorizes the General Partner to
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take such other actions (including amending the Limited Partnership Agreement)
which the General Partner determines are in the best interests of the
Partnership and the Limited Partners and are consistent with the intent of the
Restrictions on Unit Transferability and Portfolio Runoff in light of any such
amendment or proposed amendment to partnership tax law.
If the Proposal is approved, the General Partner will be authorized,
without further consent of the Limited Partners, to implement the Restrictions
on Unit Transferability and/or Portfolio Runoff (which includes the resulting
liquidation and dissolution of the Partnership). In addition, if the Proposal is
approved and if any amendment or proposed amendment to partnership tax law is
enacted or pending, the General Partner will also be authorized to take such
other actions as it determines to be in the best interests of the Partnership
and the Limited Partners and to be consistent with the intent of the
Restrictions on Unit Transferability and Portfolio Runoff in light of any change
or proposed change in partnership tax law from the law in existence on June 1,
1997.
RESTRICTIONS ON UNIT TRANSFERABILITY
As previously reported to Unitholders, unless partnership tax law is
amended, changes in the federal income tax law which occurred in 1987 will cause
the Partnership to be taxed as a corporation beginning on January 1, 1998 if the
Units continue to be traded on an established securities market or if the Units
are readily tradeable on a secondary market (or the substantial equivalent
thereof).
In order for the Partnership to avoid being taxed as a corporation, the
General Partner is proposing that it be authorized to impose Restrictions on
Unit Transferability on or about December 17, 1997. The imposition of such
restrictions will cause the New York Stock Exchange to delist the Units from
trading at that time. Thereafter, as discussed below, the General Partner will
only recognize transfers of Units made by Unitholders in accordance with the
guidance provided by Internal Revenue Service Notice 88-75 (the "Notice"), as
limited in the manner described below.
Under the Notice, an unlimited number of Units generally may be transferred
(a) at death, (b) between members of a family, (c) as a result of a distribution
to participants and beneficiaries from a qualified retirement plan and (d) in a
large "block" transfer (generally, a transfer of an interest representing more
than 5% of the outstanding Partnership interests). Collectively these transfers
are referred to as "Transfers Not Involving Trading." In addition, a limited
number of Units may be transferred in compliance with the "two percent" safe
harbor and the "matching service" ("Matching Service") safe harbor of the
Notice. The General Partner will recognize transfers qualifying for the "two
percent" safe harbor and the Matching Service safe harbor. Although the Notice
also contains a "five percent" safe harbor, the General Partner will not
recognize any transfers made by Unitholders under such "five percent" safe
harbor because the effect of allowing transfers under the "five percent" safe
harbor would be to limit the availability of the Matching Service safe harbor.
The "two percent" safe harbor permits transfers of the Units to the extent
that the aggregate percentage of interests in the Partnership transferred during
a calendar year, not including Transfers Not Involving Trading and Matching
Service transfers, does not exceed 2% of the total Partnership interests; this
2% limit, however, is reduced as discussed below. Accordingly, Unitholders
transferring their Units without the use of a Matching Service or not in the
Transfers Not Involving Trading safe harbor must comply with the "two percent"
safe harbor.
In May 1997, the National Association of Securities Dealers, Inc. (the
"NASD") began operating an electronic bulletin board which displays pricing
information for various domestic and foreign securities not otherwise listed on
NASDAQ or another primary domestic exchange. It is not expected that such
bulletin board will meet the requirements to be a qualified Matching Service
under the Notice, but it may provide a market for Unitholders to sell their
Units. Furthermore, the Internal Revenue Service has privately ruled that
Matching Services eligible for participation in the bulletin board may utilize
the bulletin board to display information regarding interests such as the Units
without disqualifying themselves as a Matching Service. The Partnership cannot
predict how the price of Units sold on the bulletin board would compare to
current market
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prices. In addition, there can be no assurance that such bulletin board will be
successful or that such bulletin board will display the pricing information of
the Units.
A Matching Service typically involves the use of a computerized or printed
listing system that lists bid and/or ask prices in order to match Unitholders
who want to dispose of their Units with persons who want to buy such Units. The
Partnership cannot predict how the price of Units sold through a Matching
Service would compare to current market prices. It is expected that independent
parties will provide Matching Services after the delisting but there can be no
assurance that such services will be provided and, if so provided, will continue
to be provided throughout the term of the Partnership. In general, a transfer of
Units will qualify under the Matching Service safe harbor if (i) the operator of
the Matching Service does not disseminate the intention to buy or sell to the
other party for 15 days after the date the seller notifies the Matching Service
that the seller's Unit is available for sale (the "Contact Date"), (ii) the
closing of the sale does not occur prior to 45 days after the Contact Date,
(iii) the seller's information is removed from the Matching Service within 120
days of the Contact Date, and following the removal such seller cannot list any
Unit for a period of 60 days after such removal of seller's information, and
(iv) the aggregate percentage of interests in the Partnership transferred during
the calendar year (not counting Transfers Not Involving Trading) does not exceed
10% of the total Partnership interests; this 10% threshold, however, is reduced
as discussed below.
Because transfers under the "two percent" safe harbor count against the 10%
threshold for the Matching Service safe harbor, the General Partner will treat
all transfers, other than Transfers Not Involving Trading, occurring during the
calendar year as first being "two percent" safe harbor transfers for such year.
Once the 2% threshold for the "two percent" safe harbor has been reached for
such year, Unitholders may thereafter transfer their Units only in compliance
with the Matching Service safe harbor or in Transfers Not Involving Trading.
For purposes of calculating the 2% and 10% percentage thresholds for the
safe harbors described above, if the General Partner (or related person within
the meaning of either Section 267(b) or Section 707(b)(1) of the Internal
Revenue Code of 1986, as amended (the "Code")) owns, in the aggregate, more than
10% of the outstanding Partnership interests at any time during the taxable year
of Partnership, the total interests that may be transferred within the safe
harbors must be determined without reference to the interests owned by the
General Partner and such related persons. The General Partner (and its
affiliates) currently own approximately 23.2% of the interests in the
Partnership. If the General Partner (and its affiliates) continue this level of
ownership, the 2% threshold for the "two percent" safe harbor and the 10%
threshold for the Matching Service safe harbor would be reduced to approximately
1.56% and 7.78%, respectively, of the outstanding Units. If the General Partner
(and related persons under applicable provisions of the Code) were to increase
its ownership interest in the Partnership above the current level of ownership,
these safe harbor percentage limitations would be reduced.
On and after the date on which the Restrictions on Unit Transferability are
imposed, currently expected to be on or about December 17, 1997, the General
Partner will not admit any transferee of Units as a partner or recognize any
rights of a transferee of Units (including any right to receive distributions or
any right to an interest in capital or profits of the Partnership) unless the
transferee certifies in an application for transfer (the "Transfer Application")
to the Partnership that the transferee has acquired the Units (a) by a "transfer
not involving trading" within the meaning of the Notice, (b) in compliance with
the "two percent" safe harbor described in the Notice or (c) in a qualified
Matching Service transaction described in the Notice. Furthermore, any transfer
of Units will be subject to a determination by the General Partner in its sole
discretion that such transfer will not cause the aggregate percentage of Units
transferred during the calendar year to exceed the allowable amount or otherwise
cause the Units to be treated as traded on an established securities market or
readily tradeable on a secondary market (or the substantial equivalent thereof)
as defined in Section 7704(b) of the Code. A legend to this effect will be
printed on all Depositary Units evidencing interests in the Partnership. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
As a result of the above limitations, the maximum percentage of Units that
may be traded during any calendar year after 1997, other than Transfers Not
Involving Trading, is currently approximately 7.78%. Accordingly, a Unitholder
may not be able to trade its Units, particularly if a Unitholder attempts to
sell a
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Unit during the later part of any calendar year after 1997. The General Partner
will permit transfers of Units within the 2% and 10% safe harbors during each
calendar year on a first-come, first-served basis, based on when a completed
Transfer Application is received by the Transfer Agent. The General Partner also
intends to provide a telephone number that Unitholders may call to obtain
information regarding the availability of transfers under the safe harbors
during any calendar year at the time of the call; no assurances will be given
that any transfers will be permitted at the time a Transfer Application is
actually submitted to the Transfer Agent. The General Partner may also implement
other means to control or limit the transfer of Units to the extent necessary or
appropriate to comply with the Notice including, but not limited to, requiring
all Matching Service transactions to be effected through a single Matching
Service.
The safe harbors of the Notice described above, rather than somewhat
different safe harbors included in regulations issued under Section 7704 of the
Code, apply to partnerships (such as the Partnership) that were engaged in an
activity before December 4, 1995. The Partnership is considering requesting a
ruling from the Internal Revenue Service that it can, as an alternative to the
Notice, rely upon the Section 7704 regulations (the "Regulations"). If such a
ruling were obtained, the Matching Service safe harbor would be somewhat more
liberal in that the 15 day limit, described above, would be modified to
generally provide that the selling partner may not enter into a contract to sell
until 15 days after information regarding the offering of the interest for sale
is made available to potential buyers. The "two percent" safe harbor, described
above, was not changed by the Regulations. Additionally, unlike the Notice, the
Regulations explicitly provide that a trade is not counted for purposes of the
safe harbors if the trade occurs without involvement by a partnership in
establishing the market or recognizing transfers. The General Partner has not
yet determined whether to seek a ruling from the Internal Revenue Service and if
it does so decide, no assurance can be given that a favorable ruling will be
obtained. Until the Partnership obtains such a ruling, the Partnership will rely
upon the safe harbors of the Notice. If such a ruling were to be obtained,
references to the Notice in the Transfer Application and any legend printed on
the Depositary Units would be changed to refer to the Regulations.
Unitholders wishing to sell or otherwise transfer Units should consult
their tax advisors as to whether the proposed sale or transfer would be
considered a qualified Matching Service transaction or a Transfer Not Involving
Trading as discussed above.
There can be no assurance that any service described above will facilitate
trading with respect to the Units or as to the price at which the Units may be
sold using such a service. In the absence of such a service Unitholders may be
unable to liquidate their investment. However, until the date Restrictions on
Unit Transferability are imposed which is anticipated to be on or about December
17, 1997, and assuming that the Partnership otherwise continues to qualify for
listing, Unitholders are free to sell or purchase Units on the New York Stock
Exchange. No assurance can be given as to future prices for Units bought or sold
on the New York Stock Exchange prior to delisting.
PORTFOLIO RUNOFF
Because of the illiquidity for Unitholders which will result from the
Restrictions on Unit Transferability, if imposed, and because of the General
Partner's conclusion that the Partnership is unlikely to be able to make
attractive investments in the future (see "SPECIAL FACTORS -- The
Proposal -- Background for the Proposal"), the Proposal provides that the
General Partner is authorized to implement Portfolio Runoff. This means that the
Partnership would not make any new aircraft investments, would sell aircraft as
attractive sale opportunities arise, would distribute sales proceeds (after
repaying debt and establishing appropriate reserves) to Unitholders after each
such disposition and would dissolve the Partnership when all assets are sold.
Although the Partnership will review attractive opportunities to sell its
aircraft subject to existing leases, it may not be possible to sell some or all
of the aircraft until on or after termination of the related lease. Assuming
that all lessees comply with their current lease obligations, none of the
lessees exercises fair market value renewal options available under certain
leases and the aircraft are sold at lease termination, 86% of the assets would
be sold within five years and the Partnership would terminate in 2006. There can
be no assurance that these circumstances will occur or as to the price at which
aircraft may be sold.
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If the Proposal is approved and the General Partner imposes Restrictions on
Unit Transferability, the General Partner will take action consistent with
Portfolio Runoff. If the Proposal is approved but restrictions on Unit
transferability are not imposed, the General Partner will consider whether it is
in the best interests of the Limited Partners to cease making new aircraft
investments in light of market conditions and the Partnership's competitive
position. Based upon the Partnership's investment experience over the last
several years and its knowledge of the market, the General Partner anticipates
that it will take action consistent with Portfolio Runoff whether or not
Restrictions on Unit Transferability are imposed.
Promptly after sale of all aircraft, all cash then held by the Partnership,
after payment of remaining liabilities and any reserve necessary for contingent
liabilities, will be distributed to Unitholders and the Partnership will be
dissolved. At that time, the Partnership's registration pursuant to the
Securities Exchange Act of 1934 and its obligation to file reports thereunder
will be terminated.
POTENTIAL CHANGE IN TAX LAW
Two bills are pending in Congress which provide that publicly traded
partnerships that were in existence on December 17, 1987, like the Partnership,
could elect to continue to be taxed as partnerships after December 31, 1997 even
though the partnership interests are traded on an established securities market,
but that the electing partnerships would be subject to an entity level tax on
their gross income from the active conduct of a trade or business. If either of
these bills were enacted in its current form and the Partnership elected to be
subject to it, the Units could continue to be listed on the New York Stock
Exchange. Under one bill which is pending in the House of Representatives, the
tax rate would be 15%, and under the other bill which is pending in the Senate,
the tax rate would be 3.5%. Although it is not clear how such tax would be
calculated, under one reasonable interpretation the tax would reduce the present
value of future cash distributions per Unit from the projected distributions for
the Proposal by approximately $2.50-$3.00 (in the case of the bill pending in
the House of Representatives) and approximately $0.50-$0.75 (in the case of the
Senate bill). See "SPECIAL FACTORS -- Review of Strategic
Alternatives -- Restricting Unit Transferability and Portfolio Runoff."
No prediction can be made as to whether or in what form such legislation
ultimately would be enacted. Similar bills have previously been introduced in
Congress but were not enacted. Furthermore, it is unknown whether California
would adopt any such federal income tax legislation, or enact similar
legislation, to prevent the Partnership from being taxed as a corporation for
California franchise tax purposes beginning January 1, 1998 if the Units
continue to be publicly traded. Any tax imposed at the partnership level by
California, whether on the gross income of the Partnership, such as under the
pending federal legislation, or which would tax the Partnership as if it were a
corporation, also would reduce the present value of future cash distributions
per Unit from the projected distributions for the Proposal.
If amendments to partnership tax law are enacted or are pending which
provide advantages to the Partnership and the Limited Partners over the
provisions of existing tax law, the Proposal authorizes the General Partner to
take such other actions (including amending the Limited Partnership Agreement)
which the General Partner determines are in the best interests of the
Partnership and the Limited Partners and which are consistent with the intent of
the Restrictions on Unit Transferability and Portfolio Runoff in light of any
change or proposed change in partnership tax law from the law in existence on
June 1, 1997.
If any amendment or proposed amendment in partnership tax law has been
enacted or is pending, the General Partner will consider whether to impose
Restrictions on Unit Transferability or to take other actions which may be
beneficial to the Partnership and the Limited Partners, taking into account the
benefits of continued liquidity for the Limited Partners, any tax or cost to the
Partnership or the Limited Partners included in any such tax law amendment, and
such other matters which the General Partner may deem relevant in light of such
change or proposed change in tax law. The General Partner intends to value any
options which may be available in a manner consistent with the strategic
alternatives reviewed prior to approving the Proposal and in light of the likely
remaining term of the Partnership.
Although the General Partner has not made a final determination, if the tax
bill pending in the House of Representatives which imposes the 15% tax were
enacted in its current form, the General Partner believes it
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probably would not cause the Partnership to be subject to this tax, and instead
would impose the Restrictions on Unit Transferability. The tax bill pending in
the Senate is significantly more favorable; however, the General Partner has not
determined whether, if this bill were enacted in its current form, it would
cause the Partnership to be subject to this tax or would instead impose
Restrictions on Unit Transferability.
If the Proposal is approved, the General Partner will be authorized to
impose Restrictions on Unit Transferability or take such other actions which are
consistent with the intent of the Proposal as described above if it determines
that such transfer restrictions or other actions are in the best interests of
the Partnership and the Limited Partners. If the General Partner does not impose
Restrictions on Unit Transferability as a result of a change in partnership tax
law, and assuming the Partnership otherwise continues to qualify for listing,
the Units will continue to be listed on the New York Stock Exchange. Unless
there is an amendment or proposed amendment to partnership tax law which the
General Partner believes may be enacted, Restrictions on Unit Transferability
will be imposed effective on or about December 17, 1997.
AMENDMENTS TO LIMITED PARTNERSHIP AGREEMENT
The Proposal authorizes the General Partner to amend the Limited
Partnership Agreement to impose restrictions on transferability of the Units
described in "Restrictions on Unit Transferability" above.
With respect to Portfolio Runoff, the Limited Partnership Agreement
currently provides that through December 31, 2004, Cash Available from Sale or
Refinancing may be retained for use in the Partnership's business. Cash
Available from Sale or Refinancing is defined in the Limited Partnership
Agreement as the proceeds received in connection with the sale, refinancing or
casualty of an aircraft after payment of costs and expenses incurred in
connection therewith, discharge of debts and other obligations of the
Partnership which the General Partner deems advisable and the creation of or
addition to any reserves established at the discretion of the General Partner.
To effect Portfolio Runoff, the Proposal authorizes the General Partner to amend
this provision to require that Cash Available from Sale or Refinancing be
distributed to Unitholders. The Limited Partnership Agreement also provides that
approval by the Limited Partners is required if all or substantially all of the
Partnership's assets are sold with a view to dissolution or if the Partnership
is to be dissolved. The Proposal authorizes the General Partner to amend these
provisions to provide that assets may be sold and the Partnership dissolved
without further Limited Partner approval.
If the Proposal is approved, the General Partner will be authorized to
amend the Limited Partnership Agreement to effect the Restrictions on Unit
Transferability and/or Portfolio Runoff without further consent of the
Unitholders. In addition, if any amendment or proposed amendment to partnership
tax law is enacted or pending, the Proposal authorizes the General Partner to
take such other actions (including amending the Limited Partnership Agreement)
which the General Partner determines are in the best interests of the
Partnership and the Limited Partners and are consistent with the intent of the
Restrictions on Unit Transferability and Portfolio Runoff in light of any change
or proposed change in partnership tax law from the law in existence on June 1,
1997. The text of the proposed amendments is attached hereto as Exhibit C.
PROJECTED FUTURE CASH DISTRIBUTIONS
For information as to the projected present value of future cash
distributions assuming the Proposal is approved and implemented and there is no
change in partnership tax law, see "SPECIAL FACTORS -- The Proposal -- Review of
Strategic Alternatives -- Restricting Unit Transfers and Portfolio Runoff."
REGULATORY REQUIREMENTS
No federal or state regulatory filings are required and no federal or state
approvals must be obtained in connection with the Proposal, other than any
filings or approvals which may be required when aircraft are sold.
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THE PARTNERSHIP
GENERAL
The Partnership was formed in 1986 as a California limited partnership
under the California Revised Limited Partnership Act. Until October 31, 1996 the
general partner of the Partnership (the "General Partner") was a wholly owned
subsidiary of USL Capital, which in turn is an indirect subsidiary of Ford Motor
Company. On October 31, 1996, BALCAP purchased the stock of the General Partner
from USL Capital and now the General Partner is a wholly owned subsidiary of
BALCAP. See "The BALCAP/USL Capital Transaction" below. BALCAP is a wholly owned
indirect subsidiary of BankAmerica Corporation. A total of 4,625,000 Units are
outstanding, of which 3,600,000 are held by the public and 1,025,000 are owned
by BALCAP and its subsidiaries. A total of 3,000,000 Units were offered and sold
to the public at an offering price of $20.50 per Unit in a registered offering
which closed on October 10, 1986. On the same date, a total of 1,625,000 Units
were sold directly by the Partnership in a private placement at the same price
net of underwriting commissions. The proceeds of the two offerings, net of
certain expenses, were used to repay indebtedness incurred to purchase aircraft.
The Partnership invests in commercial aircraft and leases the aircraft to
others, primarily airlines, pursuant to full payout or operating leases.
THE BALCAP/USL CAPITAL TRANSACTION
In August 1996, USL Capital and BALCAP entered into an agreement providing
for the purchase by BALCAP and its affiliates of approximately $1.8 billion in
assets from USL Capital, including substantially all of the aircraft portfolio
assets of USL Capital (the "BALCAP/USL Capital Transaction"). The aircraft
portfolio assets included all of the stock of the General Partner and United
States Airlease Holding, Inc. (which then owned 22.2% of the outstanding Units),
all Units owned by USL Capital and its subsidiaries, and the interests in
aircraft jointly owned by USL Capital and the Partnership (a 50% interest in the
TWA Aircraft and a 50% interest in the Sun Jet Aircraft). The purchase price for
the limited partnership interests was $15.70 per Unit and for the stock of the
General Partner was $726,260 (as adjusted to account for fees payable to the
General Partner under the Limited Partnership Agreement between September 1,
1996 and October 31, 1996), and the funds for such purchase were provided by
Bank of America National Trust and Savings Association from its working capital.
Pursuant to the agreements between USL Capital and the Partnership covering
jointly owned aircraft, the Partnership had a right of first refusal to purchase
USL Capital's interest in the TWA Aircraft and the Sun Jet Aircraft on the same
terms as those offered by BALCAP. The General Partner reviewed these terms and
determined that it would not be in the best interest of the Partnership to
purchase the Sun Jet Aircraft. With respect to the TWA Aircraft, the General
Partner determined that the purchase price was below the appraised value and
that it would be in the Partnership's best interest to purchase the TWA Aircraft
so long as the Partnership could obtain financing. As a result, USL Capital sold
its interest in the Sun Jet Aircraft to BALCAP, and that aircraft is now jointly
owned by BALCAP and the Partnership, and in January 1997, the Partnership
purchased USL Capital's interest in the TWA Aircraft, and that aircraft is now
wholly owned by the Partnership. The purchase of the TWA Aircraft was made on
the same terms offered by BALCAP, and the purchase price was $5.7 million.
As a result of the BALCAP/USL Capital Transaction, the General Partner is a
wholly owned subsidiary of BALCAP, BALCAP owns directly or through its
subsidiaries 22.2% of the Units and BALCAP and the Partnership jointly own the
Sun Jet Aircraft. USL Capital no longer has any affiliation with the
Partnership, and the General Partner believes that as a result of the BALCAP/USL
Capital Transaction, USL Capital is no longer in the aircraft leasing and
finance business.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership began operations in 1986, with the principal investment
objectives of generating income for quarterly cash distributions to Unitholders
and building a diversified portfolio of leased aircraft. At that time the
Partnership intended that until January 1, 2005, a substantial portion of the
cash derived from the sale, refinancing or other disposition of aircraft would
be used to purchase additional aircraft if attractive
41
<PAGE> 48
investments were available. Thereafter the Partnership would enter a disposition
phase during which its aircraft portfolio would be sold and proceeds distributed
to Unitholders, with the plan that all assets would be sold and the Partnership
would be dissolved by January 1, 2012. However, because of the impact of changes
in tax law and the Partnership's competitive position, the General Partner is
recommending the Proposal. See "SPECIAL FACTORS -- The Proposal -- Background
for the Proposal" and "THE PROPOSAL -- Portfolio Runoff."
AIRCRAFT PORTFOLIO
The Partnership's aircraft portfolio consists of full and undivided partial
ownership interests in 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 McDonnell Douglas MD-11, or any turboprop
or prop-fan powered aircraft.
The following table describes the Partnership's aircraft portfolio at
January 31, 1997:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER & CURRENT
TYPE; YEAR OF OWNERSHIP ACQUIRED BY LEASE PURCHASE PRICE TYPE NOISE
LESSEE DELIVERY INTEREST PARTNERSHIP EXPIRATION (IN MILLIONS) OF LEASE COMPLIANCE(1)
------- ----------------- --------- ----------- ---------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
USAir 5 MD-82 100% 1986 2001(3) $ 91.0 Direct Stage III
1981(2) finance
FedEx 1 727-200FH 100% 1987 2006 $ 18.5(4) Direct Stage III
1979 finance
TWA 1 MD-82 100%(5) 1988(5) 2002 $ 15.8(5) Direct Stage III
1984 finance
Sun Jet 1 DC-9-51 50% 1986 1997 $ 4.4(6) Operating Stage II
1975
</TABLE>
- ---------------
(1) See "Government Regulations -- Aircraft Noise," below, for a description
of laws and regulations governing aircraft noise.
(2) The investment tax credits and the accelerated depreciation originally
available upon delivery of the USAir Aircraft were sold in 1981 pursuant
to a tax benefit transfer lease, which terminated November, 1991. See
Note 10 of Notes to Financial Statements.
(3) USAir has the right to renew the lease as to all aircraft in 1998 (at
the end of the initial twelve year term) for an additional three years
at the current quarterly rental. If USAir does not elect to renew, it is
required to make a termination payment and return the aircraft to the
Partnership. See Note 2 of Notes to Financial Statements.
(4) The purchase price includes $6.9 million of conversion costs for the
upgrade of the aircraft from a Stage II passenger aircraft to a Stage
III freighter.
(5) The Partnership originally acquired a 50% interest in this aircraft in
1988 for a purchase price of $10.1 million. On January 31, 1997 the
Partnership purchased the remaining 50% interest from USL Capital for a
purchase price of $5.7 million. See "The BALCAP/USL Capital Transaction"
above.
(6) The purchase price includes $0.7 million related to the overhaul of the
aircraft.
- --------------------------------------------------------------------------------
At January 31, 1997, the book value of aircraft by lessee as a percent of
total assets was as follows: USAir, 68.9%; FedEx, 12%; TWA, 13.3%; and Sun Jet,
1.1%. Revenues by lessee as a percentage of total revenue for 1996 and 1995,
respectively, were as follows: USAir, 57.1% and 64%; TWA, 5.3% and 6.9%; FedEx,
4.1% and 4.6%; and Sun Jet, 2.6% and 2.7%
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Results of Operations" for a further discussion of the
Partnership's lessees.
The Partnership's lessees have the following fair market value renewal
options: USAir has the right to renew its lease as to any of the aircraft for up
to three additional renewal terms of one year each at a fair market value
rental, provided that the number of aircraft to be returned at the end of any
renewal term may not be less than two; 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
TWA has the right to renew its lease for one term of one, two, three or four
years at fair market value rentals.
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<PAGE> 49
EXISTING PARTICIPANTS IN LEASES
The Partnership owns a 100% interest in all aircraft in its portfolio
except the Sun Jet Aircraft which is owned 50% by the Partnership and 50% by
BALCAP. USL Capital originally participated equally with the Partnership in all
transactions except the USAir Aircraft. 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 a 50% interest in the TWA Aircraft formerly owned by USL Capital, and
now owns a 100% interest in this aircraft. See "The BALCAP/USL Capital
Transaction" above.
With respect to the Sun Jet Aircraft which is jointly owned by BALCAP and
the Partnership, BALCAP and the Partnership have agreed (i) to act in good faith
to reach agreement as to all actions which may be required with respect to the
lease and that any dispute between them will be settled by arbitration; (ii) not
to transfer any interest in the related aircraft or lease without the consent of
the other, except for a transfer to an affiliate and except for a transfer
described in clause (iii); and (iii) that each party has a right of first
refusal to purchase any such interest prior to the transfer to any third party.
DESCRIPTION OF LEASES
All aircraft owned by the Partnership are leased to third parties pursuant
to either full-payout leases (direct finance) or operating leases. Generally,
operating leases are for a shorter term than full-payout leases and, therefore,
it will be necessary for the Partnership to remarket the aircraft in order to
recover its full investment. Full-payout leases are generally for a longer term
and hence provide more predictable revenue than do operating leases.
All of the Partnership's leases are net leases, which provide that the
lessee will bear the direct operating costs and the risk of physical loss of the
aircraft; pay sales, use or other similar taxes relating to the lease or use of
the aircraft; maintain the aircraft; indemnify the Partnership-lessor against
any liability suffered by the Partnership as the result of any act or omission
of the lessee or its agents; maintain casualty insurance in an amount equal to
the specific amount set forth in the lease (which may be less than the market
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 complies with Section 1110, the transaction is not
affected by the automatic stay provisions of the Bankruptcy Code (and thus, the
lender or lessor may repossess the equipment), 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.
On October 22, 1994, President Clinton signed into law 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
43
<PAGE> 50
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 has 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. See
"Disposition of Aircraft," below for a description of the Partnership's
remarketing at lease expiration of six aircraft on lease to Continental. Under
the 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 2012, subject to prevailing market conditions and other factors. However,
because of the impact of tax law and the Partnership's competitive position in
the present market, the General Partner is recommending the Proposal. See "THE
PROPOSAL -- Portfolio Runoff" and "SPECIAL FACTORS -- The Proposal -- Background
for the Proposal."
Under the Limited Partnership Agreement, aircraft may be sold at any time
whether or not the aircraft are subject to leases if, in the judgment of the
General Partner, it is in the best interest of the Partnership to do so.
In 1995, casualty proceeds were received on one 737-200 aircraft on lease
to Continental which was damaged in a ground accident and declared a total loss.
The proceeds received exceeded the net book value of the aircraft and resulted
in a net gain of $21,000. The proceeds were distributed to Unitholders in the
third quarter of 1995 in a special cash distribution of 10 cents per Unit.
In March 1996, the Partnership sold its 50% interest in one MD-82 aircraft
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
in the second quarter of 1996 in a special cash distribution of 80 cents per
Unit. See "SPECIAL FACTORS -- The Proposal -- Background for the Proposal."
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 in a
44
<PAGE> 51
special cash distribution of 63 cents per Unit. See "SPECIAL FACTORS -- The
Proposal -- Background for the Proposal."
The lease for the Sun Jet Aircraft, which expires in December 1997,
contains a fixed price purchase option, and Sun Jet advised the Partnership that
it wishes to exercise this option. However, Sun Jet filed for bankruptcy on June
18, 1997. Sun Jet also failed to make its June rental payment and has failed to
maintain the aircraft in compliance with the lease. The Partnership is seeking
return of the aircraft, but this is subject to approval of the bankruptcy court.
Although the General Partner believes the Sun Jet Aircraft has continuing value,
no assurance can be given as to when the Partnership may obtain return of the
aircraft or as to when or at what price the aircraft could be remarketed. At
March 31, 1997, the Sun Jet Aircraft represented about 1% of the Partnership's
total assets, and rentals under the Sun Jet lease represented about 4% of first
quarter revenues.
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. 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. 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. The Sun Jet Aircraft is the only aircraft now owned by the
Partnership pursuant to a joint venture arrangement. See "Existing Participants
in Leases" above.
If the Proposal is approved, the Partnership will not enter into any joint
venture arrangements to acquire additional aircraft.
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 5 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.
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.
45
<PAGE> 52
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.
Trade publications have reported that the FAA is considering issuing an
airworthiness directive to remedy potential unsafe conditions in 727 aircraft
which were converted from passenger to freight configuration. It has
46
<PAGE> 53
also been reported that the FAA may issue weight restrictions on such aircraft
as an interim measure and may require extensive structural changes for the long
term. As of March 1, 1997, no such airworthiness directives had been issued. Any
such airworthiness directives would apply to the FedEx Aircraft. Under the lease
covering this aircraft, FedEx would be 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.
There are more than 11,500 jet aircraft in the fleets of the principal
airlines of the world. On average these aircraft are about 13 years old. Several
hundred have been in service for 20 years or more and that number is growing.
See "Aircraft Portfolio" above, for a table showing the year of delivery
(manufacture) and the Lease Termination Date of Partnership aircraft.
AIRCRAFT NOISE
The FAA, through regulations, has categorized certain aircraft types as
Stage I, Stage II and Stage III according to the noise level as measured at
three designated points. Stage I aircraft create the highest measured noise
levels. Aircraft which exceed Stage I noise maximums are no longer allowed to
operate from civil airports in the United States.
In general, the Aviation Safety and Capacity Act of 1990 bans the operation
of Stage II aircraft after December 31, 1999 for aircraft operated within the
continental United States. The Act also allows United States airports to impose
their own Stage II noise bans before the formal cut-off date, provided that an
analysis of the costs and benefits of the restriction is presented and 180 days
are allowed for public comment. The Act affects about 2,500 Stage II aircraft
operated by United States airlines.
Alternatives for operators of Stage II aircraft include hushkitting,
re-engining and movement to jurisdictions without mandated noise compliance.
Hushkit options are expected to become more plentiful. However, even when
certified, there will still be considerable lag time before each program can be
brought to maximum production efficiency.
See "Aircraft Portfolio" above, for a description of the Partnership's
aircraft portfolio. At December 31, 1996, the net book value of Stage II
aircraft owned by the Partnership was $1.1 million or 1% of total assets and
consisted of its interest in the Sun Jet Aircraft. A noise kit that will bring
this aircraft into compliance with Stage III noise requirements is generally
expected but has not yet been developed.
ACQUISITION OF ADDITIONAL AIRCRAFT
During the past five years the Partnership has made only two aircraft
investments. See "SPECIAL FACTORS -- The Proposal -- Background for the
Proposal." If the Proposal is approved, the Partnership will not acquire any
more aircraft. See "THE PROPOSAL -- Portfolio Runoff."
If the Proposal is not approved, the Partnership could invest in additional
aircraft. 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 were
required to offer the Partnership a 50% participation interest in certain
aircraft leasing investments made by Related Entities, as defined in the Limited
Partnership Agreement. 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.
47
<PAGE> 54
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.
EMPLOYEES
The Partnership has no employees. All administrative and management
services for the Partnership are performed by employees of the General Partner
or its affiliates.
PROPERTIES
The Partnership does not own any real property, and shares office space in
the offices of BALCAP and its affiliates.
LEGAL PROCEEDINGS
The General Partner is unaware of any material pending legal proceedings to
which the Partnership or the aircraft is subject.
MARKET PRICE OF UNITS AND DISTRIBUTIONS TO UNITHOLDERS
UNITS OUTSTANDING
The Units are traded on the New York Stock Exchange under the symbol FLY.
As of June 4, 1997, the Record Date, there were 1,268 holders of record of
Units. If the Proposal is approved and there is no change in partnership tax law
during 1997, transferability of the Units will be restricted on or about
December 17, 1997 which would result in delisting the Units from trading on the
New York Stock Exchange at that time. See "THE PROPOSAL -- Restrictions on Unit
Transferability." The closing price on the New York Stock Exchange on March 12,
1997, the date preceding the date of the press release announcing the Proposal,
was $17.50.
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<PAGE> 55
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, 1995 and 1996 and the quarter ended March 31, 1997.
<TABLE>
<CAPTION>
TRADING VOLUME UNIT PRICES
QUARTER ENDED (IN THOUSANDS) (HIGH-LOW)
------------------------------------------------ -------------------
<S> <C> <C> <C> <C>
March 31, 1995.................................. 236 $ 15 - $13 3/8
June 30, 1995................................... 338 $ 16 - $14
September 30, 1995.............................. 284 $ 18 - $15 1/8
December 31, 1995............................... 213 $17 7/8 - $16 1/4
March 31, 1996.................................. 257 $18 7/8 - $17
June 30, 1996................................... 557 $18 1/4 - $15
September 30, 1996.............................. 461 $16 3/4 - $13 1/4
December 31, 1996............................... 298 $16 3/8 - $14 5/8
March 31, 1997.................................. 1,104 $17 5/8 - $10
</TABLE>
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. 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. If the Proposal is approved, distributions to Unitholders will be
affected. See "THE PROPOSAL" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Plan to Restrict
Transferability of Units and Cease Reinvestment."
Distributions declared during 1995, 1996 and the first quarter of 1997 were
as follows:
<TABLE>
<CAPTION>
RECORD DATE PAYMENT DATE PER UNIT
---------------------------------------------- ------------------ --------
<S> <C> <C>
March 31, 1995................................ May 14, 1995 47 cents
June 30, 1995................................. August 13, 1995 50 cents
September 29, 1995............................ November 15, 1995 60 cents(1)
December 29, 1995............................. February 15, 1996 50 cents
March 29, 1996................................ May 15, 1996 50 cents
May 20, 1996.................................. May 31, 1996 80 cents(2)
June 28, 1996................................. August 15, 1996 45 cents
September 30, 1996............................ November 15, 1996 45 cents
December 31, 1996............................. February 14, 1997 45 cents
January 15, 1997.............................. January 31, 1997 63 cents(3)
March 31, 1997................................ May 15, 1997 45 cents
</TABLE>
- ---------------
(1) Includes a special cash distribution of 10 cents per Unit from casualty
proceeds from an aircraft on lease to Continental. See "THE
PARTNERSHIP -- Disposition of Aircraft" and "Distributions to
Unitholders -- Cash Available from Sale or Refinancing," below.
(2) Special cash distribution from sale proceeds from the sale of an aircraft on
lease to Finnair. See "THE PARTNERSHIP -- Disposition of Aircraft" and
"Distributions to Unitholders -- Cash Available from Sale or Refinancing,"
below.
(3) Special cash distribution from sales proceeds from the sale of six aircraft
on lease to Continental. See "THE PARTNERSHIP -- Disposition of Aircraft"
and "Distributions to Unitholders -- Cash Available from Sale or
Refinancing," below.
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<PAGE> 56
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 of Cash
Available from Operations generally on the fifteenth day of each 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. If the Proposal is approved, Cash Available from Sale or
Refinancing will not be reinvested and will be distributed. See "THE PROPOSAL"
and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS -- Plan to Restrict Transferability of Units and Cease Reinvestment."
For information as to the sales and casualty events giving rise to distributions
from Cash Available from Sale or Refinancing, see "THE
PARTNERSHIP -- 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
AT DECEMBER 31, 1996
At December 31, 1996, long-term borrowings of $14.1 million represented
11.3% of the cost of the aircraft presently owned by the Partnership and 16.6%
of total assets. This debt is outstanding under three long-term, nonrecourse
debt facilities collateralized by certain aircraft, two of which are at fixed
rates and one which is at a floating rate. The Partnership has entered into an
interest rate swap agreement which limits its risk on the floating rate debt. At
December 31, 1996 and 1995, $14.1 million and $27.5 million, respectively, were
outstanding under these three facilities. At December 31, 1996, approximately
$5.6 million remained available. See Note 5 of Notes to Financial Statements.
On January 31, 1997, the Partnership entered into a fourth long-term
non-recourse note agreement in the amount of $9 million. Approximately $5.6
million of this loan was utilized to purchase an additional 50% interest in the
TWA Aircraft. See "THE PARTNERSHIP -- The BALCAP/USL Capital Transaction." At
the time of the acquisition, the Partnership already owned a 50% interest in
this aircraft, and the loan is collateralized by this aircraft. The Partnership
intends to use the balance of this loan for working capital.
50
<PAGE> 57
Total scheduled debt service in 1997 (including debt service under the loan
agreement entered into in January 1997) is $7.5 million and will be paid from
revenues, primarily from the rental payments received under its aircraft leases.
Existing borrowings secured by aircraft on lease to USAir provide for full
repayment of the debt by 1998 rather than through the end of the expected lease
term in 2001. See Notes 2 and 5 of Notes to Financial Statements. As this debt
is repaid and the related line of credit expires, by 1998 the Partnership will
need to and believes that it would be able to obtain bank or other financing to
replace all or a portion of these expiring facilities.
Net cash provided by operating activities was $7.3 million for 1994, $9.3
million for 1995, and $7.3 million for 1996. Total debt service as a percentage
of net cash provided by operating activities was 95.8%, 59.3%, and 107% for
1994, 1995 and 1996, respectively. In 1993 the Partnership incurred costs to
convert an off-lease Boeing 727 to a cargo configuration and leased it to FedEx
under a finance lease. This caused debt service to increase in 1994 due to the
payment of these conversion costs, and net cash from operating activities to
decrease because, as a finance lease, the FedEx lease generates cash from
investing activities rather than operating activities. In 1996 debt service
increased by $2.9 million from the prior year due to the timing of debt service
payments. Under the loan documents, if December 31 is not a business day (as was
the case in 1995), the loan payment is due in January, causing debt service to
be lower in 1995 and higher in 1996. Net cash provided by operating activities
decreased almost $2 million primarily because of reduced rentals resulting from
the sale of one aircraft in March 1996.
Cash distributions paid by the Partnership were $8.6 million ($1.84 per
Unit) in 1994, $9.5 million ($2.04 per Unit) in 1995, and $12.6 million ($2.70
per Unit) in 1996. Distributions paid in 1995 include a special cash
distribution of 10 cents per Unit made from the proceeds received from the
casualty of one aircraft. Distributions paid in 1996 include a special cash
distribution of 80 cents per Unit made from a portion of the sale proceeds
received from the sale of a 50% interest in the aircraft on lease to Finnair.
The increase in cash distributions per Unit in 1995 and 1996 are due primarily
to the special cash distributions described above. On January 31, 1997 the
Partnership made an additional special cash distribution of 63 cents per Unit
from the proceeds received from the December 31, 1996 sale of its interest in
six 737-200 aircraft. See "Plan to Restrict Transferability of Units and Cease
Reinvestment" below and "THE PARTNERSHIP -- Disposition of Aircraft."
Partnership net income was $6.3 million in 1994, $6.8 million in 1995, and
$8.7 million in 1996. Pursuant to the Limited Partnership Agreement, the
Partnership distributed all Cash Available from Operations and also made special
cash distributions, as described above. Since such distributions were in excess
of earnings, Partnership equity declined from $71.7 million at December 31, 1995
to $65.0 million at December 31, 1996, and Limited Partner equity per Unit
declined from $15.70 to $13.92. 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 reflecting a return of capital of $4.92 per Unit, or
22% of the initial capital invested by Limited Partners.
AT MARCH 31, 1997
At March 31, 1997, $23.3 million was outstanding under the Partnership's
four long-term debt facilities and approximately $3.8 million remained
available. Long-term borrowing at March 31, 1997 represented 18% 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.
In March 1997, the Partnership recorded an allowance for doubtful accounts
of $228,000 relating to the outstanding note receivable representing advances
made to Continental to finance certain aircraft modifications. The agreement for
this financing was entered into as part of a 1991 stipulation in Continental's
bankruptcy. Continental had advised the Partnership that because the lease has
terminated these amounts are no longer due. The Partnership is reviewing
Continental's claim and has recorded the allowance until the matter can be
resolved.
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<PAGE> 58
Cash distributions paid in the first three months of 1997 amounted to $1.08
per Unit consisting of the regular fourth quarter 1996 cash distribution of 45
cents per Unit and the special cash distribution of 63 cents per Unit from
aircraft sales proceeds described above, Distributions paid in the first quarter
of 1996 amounted to 50 cents per Unit.
In March 1997 the Partnership declared a first quarter cash distribution of
45 cents per Unit amounting to $2,102,000 payable on May 15, 1997 to Unitholders
of record on March 31, 1997. This distribution exceeded first quarter net income
of $1,167,000, resulting in a return of capital of $935,000 or 20 cents per
Unit. The 1996 first quarter cash distribution was 50 cents per Unit.
RESULTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
In 1994, revenues were earned from seven aircraft subject to finance leases
(USAir, TWA, and FedEx) and nine aircraft subject to operating leases
(Continental, Finnair, and Sun Jet). TWA contributed 5.2% of 1994 total revenues
and there were two months (November and December) of non-accrual of TWA revenue.
At year-end 1994, there were no offlease aircraft and none of the Partnership's
lessees was in bankruptcy.
In 1995, revenues were earned from seven aircraft subject to finance leases
(USAir, TWA, and FedEx). Finance lease income declined from 1994 as the balances
due declined. TWA was on non-accrual status early in 1995, but remitted all
past-due amounts by the third quarter. TWA was in bankruptcy for a portion of
1995, and the TWA lease contributed 7% of total 1995 revenues. Revenues were
earned from nine aircraft subject to operating leases (Continental, Finnair, and
Sun Jet) from January through May, and eight aircraft for the balance of the
year, reflecting the casualty loss of one aircraft leased to Continental. At
year-end 1995, there were no off-lease aircraft, all of the Partnership's
lessees were current under their lease agreements, and none was in bankruptcy.
In 1996, revenues were earned from seven aircraft subject to finance leases
(USAir, TWA, and FedEx). Finance lease income declined from 1995 as the balances
due declined. Revenues were earned from eight aircraft subject to operating
leases (Continental, Finnair, and Sun Jet) from January through March, and seven
aircraft for the remainder of the year, reflecting the March sale of the
aircraft leased to Finnair. The decline in operating lease rentals is due
primarily to the sale of this aircraft. On December 31, 1996, the operating
lease with Continental covering six aircraft expired, and the aircraft were sold
on that date. The sales of the Partnership's interests in aircraft on lease to
Finnair and Continental produced gains of $556,000 and $1.9 million,
respectively. See Note 3 of Notes to Financial Statements. At year-end 1996,
there were no off-lease aircraft, all of the Partnership's lessees were current
under their lease agreements and none was in bankruptcy.
USAir, the Partnership's major lessee (76% of total year-end assets),
reported profits of $263 million on revenues of $8.1 billion for 1996, compared
with profits of $119 million on revenues of $7.5 billion for 1995.
FedEx (13.3% of total year-end assets) reported profits of $308 million on
revenues of $10.3 billion for its fiscal year ending May 31, 1996, compared with
profits of $298 million on revenues of $9.4 billion for its prior fiscal year.
TWA (8.3% of total year-end assets) reported a net loss of $285 million on
revenues of $3.6 billion for 1996, compared with a net loss of $228 million on
revenues of $3.3 billion for 1995.
Sun Jet (1.3% of total year-end assets) is in bankruptcy. See "Results of
Operations -- For the Quarter Ended March 31, 1997" below.
For information regarding the percentage of total Partnership assets and
revenues represented by aircraft owned and leased by the Partnership, see "THE
PARTNERSHIP -- Aircraft Portfolio."
The Partnership believes that its revenues and income have not been
materially affected by inflation and changing prices because its principal items
of revenue (rental payments) and expenses (interest) are at fixed long-term
rates.
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<PAGE> 59
Interest expense in 1996 reflects an average interest rate of 8.7% based on
average total outstanding debt of $21 million, compared to 1995's average
interest rate of 8.3% based on average total outstanding debt of $28.5 million.
Depreciation expense relates to aircraft subject to operating leases and
those held for sale or lease. In 1996 depreciation expense decreased because of
the March 1996 sale of the aircraft on lease to Finnair.
In 1994, general and administrative expenses were $388,000, which included
$197,000 in non-recurring expenses, primarily related to the early return and
repair of the aircraft now on lease to Sun Jet. In 1994, the Partnership
incurred total expenses of $798,000 (of which $668,000 were capitalized), to
prepare its DC-9-51 aircraft for re-lease to Sun Jet. In 1996, general and
administrative expenses increased by $117,000 to $272,000 primarily because of
legal expenses relating to the January 1997 acquisition of an interest in an
aircraft on lease to TWA and the 1998 change in tax status.
In March 1995, the Financial Accounting Standards Board issued 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," which is
effective for fiscal years beginning after December 17, 1995. The Partnership
adopted the standard January 1, 1996, and the impact on the financial statements
was not material.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. It is effective for financial statements issued
for periods ending after December 17, 1997, including interim periods and
prior-periods presented. The Partnership does not expect that adoption of SFAS
No. 128 will have a material effect on its financial position, results of
operations or net income per Unit.
FOR THE QUARTER ENDED MARCH 31, 1997
Net income for the first quarter ended March 31, 1997 was $1,167,000, a
decrease of $1,004,000 or 46% from the comparable 1996 three-month period. First
quarter revenues were $2,358,000, a decrease of $1,073,000 or 31% from the
comparable three-month period. These declines reflect the sale of an aircraft in
the first quarter of 1996 and recognition of a gain of $556,000, while no
aircraft were sold in the first quarter of 1997. In addition, the sale of seven
aircraft during 1996 reduced the size of the portfolio and reduced revenue from
operating lease rentals by $514,000. At March 31, 1997, the Partnership owned an
interest in one aircraft subject to an operating lease, compared to interests in
seven aircraft subject to operating leases at March 31, 1996.
Total expenses declined by $69,000 from the first quarter of 1996.
Depreciation expense declined by $372,000 reflecting the 1996 sales of the seven
aircraft subject to operating leases. Offsetting this reduction were an
allowance for doubtful accounts of $228,000 (see "-- Liquidity and Capital
Resources -- At March 31, 1997" above) and higher investor reporting expenses
incurred in connection with the 1998 change in tax status. Interest expense
declined due to lower average outstanding balances on the Partnership's
borrowing facilities in the first quarter 1997 compared with the first quarter
of 1996.
Sun Jet filed for bankruptcy on June 18, 1997. Sun Jet also failed to make
its June rental payment and has failed to maintain the aircraft in compliance
with the lease. The Partnership is seeking return of the aircraft, but this is
subject to approval of the bankruptcy court. Although the General Partner
believes the Sun Jet Aircraft has continuing value, no assurance can be given as
to when the Partnership may obtain return of the aircraft or as to when or at
what price the aircraft could be remarketed. At March 31, 1997, the Sun Jet
Aircraft represented about 1% of the Partnership's total assets, and rentals
under the Sun Jet lease represented about 4% of first quarter revenues.
PLAN TO RESTRICT TRANSFERABILITY OF UNITS AND CEASE REINVESTMENT
On March 13, 1997 the board of directors of the General Partner approved a
plan to restrict the transferability of Units, which will result in delisting of
the Units from trading on the New York Stock Exchange on or about December 17,
1997, and to cease making new aircraft investments, leading to an earlier than
planned liquidation of the Partnership. The plan is subject to Unitholder
approval.
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<PAGE> 60
As previously reported to Unitholders, Airlease will be taxed as if it were
a corporation effective January 1, 1998, if its Units are freely tradeable on
that date. This additional level of tax would substantially reduce distributions
to Unitholders. See Note 9 of Notes to Financial Statements. To address the
adverse change in tax law, the plan provides that transferability of the Units
would be restricted on or about December 17, 1997 and the Units would be
delisted from trading at that time. Although the Units would not be freely
tradeable on the New York Stock Exchange or a similar secondary market after
December 1997, under provisions of the tax law, there are a number of services
which may be available to facilitate purchases and sales of Units. At this time
it is difficult to know if these services will operate with respect to the
Units, and IRS rules impose various limitations as to the aggregate number of
Units which may be sold in any year utilizing these services. If no such
services develop Unitholders may be unable to sell their Units, but they would
receive distributions through the remaining term of the Partnership. See "THE
PROPOSAL -- Restrictions on Unit Transferability."
The plan also provides that Airlease would not make any new aircraft
investments, would sell its aircraft as attractive opportunities become
available and would distribute net sales proceeds to Unitholders after each
sale. Airlease cannot predict when sales will be made, or provide any assurance
as to the prices at which sales will be made. If the existing aircraft were sold
at the end of their lease terms, 86% of the assets would be sold within five
years and the remainder by 2006. This assumes that all lessees comply with their
lease obligations and available lease renewal options are not exercised.
Aircraft sales will result in a liquidation of the portfolio over time, and
increasingly cash flow and distributions will depend more upon sales proceeds
and less upon receipt of regular rental payments, and thus be less predictable.
See "THE PROPOSAL -- Portfolio Runoff."
As previously disclosed, the Partnership's sources of capital are limited.
Since all cash available from operations is distributed, there is no build up of
equity capital and acquisitions must be funded from proceeds when aircraft are
sold or from debt. Access to debt is limited because most of the aircraft are
being used to secure existing borrowings. Because of these and other factors,
Airlease cannot compete on the basis of price with many of its competitors which
are much larger and have lower capital costs. As a result, finding investment
opportunities that offer an appropriate balance of risk and reward has been very
difficult. In the past five years, the Partnership has made only two aircraft
investments, both of which were possible because of special circumstances which
the General Partner believes are unlikely to occur in the future. As described
above, during 1996 Airlease sold interests in seven aircraft at a profit, but
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 proceeds was
to distribute them to Unitholders. Since these sales proceeds were not
reinvested in aircraft, the size of the portfolio has been reduced.
These and other factors were considered by the Board of Directors of the
General Partner as affecting the competitive position of Airlease, and these
factors as well as the change in tax law were considered by the board in its
decision to propose the plan. See "SPECIAL FACTORS -- The Proposal -- Background
for the Proposal."
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<PAGE> 61
MANAGEMENT
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. Unless otherwise indicated, the business
address of each individual listed below is c/o Airlease Management Services,
Inc., 555 California Street, San Francisco, California 94104. Each person is a
citizen of the United States.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
- ------------------- ------------------------ --- -------------------------------------------------
<S> <C> <C> <C>
David B. Gebler Chairman of the Board, 47 Mr. Gebler is Senior Vice President of Bank of
President, America National Trust and Savings Association
Chief Executive Officer ("Bank of America") and of BALCAP. He has been
and a Director with BALCAP since September 1996. From 1991 to
September 1996 he was Senior Vice President of
the Transportation and Industrial Financing
business unit of USL Capital. Mr. Gebler has been
President of the General Partner since 1989 and a
Director since 1990. Mr. Gebler holds a bachelors
degree in mathematics from Clarkson University
and graduate degrees in Engineering and
Management from the University of Michigan.
Richard V. Harris Director 48 Mr. Harris is Executive Vice President of Bank of
America and Chairman and President of BALCAP. He
was elected President and CEO in 1982, adding the
title of Chairman in 1988. He has been a Director
of the General Partner since October 1996. Other
assignments at Bank of America have included
responsibilities for Project Finance and
Asset-Backed Finance along with Leasing. Prior to
assuming his present responsibilities, Mr. Harris
held both transactional and marketing management
positions at BankAmerica Leasing. Mr. Harris
holds a B.S.E.E. degree in Electrical Engineering
from Brigham Young University and a Master of
Business Administration degree also from BYU.
William A. Hasler Director 55 Mr. Hasler has been the dean of the Haas School
of Business at the University of California at
Berkeley since August 1991 and a Director of the
General Partner since 1995. From 1984 to 1991, he
was vice chairman and director of KPMG Peat
Marwick and was responsible for its worldwide
consulting business. He is a member of the board
of governors of The Pacific Stock Exchange and of
the board of directors of The Gap, TCSI, Tenera,
Walker Industries, and Aphton Corporation. He
serves on a presidential advisory board on
critical technologies. He is a 1963 graduate of
Pomona College and earned his MBA from Harvard in
1967.
</TABLE>
55
<PAGE> 62
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND
NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS
- ------------------- ------------------------ --- -------------------------------------------------
<S> <C> <C> <C>
Leonard Marks, Jr. Director 75 Mr. Marks retired as Executive Vice President of
Castle & Cooke, Inc. in 1985. Prior to that time,
he was also president of the real estate and
diversified activities group of that company. Mr.
Marks has been a Director of the General Partner
since 1986. For many years, Mr. Marks was an
assistant professor of Finance at the Harvard
Business School and a professor of Finance at the
Stanford Business School. He was Assistant
Secretary of the United States Air Force from
1964 to 1968. Mr. Marks is a director of Alexion
Pharmaceutical Inc. and Northern Trust Bank of
Arizona, N.A. Mr. Marks holds a Ph.D in Business
Administration from Harvard University.
Richard P. Powers Director 56 Mr. Powers has been Vice President, Finance and
Administration and Chief Financial Officer of
CardioGenesis Corporation, a medical device
company, since 1996. From 1981 to 1994, he was
with Syntex Corporation, a pharmaceutical
company, serving as Senior Vice President and
Chief Financial Officer of that company from 1986
to 1994. From 1994 to 1996 he served as
consultant to various companies, including
advising and assisting in the sale of Syntex
Corporation to Roche Corporation in 1994. Mr.
Powers holds a Bachelor of Science degree in
Accounting from Canisius College and a Masters in
Business Administration from the University of
Rochester.
K. Thomas Rose Director 52 Mr. Rose has been Executive Vice President and
Chief Operating Officer of BALCAP since 1992,
responsible for all non-marketing areas of
BALCAP. He also is the chief credit officer for
the subsidiaries of BankAmerica Corporation which
comprise the leasing group. He has been a
Director of the General Partner since October
1996. Prior to his present responsibilities, Mr.
Rose was with Security Pacific Leasing
Corporation as Executive Vice President -- Lease
Services since 1973. Mr. Rose holds a B.A. from
California State University, Fullerton and a
Juris Doctorate degree from Golden Gate
University, School of Law.
Richard C. Walter Chief Financial Officer 51 Mr. Walter has been Senior Vice President and
and a Director Controller of BALCAP since 1992. He has been a
director of the General Partner since October
1996. Prior to assuming his present
responsibilities at BALCAP, Mr. Walter was with
Security Pacific Leasing as Accounting Manager
since 1973. He holds a Bachelor of Science degree
in Business Administration and Accounting from
Montana State University.
</TABLE>
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 1996, such unaffiliated directors were paid an annual fee
of $14,500 and $500 for each meeting attended.
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<PAGE> 63
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 its 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
As of June 4, 1997, the Record Date, the following persons were known to
the Partnership to be beneficial owners of more than five percent of the
Partnership's equity securities:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------- ------------------------------------- -------------------- ----------------
<S> <C> <C> <C>
Depositary Units United States Airlease Holding, Inc. 231,250(1) 5%
555 California Street
San Francisco, CA 94104(2)
Depositary Units BALCAP 793,750(3) 17.2%
555 California Street
San Francisco, CA 94104(2)
</TABLE>
- ---------------
(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 is also indirectly the 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.
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------- ------------------------------------- -------------------- ----------------
<S> <C> <C> <C>
Depositary Units David B. Gebler 700(1) (2)
Depositary Units Leonard Marks, Jr. 500 (2)
Depositary Units All directors and executive 1,200(3) (2)
officers as a group
</TABLE>
- ---------------
(1) Includes 200 Units held by Mr. Gebler as custodian for a minor child as to
which Mr. Gebler has shared voting and dispositive power and as to which
beneficial ownership is disclaimed.
(2) Represents less than 1%.
(3) Includes the 200 Units described in note 1.
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 borrowed funds
from USL Capital, including advances for expense payments. All such borrowings
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<PAGE> 64
were unsecured and bore interest at a floating rate not exceeding the prime
rate. There were no such borrowings outstanding during 1996.
For information regarding the purchase by the Partnership of an interest in
the TWA Aircraft from USL Capital, see "THE PARTNERSHIP -- The BALCAP/USL
Capital Transaction." For a discussion of certain terms of the Partnership
Agreement regarding the Partnership's participation in aircraft leasing
investments made by USL Capital and its Related Entities, see "THE
PARTNERSHIP -- Acquisition of Additional Aircraft." For a discussion of aircraft
held jointly between the Partnership and BALCAP or formerly held jointly between
the Partnership and USL Capital, see "THE PARTNERSHIP -- Aircraft Portfolio,"
and "-- Existing Participants in Leases."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Orrick, Herrington & Sutcliffe LLP, special tax counsel
to the Partnership, the following summary describes the material United States
federal income tax consequences of the Proposal. This summary is based on the
Code and existing final, temporary and proposed Treasury Regulations, Revenue
Rulings and judicial decisions, all of which are subject to prospective and
retroactive changes. The Partnership will not seek a ruling from the Internal
Revenue Service (the "IRS") with regard to the United States federal income tax
treatment relating to the Proposal and, therefore, there can be no assurance
that the IRS will agree with the conclusions set forth below. This summary is
addressed only to Unitholders who are "United States persons" (as defined in
Code Section 7701(a)(30)) and deals only with Units that are held as capital
assets within the meaning of Section 1221 of the Code. In addition, this summary
does not address the tax consequences that may be relevant to Unitholders in
special tax situations (including, for example, life insurance companies,
tax-exempt organizations, dealers in securities or currency, banks or other
financial institutions, or Units held as a hedge or as part of a hedging,
straddle or conversion transaction). ACCORDINGLY, UNITHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF UNITED STATES FEDERAL
INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION, TO THEIR PARTICULAR SITUATIONS.
Certain United States federal income tax consequences associated with an
investment in the Units were discussed in the Prospectus, dated October 10,
1986, covering the initial public offering of Units. This summary does not
update that discussion; rather it discusses only the federal income tax aspects
directly relevant to the Proposal.
PARTNERSHIP TAX STATUS
A partnership generally will be treated as a "publicly traded partnership"
under Section 7704 of the Code and taxable as a corporation for United States
federal income tax purposes if its interests are traded on an "established
securities market" or are "readily tradeable on a secondary market (or the
substantial equivalent thereof)" (sometimes referred to herein as "Publicly
Traded"). An exception to this general rule applies to certain partnerships that
were Publicly Traded on December 17, 1987. The Partnership was eligible for this
exception.
The exception ceases to apply to taxable years of a Publicly Traded
partnership beginning after December 31, 1997. Consequently, the Partnership
will be taxable as a corporation for its taxable year beginning January 1, 1998,
unless the Units cease to be Publicly Traded before that date. As of the first
day the Partnership is classified as a corporation, for federal income tax
purposes it will be deemed to transfer all its assets to a newly formed
corporation; the Unitholders generally will not recognize any gain or loss on
such constructive incorporation. If the Partnership is classified as a
corporation, its income, gains, deductions, losses and credits would not be
passed through to the Unitholders, it would be required to pay tax at corporate
rates on its income, its distributions to Unitholders would be taxable to
Unitholders as dividends to the extent of its current or accumulated earnings
and profits, and such distributions would not be deductible to the Partnership.
However, to the extent that distributions made by the Partnership are treated as
dividends, a Unitholder that is taxed as a domestic corporation and that meets
certain requirements of the Code would be entitled to a
58
<PAGE> 65
deduction equal to 70% (80% in the case of a Unitholder who owns more than 20%
of the Partnership) of the dividends received (the "Dividends Received
Deduction"). Individuals, partnerships and other entities not taxable as
domestic corporations, and corporations having a special tax status are not
eligible for the Dividends Received Deduction. The Clinton Administration has
recently suggested legislation that would reduce the Dividends Received
Deduction to 50%. Because such deduction depends upon each Unitholder's
particular circumstances, Unitholders should consult their own tax advisors
regarding the availability and amount of the Dividends Received Deduction.
The purpose of the Restrictions on Unit Transferability is to permit the
Partnership to continue to be treated as a partnership for federal income tax
purposes after December 31, 1997. In addition, from and after the date the Units
are delisted from trading on the New York Stock Exchange (see "THE PROPOSAL --
Restrictions on Unit Transferability"), the Units will contain a legend that
provides:
The General Partner will not admit any transferee of Units as a partner or
recognize any rights of a transferee of Units (including any right to
receive distributions or any right to an interest in capital or profits of
the Partnership) unless the transferee certifies in an application for
transfer (the "Transfer Application") to the Partnership that the
transferee has acquired the Units (a) by a "transfer not involving trading"
within the meaning of Internal Revenue Service Notice 88-75 (the "Notice"),
(b) in compliance with the "two percent" safe harbor described in the
Notice or (c) in a qualified "matching service" transaction described in
the Notice. Furthermore, any transfer of Units will be subject to a
determination by the General Partner in its sole discretion that such
transfer will not cause the aggregate percentage of Units transferred
during the calendar year to exceed the allowable amount or otherwise cause
the Units to be treated as traded on an established securities market or
readily tradeable on a secondary market (or the substantial equivalent
thereof) as defined in Section 7704(b) of the Internal Revenue Code of
1986, as amended.
As described herein under "THE PROPOSAL -- Restrictions on Unit
Transferability," the Partnership is considering requesting a ruling from the
Internal Revenue Service that it can, as an alternative to imposing transfer
restrictions consistent with the Notice, impose transfer restrictions consistent
with regulations promulgated under Section 7704 of the Code (the "Regulations").
Such restrictions are somewhat less restrictive than those required by the
Notice. If such a ruling were obtained, references to the Notice in the
foregoing legend and the Transfer Application would be changed to refer to the
Regulations.
There is no statutory definition of an "established securities market,"
"secondary market" or "the substantial equivalent thereof." The legislative
history to Section 7704 indicates that a "secondary market" or "substantial
equivalent thereof" exists if partners are readily able to buy, sell or exchange
their partnership interests in a manner that is comparable, economically, to
trading on an established market. Because of the Restrictions on Unit
Transferability (see "THE PROPOSAL -- Restrictions on Unit Transferability"),
the General Partner does not expect the Units to be considered traded on an
established securities market or to be considered readily tradeable on a
secondary market (or substantial equivalent thereof).
TRANSFER RESTRICTIONS
The Restrictions on Unit Transferability itself should not result in any
federal income tax consequences to the Unitholders.
SALES OF AIRCRAFT
The sale of an aircraft will be a taxable event, and any gain or loss
resulting from such sales will be taxable to the Unitholders in the event that
the Partnership is classified for federal income tax purposes as a partnership.
Each Unitholder will be required to take into account in computing its tax
liability its share of any gain or loss resulting from any such sale in the
Partnership's taxable year ending with or within the taxable year of the
Unitholder. Any such gain or loss will generally constitute Section 1231 gains
or Section 1231 losses (i.e., gains or losses from real property or depreciable
personal property used in a trade or business and held for more than one year,
other than property held for sale to customers in the ordinary course of
business). A Unitholder's share of the gains or losses from the sales of
aircraft would be combined with any other
59
<PAGE> 66
Section 1231 gains or Section 1231 losses of the Unitholder for that year and
the net Section 1231 gains or Section 1231 losses generally would be treated as
long-term capital gain or ordinary loss, as the case may be. However, a
Unitholder's net Section 1231 gains would be treated as ordinary income rather
than capital gain to the extent of its net Section 1231 losses, if any, incurred
in the five preceding years. Furthermore, in the event that an aircraft is sold
at a gain, the depreciation expense will be recaptured as ordinary income under
Section 1245 of the Code to the extent of the realized gain.
An additional portion of the realized gain on the disposition of aircraft
may be recaptured as ordinary income under Section 467 of the Code. If a lessor
disposes of an asset subject to a Section 467 rental agreement (i.e., a rental
agreement providing for increasing or deferred rents) an amount equal to the
rental payments based on a constant rental amount over the rental payments
previously taken into account, if any, may be treated as ordinary income, to the
extent of the realized gain (reduced by any portion of the gain otherwise
treated as ordinary income). Under proposed Treasury Regulations, Section 467
rental agreements would also include rental agreements which provide for prepaid
or decreasing rents. However, such proposed Treasury Regulations would only
apply to rental agreements entered into after the proposed Treasury Regulations
are published as final Treasury Regulations.
The Partnership made an election in respect of its 1988 taxable year under
Section 754 of the Code. If a Unitholder acquired its Units in 1988 or
thereafter by purchase or upon death, such Unitholder's share of any gain or
loss from the sale of an aircraft will be adjusted to take into account any
special basis adjustment to the assets of the Partnership with respect to such
Unitholder under Section 743(b) of the Code. Section 743(b) generally provides
for an adjustment to the bases of the Partnership's properties to reflect the
price at which such Unitholder's Units were purchased (or fair market value if
transferred at death) as if such Unitholder had acquired a direct interest in
the Partnership's assets. Such Section 743(b) adjustment is attributable solely
to such Unitholder and is not added to the bases of the Partnership's assets
associated with all of the Unitholders ("common bases"). As with the common
bases, the Section 743(b) adjustment must be reduced for depreciation and any
gain or loss is Section 1231 gain or Section 1231 loss, subject to recapture as
ordinary income. Because the Section 743(b) adjustments are highly complex and
there is little legal authority dealing with the mechanics of the adjustments,
there are no assurances that the IRS will agree with the adjustments made by the
General Partner.
Under Section 702(a) of the Code (which generally deals with the "pass
through" of tax items from a partnership to its partners), a partnership is
required to separately state, and partners are required to separately account
for, their distributive share of all gains and losses of the partnership.
Accordingly, each Unitholder's allocable share of gains or losses from a
disposition of aircraft (including the amount of any capital gain or loss,
Section 1231 gains and Section 1231 losses, and any amount treated as ordinary
income under Sections 1245 or 467 of the Code) will be separately stated and
reflected on the applicable Schedule K-1 provided to the Unitholder by the
Partnership.
PASSIVE LOSS LIMITATION
Unitholders who are individuals, trusts, estates, closely held corporations
or personal service corporations are subject to the passive activity loss
limitations rules. A Unitholder's allocable share of any Partnership income and
loss is treated as derived from a passive activity, except to the extent of any
portfolio income (including interest, dividends and gains from the sale of
property held for investment purposes of the Partnership). Under a special rule
applicable only to publicly traded partnerships, for periods prior to delisting
from trading on the New York Stock Exchange, a Unitholder's share of Partnership
income or gain cannot be used to offset passive activity losses from other
passive activities of the Unitholder and a Unitholder's share of Partnership
losses cannot be offset by passive activity income from other passive activities
of the Unitholder. From and after the date the Units are delisted from trading
on the New York Stock Exchange, a Unitholder's share of any Partnership income
or gain will be characterized as passive activity income that should be eligible
to be offset by passive activity losses from other passive activity investments
of the Unitholder and a Unitholder's share of Partnership's losses should be
eligible to be offset by passive activity income from other passive activities
of the Unitholder. If all of the Partnership's aircraft are sold, a Unitholder's
allocable share of any Partnership loss realized on the sale of its aircraft
investments, or loss realized by the Unitholder upon
60
<PAGE> 67
liquidation of his or her Units, will not be subject to the passive activity
loss limitations. In addition, upon the complete disposition of a Unitholder's
entire interest in the Partnership, any suspended passive activity loss of the
Unitholder with respect to the Partnership is allowed as a loss against other
income of the Unitholder.
DISTRIBUTIONS OF SALE PROCEEDS
Pursuant to the Proposal, the Partnership will make distributions of the
proceeds from the sale or other disposition of aircraft (after repaying debt and
establishing appropriate reserves) to Unitholders after each such disposition.
See "THE PROPOSAL -- Portfolio Runoff." Distributions to a Unitholder will
generally not be taxable to the extent the distributions do not exceed the
Unitholder's adjusted tax basis in its Units. The tax basis in the Units will be
reduced by the distributions, and those in excess of the tax basis will
generally be treated as capital gain, and will be long-term if the applicable
Unit has been held for more than one year. Unitholders that have remaining tax
basis in their Units after dissolution of the Partnership will generally have a
capital loss.
TAX ALLOCATIONS OF DISTRIBUTIONS
For information as to the allocations for tax purposes of Partnership
income, gain, loss deduction, credit and tax preference, see "MARKET PRICE OF
UNITS AND DISTRIBUTIONS TO UNITHOLDERS -- Distributions to Unitholders -- Tax
Allocations."
FINAL PARTNERSHIP RETURNS AND FUTURE TAX ISSUES
Following the dissolution of the Partnership, the General Partner, on
behalf of the Partnership, will file a final tax return for the Partnership,
and, on a timely basis will provide Schedule K-1 forms to all Unitholders
setting forth their allocable shares of the Partnership's items of income,
gains, losses and deductions. The General Partner will also have full
responsibility and authority for any other accounting or tax-related matter
arising after the dissolution of the Partnership, including acting as the "tax
matters partner" representing the Partnership in any federal or other audit of
returns of the Partnership for its final year or any prior year.
Unitholders should understand that while the Partnership will be dissolved,
such dissolution will not eliminate the possibility that the IRS could challenge
the tax treatment of the Partnership's activities for the year of dissolution or
any prior year for which the statute of limitations for making adjustments has
not elapsed. If any adjustments are made to the Partnership's income tax
returns, the General Partner will so notify the Unitholders. Any tax audit or
adjustments could result in assessment of additional tax liabilities upon the
Unitholders which would be payable from their own funds and would not be
reimbursable by the General Partner or the Partnership.
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax consequences described above,
Unitholders should consider the potential state and local tax consequences of
the Proposal. Because each state's tax law varies, it is not possible to predict
the tax consequences to the Unitholders in all of the state tax jurisdictions in
which they may be subject to tax. Accordingly, Unitholders should consult with
their own tax advisors regarding the state income tax consequences of the
Proposal.
California generally requires partnerships to withhold 7% of the amount of
any distributions made to partners who are not residents of California if the
distribution represents California source income. There is an exception to these
withholding rules if the partnership is a publicly traded partnership. If the
General Partner imposes the Restrictions on Unit Transferability, the
Partnership will not be a publicly traded partnership and it will be subject to
the California withholding requirements. Generally, withholding will not apply
to distributions made to Unitholders with a California street address or who
otherwise provide to the Partnership an appropriate certification of exemption.
Unitholders should consult their tax advisors regarding their qualification for
exemption from any withholding and the procedure for obtaining such an
exemption.
61
<PAGE> 68
A Unitholder whose distribution is subject to withholding will be allowed a
credit for any withheld amount against such Unitholder's California income tax
liability. If the withheld amount exceeds a Unitholder's California income tax
liability, the Unitholder will be entitled to a refund for such excess
withholding. A Unitholder generally may be entitled to credit California income
tax (whether paid by withholding or otherwise) on California source income
against tax owed to the Unitholder's state of residence with respect to the same
income.
62
<PAGE> 69
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility for Financial Statements.................................. FS-2
Independent Auditors' Report.......................................................... FS-3
Financial Statements:
Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 and for
the Three Months Ended March 31, 1997 and 1996................................... FS-4
Balance Sheets, as of December 31, 1996 and 1995 and March 31, 1997.............. FS-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 and
for the Three Months Ended March 31, 1997 and 1996............................... FS-6
Statements of Changes in Partners' Equity for the Years Ended December 31, 1996,
1995
and 1994 and for the Three Months Ended March 31, 1997........................... FS-7
Notes to Financial Statements.................................................... FS-8
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.
</TABLE>
FS-1
<PAGE> 70
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Airlease Management Services, Inc. ("AMSI"), the general partner of the
partnership was a wholly owned subsidiary of USL Capital until October 31, 1996,
when BA Leasing & Capital Corporation ("BALCAP") purchased 100% of the stock of
AMSI. AMSI 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 generally accepted accounting principles.
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
BALCAP's staff of operating control specialists who conduct reviews of adherence
to the partnership's procedures and policies.
The partnership's financial statements have been audited by Coopers & Lybrand
L.L.P., independent auditors for the years ended December 31, 1996, and December
31, 1995. Their audits were conducted in accordance with generally accepted
auditing standards which included consideration of the general partner's
internal control structure. The Independent Auditors' Report appears on page
FS-3.
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/ Richard C. Walter
- ------------------------------------
Richard C. Walter
Chief Financial Officer
Airlease Management Services, Inc.
FS-2
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
To the Partners of Airlease Ltd.,
A California Limited Partnership:
We have audited the accompanying balance sheet of Airlease Ltd., A California
Limited Partnership as of December 31, 1996 and 1995, 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, 1996. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 the partnership as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- ------------------------------------
Coopers & Lybrand L.L.P.
San Francisco, California
January 27, 1997
except for Note 9 for which
the date is March 13, 1997
FS-3
<PAGE> 72
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER
(UNAUDITED) 31,
----------------- ----------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(IN THOUSANDS EXCEPT PER-UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES
Finance lease income.......................... $2,263 $2,253 $8,800 $9,455 $9,635
Operating lease rentals....................... 85 599 1,798 2,883 2,743
Gain on disposition of equipment, net......... 0 556 2,501 21 0
Other income.................................. 10 23 149 154 160
------ ------ ------ ------ ------
Total Revenues...................... 2,358 3,431 13,248 12,513 12,538
------ ------ ------ ------ ------
EXPENSES
Interest...................................... 472 523 1,830 2,366 2,660
Depreciation -- operating leases.............. 71 443 1,500 2,129 2,146
Provision for doubtful accounts............... 228 0 0 0 0
Management fee -- general partner............. 176 192 740 784 800
Investor reporting............................ 201 63 254 258 213
General and administrative.................... 43 39 272 154 388
------ ------ ------ ------ ------
Total expenses...................... 1,191 1,260 4,596 5,691 6,207
------ ------ ------ ------ ------
NET INCOME.................................... $1,167 $2,171 $8,652 $6,822 $6,331
------ ------ ------ ------ ------
NET INCOME ALLOCATED TO:
General Partner............................... $ 12 $ 22 $ 87 $ 68 $ 63
------ ------ ------ ------ ------
Limited Partners.............................. $1,155 $2,149 $8,565 $6,754 $6,268
------ ------ ------ ------ ------
NET INCOME PER LIMITED PARTNERSHIP UNIT....... $ 0.25 $ 0.46 $ 1.85 $ 1.46 $ 1.36
------ ------ ------ ------ ------
</TABLE>
See notes to financial statements
FS-4
<PAGE> 73
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, AS OF DECEMBER 31,
1997 --------------------
NOTES (UNAUDITED) 1996 1995
----- ----------- ------- --------
(IN THOUSANDS EXCEPT UNIT DATA)
<S> <C> <C> <C> <C>
Cash................................................ $ 1,682 $ 580 $ 0
Finance leases-net.................................. 1 & 2 87,813 83,056 91,564
Operating leases-net................................ 1 & 3 999 1,090 10,259
Notes receivable (net of allowance for doubtful
accounts of $228 in 1997)......................... 4 & 7 0 236 933
Prepaid expenses and other assets................... 257 168 265
------- ------- --------
Total Assets.............................. $90,751 $85,130 $103,021
------- ------- --------
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Distribution payable to partners.................... $ 2,102 $ 5,045 $ 2,336
Accounts payable and accrued liabilities............ 1,235 972 1,490
Long-term notes payable............................. 5 23,307 14,071 27,483
------- ------- --------
Total liabilities......................... 26,644 20,088 31,309
------- ------- --------
COMMITMENTS AND CONTINGENCIES....................... 6
PARTNERS' EQUITY:
Limited partners (4,625,000 units outstanding)...... 63,466 64,391 70,995
General partner..................................... 641 651 717
------- ------- --------
Total partners' equity.................... 64,107 65,042 71,712
------- ------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY.... $90,751 $85,130 $103,021
------- ------- --------
</TABLE>
See notes to financial statements
FS-5
<PAGE> 74
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED MARCH
31,
(UNAUDITED) FOR THE YEARS ENDED DECEMBER 31,
------------------- ---------------------------------
1997 1996 1996 1995 1994
------- ------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income....................................... $ 1,167 $ 2,171 $ 8,652 $ 6,822 $ 6,331
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 71 443 1,500 2,129 2,146
Increase (decrease) in accounts payable and
accrued liabilities......................... 283 589 (518) 231 (1,092)
Decrease (increase) in prepaid expenses and
other assets................................ (89) 13 97 54 (157)
Decrease (increase) in accounts receivable..... 0 29 111 111 103
Gain on disposition of equipment, net.......... 0 (556) (2,501) (21) 0
Provision for doubtful accounts................ 228 0 0 0 0
------- ------- -------- -------- -------
Net cash provided by operating activities........ 1,660 2,689 7,341 9,326 7,331
------- ------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Aircraft equipment purchase and refurbishment
(net of accrued refurbishment costs of $66 in
1995, and $250 in 1994)........................ (5,753) 0 0 (66) (4,401)
Proceeds from disposition of equipment........... 0 6,559 10,060 440 0
Decrease (increase) in notes receivable.......... 8 167 697 (260) (434)
Rental receipts in excess of earned finance lease
income......................................... 996 1,007 8,508 2,133 4,513
------- ------- -------- -------- -------
Net cash provided (used) by investing
activities..................................... (4,749) 7,733 19,265 2,247 (322)
------- ------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing/(repayment) under lines of credit,
net............................................ 1,405 (2,781) (7,381) 545 5,946
Proceeds from issuance of long-term debt......... 9,000 0 0 575 0
Repayment of long-term debt...................... (1,169) (1,538) (6,031) (3,162) (4,361)
Distributions paid to partners................... (5,045) (2,336) (12,614) (9,531) (8,596)
------- ------- -------- -------- -------
Net cash provided (used) by financing
activities..................................... 4,191 (6,655) (26,026) (11,573) (7,011)
------- ------- -------- -------- -------
Increase (decrease) in cash...................... 1,102 3,767 580 0 (2)
Cash at beginning of period...................... 580 0 0 0 2
------- ------- -------- -------- -------
Cash at end of period............................ $ 1,682 $ 3,767 $ 580 $ 0 $ 0
------- ------- -------- -------- -------
ADDITIONAL INFORMATION:
Cash paid for interest........................... $ 234 $ 426 $ 2,097 $ 2,052 $ 2,483
------- ------- -------- -------- -------
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the second quarter of 1994, accrued
conversion costs were adjusted by $920,000
</TABLE>
See notes to financial statements
FS-6
<PAGE> 75
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 (UNAUDITED)
---------------------------------------------
GENERAL PARTNER LIMITED PARTNERS TOTAL
--------------- ---------------- --------
(IN THOUSANDS EXCEPT PER-UNIT AMOUNTS)
<S> <C> <C> <C>
Balance, December 31, 1993.............................. $ 769 $ 76,105 $ 76,874
Net Income -- 1994...................................... 63 6,268 6,331
Distributions to partners declared ($1.36 and $0.49 per
limited partnership unit related to the net earnings
and return of capital, respectively).................. (86) (8,557) (8,643)
----- -------- --------
Balance, December 31, 1994.............................. 746 73,816 74,562
Net Income -- 1995...................................... 68 6,754 6,822
Distributions to partners declared ($1.46 and $0.61 per
limited partnership unit related to net earnings and
return of capital, respectively)...................... (97) (9,575) (9,672)
----- -------- --------
Balance, December 31, 1995.............................. 717 70,995 71,712
Net Income -- 1996...................................... 87 8,565 8,652
Distributions to partners declared ($1.85 and $1.43 per
limited partnership unit related to net earnings and
return of capital, respectively)...................... (153) (15,169) (15,322)
----- -------- --------
Balance, December 31, 1996.............................. $ 651 $ 64,391 $ 65,042
Net Income -- 3 months ended March 31, 1997
(unaudited)........................................... 12 1,155 1,167
Distributions to partners declared ($0.25 and $0.20 per
limited partnership unit related to net earnings and
return of capital, respectively)...................... (22) (2,080) (2,102)
----- -------- --------
Balance, March 31, 1997 (unaudited)..................... $ 641 $ 63,466 $ 64,107
----- -------- --------
</TABLE>
See notes to financial statements
FS-7
<PAGE> 76
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
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. ("AMSI") which was a wholly-owned subsidiary of USL Capital
Corporation ("USL Capital") until October 31, 1996 on which date BA Leasing and
Capital Corporation ("BALCAP") purchased all of the stock of AMSI and of United
States Airlease Holding ("Holding"), which holds 5% of the outstanding units
from USL Capital. BALCAP owns directly or through its subsidiaries 22.2% of the
units. An additional 3,600,000 units are publicly held.
BASIS OF PRESENTATION -- The preparation of financial statements in conformity
with generally accepted accounting principles 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.
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 terms 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 cost which includes
acquisition fees paid to an affiliate of the general partner. Aircraft are
depreciated over the related lease terms, generally five to nine years on a
straight-line basis to an estimated residual value, or over their useful lives
for aircraft held for lease or sale, 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).
CONCENTRATION OF CREDIT RISK -- At December 31, 1996, all eight aircraft owned
by the partnership (either directly or through joint ventures) were leased to
commercial airlines and a major freight carrier.
DERIVATIVES -- Derivatives consist principally of interest rate swap agreements
used to manage the Company's interest rate risk. Interest differentials paid or
received under interest rate swap agreements are recognized as an adjustment to
interest expense over the life of the agreements.
2. FINANCE LEASES
The partnership owns five aircraft which are leased to USAirways. The lessee is
required to pay a substantial additional amount if it does not renew the lease
for three years at the end of the initial 12-year term (1998); accordingly, the
lease is accounted for as a 15-year lease. In 1996, 1995, and 1994, leases with
USAirways resulted in finance lease revenues of $7,559,000, $8,007,000, and
$8,409,000, respectively.
A sixth aircraft subject to a finance lease expiring in 2002 was held jointly
with USL Capital and leased to Trans World Airlines. On January 31, 1997, the
partnership purchased USL Capital's 50% interest in this aircraft for $5.7
million and now holds a 100% interest in the aircraft.
A seventh wholly-owned aircraft is leased to FedEx under a 13-year finance lease
which expires in 2006.
FS-8
<PAGE> 77
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The finance leases at March 31, 1997 and December 31, 1996 and 1995 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Receivable in installments................. $ 77,716 $ 74,875 $ 92,183
Residual valuation......................... 45,500 41,950 41,950
Unearned lease income...................... (35,403) (33,769) (42,569)
-------- -------- --------
NET INVESTMENT............................. $ 87,813 $ 83,056 $ 91,564
======== ======== ========
</TABLE>
Residual valuation, which is reviewed annually by comparison of booked residual
values to published data for aircraft values, represents the estimated amount to
be received from the disposition of aircraft after lease termination. If
necessary, residual adjustments are made when booked residual values exceed
established data for aircraft value and result in an immediate charge to
earnings and/or a reduction in earnings over the remaining term of the lease.
It is possible that residual values would not be fully recovered if assets were
sold prior to the termination of the existing leases.
Finance lease receivables at December 31, 1996 are due in installments of
$14,348,000 annually through 2000, and $11,389,000 in 2001, and $6,094,000
thereafter.
3. OPERATING LEASES
The partnership, jointly with USL Capital and PS Group, Inc., owned an undivided
1/3 interest in six aircraft, subject to an operating lease with Continental
Airlines, Inc. ("Continental") which were sold on December 31, 1996 and resulted
in a net gain of $1.9 million. A seventh aircraft damaged and declared a
casualty loss in July 1995 resulted in a net gain of $21,000. Operating lease
revenues to the partnership from this lease were $1,260,000 in 1996, $1,347,500
in 1995, and $1,470,000 in 1994.
In April 1992, the partnership, jointly with USL Capital, purchased an
individual 50% interest in one aircraft for $8,526,000, and placed it on lease
to Finnair OY for a seven-year term. In March 1996, the partnership sold its 50%
interest in this aircraft, resulting in a net gain of $556,000. Finnair
generated partnership operating lease revenues of $199,000 and $1,197,000 in
1996 and 1995, respectively.
In December 1994, the partnership leased one aircraft which was previously off
lease to Sun Jet International, Inc. under a three-year operating lease which
expires in 1997. The aircraft was previously held with USL Capital. On October
31, 1996, USL Capital sold its 50% interest in the aircraft to BALCAP. Operating
lease revenues to the partnership from this lease were $339,000 in 1996 and 1995
and $14,000 in 1994.
The operating leases at December 31, 1996 and 1995 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Leased aircraft (at cost)............................... $ 4,501 $ 27,492
Accumulated depreciation................................ (3,411) (17,344)
Rentals receivable...................................... 0 111
------- --------
NET INVESTMENT.......................................... $ 1,090 $ 10,259
======= ========
</TABLE>
Future minimum rentals on operating leases at December 31, 1996, are due in
installments of $290,000 in 1997.
During 1995, the partnership incurred capital expenditures of $66,000 for repair
work on the DC-9-51 aircraft.
FS-9
<PAGE> 78
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES RECEIVABLE
At December 31, 1996 and 1995, the partnership had outstanding notes receivable
of $236,000 and $933,000, respectively, from Continental for certain aircraft
modifications pursuant to the restructuring of the lease agreement on the
aircraft in 1991 as part of a stipulation in Continental's bankruptcy.
In March 1997 the partnership recorded an allowance for doubtful accounts of
$228,000 relating to the outstanding note receivable representing advances made
to Continental Airlines to finance certain aircraft modifications. The agreement
for this financing was entered into as part of a 1991 stipulation in
Continental's bankruptcy. Continental has advised the partnership that because
the lease has terminated these amounts are no longer due. The partnership is
reviewing Continental's claim and has recorded the allowance until the matter
can be resolved.
The weighted average interest rate at December 31, 1996 and 1995 was 11.28% and
11.11%, respectively, and the principal is due in subsequent years as follows:
1997, $65,000; 1998, $73,000; 1999, $81,000; and $14,000 thereafter.
5. LONG-TERM NOTES PAYABLE
At December 31, 1996 and 1995, the partnership had outstanding borrowings of
$8,026,000 and $13,059,000, respectively, under an 8.75% note payable through
September 30, 1998. The note is collateralized by three of the aircraft leased
to USAirways under a finance lease with no other recourse to the partnership.
The partnership has a non-recourse revolving variable interest loan facility
which is collateralized by one of the aircraft leased to USAirways. The
partnership may borrow up to $5,634,000 which amount declines through 1998. At
December 31, 1996 and 1995, $0 and $7,381,000 were outstanding, respectively.
The partnership has entered into an interest rate swap agreement which
effectively fixes the interest rate at 7.36% on substantially all the borrowing
through November 1998. See Note 6.
In April 1993, the partnership entered into a non-recourse revolving declining
loan agreement collateralized by the 50% interest in the aircraft leased to
Finnair OY. The aircraft was sold in March 1996 and a portion of the sales
proceeds were used to repay the outstanding debt under this agreement.
In November 1993, the partnership entered into a non-recourse fixed interest
rate loan facility collateralized by its 100% interest in the aircraft leased to
FedEx. At December 31, 1996 and 1995, $6,045,000 and $6,467,000, respectively,
were outstanding under a 7.4% note payable through 2006.
Based upon amounts outstanding at December 31, 1996, the minimum future
principal payments on all outstanding long-term notes payable are due as follows
(in thousands):
<TABLE>
<S> <C>
1997....................................................... $ 4,893
1998....................................................... 4,080
1999....................................................... 529
2000....................................................... 568
2001....................................................... 612
Thereafter................................................. 3,389
-------
TOTAL............................................ $14,071
=======
</TABLE>
On January 31, 1997, the partnership entered into a fourth long-term
non-recourse note agreement in the amount of $9 million. Loan payments are due
in equal monthly installments, with the exception of a final payment due on the
maturity date of the loan. Approximately $5.6 million of this loan was used to
purchase an additional 50% interest in the Trans World Airlines aircraft. At the
time of the acquisition, the partnership
FS-10
<PAGE> 79
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
already owned a 50% interest in this aircraft and the loan is collateralized by
this aircraft. At March 31, 1997, $8.9 million was outstanding under a 9.85%
note payable through 2002.
6. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements involve the exchange of interest obligations on
fixed and floating interest rate debt without the exchange of the underlying
principal amounts. The agreements generally mature at the time the related debt
matures. The differential paid or received on interest rate swap agreements is
recognized as an adjustment to interest expense over the life of the agreements.
Notional amounts are used to express the volume of interest rate swap
agreements. The notional amounts do not represent cash flows and are not subject
to risk of loss. In the unlikely event that a counterparty fails to meet the
terms of an interest rate swap agreement, the partnership's exposure is the
termination value of the contracts. At December 31, 1996,the partnership had one
interest rate swap agreement outstanding, which was in a payable position, with
a notional principal amount of $5,462,000 and a termination value of $89,000.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents carrying amounts and fair values of the
partnership's financial instruments at December 31, 1996. 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.
<TABLE>
<CAPTION>
1996
------------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Notes receivable (Note 4)......................... $ 236 $ 244
Long-term debt (Note 5)........................... $14,071 $ 14,115
Derivatives relating to debt (Note 6).............
Interest rate swaps-net pay position.............. n/a $ (89)
</TABLE>
The carrying amounts presented in the table are included in the balance sheet
under the indicated captions.
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
NOTES RECEIVABLE are estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
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.
DERIVATIVES are estimated as the amount that the partnership would receive
or pay to terminate the agreements at the reporting date, taking into
account current market interest rates and corresponding borrowing spreads.
FS-11
<PAGE> 80
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1996, 1995, and 1994, were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- ----
<S> <C> <C> <C>
Management fees..................................... $ 673 $718 $735
Disposition fees.................................... 501 23 0
Remarketing fees.................................... 67 66 65
Reimbursement of other costs........................ 79 79 79
Reimbursement of interest costs..................... 6 15 39
------ ---- ----
TOTAL..................................... $1,326 $901 $918
====== ==== ====
</TABLE>
Disposition fees have been netted against the reported gain on sale amounts. See
Note 3.
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 and therefore will be subject to Federal income tax on any
taxable income at regular corporate rates beginning in 1998. At that time the
partners would no longer be entitled to take into account their distributive
shares of deductions, income or credits, and would be subject to tax on their
share of dividends to the extent distributed (1) out of current or accumulated
earnings and profits or (2) as a return of capital in excess of their tax basis.
The partnership has seven aircraft on finance leases which expire after 1997.
The partnership's use of different accounting methods for income tax and
financial statement purposes which may cause the partnership's taxable income to
exceed financial statement income for years subsequent to 1997 up to $70
million, would result in partnership tax liabilities at the partnership level of
up to a maximum of $28 million based upon current tax rates. On March 13, 1997,
the general partner's board of directors approved a plan to restrict
transferability of units which will result in the delisting of the partnership
from the New York Stock Exchange in December 1997. The plan is subject to
unitholder approval. On the basis of this tax planning strategy, no deferred
taxes were recorded in the financial statements at December 31, 1996. It is
possible that unitholders may not approve this plan in which case deferred taxes
may need to be recorded in 1997 in an amount that could be material to the
financial statements.
10. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
The aircraft on lease to USAirways were purchased by the partnership subject to
a tax benefit transfer lease ("TBT") which provided for the transfer of Federal
income tax ownership of the 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 under the TBT lease
resulted in tax deductions for the partnership and the interest was included by
the partnership in taxable income. In 1991, the TBT lease agreement terminated
and the tax attributes transferred under the TBT lease reverted to the
partnership.
FS-12
<PAGE> 81
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income per financial statements:....... $ 8,652 $ 6,822 $ 6,331
Increases (decreases) resulting from
Gain on disposition of equipment, net.... 777 109 0
Lease rents less earned finance lease
income................................ 5,627 5,207 4,530
Depreciation and amortization............ (6,242) (7,949) (6,577)
-------- -------- --------
Income per income tax method............... 8,814 4,189 4,284
Allocable to general partner............... (88) (42) (43)
-------- -------- --------
TAXABLE INCOME ALLOCABLE TO LIMITED
PARTNERS................................. $ 8,726 $ 4,147 $ 4,241
Taxable income per limited partnership unit
after giving effect to taxable income
allocable to general partner (amount
based on a unit owned from October 10,
1986).................................... $ 1.89 $ 0.90 $ 0.92
Partners' equity per financial
statements............................... $ 65,042 $ 71,712 $ 74,562
Increases (decreases) resulting from
Gain on disposition of equipment, net.... 777 109 0
Lease rents less earned finance lease
income................................ 33,900 28,273 23,066
Deferred underwriting discounts and
commissions and organization costs.... 5,351 5,351 5,351
Accumulated depreciation and
amortization............................. (51,222) (45,089) (37,140)
TBT interest income less TBT rental
expense.................................. (54,030) (54,030) (54,030)
-------- -------- --------
PARTNERS' EQUITY PER INCOME TAX METHOD..... $ (182) $ 6,326 $ 11,809
</TABLE>
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1995 and the three months ended March 31, 1997 (in
thousands, except per unit amounts):
<TABLE>
<CAPTION>
1997 MARCH 31
- ------------------------------------------ ---------
<S> <C> <C> <C> <C>
Total Revenues............................ $ 2,358
Net Income................................ $ 1,167
Net Income Per Limited Partnership Unit... $ 0.25
Unit Trading Data:
Unit Prices (high-low) on NYSE............ $17 5/8-$10
Unit Trading Volumes on NYSE.............. 1,104
</TABLE>
<TABLE>
<CAPTION>
1996 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ------------------------------------------ --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Total Revenues............................ $ 3,431 $ 2,717 $ 2,598 $ 4,502
Net Income................................ $ 2,171 $ 1,588 $ 1,532 $ 3,361
Net Income Per Limited Partnership Unit... $ 0.46 $ 0.34 $ 0.33 $ 0.72
Unit Trading Data:
Unit Prices (high-low) on NYSE............ $18 7/8-$17 $18 1/4-$15 $16 3/4-$13 1/4 $16 3/8-$14 5/8
Unit Trading Volumes on NYSE.............. 257 557 461 298
</TABLE>
<TABLE>
<CAPTION>
1995 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ------------------------------------------ --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Total Revenues............................ $ 3,103 $ 3,221 $ 3,179 $ 3,010
Net Income................................ $ 1,656 $ 1,793 $ 1,725 $ 1,648
Net Income Per Limited Partnership Unit... $ 0.35 $ 0.38 $ 0.37 $ 0.36
Unit Trading Data:
Unit Prices (high-low) on NYSE............ $15-$13 3/8 $ 16-$14 $18-$15 1/8 $17 7/8-$16 1/4
Unit Trading Volumes on NYSE.............. 236 338 284 213
</TABLE>
FS-13
<PAGE> 82
EXHIBIT A
CASH FLOW PROJECTIONS
THE FOLLOWING CASH FLOW PROJECTIONS CONTAIN CERTAIN FORWARD LOOKING STATEMENTS
WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF
THE PARTNERSHIP FOLLOWING THE CONSUMMATION OF THE PROPOSAL OR THE OTHER
STRATEGIC ALTERNATIVES AVAILABLE TO MAXIMIZE VALUE TO THE LIMITED PARTNERS
(COLLECTIVELY THE "ALTERNATIVES"), INCLUDING STATEMENTS RELATING TO: (A) THE
IMPACT ON REVENUES, EXPENSES AND CASH FLOW OF THE PROPOSAL OR ANOTHER
ALTERNATIVE UNDER CERTAIN ASSUMPTIONS; AND (B) FUTURE CASH DISTRIBUTIONS WHICH
WOULD BE PAYABLE AS A RESULT OF THE PROPOSAL OR ANOTHER ALTERNATIVE. THESE
FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT
MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES:
(1) LESSEES MAY DEFAULT UNDER LEASES, CAUSING THE PARTNERSHIP TO INCUR
UNCONTEMPLATED EXPENSES OR NOT TO RECEIVE RENTAL INCOME AS AND WHEN EXPECTED;
(2) AIRCRAFT COULD BE SOLD FOR MORE OR LESS THAN APPRAISED RESIDUAL VALUES OR AT
TIMES OTHER THAN UPON ASSUMED LEASE TERMINATION DATES; (3) LESSEES MAY EXERCISE
RENEWAL OPTIONS UNDER THE LEASE WHICH COULD AFFECT THE PARTNERSHIP'S ABILITY TO
SELL AIRCRAFT ON THE ASSUMED DATES; (4) COMPETITIVE PRESSURE OR CHANGES IN THE
AIRCRAFT OR AIRCRAFT LEASING MARKET MAY BE GREATER THAN EXPECTED; (5)
LEGISLATION OR REGULATORY CHANGES WHICH ADVERSELY AFFECT THE VALUE OF THE
AIRCRAFT MAY OCCUR; OR (6) CHANGES IN THE TAX LAW OR IN INTEREST RATES MAY
OCCUR.
GENERAL ASSUMPTIONS
The Cash Flow Projections which follow present the cash flow as of December
31, 1997 from the Partnership's existing portfolio of aircraft based on
scheduled rent payments over the remaining term of its existing leases and the
estimated residual value of each aircraft (the "Appraised Residual Value") as of
the date of termination of the lease to which such aircraft is subject (the
aircraft's "Lease Termination Date"). The Appraised Residual Value for each
aircraft (other than the aircraft on lease to Sun Jet International, Inc. ("Sun
Jet")) is based on the average of the three Appraisals. See "SPECIAL
FACTORS -- Appraisals -- Comparison of Appraisals." The lease for the Sun Jet
Aircraft contains a fixed-price purchase option, and for that reason, the
Appraised Residual Value of the Sun Jet Aircraft is based on the fixed-price
purchase option as set forth in the lease.
The Cash Flow Projections take into account expenses of the Partnership,
consisting of general and administrative expenses, fees payable to the General
Partner pursuant to the Limited Partnership Agreement, projected debt service
payments and the cost of soliciting Unitholder consent. The Cash Flow
Projections assume that additional debt would be obtained within the next year
to provide operating cash flow and be available to make distributions to
Unitholders, pending the ultimate sale of the aircraft portfolio.
The Cash Flow Projections, assume, among other matters, that all scheduled
rent will be paid as and when due, that no lease will be renewed and that
aircraft will be sold on their respective Lease Termination Dates at their
Appraised Residual Value or at a specified percentage of their Appraised
Residual Values. All aircraft owned by the Partnership except the Sun Jet
Aircraft are subject to leases which provide renewal options to the lessee. Many
circumstances could occur which would cause actual results to differ materially
from those contemplated by the Cash Flow Projections, including the following
circumstances: a lessee could default in its rental obligations; a lessee could
exercise renewal options under the lease; aircraft could be sold subject to
existing leases and prior to or after their respective Lease Termination Dates;
and aircraft could be sold for more or less than the Appraised Residual Values
as set forth in the Cash Flow Projections;
A-1
<PAGE> 83
competitive pressure or changes in the aircraft or aircraft leasing market may
be greater than estimated; legislation or regulatory changes which adversely
effect the value of the aircraft may occur; or changes in the tax law or
interest rates may occur. The Cash Flow Projections by their nature are
projections based on estimates and assumptions which are considered reasonable
at a point in time. Changes in the estimates or assumptions would affect the
values set forth in the Cash Flow Projections. No assurances are given that the
values set forth in the Cash Flow Projections will be realized.
Sun Jet filed for bankruptcy on June 18, 1997. Sun Jet also failed to make
its June rental payment and has failed to maintain the aircraft in compliance
with the lease. Although the General Partner believes the Sun Jet Aircraft has
continuing value, no assurance can be given as to when the Partnership may
obtain return of this aircraft or as to when or at what price the aircraft could
be remarketed. At March 31, 1997, the Sun Jet Aircraft represented about 1% of
the Partnership's total assets, and rentals under the Sun Jet lease represented
about 4% of first quarter revenues.
The financial information presented in the Cash Flow Projections and in the
Immediate Sale Projections, the Restricting Unit Transfers and Portfolio Runoff
Projections and the Corporate Taxation and Portfolio Runoff Projections,
attached hereto, are not presented as income statements, balance sheets, and
statements of cash flow with footnotes prepared in accordance with generally
accepted accounting principles and therefore have not been prepared in
accordance with the standards for prospective financial information issued by
the American Institute of Certified Public Accountants ("AICPA"). The
Partnership's independent accountants, Coopers & Lybrand L.L.P. have not
examined, compiled or applied any procedures to such prospective financial
information and express no opinion or any assurance on their reasonableness or
achievability.
A-2
<PAGE> 84
EXHIBIT A-1
IMMEDIATE SALE PROJECTIONS
ADDITIONAL ASSUMPTIONS
The Cash Flow Projections relating to the Immediate Sale Alternative assume
that all aircraft (other than the Sun Jet Aircraft) would be sold as of December
31, 1997 and that the Partnership would be dissolved on December 31, 1997.
Projected sale proceeds were determined using a commercially available lease
pricing system developed by a third party and used by BALCAP and many other
participants in the leasing industry. The system determines a sale price based
on projected cash flows and a discount rate. The projected cash flows used for
this analysis were based on the same assumptions used in the Cash Flow
Projections, except that estimated expenses of sale, including prepayment
premiums on early payment of debt were included, residual values were assumed to
be 50% or 75% of the Appraised Residual Value as set forth in the Cash Flow
Projections to reflect the encumbrances of the present leases, and alternative
discount rates of 9% and 12% were utilized. The General Partner's experience is
that purchasers of aircraft subject to lease will not pay an amount which
assumes the full projected value of an aircraft at the end of the lease term
when the lessees have an option to purchase or to return the aircraft on
termination of the lease. All Aircraft owned by the Partnership except the Sun
Jet Aircraft are subject to leases which provide this option to the lessee. Many
circumstances could occur which would cause actual results to differ materially
from those contemplated by the Immediate Sale Projections, including the
circumstances described in "General Assumptions" above. The Immediate Sale
Projections by their nature are projections based on estimates and assumptions
which are considered reasonable at a point in time. Changes in the estimates and
assumptions would affect the values set forth in the Immediate Sale Projections.
No assurances are given that the values set forth in the Immediate Sale
Projections will be realized.
A-1-1
<PAGE> 85
IMMEDIATE SALE PROJECTIONS
Assuming Discount Rate of 9%
<TABLE>
<CAPTION>
RESIDUAL ASSUMPTION
AS % OF APPRAISED
VALUE
---------------------
50% 75%
------ ------
<S> <C> <C>
Projected Sales Price
USAir................................................................ $ 53.8 $ 62.1
TWA.................................................................. 11.6 13.4
FedEx................................................................ 9.5 10.0
------ ------
$ 74.9 $ 85.5
Debt Balance........................................................... 21.1 21.1
Other Expenses
Fee on sale of Aircraft.............................................. $ 3.7 $ 4.3
Estimated expenses................................................... 1.7 1.7
------ ------
$ 5.4 $ 6.0
Net Value............................................................ $ 48.4 $ 58.4
Net Value per Unit................................................... $10.36 $12.51
</TABLE>
Assuming Discount Rate of 12%
<TABLE>
<CAPTION>
RESIDUAL ASSUMPTION
AS % OF APPRAISED
VALUE
---------------------
50% 75%
------ ------
<S> <C> <C>
Projected Sales Price
USAir................................................................ $ 50.5 $ 58.0
TWA.................................................................. 10.9 12.6
FedEx................................................................ 8.8 9.2
----- ------
$ 70.2 $ 79.8
Debt Balance........................................................... 21.1 21.1
Other Expenses
Fee on sale of Aircraft.............................................. $ 3.5 $ 4.0
Estimated expenses................................................... 1.7 1.7
----- ------
$ 5.2 $ 5.7
Net Value............................................................ $ 43.9 $ 53.0
Net Value per Unit................................................... $ 9.39 $11.35
</TABLE>
Dollars in millions except for per unit information.
A-1-2
<PAGE> 86
EXHIBIT A-2
RESTRICTING UNIT TRANSFERS AND
PORTFOLIO RUNOFF PROJECTIONS
ADDITIONAL ASSUMPTIONS
The Cash Flow Projections relating to the Restricting Unit Transfers and
Portfolio Runoff alternative assumed that the Partnership would continue to be
taxed as a flow through entity, would cease reinvesting in aircraft, would
distribute Cash Available from Operations (as defined in the Limited Partnership
Agreement) as it becomes available and would distribute net cash proceeds from
sale of aircraft on the applicable Lease Termination Date. The projected cash
flows used for this analysis were based on the above assumptions and the
assumptions used in the Cash Flow Projections, except that the sales proceeds of
the aircraft were assumed to be 75% or 100% of the Appraised Residual Values set
forth in the Cash Flow Projections and alternative discount rates of 6%, 8%, 9%,
10% or 12% were utilized. Many circumstances could occur which would cause
actual results to differ materially from those contemplated by the Restricting
Unit Transfers and Portfolio Runoff Projections, including the circumstances
described in "General Assumptions" above. The Restricting Unit Transfers and
Portfolio Runoff Projections by their nature are projections based on estimates
and assumptions which are considered reasonable at a point in time. Changes in
the estimates and assumptions would affect the values set forth in the
Restricting Unit Transfers and Portfolio Runoff Projections. No assurances are
given that the values set forth in the Restricting Unit Transfers and Portfolio
Runoff Projections will be realized.
A-2-1
<PAGE> 87
PROJECTED CASH FLOW
RESTRICT UNIT TRADING AND PORTFOLIO RUNOFF
100% APPRAISED RESIDUALS
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 2004 2005 2006
------ ----- ----- ------ ----- ----- ----- ----- -----
(MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rent
USAir........................ $ 11.8 $11.8 $11.8 $ 8.9
TWA.......................... 1.2 1.2 1.2 1.2 0.2
TWA (additional 50%)......... 1.2 1.2 1.2 1.2 0.2
FedEx........................ 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 0.7
Other........................ 0.1 0.1
------ ----- ----- ------ ----- ----- ----- ----- -----
Total................ 15.6 15.6 15.6 12.6 1.7 1.3 1.3 1.3 0.7
Residual
USAir........................ 43.8
TWA.......................... 10.4
FedEx........................ 3.6
------ ----- ----- ------ ----- ----- ----- ----- -----
Total................ 0.0 0.0 0.0 43.8 10.4 0.0 0.0 0.0 3.6
Expenses before debt service
SG&A......................... (0.4) (0.4) (0.4) (0.4) (0.4) (0.3) (0.3) (0.3) (0.3)
Fees......................... (0.7) (0.6) (0.6) (2.7) (0.6) (0.1) (0.1) (0.1) (0.2)
------ ----- ----- ------ ----- ----- ----- ----- -----
(1.1) (1.0) (1.0) (3.1) (1.0) (0.4) (0.4) (0.4) (0.5)
Cashflow before debt and
distributions ............... $ 14.5 $14.6 $14.5 $ 53.3 $11.1 $ 0.9 $ 0.9 $ 0.9 $ 3.7
Net debt service............... (6.1) (6.2) (2.9) (2.7) (4.2) (0.9) (0.9) (0.9) (0.5)
------ ----- ----- ------ ----- ----- ----- ----- -----
Net cash flow................ $ 8.4 $ 8.4 $11.7 $ 50.6 $ 6.9 $ 0.0 $ 0.0 $ 0.0 $ 3.3
Memo: per unit
Net cash flow................ $ 1.80 $1.80 $2.50 $10.83 $1.48 $0.00 $0.00 $0.00 $0.70
- ---------
Net Present Value @ 6%......... $15.51
---------
Net Present Value @ 8%......... $14.52
---------
Net Present Value @ 9%......... $14.06
---------
Net Present Value @ 10%........ $13.62
---------
Net Present Value @ 12%........ $12.80
---------
</TABLE>
A-2-2
<PAGE> 88
PROJECTED CASH FLOW
RESTRICT UNIT TRADING AND PORTFOLIO RUNOFF
75% APPRAISED RESIDUALS
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 2004 2005 2006
------ ----- ----- ----- ----- ----- ----- ----- -----
(MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rent
USAir......................... $ 11.8 $11.8 $11.8 $ 8.9
TWA........................... 1.2 1.2 1.2 1.2 0.2
TWA (additional 50%).......... 1.2 1.2 1.2 1.2 0.2
FedEx......................... 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 0.7
Other......................... 0.1 0.1
------ ----- ----- ----- ----- ----- ----- ----- -----
Total................. 15.6 15.6 15.6 12.6 1.7 1.3 1.3 1.3 0.7
Residual
USAir......................... 32.9
TWA........................... 7.8
FedEx......................... 2.7
------ ----- ----- ----- ----- ----- ----- ----- -----
Total................. 0.0 0.0 0.0 32.9 7.8 0.0 0.0 0.0 2.7
Expenses before debt service
SG&A.......................... (0.4) (0.4) (0.4) (0.4) (0.4) (0.3) (0.3) (0.3) (0.3)
Fees.......................... (0.7) (0.6) (0.6) (2.1) (0.5) (0.1) (0.1) (0.1) (0.2)
------ ----- ----- ----- ----- ----- ----- ----- -----
(1.1) (1.0) (1.0) (2.5) (0.9) (0.4) (0.4) (0.4) (0.5)
Cashflow before debt and
distributions................. $ 14.5 $14.6 $14.5 $42.9 $ 8.7 $ 0.9 $ 0.9 $ 0.9 $ 2.9
Net debt service................ (6.1) (6.2) (2.9) (2.7) (4.2) (0.9) (0.9) (0.9) (0.5)
------ ----- ----- ----- ----- ----- ----- ----- -----
Net cash flow................. $ 8.4 $ 8.4 $11.7 $40.2 $ 4.5 $ 0.0 $ 0.0 $ 0.0 $ 2.4
Memo: per unit
Net cash flow................. $ 1.80 $1.80 $2.50 $8.61 $0.95 $0.00 $0.00 $0.00 $0.51
- ---------
Net Present Value @ 6%.......... $13.24
---------
Net Present Value @ 8%.......... $12.43
---------
Net Present Value @ 9%.......... $12.06
---------
Net Present Value @ 10%......... $11.70
---------
Net Present Value @ 12%......... $11.02
---------
</TABLE>
A-2-3
<PAGE> 89
EXHIBIT A-3
CORPORATE TAXATION AND PORTFOLIO RUNOFF PROJECTIONS
ADDITIONAL ASSUMPTIONS
The Cash Flow Projections relating to the Corporate Taxation and Portfolio
Runoff alternative utilized the same assumptions as the Restricting Unit
Transfers and Portfolio Runoff alternative except that it was assumed that the
Partnership would be taxed as a corporation beginning January 1, 1998 and that
administrative expenses would be lower reflecting the elimination of the K-1 tax
returns for limited partners. It was assumed that the Partnership's tax bases in
its assets as of January 1, 1998 is equal to approximately $12 million. Such
amount represents the approximate projected tax bases in the Partnership's
assets as of January 1, 1998. Taxable income was reduced by deducting
depreciation expenses based on these assumed tax bases, and a tax rate of 35%
(the highest current federal corporate income tax rate and no state income tax)
was applied to estimated taxable income. Many circumstances could occur which
would cause actual results to differ materially from those contemplated by the
Corporate Taxation and Portfolio Projections, including the circumstances
described in "General Assumptions" and the following matters relating to
taxation. The Corporate Taxation and Portfolio Runoff Projections by their
nature are projections based on estimates and assumptions which are considered
reasonable at a point in time. Changes in the estimates or assumptions would
affect the values set forth in the Corporate Taxation and Portfolio Runoff
Projections. No assurances are given that the values set forth in the Corporate
Taxation and Portfolio Runoff Projections could be realized.
If a tax termination of the Partnership occurs, it could result in higher
tax bases than the assumed tax bases and less corporate level tax. Thus, a tax
termination could result in an increased present value of future cash
distributions. In general, a tax termination occurs if within a 12-month period
there has been a sale or exchange of 50% or more of the interests in a
partnership. Transfers of the same interest in a partnership during the 12-month
period are counted only once. Based upon the historical trading volume of the
Units, the General Partner does not believe that a tax termination of the
Partnership has occurred prior to 1997. However, determining whether a tax
termination has occurred during 1997 is extremely difficult because the
information necessary to make such a determination is not readily accessible
until the end of the year.
In the event that a tax termination of the Partnership occurred during 1997
and prior to May 9, 1997, the tax bases of the Partnership assets would be
"stepped up" to equal the tax bases of all the Unitholders and the General
Partner in their Partnership interests at the time of such tax termination,
which would be substantially higher than the assumed tax bases set forth in the
Corporate Taxation and Portfolio Runoff Projections. The estimated tax bases of
the Unitholders and the General Partner in their Partnership interests as of
January 1, 1997 were approximately equal to $48.7 million. Assuming that the
Partnership's tax bases in its assets were "stepped up" to $48.7 million, the
present value of future cash distributions would be increased by approximately
$2.00 per Unit from the amounts set forth in the Corporate Taxation and
Portfolio Runoff Projections. The actual tax bases of the Unitholders and the
General Partner in their Partnership interests would be different than the $48.7
million bases assumed because the tax bases would depend upon the acquisition
price of the Units, the income and deductions of the Partnership between January
1, 1997 and the date, if any, a tax termination occurred, and the trading
volume, prices, and Unitholders' tax bases of the Units sold between January 1,
1997 and the date, if any, on which a tax termination occurred.
Recently issued Treasury Regulations, effective for tax terminations
occurring on or after May 9, 1997, substantially changed the way in which the
asset bases of a partnership are determined in the event of a tax termination of
the partnership. Under such Treasury Regulations, a partnership's tax bases in
its assets would not be adjusted to equal the partners' bases in their
partnership interests on a tax termination. Accordingly, in the event that a tax
termination did not occur prior to May 9, 1997, the Partnership would be unable
to obtain "stepped up" bases in its assets as a result of a tax termination
occurring on or after May 9, 1997.
If the Unitholders do not consent to the Proposal, the General Partner does
not believe that the Partnership will be able to obtain "stepped up" bases in
its assets greater than the approximate projected tax bases of $12 million.
A-3-1
<PAGE> 90
PROJECTED CASH FLOW
CORPORATE TAXATION AND PORTFOLIO RUNOFF
100% APPRAISED RESIDUALS
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 2004 2005 2006
----- ----- ----- ------ ----- ------ ------ ------ -----
(MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rent
USAir...................... $11.8 $11.8 $11.8 $ 8.9
TWA........................ 1.2 1.2 1.2 1.2 0.2
TWA (additional 50%)....... 1.2 1.2 1.2 1.2 0.2
FedEx...................... 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 0.7
Other...................... 0.1 0.1
----- ----- ------ ----- ------ ------ ------ ------ -----
Total.............. 15.6 15.6 15.6 12.6 1.7 1.3 1.3 1.3 1.3
Residual
USAir...................... 43.8
TWA........................ 10.4
FedEx...................... 3.6
----- ----- ------ ----- ------ ------ ------ ------ -----
Total.............. 0.0 0.0 0.0 43.8 10.4 0.0 0.0 0.0 3.6
Expenses before debt service
SG&A....................... (0.4) (0.4) (0.4) (0.4) (0.4) (0.3) (0.3) (0.3) (0.3)
Fees....................... (0.7) (0.6) (0.6) (2.7) (0.6) (0.1) (0.1) (0.1) (0.2)
----- ----- ------ ----- ------ ------ ------ ------ -----
(1.1) (1.0) (1.0) (3.1) (1.0) (0.4) (0.4) (0.4) (0.5)
Cashflow before debt and
distributions.............. $14.5 $14.6 $14.5 $ 53.3 $11.1 $ 0.9 $ 0.9 $ 0.9 $ 3.7
Net debt service............. (6.1) (6.2) (2.9) (2.7) (4.2) (0.9) (0.9) (0.9) (0.5)
----- ----- ------ ----- ------ ------ ------ ------ -----
Pre-tax cash flow.......... $ 8.4 $ 8.4 $11.7 $ 50.6 $ 6.9 $ 0.0 $ 0.0 $ 0.0 $ 3.3
Taxes........................ (2.5) (3.8) (4.1) (18.1) (3.3) (0.2) (0.2) (0.2) (1.2)
----- ----- ------ ----- ------ ------ ------ ------ -----
After-tax cash flow........ 5.9 4.7 7.6 32.5 3.6 (0.2) (0.2) (0.2) 2.0
Memo: per unit
Net cash flow.............. $1.27 $1.00 $1.62 $ 6.97 $0.78 $(0.04) $(0.04) $(0.05) $0.43
- --------
Net Present Value @ 6%....... $9.72
--------
Net Present Value @ 8%....... $9.11
--------
Net Present Value @ 9%....... $8.83
--------
Net Present Value @ 10%...... $8.55
--------
Net Present Value @ 12%...... $8.05
--------
</TABLE>
A-3-2
<PAGE> 91
PROJECTED CASH FLOW
CORPORATE TAXATION AND PORTFOLIO RUNOFF
75% APPRAISED RESIDUALS
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 2004 2005 2006
----- ----- ----- ------ ----- ------ ------ ------ -----
(MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL) (MIL)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rent
USAir...................... $11.8 $11.8 $11.8 $ 8.9
TWA........................ 1.2 1.2 1.2 1.2 0.2
TWA (additional 50%)....... 1.2 1.2 1.2 1.2 0.2
FedEx...................... 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 0.7
Other...................... 0.1 0.1
----- ----- ------ ----- ------ ------ ------ ------ -----
Total.............. 15.6 15.6 15.6 12.6 1.7 1.3 1.3 1.3 0.7
Residual
USAir...................... 32.9
TWA........................ 7.8
FedEx...................... 2.7
----- ----- ------ ----- ------ ------ ------ ------ -----
Total.............. 0.0 0.0 0.0 32.9 7.8 0.0 0.0 0.0 2.7
Expenses before debt service
SG&A....................... (0.4) (0.4) (0.4) (0.4) (0.4) (0.3) (0.3) (0.3) (0.3)
Fees....................... (0.7) (0.6) (0.6) (2.1) (0.5) (0.1) (0.1) (0.1) (0.2)
----- ----- ------ ----- ------ ------ ------ ------ -----
(1.1) (1.0) (1.0) (2.5) (0.9) (0.4) (0.4) (0.4) (0.5)
Cashflow before debt and
distributions.............. $14.5 $14.6 $14.5 $ 42.9 $ 8.7 $ 0.9 $ 0.9 $ 0.9 $ 2.9
Net debt service............. (6.1) (6.2) (2.9) (2.7) (4.2) (0.9) (0.9) (0.9) (0.5)
----- ----- ------ ----- ------ ------ ------ ------ -----
Pre-tax cash flow.......... $ 8.4 $ 8.4 $11.7 $ 40.2 $ 4.5 $ 0.0 $ 0.0 $ 0.0 $ 2.4
Taxes........................ (2.5) (3.8) (4.1) (14.4) (2.4) (0.2) (0.2) (0.2) (0.9)
----- ----- ------ ----- ------ ------ ------ ------ -----
After-tax cash flow........ 5.9 4.7 7.6 25.8 2.0 (0.2) (0.2) (0.2) 1.5
Memo: per unit
Net cash flow.............. $1.27 $1.00 $1.62 $ 5.52 $0.44 $(0.04) $(0.04) $(0.05) $0.32
- --------
Net Present Value @ 6%....... $8.24
--------
Net Present Value @ 8%....... $7.75
--------
Net Present Value @ 9%....... $7.52
--------
Net Present Value @ 10%...... $7.30
--------
Net Present Value @ 12%...... $6.89
--------
</TABLE>
A-3-3
<PAGE> 92
Exhibit B-1
BK Associates, Inc.
1295 Northern Boulevard
Manhasset, New York 11030
(516) 365-6272 - Fax (516) 365-6287
February 26, 1997
Mr. David B. Gebler, President
AIRLEASE MANAGEMENT SERVICES, INC.
555 California Street, 4th Floor
San Francisco, CA 94104
Dear Mr. Gebler:
In response to your request, BK Associates, Inc. is pleased to provide this
opinion on the current market value (CMV) and forecast value at the end of
their respective leases on each of six McDonnell Douglas MD82 aircraft and a
Boeing 727-2D4F aircraft (Aircraft). The Aircraft are further identified below:
<TABLE>
<CAPTION>
Year of Serial Total Total
Lessee Mfgr. Reg. # Number Hours Cycles
------ ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
USAir 1981 N806US 48038 41,400 38,312
USAir 1981 N807US 48039 42,316 39,316
USAir 1981 N808US 48040 41,392 38,440
USAir 1981 N809US 48041 41,554 38,552
USAir 1981 N810US 48042 41,527 38,343
FedEx 1979 N288FE 21850 31,302 19,544
TWA 1984 N913TW 49184 39,503 20,664
</TABLE>
We understand the older MD82 aircraft, which were manufactured as MD82s are
being operated as MD81s by USAir but, at the end of the lease, will be
returned as MD82s with at least 500 hours remaining to "C" check, 5,000 hours
to "D" check and no less than 2,000 hours to the next limit on each engine. The
1984 TWA MD82 will be returned with no less than 1/4-time remaining to major
maintenance events. The B727, which was originally made as a passenger model,
has been converted to freighter configuration and fitted with Stage 3 hush
kits. We understand it will also be returned by FedEx at the end of the lease
with 1/4-time remaining to major maintenance events.
Based upon our knowledge of the MD82 and B727-200F aircraft, our knowledge of
the capabilities and uses to which they have been put in various parts of the
world, our knowledge of the marketing of used aircraft, and our knowledge of
aircraft in general, it is our opinion that the CMVs of the Aircraft are as
shown below:
B-1-1
<PAGE> 93
Mr. David B. Gebler
February 26, 1997
Page 2
<TABLE>
<CAPTION>
Aircraft CMV
-------- ---
<S> <C>
N806US $13,150,000
N807US 13,150,000
N808US 13,150,000
N809US 13,150,000
N810US 13,150,000
N288FE 8,350,000
N913TW 15,100,000
</TABLE>
It is further our opinion that the forecast market values of these aircraft at
lease end are as follows:
<TABLE>
<CAPTION>
Lease End FAIR MARKET VALUE
Aircraft Date Const. 1997 $ Infla. at 3%
--------- ---- ------------- ------------
<S> <C> <C> <C>
N806US 09/2001 $8,125,000 $9,280,000
N807US 09/2001 8,125,000 9,280,000
N808US 09/2001 8,125,000 9,280,000
N809US 09/2001 8,125,000 9,280,000
N810US 09/2001 8,125,000 9,280,000
N288FE 04/2006 3,850,000 5,025,000
N913TW 03/2002 9,350,000 10,840,000
</TABLE>
The inflated future values above assume an annual inflation rate of three
percent per year which we believe is a reasonable rate to use and is consistent
with the rate used in other aviation industry forecasts such as the one issued
by the FAA. The constant dollar lease-end values for the USAir MD80s are
slightly higher than they were when we appraised the same aircraft in December
1996. This is partly the result of expressing them in 1997 rather than 1996
dollars and partly in recognition of our opinion that MD80 values may begin to
rise above previously expected levels as the noise regulation deadlines are
reached.
According to the International Society of Transport Aircraft Trading's (ISTAT)
definition of current market value, to which BK Associates subscribes, the
quoted current market value is the Appraiser's opinion of the most likely
trading price that may be generated for an aircraft under the market
circumstances that are perceived to exist at the time in
B-1-2
<PAGE> 94
Mr. David B. Gebler
February 26, 1997
Page 3
question. The Current Market Value assumes that the aircraft is valued for its
highest and best use, that the parties to the hypothetical sale transaction are
willing, able, prudent and knowledgeable, and under no unusual pressure for a
prompt sale, and that the transaction would be negotiated in an open and
unrestricted market on an arm's length basis, for cash or equivalent
consideration, and given an adequate amount of time for effective exposure to
prospective buyers, which BK Associates considers to be 12 to 18 months.
The forecast market value definition is the same as for the current market
value above, except that unless the future date under consideration is in the
very near future, market conditions are assumed to be in approximate balance
between supply and demand. Where the forecast market value is at lease
termination, the return maintenance conditions of the aircraft may be taken
into account if known and are substantially different from half-time between
high cost inspections or overhauls. For the values given above, the Aircraft
were assumed to be in the condition required by the lease return provisions.
It should be understood that BK Associates has neither inspected the Aircraft
nor their maintenance records. We have relied on the data you provided and our
own database. The assumptions have been made that the Aircraft are in average
or better condition; all Airworthiness Directives have been complied with;
accident damage has not been incurred that would affect market values; the
Aircraft are at half-time between major maintenance events; and maintenance
has been accomplished in accordance with an Airworthiness Authority approved
maintenance program and accepted industry standards. Deviations from these
assumptions can change our opinion significantly regarding the Aircraft values.
For the current FMVs, we have assumed the Aircraft are at half-time between "C"
checks, "D" checks, engine heavy shop visits, and landing gear overhaul. The
purpose of the adjustment for deviation from half-time on major maintenance
items is to recognize the cost of a major maintenance expense which may be
imminent for the buyer or which may have recently been absorbed by the seller.
Where the operator of the aircraft does not change and he continues to be
responsible for maintaining the aircraft, recent major maintenance expenses or
impending expenses are usually not relevant to the current market value.
Rather, only those conditions that result in a maintenance expense or saving at
the time the aircraft is returned to the lessor are relevant and these usually
have an impact only on the residual values expectation and, in this case, they
have been considered in the future value forecasts.
B-1-3
<PAGE> 95
Mr. David B. Gebler
February 26, 1997
Page 4
Supply and demand is the major influence on aircraft values. Our industry has
experienced the recent peak of surplus commercial jet aircraft on the market in
mid-1991 and watched the subsequent increase in demand for air travel bring
about a return of many of the grounded and stored surplus fleet to revenue
service. The peak surplus of 815 aircraft in 1991 has been reduced to 202
currently advertised for sale or lease. Within this general market improvement,
the narrow-body fleet has out-performed the wide-bodies and has returned to
near balance in supply and demand while the wide-bodies are expected to balance
approximately 1999. The Federal Express Aviation Services, Inc. (FEASI) report
lists no B727-200 freighters or MD82s as currently available for sale or lease.
For the MD80s, there are three MD81s and one MD82 currently available. For most
of the past year, no MD80s have been available and the market has been rather
firm with several airlines seeking whatever aircraft do become available.
Current values are normally based on comparison to recent sales of comparable
aircraft. Our database of used aircraft sales contains the following
transactions conducted during the past year involving aircraft similar to the
Aircraft.
There were several B727-200F transactions during the past year. None were
hushed and all were a few years older than N288FE. The aircraft were made
between 1973 and 1975. Reported "values" were between $3.15 and $6.0 million.
The $3.15 million was the price in an actual sale. The others were "agreed
values" or "stipulated loss values" in lease transactions. An agreed value
or stipulated loss value is not a sale price, but is a value agreed to by the
parties to a transaction and is usually higher than a sale price.
For the MD80s, several transactions were reported in the past year. Early in
1996 ValuJet purchased an MD81 for $13.1 million and a 1986 MD83 for $13.9
million. BWIA sold a 1987 MD83 for $18.81 million. Later in the year, there
were two other transactions that were not publicly reported, but we are aware
of them through confidential reports. One MD81 was sold for $11 million and a
1989 MD82 was sold for about $25.25 million.
Considering these data and the current strong market, we concluded the current
values were as shown above.
The future values were largely based on comparison to historic sales data under
comparable circumstances adjusted to account for the impact of expected market
conditions. The market conditions that will have the most impact on the
residual value during the next few years are noise regulations and the expected
return to balance between supply and demand.
B-1-4
<PAGE> 96
Mr. David B. Gebler
February 26, 1997
Page 5
BK Associates, Inc. is an internationally recognized aircraft appraisal firm
located in Manhasset, New York. It was founded in 1984 and thus is the oldest
of the recognized aircraft appraisal firms that employs certified appraisers
exclusively. Its clients include domestic and foreign airlines; aircraft,
engine, and aviation equipment manufacturers; corporate aircraft operators;
governmental agencies; and financial institutions. The president of the firm,
Mr. John F. Keitz has been certified as a Senior Aircraft Appraiser by the
International Society of Transport Aircraft Trading and abides by the
"Principles of Appraisal Practice and Code of Ethics" of the Society. ISTAT has
established the principles to improve aircraft appraisal standards and
techniques; encourage sound professional practices and ethical conduct. Richard
L. Britton, Vice President, is also an ISTAT Certified Appraiser.
BK Associates, Inc. has no present or contemplated future interest in the
Aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation. It is not given as a recommendation, or as an inducement, for
any financial transaction and further, BK Associates, Inc. assumes no
responsibility or legal liability for any action taken or not taken by the
addressee, or any other party, with regard to the appraised equipment. By
accepting this appraisal, the addressee agrees that BK Associates, Inc. shall
bear no such responsibility or liability. This appraisal is prepared for the
use of the addressee and shall not be provided to other parties without the
express consent of the addressee. We hereby consent to the use of this report
and our name in your Information Statement which may be filed with the
Securities and Exchange Commission.
Sincerely yours,
BK ASSOCIATES, INC.
/s/ JOHN F. KEITZ
John F. Keitz
President
ISTAT Certified Senior Appraiser
JFK/kf
B-1-5
<PAGE> 97
Exhibit B-2
[AVITAS LOGO]
Airlease Management Services, Inc. February 28, 1997
INTRODUCTION
AVITAS, Inc. has been retained by AirLease Management Services, Inc. (the
"Client") to provide its opinion as to the Base Value, Current Market Value and
Future Market Values for six McDonnell Douglas MD-82 aircraft and one Boeing
727-200FH aircraft. The subject aircraft are identified and their values are
set forth in Table 1 on Page 3.
In determining the values, AVITAS has not had the opportunity to recently
inspect the subject aircraft or review its related technical documentation.
Consequently, unless otherwise stated, we use the following assumptions in our
valuation:
- - the aircraft are in good physical condition
- - they are in half-life, half-time condition with regard to the airframe,
engines, landing gear and other critical components unless stated otherwise
- - they are in passenger configuration unless specifically stated otherwise
- - they are operated under the air transport regulations of a major nation
- - the historical maintenance documentation has been properly controlled under
internationally recognized standards
- - they are in compliance with all mandatory airworthiness directives
- - their specifications and modification status are comparable to other aircraft
of their type and age
- - their utilization rate is similar to that of other aircraft of their type and
age
As AVITAS has not had the opportunity to physically inspect the subject
aircraft nor its related technical documentation, we have relied solely on data
provided by the Client to prepare this valuation. Utilizing that information,
the value of the aircraft has been adjusted from a baseline value according to
its individual status as outlined by the Client. This baseline value assumes a
specifically aged aircraft model in good overall condition and in half life
status with regard to the airframe, engines and landing gear. We also assume
that the aircraft is in a passenger configuration, unless stated otherwise and
certificated for commercial operations under the air transport regulations of a
major nation, that it is in compliance with all mandatory airworthiness
directives and that the specifications and modification status are comparable
with other aircraft of same type and similar vintage. We have further assumed
that the utilization rate of the aircraft is similar to that of other aircraft
of same type in the world fleet.
B-2-1
<PAGE> 98
Airlease Management Services, Inc. February 28, 1997
The values presented in this report do not take into consideration fleet sales,
attached leases, tax considerations or other factors that might be considered
in structuring the terms and conditions of a specific transaction. These
factors do not directly affect the value of the aircraft itself but can affect
the economics of the transaction. Therefore, the negotiated striking price in
an aircraft transaction may take into consideration factors such as the present
value of the future lease stream, the terms and conditions of the specific
lease agreement and the impact of tax considerations, etc. Their impact on the
parties involved can vary significantly and are best determined by the parties
involved.
DEFINITIONS
AVITAS's value definitions, set forth in full in the appendix at the end of this
report, conform to those of the International Society of Transport Aircraft
Trading ("ISTAT") adopted in January 1994, and are summarized as follows:
- - BASE VALUE is the appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a reasonable
balance of supply and demand, and assumes full consideration of its "highest
and best use." An aircraft's Base Value is founded in the historical trend of
values and in the projection of value trends and presumes an arms-length, cash
transaction between willing and knowledgeable parties, acting prudently, with
an absence of duress and with a reasonable period of time for marketing. Base
Value typically assumes that an aircraft's physical condition is average for
an aircraft of its type and age, and its maintenance time status is at
mid-life, mid-time (or benefitting from an above-average maintenance status if
it is new or nearly new).
- - MARKET VALUE (or CURRENT MARKET VALUE if the value pertains to the time of the
analysis) is the appraiser's opinion of the most likely trading price that may
be generated for an aircraft under the market conditions that are perceived to
exist at the time in question given an adequate amount of time to properly
market it, etc. It assumes that an aircraft's physical condition is average
for an aircraft of its type and age, and its maintenance time status is at
mid-life, mid-time (or benefitting from an above-average maintenance status if
it is new or nearly new). Market Value is synonymous with Fair Market Value.
- - ADJUSTED MARKET VALUE indicates that the Market Value of the aircraft has been
adjusted to include some degree of actual technical status and maintenance
condition of the aircraft.
- - FUTURE MARKET VALUE is the appraiser's forecast of future aircraft value(s)
setting forth Market Value(s) as defined above.
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[AVITAS LOGO]
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AIRCRAFT VALUE
AVITAS's opinion as to the value of the subject aircraft is presented below in
millions of U.S. dollars. Future Base Values are in then-current dollars using
a 3.5% p.a. inflation rate compounded annually.
We have relied upon data provided by the Client to adjust the values to include
the minimum return provisions as outlined below:
MD-82s, 1981 Manufacture
Aircraft to be returned at the end of the lease with 500 hours remaining to
next C-check, 5,000 hours to next D-check and no less than 2,000 hours to next
limit on each engine.
MD-82, 1984 Manufacture
Aircraft to be returned at the end of the lease with no less than 1/4 time
remaining to major maintenance events.
727-200FH
Aircraft to be returned at the end of the lease with no less than 1/4 time
remaining to major maintenance events.
<TABLE>
<CAPTION>
=====================================================================================================================
Table 1
SUMMARY OF AIRCRAFT VALUES
(MILLIONS OF US DOLLARS @ 3.5% INFLATION)
- ---------------------------------------------------------------------------------------------------------------------
S/N AIRCRAFT MFG. BV CMV ADJ. ADJ. LEASE END FUT. ADJ. ADJ. FUTURE
CMV MV MV
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
48038 MD-82 1981-06 11.05 11.61 (0.54) 11.08 2001-09 9.74 (0.64) 9.10
48039 MD-82 1981-06 11.01 11.57 (0.54) 11.03 2001-09 9.74 (0.64) 9.10
48040 MD-82 1981-06 11.05 11.61 (0.54) 11.08 2001-09 9.74 (0.64) 9.10
48041 MD-82 1981-06 11.05 11.61 (0.54) 11.08 2001-09 9.74 (0.64) 9.10
48042 MD-82 1981-06 11.05 11.61 (0.54) 11.08 2001-09 9.74 (0.64) 9.10
49184 MD-82 1984-02 13.60 14.26 (0.50) 13.76 2002-03 11.76 (0.62) 11.15
21850 727-200FH 1979-08 7.12 7.39 (0.70) 6.69 2006-04 3.94 (0.99) 2.95
- ---------------------------------------------------------------------------------------------------------------------
BV: Base Value
CMV: Current Market Value
Adj.: Maintenance Condition Adjustment
Fut. MV: Future Market Value
=====================================================================================================================
</TABLE>
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Airlease Management Services, Inc. February 28, 1997
GENERAL MARKET OVERVIEW
MARKET OVERVIEW
In 1995, for the first time in five years, new aircraft orders exceeded
deliveries which indicated an increasing backlog of undelivered aircraft
orders. This marked the long awaited recovery in the aircraft market which
continued through 1996.
In the late 1980s, an extended period of economic growth, consumers with
disposable income, growing passenger ridership and a wealth of readily
available inexpensive capital resulted in a boom in aircraft demand. The result
was a record number of new jetliner orders, the retention in airline fleets of
aging Stage 2 narrowbodies, a lot of financing to airlines on very favorable
terms, and because manufacturers could not increase capacity fast enough, a
rapidly growing order book backlog which in 1990 peaked at 3,100 jetliners,
almost triple the previous peak in 1966.
In late 1990, however, there was a surprisingly fast reversal in the
supply-demand situation. Several major world economies were in or about to
enter recession, the Gulf War had broken out and there was a sharp run up in
jet fuel prices. Demand for air travel fell precipitously while fuel price
increases were hammering airline costs. As a result, demand for aircraft
dropped sharply at the same time that aircraft supply, i.e. scheduled jetliner
deliveries, was at a record high. Graph 1 below summarizes the situation:
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GRAPH 1
[COMMERCIAL JET NEW ORDERS, DELIVERIES AND BACKLOG YEAR END 1995 GRAPH]
<TABLE>
<CAPTION>
Deliveries New Orders Backlog
---------- ---------- -------
<S> <C> <C> <C>
1970 318 204 463
1971 233 136 366
1972 215 275 426
1973 283 257 400
1974 317 273 356
1975 285 173 244
1976 234 242 252
1977 191 328 389
1978 259 684 814
1979 399 544 959
1980 433 359 885
1981 426 274 733
1982 284 197 646
1983 311 224 559
1984 263 357 653
1985 343 624 934
1986 395 666 1,205
1987 414 597 1,388
1988 508 1,031 1,911
1989 564 1,280 2,627
1990 665 911 2,873
1991 835 448 2,486
1992 785 407 2,108
1993 641 341 1,808
1994 517 426 1,717
1995 473 736 1,980
</TABLE>
AVITAS's view today is that most supply and demand indicators have been moving
in the right directions, particularly since the second half of 1994. On the
demand side of the equation, passenger traffic is showing improvement, cargo
movement is up and load factors are generally high. A US Industry traffic
comparison of 1995 versus 1994 as tracked by AVITAS indicates that revenue
passenger miles are up roughly 5%, and available seat miles are up roughly 4%.
And while ongoing fare wars and the effects of low-cost startups such as
ValuJet continue to dilute yields, they appear to be less damaging than those
which occurred in 1992. Cost cutting efforts of the major airlines have begun
to show results and will continue to increase their resilience to downward
turns in yields. There continues to be a demand for good quality Stage 2
narrowbodies from startup carriers as well as some established airlines,
however the supply of these aircraft is severely dwindling.
Regarding the supply of aircraft, the signs continue to be positive from an
aircraft value standpoint:
- - Jetliner retirements have increased substantially during the last 4 years.
From 1974 through 1993, retirements averaged 83 airplanes annually. That
fell during 1986-1990 to only 48 per year.
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Retirements for 1991 through 1994 totaled about 450 airplanes, or 112
airplanes annually, up sharply from preceding years.
o Manufacturing capacity has fallen. In early 1993, Boeing's aircraft
production rate was 32.5 airplanes per month; by late 1994, it was 19.5 per
month. This further decreased in 1995, though increases have been announced
for 1997.
o Deliveries peaked out in 1991 at 830 aircraft and by 1993 had fallen 25%
from that level. 1994 and 1995 figures indicate that this trend has been
continuing. See Graph 2.
[JETLINER DELIVERIES 1990-1995 GRAPH 2]
<TABLE>
<CAPTION>
Deliveries
1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BOEING 379 419 441 330 270 202 220
AIRBUS 95 162 157 136 122 124 126
DOUGLAS 142 171 127 72 39 50 51
OTHER 49 83 60 103 86 97 98
--- --- --- --- --- --- ---
TOTALS 665 835 785 641 517 473 495
</TABLE>
o New aircraft orders turned up slightly in 1994 and accelerated through 1995
as noted in Graph 3. In 1990, almost 950 orders were placed. Since then,
they have been running at less than half that level. In summary, more people
and cargo are flying on fuller aircraft, less airplanes are being delivered,
manufacturing capacity has shrunk and more aircraft are being retired. The
number of airliners on the market has declined from 872 in mid-1991 to 442
as of March 1, 1996, almost a 50% decline. With the exceptions of widebody
aircraft and aging Stage 2 narrowbodies, we believe the market is again
approaching supply-demand equilibrium.
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GRAPH 3
[JETLINER ORDERS 1990-1995 GRAPH]
<TABLE>
<CAPTION>
Orders
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C>
BOEING 460 270 200 173 179 329
AIRBUS 282 98 119 39 140 123
DOUGLAS 111 44 45 13 16 133
OTHER 58 36 43 116 91 151
--- --- --- --- --- ---
TOTALS 911 448 407 341 426 736
</TABLE>
THE NARROWBODY MARKET
After having suffered severe oversupply in the early 1990s, the number of
available and stored narrowbodies has been steadily declining since late 1993.
Graph 4 at the end of this section gives a macro view of narrowbody and
widebody trends.
AVITAS sees 3 distinct segments to this market, which accounts for almost 75%
of the current world jetliner fleet: Stage 3 airplanes, later model Stage 2
aircraft and early vintage Stage 2 airplanes. Supply-demand conditions vary
within these segments. For Stage 3 narrowbodies, we view the market as being
very firm. Out of a population of almost 4,500, only about three dozen of
these airplanes were advertised as available in March 1996. We continue to
hear finance houses and investors express a desire for them and believe that
Current Market Values are above their Base Values for many of these aircraft
and will continue to be under upward pressure. For late model Stage 2
aircraft, the market since the last half of 1994 has firmed substantially.
Values for these airplanes are extremely sensitive to records quality and
physical condition. High quality DC-9-30s, 727-200As and 737-200As, which have
higher operating costs but are very attractive in terms of purchase and
financing costs, have been trading and their availability has been tight. For
the third market segment, the early-vintage Stage 2 airplanes, demand has been
pulled up by the lack of available aircraft in the previous two segments, with
Current Market Values approaching Base Values for most types.
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GRAPH 4
AIRCRAFT AVAILABLE & PARKED
<TABLE>
<CAPTION>
Widebodies Widebodies Narrowbodies Narrowbodies
Available Parked Available Parked
<S> <C> <C> <C> <C>
3-92 174 130 590 706
4-92 170 127 566 714
5-92 162 125 542 679
6-92 156 117 552 651
7-92 150 120 533 648
8-92 143 114 522 664
9-92 146 122 503 667
10-92 152 130 499 688
11-92 148 135 520 705
12-92 140 160 507 824
1-93 153 160 508 825
2-93 177 167 532 840
3-93 182 167 533 849
4-93 176 180 522 856
5-93 183 183 539 848
6-93 208 183 503 828
7-93 211 173 494 835
8-93 225 175 500 865
9-93 220 177 511 869
10-93 229 177 492 882
11-93 225 186 499 860
12-93 224 190 492 884
1-94 232 209 473 881
2-94 237 213 476 868
3-94 242 218 455 869
4-94 252 222 491 857
5-94 259 221 482 832
6-94 257 231 420 818
7-94 233 230 446 798
8-94 233 216 446 765
9-94 221 216 448 766
10-94 229 219 428 764
11-94 208 224 407 736
12-94 214 232 361 696
1-95 205 225 329 676
2-95 202 226 331 664
3-95 178 229 316 639
4-95 178 225 320 611
5-95 184 221 325 583
6-95 169 209 314 550
7-95 180 199 323 536
8-95 170 196 280 519
9-95 180 194 281 490
10-95 180 192 302 485
11-95 182 188 299 482
12-95 184 207 286 467
1-96 186 204 287 456
2-96 190 209 305 459
3-96 179 218 263 450
</TABLE>
THE WIDEBODY MARKET
Conditions in the widebody fleet, which currently numbers about 3,050
airplanes, are difficult to paint with a broad brush. At a time when narrowbody
availability is declining and that market is firm, available widebody aircraft
in March stood at levels roughly 3 times what they were at the beginning of the
decade. While availability has been relatively flat during the last year, we
believe that owners have withdrawn their airplanes from the market in defeat or
have scrapped them. Stored widebodies have also remained around 200 aircraft.
Graph 4 above shows these trends.
The market for old widebodies is very soft. About 6.5% of the fleet is available
for sale, and almost three-fifths of them are more than 15 years old.
Similarly, over two-thirds of parked widebodies are over 15 years old. For
younger aircraft, we believe the market is somewhat soft, but there has been a
bit of an increase in aftermarket activity, though neither values nor lease
rates have improved. This is usually a sign of improving conditions, and the
precursor to value recovery. Also, widebodies tend to lag narrowbody aircraft
in a recovery due to their relative size and cash operating costs. Widebody
aircraft tend to represent higher risks in operation as well as in financing
because they are generally not suited to start-up and entrepreneurial ventures.
Though start-up airlines tend to represent considerable credit risks, they have
afforded many narrowbody aircraft a home which is preferable to desert storage.
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OUTLOOK
While airlines are working diligently to control costs and improve
productivity, they must concentrate as well on the other side of the business,
i.e., increasing revenues and generating profits. There are still carriers
whose financial situations remain precarious. Most signs are positive, though.
The great driver of air traffic, improving economic conditions, is at work in a
number of regions and traffic is increasing. Aircraft retirements are up
sharply, deliveries have been declining and new orders have turned up.
Manufacturing capacity itself has declined, resulting in a bit of a surge in
both values and order book backlog for some types. Values for many of the
younger narrowbodies are very firm with Current Market Values for certain
models exceeding Base Values. Demand for old narrowbody and widebody airplanes
is firming, reviving hope for some older aircraft, previously thought destined
for the scrap yard. For younger widebodies, the near-term value outlook is
good; the usual low level of aftermarket activity which is normal for such
young airplanes is yielding few clues. We believe, however, that conditions are
improving. All in all, though, while the recovery is uneven, conditions in the
aircraft markets are considerably better than during the last 4 years.
WORLD AIR FREIGHT MARKET
Similar to air passenger growth, the growth of air freight is closely tied to
the growth in world gross domestic product (GDP). In mature markets, such as the
North Atlantic, average historical growth rates have been in the order of 5-7%.
In new markets, developed between economies with strong economic growth such as
the Pacific Rim, average historical growth rates have been in the range of
8-15%.
Air freight growth has also been fueled in part by the evolution of dedicated
system overnight package and express operations such as Federal Express, United
Parcel Service and Emery Worldwide, which have provided a higher level of
service and generated new demand in competition to local government postal
services. A worldwide presence for service providers is needed and quality as
well as reliability of service are key factors.
It is a widely held view that the rate of growth in air freight will continue to
be at a higher rate than the rate of growth in passenger traffic. Ocean
shipping is expected to continue to lose higher value, more time sensitive
freight to air transportation, not only because of the time value of money, but
also because of the superior controls, lower losses due to theft and damage and
positive shipment tracking.
Mature markets are characterized by the highest tonnage between a limited
number of gateways, with long haul flows complemented with lower capacity
feeder flows. The largest mature markets are: North Atlantic, Europe - Far East
and U.S. - Far East and compromise over half of the world's total freight
traffic. New markets require smaller unit loans with growth toward medium
capacity freighters. The highest future growth is expected to be intra-Asia and
intra-Pacific Rim.
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WORLD FREIGHTER AIRCRAFT MARKET
The worldwide all cargo fleet for aircraft up to 30 tonnes has increased more
than tenfold over the last fifteen years. This segment, primarily consisting of
B727 and DC-9 freighters has been fueled by the parcel and express operators.
This market is still characterized by a limited number of specialized operators
and was originally started in the U.S. domestic market. This choice of aircraft
size is a result of distribution networks built around the hub and spoke
philosophy. Both, the B727 and DC-9 operations are currently under pressure by
tightening of noise and emissions regulations. Hushkits for noise compliance
are available for both aircraft types.
The growth in aircraft numbers in the 30 - 50 tonne category is caused by the
expansion of parcel and express operators into long haul services, primarily
with re-engined DC-8-70 series aircraft. Over the last fifteen years, the
number of aircraft in this segment has more than doubled.
The number of worldwide dedicated freighter aircraft with capacities larger
than 50 tonnes has also more than doubled and can be attributed to the growth
in mature markets. Primarily DC-10, A300, L-1011 and B747 freighter conversions
have contributed to the capacity rise.
The majority of dedicated freighter aircraft capacity will continue to come
from converted passenger aircraft. The 747 conversions have dominated the
market. As values have declined, the next major group of conversions are older
twin and tri-jets such as the McDonnell Douglas DC-10, Lockheed L-1011 and
Airbus A300s.
Demand for newer dedicated freighter aircraft such as the A310, B767 and MD-11
has also recently increased tremendously. These new aircraft are entering
service with the parcel and express operators such as FedEx, UPS and Airborne
Express, which carry high yield traffic and are primarily depended on aircraft
reliability.
The recent growth of all B747 cargo carriers such as Atlas Air and Polar Air
Cargo has further stimulated demand younger wide-body aircraft conversions.
This development has been overshadowed by concerns and restrictions imposed on
GATX/Airlog 747 conversions by the U.S. FAA. The FAA's airworthiness directive
(AD) requiring modification of the cargo-door installation which has virtually
grounded all 10 of 23 GATX/Airlog converted 747s, has raised fears that it is
tightening up its standards on modifications. The 747 market is dominated by
Boeing's Wichita modification center which has performed almost 70 747
conversions.
The DC-10's freight capacity fits in between the DC-8 and B747. At comparable
range, the aircraft offers superior economics to the 747 and has higher
capacity than the DC-8. Aeronavi is MDC's exclusive licensee for DC-10
modifications, while MDC performs its own MD-11 conversions at Sabre-Tech in
Phoenix.
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Airbus and Lockheed L-1011 owners are watching the market for maximizing asset
values through freighter conversions of their aircraft. Marshall Aerospace
already has orders for L-1011 conversions and Deutsche Airbus is converting
A310-200s and has developed an A300-B4 modification.
Atlas Air, World Airways as well as Gemini are pioneering the operation of
freighter aircraft under long term aircraft, crew, maintenance and insurance
(ACMI) lease contracts for major airlines. Under these arrangements, the
freighter carrier provides sub-service for major airlines, whose cost structure
would not allow a profitable operation of freighter aircraft in its own fleet.
ACMI operations also provide additional capacity flexibility to the airline.
STAGE 3 ALTERNATIVES
The subject 727-200 Advanced aircraft, as originally designed and equipped,
does not meet the noise abatement standards established by US FAR Part 36 State
3 and comparable international regulations. There are three retrofit programs
designed for the 727 to bring these aircraft into compliance with the standards
that have been established for Stage 3. A re-engining program was offered by
VALSAN Partners, Ltd., and was recently launched by Rohr, Inc. A Stage 3 Kit
program is offered by FedEx Aviation Services. In December 1996, the FAA
granted a supplemental type certificate (STC) to Raisbeck Engineering for their
Stage 3 system. This system, rather than quieting the engine of the 727,
achieves Stage 3 compliance through restricted takeoff and landing settings,
increased takeoff and landing speeds and a derated JT8D engine. The current
STC allows for takeoff weights of up to 167,000 pounds. The company expects to
introduce a 175,000 to 179,000 pound version in early 1998. Though this
system severely limits the payload/range characteristics of higher takeoff
weight aircraft, the pricing is reportedly in the $700,000 range, making it an
economical fit for operators that do not require higher capacity.
The FedEx program calls for the installation of acoustically treated nose cowls
and re-spaced inlet guide vanes for the number 1 and number 3 engines and
acoustically treated tailpipes for all engines. This program also requires the
installation of modified C-1 fan blades, Pratt & Whitney internal exhaust gas
mixers, modification of the cascade vane thrust reversers, structural
modifications to the pylons and the installation of a 30 degree flap limiter.
The list price of the FedEx Heavyweight Stage 3 Kit is US$2.625 million plus
installation, which brings the total cost to approximately US$2.78 million.
Installation requires 4,000 man hours and up to three weeks of down-time for
the aircraft.
The order book for the FedEx Stage 3 (Lightweight and Heavyweight) Kits
currently stands at 534 firm orders from 49 customers, of which 239 kits have
been delivered to date. Included among FedEx's customers are Delta Airlines,
UPS, FedEx, DHL, Emery and USAir Shuttle. This compares to the VALSAN
modification program with approximately 22 deliveries. Among VALSAN's customers
were FedEx, Greyhound Financial Corporation and Sun Country Airlines.
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The VALSAN program involved the removal of engines in positions number one and
three for replacement with Stage 3 compliant P&W JT8D-217C/219 engines. In
addition, the number two (centerline) engine was modified by the removal of the
thrust reverser and the installation of an exhaust mixer and acoustical
material to the exhaust duct. Twenty-two aircraft were modified under the
VALSAN program and these aircraft are currently in service with four commercial
operators and five private or corporate operators. In March 1994, VALSAN
liquidated its operations, leaving only FedEx Aviation Services in the market
for the Stage 3 modification business. However, Rohr, Inc. has purchased the
Supplemental Type Certificate (STC) from the creditors of the defunct Valsan
Partners, Ltd., and is re-introducing the re-engined aircraft, dubbed the
Super 27.
BACKGROUND - McDONNELL DOUGLAS MD-80
The DC-9-80 series (subsequently referred to as the MD-80 series) was developed
to provide more passenger capacity than its predecessor, the DC-9, as well as
to comply with the new Stage 3 noise requirements. All MD-80 airplanes are
Stage 3 compliant.
The first of the MD-80 series, the MD-81, entered service in 1980 and was
powered by two medium bypass JT8D-209 engines. It is capable of transporting
160 passengers in an all economy configuration. Many operators needed
additional range and a more reliable powerplant, so McDonnell Douglas developed
the MD-82 in which the JT8D-209 engines were replaced with the upgraded
JT8D-217 providing for improved hot and high operations. With the advent of the
improved JT8D-217A engine the MD-82 was recertificated with increased takeoff
weights and longer range capabilities. Airline requirements for yet again
increased range resulted in the development of the MD-83 with improved JT8D-219
engines, increased maximum takeoff weight to 160,000 pounds and increased fuel
capacity. It has a range of 2,596 nautical miles with 143 mixed class
passengers.
The next derivative was the MD-87 which had a shortened fuselage. This version
had considerable aerodynamic cleanup work carried out on the structures,
producing improved fuel burn performance. Powered by the Pratt & Whitney
JT8D-217C engine, the MD-87 can carry 117 2-class passengers and baggage 2,750
nautical miles.
The last of the MD-80 series is the MD-88, powered by JT8D-217C or -219 engines
with state-of-the-art systems such as EFIS cockpit displays, flight management
systems (FMS) as standard equipment and a new cabin design. The MD-88 was
originally designated to recognize Delta's cockpit and avionics configuration.
Since then, other airlines have taken delivery of MD-88s, but Delta still owns
the vast majority of the world MD-88 fleet.
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CURRENT MARKET - McDONNELL DOUGLAS MD-82
CURRENT MARKET
AVITAS is of the opinion that the market for the MD-82 is firm, with the
JT8D-217C/219 powered aircraft in greater demand than the JT8D-217/217A powered
aircraft.
MD-82s are designed for short to medium haul operations and are extensively
used in U.S. domestic service, particularly with American Airlines who operate
227 of them. While the MD-80 series is considered to be early Stage 3
technology, and despite being close to the end of its production life, these
aircraft are economic competitors on a wide array of routes.
THE OPERATING LEASE MARKET
Lease rates have improved over the last 1-2 years as demand has increased and
supply has dried up. For example, operating lease rates that were seen as low
as $150,000 per month in the early 1990s for mid to late 1980s vintage
airplanes, have improved to the $180,000 - $190,000 range and over $170,000 for
early 1980s vintage aircraft.
AVAILABILITY
As of February 1997, there are no MD-82 available for sale or lease, and only
four (1) MD-80 series aircraft being marketed. This demonstrates the firm
market for the type and the Stage 3 narrowbody market in general.
RECENT FLEET DEVELOPMENTS
The market for the MD-80 has been under much speculation since the December
1996 announcement that Boeing and McDonnell Douglas would merge in the new
year. AVITAS does not foresee this as having a significant impact on MD-80
values in the long term.
The aircraft is considered to be close to the end of its production life with
only 7 aircraft remaining on firm backlog through 1998 for the MD-82.
Additionally, the MD-82 program has only 5 remaining orders for the MD-82 and
19 for the MD-83. It is therefore likely that the new Boeing/Douglas entity
will have little or no effect on the MD-80 market.
With regard to the secondary markets, AVITAS expects that there will be an
almost seamless transition with regard to product support and spare parts. The
MD-80 has achieved deep market penetration for Douglas and the new organization
is anticipated to offer full support to such a profit maker.
Although we consider it highly unlikely, the Boeing and McDonnell Douglas
merger could lead to the cessation of production for the MD-80. Should Boeing
view the aircraft as unwanted competition to the 737 series, the decision to
halt production could be made. If this unlikely scenario should take place,
AVITAS believes it would have an insignificant affect on values. With only 31
aircraft remaining on firm
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Airlease Management Services, Inc. February 28, 1997
order and over 1,100 aircraft in service, the MD-80 is assured of its market
hold. The next few years should see the end of production cycle for the MD-80
regardless of outside circumstances.
Additionally, the merger is likely to be viewed as a positive for potential
buyers who in the past were wary of dealing with a manufacturer whose longevity
was under so much speculation. In this scenario the MD-80 could see a slight
increase in orders as operators concerns begin to ease. In this event, values
for MD-80 aircraft will continue to enjoy already firm markets and the impact
will be minimal, but positive.
AVITAS believes this scenario is also unlikely to happen. With newer technology
aircraft being available, orders for the MD-80 series have begun to dry up.
Secondary transactions have taken place and there appears to be little demand
for new aircraft as opposed to used.
In July of 1996, Alaska Airlines announced its plans to move toward one fleet
type and phase out of the MD-80 over the next seven to ten years. With 13
MD-82s and 31 MD-83s, Alaska is one of the largest operators of the type. The
carrier has already leased several airplanes to Trans World Airlines and is in
discussions with TWA to lease more.
TWA has been the most visible party acquiring the MD-80 over the past two
years, and continues to have an appetite, despite a recent order for 15 new
aircraft from the manufacturer. Continental recently purchased two MD-83s from
Alaska Airlines as well.
ENGINE CHOICES
================================================================================
TABLE 3
ENGINE CHOICE FOR MD-82
AS OF FEBRUARY 1997
- --------------------------------------------------------------------------------
JT8D-209 1
JT8D-217 52
JT8D-217A 237
JT8D-217C 249
JT8D-219 31
TOTAL 570
================================================================================
CURRENT OPERATOR BASE AND BACKLOG
As of February 1997, there are 570 aircraft in service among 26 operators and
five on order for Alitalia.
OUTLOOK AND FUTURE ASSET RISK ANALYSIS
A potential problem for the MD-80 series could arise if the largest operators of
the aircraft (American with 260 and Delta with 119) decide to dispose of their
fleets in the near future. With about 34% of the total MD-80 population in the
hands of these operators, the aircraft is vulnerable to a change in market
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Airlease Management Services, Inc. February 28, 1997
structure. Although both Delta and American are looking to replace aircraft in
the near term with major acquisitions, the MD-80 aircraft in their fleets are
not targeted for replacement at this time.
As discussed earlier, the MD-82 is physically identical to other EFIS equipped
MD-80 models, except for the Flight Management System as standard (available on
all models as options).
McDonnell Douglas has developed its production line to produce MD-80s and the
next derivative, the MD-90, simultaneously. However, with the decline in orders
for MD-80s, AVITAS anticipates that production will cease some time in 1998.
Douglas will have enjoyed an 18 year production run of the MD-80 and will have
delivered over 1,100 units. This represents a substantial market base for this
aircraft type. Since the MD-80 also offers a competitive economic profile to
airline operators, AVITAS does not anticipate a major shift in the secondary
market for this type when production ceases.
The pending merger between Boeing and McDonnell Douglas will likely have a
slight positive, if any, effect on the MD-80 market.
BACKGROUND BOEING 727
The Boeing 727 series aircraft has served as the workhorse of the U.S. domestic
airline industry for many years. Originally designed as a short to medium haul
narrowbody aircraft, the series started with the version most commonly known as
the 727-100, first entering service in 1963. It was originally equipped with
three Pratt & Whitney JT8D-1/-7/-9 engines and has a maximum takeoff weight of
up to 169,500 pounds. There are also some 727-100QC aircraft equipped for
"quick change" between passenger and cargo configuration in operation. There
are currently two approved Stage 3/Chapter 3 modification programs available
for the 727-100 offered - a Stage 3 Kit (hush kit) offered by FedEx Aviation
Services and a Rolls-Royce Tay 651 re-engining program offered by Dee Howard.
As of February 1997 there were 349 727-100s in service worldwide.
The 727-200, a "stretched" variant, followed in 1967. The 727-200 incorporated
a longer fuselage and uprated Pratt & Whitney JT8D-7A engines which permitted
an increase in seating capacity and operation at higher gross weights. Maximum
takeoff weights are available up to 172,000 pounds, and the maximum seating
capacity is 189 passengers in a single class configuration.
The Advanced version of the 727-200 entered service in August 1972. This version
used the same fuselage as the 727-200 but incorporated many design and
construction refinements which increased performance and reduced maintenance
costs. With uprated engines, the 727-200 Advanced can achieve operation at up to
a 209,000 pound takeoff weight. Available options included Pratt & Whitney
JT8D-9/-9A/-15/-17/-17A or -17R engines. The 727-200 Advanced is capable of
transporting up to 189 passengers over stage lengths of up to 2,500 nautical
miles.
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Airlease Management Services, Inc. February 28, 1997
The aircraft is popular throughout the world as a passenger airliner although
many have been and are being converted for use as freighters. The 727 freighter
is the core of the FedEx domestic U.S. fleet and is also in service with UPS,
Emery Worldwide, DHL and several other cargo carriers. Its fuselage
cross-section provides container commonality with other freighter aircraft
including widebodies, and its power to weight ratio provides good performance
at high takeoff weights. There are currently 169 727-200AF aircraft in the
world fleet.
CURRENT MARKET - BOEING 727-200A
Current Market
AVITAS is of the opinion that the current market for the 727-200A is firm.
Aircraft that have been hushkitted to meet Stage 3 noise restrictions are at a
premium and command a price two to three million dollars more than an unhushed
aircraft, depending on the type of engine and takeoff weight. The market has
shown greater demand for aircraft equipped with JT8D-15 and JT8D-17 engines
than lower rated -7 and -9s. This is directly attributable to their better
takeoff performance, which is especially sought after for freighter conversion
candidates. The overall demand for premium aircraft should not over shadow the
market for less equipped aircraft. There has continued to be solid demand for
these aircraft over the last year, and the economic advantages of hushkitting
and freighter conversion are prolonging lives.
Availability and Storage
According to BACK Information Services, there are (26) 727-200 aircraft
actively being marketed for sale or lease as of February 1997. This shows a
firming trend over the past year when there was approximately double the number
of aircraft being actively marketed. Stored aircraft numbers are down from last
year with 149 aircraft being stored versus 195 727s last year. Of these, 61 are
- -200Adv models, and of the 200Adv aircraft being stored, 16 are temporarily
stored awaiting delivery to new lessees or undergoing modifications such as
hush kits or conversion to freighter. All of the aircraft that are in storage
are Stage 2. It is likely that many of the older stored aircraft, particularly
those which have been in storage for a number of years, will be permanently
retired as major operators begin to put their 727 fleets on the market.
Recent Fleet Developments
Announced in November, the American Airlines/Boeing deal could have an impact
on the 727-200 market in the future, but is likely not to dramatically affect
values for several years. The (81) 727-200As American currently has in its
fleet will be replaced by the 75 Boeing 737-800s on order. AVITAS believes that
the changeover will be a gradual one, and that the 727s will be released into
the market slowly. Due to Boeing's delivery schedule, it will not be possible
for American to receive enough 737s by the year 2000, when Stage 3 noise
regulations are implemented; therefore, it will be necessary for them to keep
and hushkit 40 to 50 of them. This will be facilitated by American's recent
announcement of a deal with FedEx, whereby, American's DC-10-10 aircraft will
be traded for 30 hushkits.
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Airlease Management Services, Inc. February 28, 1997
Another major operator of 727s, Continental Airlines, announced in July that
it would be retiring its 31 remaining 727-200A aircraft. As of October 1996,
Continental has (24) 737-700s, (24) 737-800s, and (8) 757s on firm order. The
737-700s and -800s deliveries are expected to begin in 1998 at the rate of 5
per year and be completed by 2002.
Recent Transactions
There have also been a number of lease extensions, sales and leases of 727-200
Advanced aircraft of late. Sun Country is extending the lease of two of their
aircraft, serial number 21676 and serial number 21438. The leases of the 1977
and 1978 vintage, Valsan modified aircraft were scheduled to expire in October.
However, Sun Country extended the leases through April 2001 for serial number
21676 and May 2001 for serial number 21438. Rent for serial number 21676, the
1978 vintage, is $153,000 per month through January 1997, at which time it will
decrease to $147,250. The rent will further decrease to $144,250 in years
1998-2000, and in the final year of the lease the rent will be $141,250. Serial
number 21438's rental payments decrease in similar fashion. However, they begin
at $163,700 per month, and will be $141,250 by the end of the lease term. Last
year Sun Country leased a similar aircraft with a "flex lease" based on
utilization. The rent for the aircraft was in the $90,000 to $120,000 per month
range, depending on utilization.
In June of 1996, Continental Micronesia leased two 1973 vintage aircraft for 3
years. The aircraft were -17R powered freighters which Continental Micronesia
operates for DHL. The rent is $110,000 per month for each aircraft. Compare this
to a Carnival Airlines lease from CIT Leasing in that same month. The Carnival
aircraft was -17 powered and in passenger configuration. Rent was reported to be
$85,000 per month, but was expected to be increased to amortize a newly
installed hushkit over a period of 96 months. Rental rates overall have
increased from last year and have recently been in the $75,000 to $115,000 range
for 727-200As, dependent on individual aircraft condition and specification.
Earlier in 1996, Pacific Aviation Holdings purchased six aircraft from
Wilmington Trust (as Trustees for bond holders). The unhushed aircraft were all
- -9A powered and ranged in vintage from 1979 to 1981 and had been previously on
lease to Continental. The amount of the 6 aircraft purchase was from $14 to $15
million. The aircraft did not sell at the April 1996 Capital Registry auction,
where they received bids that ranged from $2.15 million to $2.37 million,
somewhat lower than the average price per aircraft that Pacific paid.
As we approach the deadline to convert to an all Stage 3 fleet in the US, a
significant number of Stage 2 aircraft will be retired from carrier's fleets.
As noted above, several carriers have been placing orders for 150 seat aircraft
to replace their 727 fleet. Therefore, though AVITAS sees a very firm 727-200
market at present, as new production rates increase, and carriers dispose of
their Stage 2 fleets, the market is expected to soften.
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Airlease Management Services, Inc. February 28, 1997
COVENANTS
Unless otherwise noted, the values presented in this report assume an arm's
length, free market transaction for cash between informed, willing and able
parties free of any duress to complete the transaction. If a distress sale
becomes necessary, a substantial discount may be required to quickly dispose of
the equipment.
AVITAS does not have, and does not intend to have, any financial or other
interest in the subject aircraft. Further, this report is prepared for the
exclusive use of Client and shall not be provided to other parties without the
express consent of the Client. However, it is expressly understood by AVITAS
that the Client will distribute this report to the Securities and Exchange
Commission.
This report represents the opinion of AVITAS and is intended to be advisory
only in nature. Therefore, AVITAS assumes no responsibility or legal liability
for any action taken, or not taken, by Client or any other party, with regard
to this equipment. By accepting this report, all parties agree that AVITAS
shall bear no such responsibility or legal liability including liability for
special or consequential damage.
STATEMENT OF INDEPENDENCE
AVITAS hereby states that this valuation report has been independently prepared
and fairly represents AVITAS's opinion of the subject aircraft's value.
/s/ JOHN W. VITALE
- ---------------------------------
John W. Vitale
Vice President - Asset Valuation
/s/ SUSANNA BLACKMAN
- ---------------------------------
Market Analyst
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APPENDIX A - AVITAS VALUE DEFINITIONS
o BASE VALUE is the appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a
reasonable balance of supply and demand and assumes full consideration of
its "highest and best use." An aircraft's Base Value is founded in the
historical trend of values and in the projection of value trends and
presumes an arms-length, cash transaction between willing and knowledgeable
parties, acting prudently, with an absence of duress and with a reasonable
period of time for marketing. Base Value typically assumes that an aircraft's
physical condition is average for an aircraft of its type and age, and its
maintenance time status is at mid-life, mid-time (or benefitting from an
above-average maintenance status if it is new or nearly new).
o MARKET VALUE (or CURRENT MARKET VALUE if the value pertains to the time of
the analysis) is the appraiser's opinion of the most likely trading price
that may be generated for an aircraft under the market conditions that are
perceived to exist at the time in question. Market Value assumes that the
aircraft is valued for its highest, best use, that the parties to the
hypothetical transaction are willing, able, prudent and knowledgeable,
and under no unusual pressure for a prompt sale, and that the transaction
would be negotiated in an open and unrestricted market on an arm's length
basis, for cash or equivalent consideration, and given an adequate amount of
time for effective exposure to prospective buyers. Market Value assumes
that an aircraft's physical condition is average for an aircraft of its type
and age, and its maintenance time status is at mid-life, mid-time (or
benefitting from an above-average maintenance status if it is new or
nearly new). Market Value is synonymous with Fair Market Value in that both
reflect the state of supply and demand in the market that exists at the
time.
o ADJUSTED (CURRENT) MARKET VALUE indicates the Market Value of the aircraft
adjusted for the actual technical status and maintenance condition of the
aircraft, but still assuming the same market conditions and transaction
circumstances as described above.
o DISTRESS VALUE is the appraiser's opinion of the price at which an aircraft
could be sold under abnormal conditions, such as an artificially limited
marketing time period, the perception of the seller being under duress to
sell, an auction, a liquidation, commercial restrictions, legal complications
or other such factors that significantly reduce the bargaining leverage of
the seller and give the buyer a significant advantage that can translate into
heavily discounted actual trading prices. Apart from the fact that the
seller is uncommonly motivated, the parties to the transaction are otherwise
assumed to be willing, able, prudent and knowledgeable, negotiating under
the market conditions that are perceived to exist at the time, not in an
idealized balanced market. While Distress Value normally implies that the
seller is under some duress, there are occasions when buyers, not sellers,
are distressed and, therefore, willing to pay a premium price.
o FUTURE BASE VALUE is the appraiser's forecast of future aircraft value(s)
setting forth Base Value(s) as defined above.
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APPENDIX A - AVITAS VALUE DEFINITIONS
o SECURITIZED VALUE or LEASE - ENCUMBERED VALUE is the appraiser's opinion of
the value of an aircraft under lease, given a specified lease payment stream
(rents and term), an estimated future residual value at lease termination
and an appropriate discount rate. The Securitized Value or Lease -
Encumbered Value may be more or less than the appraiser's opinion of Market
Value. The appraiser may not be fully aware of the credit risks associated
with the parties involved, nor the time-value of money to those parties, nor
with possible tax consequences pertaining to the parties involved, nor with
all of the provisions of the lease that may pertain to items such as
security deposits, purchase options at various dates, term extensions, sub-
lease rights, repossession rights, reserve payments and return conditions.
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APPENDIX B - AVITAS APPRAISAL METHODOLOGY
At AVITAS, we undertake formal periodic value reviews of the approximately ten
dozen aircraft types that we regularly track as well as value updates as market
events and movements require. The primary value opinions we develop are Market
Value, Base Value and Future Base Value. An aircraft's Market Value is the
price at which you could sell the aircraft under the market conditions
prevailing at the time in question and its Base Value is the theoretical value
of the aircraft assuming a balanced market in terms of supply and demand. In
reaching our value opinions, we use data on actual market transactions, various
analytical techniques, a proprietary forecasting model and our own extensive
industry experience. And while Market Value and Base Value embody different
value concepts, we are continually cross checking their relationships to
determine if our value opinions are reasonable given existing market conditions.
Our broad aviation industry backgrounds are critically important; they add a
diversity of viewpoints and a high degree of realism to our value opinions. Our
backgrounds include: aircraft design, performance analysis, traffic and yield
forecasting, fleet forecasting, aircraft finance, the negotiation of aircraft
loans, finance leases and operating leases, problem deal workouts,
repossessions, aircraft sales, jetliner manufacturing, maintenance and overhaul
activities, econometric modeling and forecasting, market research, and database
development.
o MARKET VALUE In determining Current Market Values, we use a blend of
techniques and tools. First, through various services and our extensive
personal contacts, we collect as much actual transaction data as possible on
aircraft sales, leases, financings and scrappings. Our published values assume
airframes, engines and landing gear to be halfway through their various
overhaul and/or life cycles. Because sales of half-life aircraft rarely occur,
and because sales can include spare engines, parts, attached lease streams, tax
considerations and other factors, judgment and experience are important in
adjusting actual transaction data to represent clean, half-life Market Values.
In addition, because over the last several years there have been a large number
of aircraft leases, our experience and knowledge of the market is used to make
value inferences from lease rentals and terms.
As a supplement to transaction data, and in some cases in the absence of actual
market activity, we also use other methods to assist in framing Market Value
opinions. We use several analytical tools because we do not believe that there
is any one technique which always results in the "right" number. Replacement
cost analysis can simply be the cost of a new airplane of the same model or it
can be used where it is possible to reproduce an aircraft. It is often helpful
in framing the upper limit of an aircraft's value, particularly for modified or
upgraded aircraft. Examples would be a passenger aircraft such as the 747-100
which can be converted into freighter configuration or a Stage 2 airplane which
can be hushkitted to Stage 3 compliance. Value in use or income analysis is
another technique in which an aircraft's earning capacity over time is
determined and the present value of those earnings is calculated. Because
different operators have different costs, yields and hurdle rates of return,
this technique can yield a range of values. Therefore, the appraiser must use
his judgment to determine what value in that range represents a Market Value
representative of the overall marketplace. Another powerful tool which we use
is should-cost analysis, which is a blend of replacement cost and value in use
analysis. This technique is used when there is little or
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APPENDIX B - AVITAS APPRAISAL METHODOLOGY
no market data on a particular airplane type but there is on similar or
competing types. By analyzing the economic and operational profiles of
competing aircraft, the appraiser is able to impute what the aircraft in
question should cost to position it competitively.
Once we have formulated our own internal Market Value opinions, we present them
to a small, select group of outside aviation experts - individuals in the fields
of - aircraft manufacturing, sales, remarketing, financing and forecasting who
we know well and regard very highly - for their review and frank comments. We
consider this "reality check," which often results in further value refinements,
to be a critical part of our value process in that it helps us combat "ivory
tower syndrome."
o BASE VALUE The determination of Base Value, an aircraft's balanced market,
long term value, is a highly subjective matter, one in which even the most
skilled appraisers may have widely divergent views. We use 3 main tools in
developing Base Values. First, we use our own research, judgment and
perceptions of each aircraft type's long term competitive strengths and
weaknesses vis-a-vis both competing aircraft types and the marketplace as a
whole. Second, we utilize a transaction-based computer forecasting model
developed by a former AVITAS director and refined over the years. Based on
thousands of actual market transactions, the model sets forth a series of value
curves which describe the value behaviors of aircraft under different
circumstances. Third, we do a final reality check by comparing our opinion of
an aircraft's Base Value to our opinion of its Current Market Value and current
marketplace conditions.
We analyze each aircraft model to determine its historic, current and projected
competitive position with respect to similar aircraft types in terms of mission
capability (i.e., what are the aircraft's capabilities and to what extent does
the market require those capabilities), economic profile and market
penetration. As a result of weighing those factors, we assign a numerical
"strength" to each aircraft for each year of its economic life, where Strength
10 represents the strongest value performance and Strength 1 the weakest. The
model then takes those strength factors and translates them into the aircraft's
Base and Future Base Values based on its actual replacement cost (or
theoretical replacement cost if it is no longer in production). After Base
Values have been calculated, we compare them to our Current Market Value
opinions as a calibration check of the computer model. In the infrequent case
where the marketplace for that aircraft is in balance, Base Value and Current
Market Value should be the same. In most cases, though, we must subjectively
compare Base Value with Current Market Value to see if we believe the
relationship is reasonable. This may highlight where Base Value inputs require
further refinements. Because of the dynamics of the aircraft marketplace and
our continuing recalibration, Base Value opinions are not static.
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APPENDIX C - QUALIFICATIONS
THE COMPANY
AVITAS, Inc. is an aviation consulting firm which provides a broad range of
services to aircraft lessors and lenders, legal counsel, airlines, maintenance
providers, corporations and government entities. It is wholly-owned by Det
Norske Veritas of Oslo, Norway. Founded in 1864, Veritas is a society whose
interests include quality assurance, technical and engineering matters, and
safety of life, property and the environment. As their aerospace arm, AVITAS's
charter is to provide high-quality, time responsive and expert aviation
assistance to its clients around the world.
In order to serve its international clientele, AVITAS personnel are located near
Washington, D.C., Miami and London. One of AVITAS's major strengths is that,
rather than dealing on a theoretical basis, each employee has specific hands-on
aviation industry experience in such areas as aircraft financing, airline
management, maintenance and engineering, aircraft valuations, and data analysis
and interpretation.
Larry Crawford, AVITAS founder, President and C.E.O., is an engineer, naval
aviator, airline pilot, and has 17 years experience in finance, operations and
marketing as a senior executive with several major and national airlines.
John Vitale, Vice President - Asset Valuation, has been in the manufacturing,
marketing and finance areas of the aviation industry since the mid-1980s with
experience portfolio management, traffic and value forecasting and industry
analysis. John is an ISTAT Certified Appraiser.
David Stamey, Vice President - Airline Consulting, has over 25 years of
experience in the airline industry in senior planning and marketing positions
with Braniff, Southern and Texas Air Corporation.
Lauren Nelson, President of AVITAS Engineering in Miami, has 30 years Aviation
experience including chief engineer of a major U.S. carrier and with the FAA.
Don Benfell, Vice President - Technical, has extensive airline maintenance and
engineering experience. He is also certified as an Appraiser by ISTAT.
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EXHIBIT B-3
GRA Aviation Specialists, Inc.
DESKTOP VALUATION REPORT
GRA Aviation Specialists, Inc. ("GRAS") has been engaged by Airlease Management
Services, Inc. (""Client") to provide a desktop valuation setting forth Base
Value, Current Market Value (fair market value) and Future Base Values for six
MD-82s (serial numbers 48038-48042, 49184) and one 727-200F (serial number
21850). Further aircraft information is included in the Aircraft Values section
below.
This report contains the following sections:
<TABLE>
<S> <C>
o Desktop Valuation Assumptions o Aircraft Profile and Market Conditions
o Value Definitions and Explanations o Commercial Jet Market Overview
o Aircraft Values o Covenants
</TABLE>
DESKTOP VALUATION ASSUMPTIONS
By definition, in a desktop valuation the appraiser does not see the subject
aircraft or review its specifications and technical documents; consequently, we
make certain assumptions. Regarding the airplane itself, unless specifically
stated otherwise, we assume:
- It is of average specification for its type and age and has no
special equipment or characteristics which would materially affect
its value.
- Its utilization in terms of hours and cycles is average for its type
and age.
- It is in passenger configuration.
- It is certificated and operated under the aegis of a major
airworthiness authority such as the FAA, CAA or DGAC.
- It is in average physical condition and its maintenance records and
documents are in compliance with all applicable regulations and good
industry practices.
- With regard to maintenance status, the airframe, engines, landing
gear and other major life- or time-limited components are in
half-life, half-time condition.
- It is in compliance with all applicable Airworthiness Directives
and mandatory Service Bulletins.
In developing our values, we make two further assumptions:
- That the aircraft will be sold as a single unit or as part of a
small lot. It will not be the subject of a fleet sale which could
result in a price discount.
- That the aircraft is not subject to an existing lease. Our opinion
of values excludes the effects of attached lease rental streams and
tax benefits.
VALUE DEFINITIONS AND EXPLANATIONS
We use the ISTAT definitions for Base Value and Current Market Value which are
as follows:
- BASE VALUE is an appraiser's opinion of the underlying economic value
of an aircraft in an open, unrestricted, stable market environment
with a reasonable balance of supply and demand, and assumes full
consideration of its "highest and best use". An aircraft's Base
Value is founded in the historical trend of values and in the
projection of value
- ----------------------------------
AIRLEASE MANAGEMENT SERVICES, INC.
February 26, 1997
B-3-1
<PAGE> 121
trends and presumes an arm's length, cash transaction between
willing, able and knowledgeable parties, acting prudently, with
an absence of duress and with a reasonable period of time
available for marketing. In most cases, the BASE VALUE of an
aircraft assumes its physical condition is average for an
aircraft of its type and age, and its maintenance time status is
at mid-life, mid-time (or benefitting from an above average
maintenance status if it is new or nearly new, as the case may
be).
- MARKET VALUE (or CURRENT MARKET VALUE if the value pertains to
the time of the analysis) is the appraiser's opinion of the most
likely trading price that may be generated for an aircraft under
the market circumstances that are perceived to exist at the time
in question. MARKET VALUE assumes that the aircraft is valued
for its highest, best use, that the parties to the hypothetical
sale transaction are willing, able, prudent and knowledgeable,
and under no unusual pressure for a prompt sale, and that the
transaction would be negotiated in an open and unrestricted
market on an arm's length basis, for cash or equivalent
consideration, and given an adequate amount of time for
effective exposure to prospective buyers.
Please note three further points regarding our use of these value definitions:
- In our opinion, the commonly used term FAIR MARKET VALUE is
synonymous with the ISTAT term MARKET VALUE or CURRENT MARKET
VALUE.
- When we set forth CURRENT MARKET VALUE, we are specifically
excluding costs of sale and carrying costs of the subject
aircraft. That is, we are measuring the trading price of the
aircraft itself without any potential transaction costs.
- For future and/or residual values for an aircraft - FUTURE BASE
VALUES - we make the assumption that not only is the aircraft
marketplace in reasonable balance, but also that economic
conditions are neutral, that is, neither boom nor bust. We are
measuring the subject aircraft's value, utility and market
acceptance in a balanced marketplace and are attempting to
sterilize the effects of economic cycles on its market price.
AIRCRAFT VALUES
- -------------------------------
With respect to the five MD-82s in service at USAir, serial numbers 48038
through 48042, the following points are of note:
- - Client has advised that while these aircraft are MD-82s with JT8D-217A
engines, USAir is currently operating them as MD-81s and is obligated to
return them to lessor re-rated to MD-82s. Consequently, GRAS has shown
Current Market Values for the aircraft as MD-82s and, for the sake of
comparison, as MD-81s of the same vintage.
- - GRAS understands that the USAir MD-82s are to be returned to lessor with
at least 500 hours remaining until next C check, 5,000 hours to D check
and no less than 2,000 hours to the next limiting item on each engine.
For Future Base Value at lease termination, GRAS has shown both the
halftime/halflife Future Base Value as well the Adjusted Future Base
Value which assumes that each aircraft is returned in the minimum
required condition.
- ----------------------------------
AIRLEASE MANAGEMENT SERVICES, INC.
February 26, 1997
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<PAGE> 122
For the MD-82 in service with TWA, GRAS has shown Future Base Value assuming
the aircraft to be halftime/halflife and has also adjusted Future Base Value to
reflect the return conditions that require aircraft return with no less than
one-quarter time remaining until major maintenance events.
With respect to the FedEx 727-200F, there is a developing situation with
certain Boeing 727 freighters, the breadth and depth of which is currently
uncertain, but which GRAS believes has the potential to materially affect 727F
values and utility. The problem involves those 727s which underwent after
market conversions from passenger to freight configuration. GRAS understands
that the FAA is concerned about the lack of testing that went into the
development of the conversion STCs, and as an extension of that, the structural
integrity of the post-conversion airframes, particularly the main deck, cargo
door, cargo vent door and the 9G barrier. There was a meeting in Seattle
February 14 between the FAA and concerned 727F operators to discuss the problem
and it appears that the FAA will issue a Notice of Proposed Rule Making ("NPRM")
very shortly, possibly by the end of February, with a 45 day comment period. It
will probably address the issue of floor loading and propose limiting pallet
loads to 3,000 pounds until proper modifications can be made to the aircraft.
An Airworthiness Directive may well follow shortly after the NPRM period which
will formally limit pallet loads. Further NPRMs and ADs may follow. The upshort
of this situation is as follows:
- - Although there have been no reported incidents, the FAA believes there
is a problem with those 727s converted from pax to freight
configuration.
- - What course of action will be taken by the FAA is uncertain, but it
appears that main deck floor loading restrictions, and possibly other
restrictions, will be put in place until an engineering solution can be
developed. Such restrictions will likely change the economics of 727F
operation.
- - The timing, nature and cost of potential engineering solutions is
currently uncertain. Technical sources with whom GRAS has discussed this
matter estimate the cost of an engineering fix at anywhere between
$100,000 and $1,000,000.
- - FAA actions may materially impair the economic utility and values of
727Fs for some period, but at this time, no one can quantify the size or
timing of the problem.
Because of the multiple uncertainties associated with this situation, GRAS
cannot estimate an impact on 727F values. Rather, it will be necessary to watch
closely to see what develops over the near term.
GRAS has adjusted the Future Base Value of the 727-200F to reflect return
conditions that require redelivery with no less than one-quarter time remaining
to next major maintenance events.
Our value opinions for the subject aircraft are set forth in millions of U.S.
dollars in the following table. With respect to aircraft inflation rates, we
believe that a rate of 2.5% - 3.5% p.a. is reasonable. In the table below, we
have set forth Future Base Values in both constant 1997 dollars and in inflated
dollars using 3.0% annual inflation.
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<TABLE>
<CAPTION>
AIRLEASE MANAGEMENT SERVICES, INC. AIRCRAFT DESCRIPTIONS AND VALUES
<S> <C> <C> <C> <C> <C> <C> <C>
AC TYPE MD-82 MD-82 727-200F(HK)
SERIAL # 48038 48039 48040 48041 48042 49184 21850
REGIST MARK N806US N807US N808US N809US N810US N913TW N288FE
OPERATOR USAIR TWA FEDEX
IN SERVICE DATE 09-81 03-84 10-79
ENGINE TYPE: JT8D -217A -217A -15A W/HKS
MTOW NA 149,000 NA
CONFIG. PAX PAX FREIGHTER
LSE TERMIN DATE 9-2001 3-2002 4-2006
</TABLE>
<TABLE>
<CAPTION>
CURRENT AND BASE VALUES
AS MD-81S AS MD-82S
<S> <C> <C> <C> <C>
BASE VALUE $9.7 $10.7 $12.7 $7.1
CURR MKT VALUE $9.7 $10.7 $12.7 $7.5
</TABLE>
<TABLE>
<CAPTION>
FUTURE BASE VALUES AT LEASE TERMINATION
IN CONSTANT 1997 $ IN $ INFLATED @ 3% P.A. 1997$ INFLATED $ 1997$ INFLATED $
<S> <C> <C> <C> <C> <C> <C>
FUTURE VALUE @ $7.9 $8.9 $9.0 $10.4 $3.3 $4.2
LEASE TERMINATION
RETURN CONDITION ($0.9) ($1.0) ($0.9) ($1.1) ($1.0) ($1.3)
ADJUSTMENT
ADJ FUT BASE VAL $7.0 $7.9 $8.1 $9.3 $2.3 $2.9
</TABLE>
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Return condition deductions for each aircraft are summarized in the following
table:
AIRCRAFT MAINTENANCE ADJUSTMENT SUMMARY IN 1997 $000S
EVENT USAIR MD-82S TWA MD-82 FEDEX 727-200F
C CHECK $103 $69 $75
D CHECK $313 $313 $375
LANDING GEAR OVERHAUL NA $58 $46
ENGINE OVERHAULS $250 $250 $262
ENGINE LIFE LIMITED PARTS $225 $225 $262
TOTAL DEDUCTIONS $891 $915 $1,020
AIRCRAFT PROFILE AND MARKET CONDITIONS
- -----------------------------------------
MD-80 Series Profile and Demographics
The MD-80 series is McDonnell Douglas's follow on to its successful DC-9 family
and is comprised of the MD-81, MD-82, MD-83, MD-87 and MD-88, all of which are
twin-engine, two-pilot, Stage 3 narrowbody jetliners. They make increased use
of composites in such areas as the spoilers, certain control surfaces, engine
nacelles, tail cone and wing root fillets. An EFIS cockpit is standard on the
MD-88 version and is optional on all other models. Except for the shortened
MD-87, all MD-80s are the same size physically (about 40 feet longer than the
DC-9-30), all use Pratt & Whitney JT8D-200 series engines and all have the same
seating capacity. Standard fuel capacity is 5,840 U.S. gallons in all models
except the MD-83 which typically carries 6,970 gallons. The aircraft differ
primarily in terms of takeoff weights, engines and ranges. The table below
compares MD-80 series airplanes.
MD-80 SERIES DEMOGRAPHICS AND SPECIFICATIONS (DECEMBER 1996)
MD-81 MD-82 MD-83 MD-88 MD-87
YRS OF DELIV 1980-84 SINCE 1981 SINCE 1985 1987-93 1986-92
# IN SERVICE 120 562 224 153 76
# ON ORDER 0 0 9 5 0
# OF OPERATORS 10 28 36 6 14
LENGTH, FT 147.9 130.4
WINGSPAN, FT. 107.8
ENGINES, ALL -209 53% -209 0% -217 2% -217 8% -217 72%
JT8D- -217 41% -217 94% -219 98% -219 92% -219 28%
-219 6% -219 6%
MTOW, OOO# 140-142 147-149.5 160 149.5-160 140-149.5
RANGE, NM 1,620 W/ 2,176 W/ 2,618 W/ 2,618 W/ 2,879 W/
155 PAX 155 PAX 155 PAX 155 PAX 130 PAX
# PAX, TYP/MAX 143-172 117-139
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The initial model was the MD-81 which was certificated in August 1980 with
first delivery the following month to Swissair. Initially equipped with
JT8D-209 engines of 18,500 pounds thrust, it has a maximum takeoff weight of
140,000 pounds and typically seats 155 passengers in a 3+2 configuration.
The MD-82 entered service in August 1981, was powered by the JT8D-217 engine
and had a maximum takeoff weight of 147,000 pounds. The MTOW later increased to
149,500 pounds with the advent of the -217A engine. In terms of the number of
aircraft in the fleet, the MD-82 has been the most popular member of the MD-80
family.
The MD-83 entered service with Alaska Airlines and Finnair in early 1986 and
has a MTOW of 160,000 pounds. About 98% of all MD-83s are powered by the
JT8D-219 engine which has 21,000 pounds thrust and improved fuel consumption
over the -217A version. MD-83s are generally equipped with two auxiliary fuel
tanks in the cargo bays which increase fuel capacity by 1,130 U.S. gallons.
These tanks can be fitted as options on other MD-80 models.
Entering service in January 1988, the MD-88 is an offshoot of the MD-82 or the
MD-83 with a standard EFIS cockpit, flight management system, increased use of
composites and a redesigned interior. Originally built as a Delta specification
(Delta has almost 80% of the MD-88 fleet), there are a handful of other users
as noted below. Over ninety percent of MD-88s are powered with the JT8D-219
engine.
The MD-87 was developed for thinner routes, has a fuselage shortened by 11
frames (17.5 feet), a higher vertical stabilizer and is typically configured to
carry 130 passengers. Initial deliveries were to Finnair and Austrian Airlines.
The MD-87 is primarily used in Europe.
As of December 1996, 1,135 MD-80s of all types were in service with 59
operators. The table below shows a summary of major operators:
MD-80 SERIES PRINCIPAL OPERATORS (DECEMBER 1996)
<TABLE>
<CAPTION>
OPERATOR MD-81 MD-82 MD-83 MD-87 MD-88 TOTAL
<S> <C> <C> <C> <C> <C> <C>
AERO LLOYD 0 1 15 2 0 18
AEROMEXICO 0 10 3 2 10 25
ALASKA AIRLINES 0 9 33 0 0 42
ALITALIA 0 89 0 0 0 89
AMERICAN AIRLINES 0 234 26 0 0 260
AOM FRENCH AIRLINES 0 0 10 0 0 10
AUSTRIAN AIRLINES 8 5 2 5 0 20
AVIACO 0 0 0 0 13 13
AVIANCA 0 0 11 0 0 11
CHINA EASTERN 0 13 0 0 0 13
CHINA NORTHERN 0 23 0 0 0 23
CONTINENTAL AIRLINES 9 56 4 0 0 69
CROSSAIR 1 2 5 0 0 8
DELTA 0 0 0 0 120 120
DOUGLAS/MDFC 1 3 1 1 0 6
FAR EAST. AIR TRANS 0 7 2 0 0 9
FINNAIR 0 10 8 3 0 21
IBERIA 0 0 0 24 0 24
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
JAPAN AIR SYSTEM 26 0 0 8 0 34
KOREAN AIRLINES 0 11 3 0 0 14
MERIDIANA 0 8 0 0 0 8
NORTHWEST AIRLINES 0 8 0 0 0 8
RENO AIR 0 6 14 4 0 24
SAS 41 10 2 18 0 71
SPANAIR 0 1 15 2 0 18
SWISSAIR 11 0 0 0 0 11
TWA 0 29 24 0 0 53
USAIR 19 12 0 0 0 31
</TABLE>
Geographic distribution of the MD-80 fleet is as follows:
MD-80 SERIES GEOGRAPHIC DISTRIBUTION (# OF AIRCRAFT DECEMBER 1996)
<TABLE>
<CAPTION>
MD-81 MD-82 MD-83 MD-87 MD-88 TOTAL
<S> <C> <C> <C> <C> <C> <C>
EUROPE 61 128 83 56 13 341
AFRI-ME 0 0 5 0 0 5
A-PAC 26 61 5 8 0 100
N AMER 31 360 104 9 122 626
S AMER 2 13 27 3 18 63
TOTAL 120 562 224 76 153 1135
</TABLE>
The following chart indicates the chronology of MD-80 deliveries:
MD-80 SERIES DELIVERIES (DECEMBER 1996)
<TABLE>
<CAPTION>
MD-81 MD-82 MD-83 MD-87 MD-88
<S> <C> <C> <C> <C> <C>
1980 6
1981 46 12
1982 10 25
1983 49
1984 42
1985 6 58 8
1986 8 69 8 1
1987 3 44 32 4 12
1988 7 53 27 13 19
1989 7 42 29 15 25
1990 5 58 28 24 23
1991 11 51 27 14 32
1992 5 18 27 5 29
1993 2 17 27 13
1994 4 9 11
1995 13 5
1996 2 10
</TABLE>
MD-80 Series Market and Availability
GRAS views the MD-80 family as being a continuum of airplanes in that all but
the shorter MD-87 are of the same passenger capacity and from an operating
standpoint differ primarily in their range capabilities. The MD-80 market is
currently firm with low availability for such a large fleet - only seven MD-83s
were publicly available in early February 1997. With the exception of the
MD-87, which has a very small market presence, GRAS believes the MD-80 has a
good probability of average to above average
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future value retention but there are uncertainties facing it on two fronts which
could also cause above average price volatility. First, as noted below, there is
substantial MD-80 operator concentration and second there is the question of
Douglas's future role in the commercial aircraft manufacturing business.
In terms of risk from a financier's viewpoint, GRAS's perspective on the MD-80
family (excluding the MD-87) is as follows:
Positives
- A reliable workhorse with a large population and a fairly broad
operator base.
- Well-placed for its mission and in a large and active market
segment as a 150-seat medium range jetliner.
- Good operating economics
- Likely to enjoy a very long physical life with low airframe
maintenance costs as do sister Douglas aircraft the DC-8 and
DC-9.
Negatives
- Substantial operator concentration could increase price
volatility should a large operator decide to move MD-80s out of
its fleet.
- Uncertainty over Douglas's future role in the commercial
aircraft industry.
- Probably has limited appeal as a cargo conversion or small
package freighter.
- Possibility of problems should noise regulations be tightened.
The MD-80 is a successful jetliner with over 1,100 in service since the
original deliveries commenced in 1980. For several major airlines, the MD-80
series has become the mainstay of their medium capacity, medium haul fleets.
American Airlines, for instance, operates 260 MD-82s and MD-83s. In Europe,
carriers such as SAS and Alitalia have major MD-80 fleets using the aircraft
within their respective intra-European routes. The used market is somewhat
paradoxical in that while there is a very large MD-80 population, there appears
to be neither a large number of trades nor are there many openly available in
the used market at any given time. Even during the slump in the narrowbody
market during the early 1990s, MD-80 availability was very modest as the chart
below, which is current as of January 1997, indicates:
[MD-80S PARKED AND AVAILABLE]
<TABLE>
<CAPTION>
Parked 81 Avail 82 Avail 83 Avail
<S> <C> <C> <C> <C>
1-90 3 4 1
2-90 0 2 1
3-90 1 3 0
4-90 1 3 0
5-90 0 5 0
6-90 2 7 2
7-90 2 7 6
8-90 2 1 6
9-90 2 1 6
10-90 2 1 6
11-90 1 1 6
12-90 2 5 8
1-91 2 5 8
2-91 2 5 11
3-91 2 5 11
4-91 2 10 10
5-91 2 12 13
6-91 2 12 10
7-91 2 12 10
8-91 2 12 10
9-91 2 9 10
10-91 2 9 8
11-91 2 8 8
12-91 2 13 8
1-92 3 17 7
2-92 3 17 7
3-92 46 3 15 9
4-92 39 3 14 6
5-92 29 3 17 5
6-92 23 3 14 4
7-92 18 3 12 3
8-92 18 3 12 3
9-92 16 3 12 3
10-92 20 3 12 3
11-92 19 3 11 3
12-92 20 3 11 3
1-93 20 3 10 3
2-93 23 3 9 3
3-93 22 3 9 3
4-93 28 3 9 3
5-93 30 3 9 3
6-93 29 3 9 1
7-93 27 3 6 1
8-93 25 2 4 2
9-93 20 2 4 2
10-93 18 0 4 2
11-93 15 0 4 4
12-93 14 0 2 6
1-94 16 0 2 6
2-94 17 0 2 6
3-94 12 0 2 5
4-94 14 0 0 5
5-94 11 0 0 5
6-94 10 0 0 3
7-94 8 0 0 3
8-94 7 0 0 3
9-94 7 0 2 1
10-94 7 0 2 1
11-94 7 0 2 1
12-94 12 0 7 1
1-95 11 0 9 1
2-95 12 1 7 1
3-95 12 1 7 1
4-95 13 1 7 1
5-95 9 1 9 1
6-95 7 1 9 1
7-95 5 1 9 1
8-95 3 1 7 3
9-95 3 1 7 4
10-95 3 0 0 4
11-95 3 0 0 3
12-95 3 0 0 3
1-96 4 0 0 3
2-96 6 0 0 3
3-96 8 0 0 1
4-96 10 0 0 3
5-96 10 0 0 5
6-96 4 0 2 6
7-96 3 0 0 4
8-96 3 0 0 4
9-96 3 0 0 4
10-96 1 0 0 5
11-96 8 0 0 5
12-96 7 0 0 7
1-97 12 0 0 7
</TABLE>
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While the MD-80 user base is fairly broad with 58 operators, there is still
substantial concentration with a few operators having a large number of each
type. The table below shows for each type of MD-80 the percentage of the
population of that type cumulatively held by the three largest operators:
MD-80 SERIES OPERATOR CONCENTRATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
% OF TOTAL FLEET HELD BY THE: MD-81 MD-82 MD-83 MD-87 MD-88
LARGEST OPERATOR 34% 42% 16% 32% 78%
TWO LARGEST OPERATORS 55% 58% 28% 55% --
THREE LARGEST OPERATORS 71% 68% 38% -- --
TOTAL # OF AIRCRAFT IN FLEET 121 560 222 76 153
</TABLE>
This concentration means that there is the potential for substantial price
swings should a large operator decide to eliminate MD-80s from its fleet.
Swissair, which as of late 1996 operated eleven MD-81s, will be replacing them
with Airbus equipment. In November 1996, USAir announced orders and options
for as many as 400 aircraft from Airbus, of which 120 are firm orders scheduled
for delivery through 2000. It will retire its DC-9-30s, 737-200s and 19 MD-81s
and 12 MD-82s. Market sources indicate that, due to their age, the MD-80s will
be the last aircraft replaced. However, there is uncertainty as to the status
of USAir's order. In September 1996, Alaska Airlines announced plans to
replace its MD-80s with 737-400s. Some of those MD-80s are now leaving
Alaska's fleet. GRAS also understands that Austrian may be replacing its fleet
of about 20 MD-80s.
With the exception of early MD-81s and the smaller MD-87s, MD-80s are capable
of various weight and engine upgrades. For example, American is currently
upgrading the JT8D-217A engines on its aircraft to more efficient -217Cs and
- -219s. Carriers who require extra range or payload can either add auxiliary
fuel tanks and/or have the MTOW increased via either structural improvements or
through paper changes.
The majority of MD-80 transactions have involved leases. Typical lease rates
range from $130,000-150,000 per month for early MD-81s to roughly
$230,000-250,000 for late model MD-83s. In the U.S., younger MD-82s are
generally in the $190,000-210,000 range for reasonable credits. Reno recently
renewed two MD-82 leases for a reported $205,000 per month and a recent TWA
lease was reported at $225,000. MD-83 rates are somewhat higher and are in the
$210,000-220,000 range in the U.S. and slightly higher in Europe. For example,
Reno recently leased a 1987 MD-83 for $215,000 per month.
In 1996, Aero Lloyd offered its 1986 vintage MD-83 with an asking price of $15
million; it was eventually sold to Sun Jet. Alitalia is known to have acquired
some late model MD-83s for approximately $32 million. More recently,
Continental is known to have acquired a 1985 built ex-Alaska MD-82 for
approximately $18 million. As of early 1997, GRAS is aware of a pair of late
1980s MD-83s now available which are generating interest in the $18-20 million
range.
Boeing 727 Family Profile and Demographics
The Boeing 727, in both the -100 and -200 versions, is a short to medium range
jetliner with three aft-mounted engines and a three person cockpit. Originally
built as a Stage 2 airplane, a number of 727s have been hushkitted and some
re-engined to achieve Stage 3/Chapter 3 noise status. An extremely popular
aircraft, particularly in North America, 1,831 were delivered over a 20 year
period from 1964 through 1984, over 80% of which are still in service as of
October 1996. It was the first commercial airliner to pass the 1,000 sales
mark for civilian use. During its production run, progressive modifications
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and improvements were made including higher operating weights, more powerful
engines, a stretched fuselage and improved range.
The 727 program was launched in late 1960 when United and Eastern Airlines each
ordered 40 airplanes. It was the follow-on to the 707, with which it shares a
common upper fuselage and many systems and components. It was the first Boeing
jetliner with completely powered flight controls and had built-in air stairs,
APU and a single-point refueling system to reduce reliance on ground support
equipment. In order to improve low-speed performance and allow its use in
smaller airports, it had triple-slotted trailing edge flaps and new leading
edge slats.
The initial version, the -100, was first rolled out in November 1962,
certificated 13 months later and entered service with Eastern and United in
February 1964. During its production run, which ended in late 1972, the -100
was available in 3 basic versions. The -100 was the standard all-passenger
aircraft and could accommodate 131 passengers. The -100C was a convertible
model with strengthened flooring and a large main deck cargo door which could
be flown in all-passenger, all-cargo or mixed configuration with
reconfiguration taking only a few hours. The -100QC was a quick change model
with palletized seats and galleys and could be converted between all-passenger
and all-freight configurations in less than an hour.
The -200 was certificated in November 1967 and entered service with Northeast
Airlines a month later. It had a fuselage 20 feet longer than the -100,
increased gross weight and could accommodate up to 189 passengers. The -200
series was succeeded in June 1972 with the delivery of the first -200Advanced
model to ANA. Structural improvements, greater fuel capacity and more powerful
engines gave it better payload-range capability, better runway performance and
maximum takeoff weights of up to 209,500 pounds. The -200 series was available
in both passenger and all-freight versions, the latter having a strengthened
fuselage, no windows and a large main-deck cargo door. Fifteen -200Fs were
delivered to FedEx ending in September 1984.
A number of 727s have been converted post-delivery from passenger to freighter
configuration by several companies including FedEx and PEMCO using their own
Supplemental Type Certificates (STCs). The cost of converting a 727 passenger
aircraft to freight configuration is $750,000-1,000,000. As noted in the
Aircraft Values section above, the FAA is currently expected to release a
Notice of Proposed Rule Making followed by an Airworthiness Directive covering
potential structural problems with non-Boeing modified 727 freighters.
The table below sets forth some 727 specifications and demographics:
BOEING 727 DEMOGRAPHICS AND SPECIFICATIONS (DECEMBER 1996)
<TABLE>
<S> <C> <C>
-100 SERIES -200/-200A(1) SERIES
YEARS OF DELIVERY 1963-71 1967-72 / 1972-84
# ORIGINALLY DELIVERED 571 1,260(1)
# IN SERVICE 413 (178 PAX; 76 C; 159F)(2) 1,114 (965 PAX; 149F)
GEOGRAPHIC EUROPE 7%; AFR/ME 10%; EUROPE 10%; AFR/ME 8%;
DISTRIBUTION ASIA/PAC 3%; N. AMER 62%; S. ASIA/PAC 3%; N. AMER 69%;
AMER 18% S. AMER 10%
</TABLE>
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<TABLE>
<S> <C> <C>
# OF OPERATORS 137 179
LENGTH, FT 133.1 153.2
WINGSPAN, FT 108 108
ENGINES JT8D-7 81%; -9 6%; -217C JT8D-7 8%; -9 26%; -15
1%; Tay 651 12% 48%; -17 17%; -217 1%
MTOW IN 000# 160-169 184.8-209.5
RANGE, NM 1,476 1,800 / 2,475 W 163 PAX
# OF PAX, TYPICAL/MAX 131 163 / 189
</TABLE>
(1) -200 ADVANCED PRODUCTION BEGAN WITH LINE NUMBER 881 IN SECOND QUARTER OF
1972
(2) INCLUDES 4 IN SERVICE WITH THE U.S. AIR FORCE
Major 727 operators are as follows:
SUMMARY OF PRINCIPAL 727 OPERATORS (DECEMBER 1996)
<TABLE>
<CAPTION>
OPERATOR 100 SERIES 200 SERIES TOTAL
<S> <C> <C> <C>
AEROEJECUTIVO 2 13 15
AIR ALGERIE 0 11 11
AMERICAN 0 80 80
AMERICAN INTERNATIONAL AIRWAYS 3 14 17
AMERICAN TRANS AIR 0 24 24
AMERIJET INTERNATIONAL 3 7 10
AVENSA 7 11 18
CONTINENTAL 0 32 32
DELTA 0 129 129
DHL 11 13 24
EUROPEAN AIR TRANSPORT 6 6 12
EXPRESS ONE 7 13 20
FEDEX 64 96 160
HUNTING CARGO AIRLINES 0 10 10
IBERIA 0 28 28
KELOWNA FLIGHTCRAFT AIRCHARTER 8 9 17
KITTY HAWK 0 10 10
KIWI 0 15 15
MEXICANA 0 22 22
NORTHWEST 0 45 45
RYAN INTERNATIONAL 25 9 34
SUN COUNTRY 0 10 10
TWA 7 39 46
UNITED 0 77 77
UPS 44 8 52
USAIR SHUTTLE 0 11 11
</TABLE>
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The following chart shows the delivery chronology for those 727s which are
still in service:
727 DELIVERIES (DECEMBER 1996)
727-100 727-200
------- -------
1963 2
1964 39 2
1965 70 2
1966 99
1967 128
1968 38 47
1969 9 77
1970 11 30
1971 10 19
1972 2 32
1973 89
1974 86
1975 88
1976 1 60
1977 65
1978 117
1979 133
1980 1 131
1981 3 92
1982 25
1983 11
1984 8
With regard to noise compliance, there have been several programs which allow
727s to conform to Stage 3/Chapter 3 noise regulations. FedEx offers a
lightweight hushkit for 727-100s and -200s with JT8D-7 and -9 engines and
maximum takeoff weights up to 178,400 pounds. The lightweight kits add
approximately 500 pounds to the aircraft with little discernible effect on fuel
burn. List prices for the -100 and -200 kits are about $1.9 million and $2
million, respectively, plus 800-1,000 man hours for installation. Heavyweight
kits are available for -200s with -9, -15 and -17 engines up to 204,500 pounds
maximum takeoff weight at list prices of $2.6-2.8 million plus about 4,000 man
hours for installation. The heavyweight kit adds 900-1,200 pounds to the
aircraft's weight, requires some structural strengthening and causes a small
fuel burn penalty on shorter stage lengths. As of January 1997, 587 shipsets
had been ordered and 275 had been delivered.
There have been two Stage 3 re-engining programs for the 727. During the late
1980s and early 1990s, Valsan offered a program in which the outboard engines
were replaced by JT8D-217C engines and the center engine was acoustically
treated for a net cost of $8-9 million. Valsan is no longer active but we
understand that the program's STC is still valid and has been purchased by
Rohr. We are aware of about a dozen and a half 727s, 11 of them with FedEx,
which underwent this program. In addition, 51 airplanes were fitted with Tay
engines, 46 of which are in service with UPS.
Boeing 727-200/200Advanced Market and Availability
The Boeing 727-200, originally designed to be the 150-seat, mid-range workhorse
of the North American market, became an extremely successful airplane with over
1,250 delivered and has been in service over a span of 4 decades. This long
production run with build specifications that improved over time, the large
population of airplanes still in service and the 727-200's status as an early
technology jetliner all contribute to what GRAS views as a stratified market
with a mixed future value outlook for 727-200s. Boeing 727s are readily
convertible for passenger to freighter configuration, consequently market
conditions for both aircraft types tend parallel each other.
Given this continuum from old to young and keeping in mind that age, build
specification and condition are major value determinants, GRAS's opinion of the
727-200 series from a financier's risk viewpoint is
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as follows:
Positives
- Very large population still in service with an extremely large
operator base.
- Still well-placed for its mission, that is, as a 150-seat medium
range jetliner.
- Relatively low to very low capital cost.
- Proven as a freight conversion, with almost 15% of -200s operating as
freighters.
Negatives
- High operating costs as old technology airplanes with 3 engines, 3
pilots and aging aircraft requirements.
- Fuel thirsty trijet.
- Noisy but can be quieted at a cost.
- Geographically heavily concentrated in North America with non-addition
rules prohibiting unhushkitted export to Europe and Australia.
- For after market 727 freighter conversions, likely near term
regulatory actions may reduce the utility and impact values until
engineering fixes can be developed as discussed in the Aircraft Values
section above.
The market for younger 727s, those built since the late 1970s with improved
build standards (and therefore reduced aging aircraft cost exposure), has
reached a very firm state and GRAS expects those airplanes to retain their
utility and show average to good value retention over the foreseeable future.
Very few of these airplanes are currently available in the market. The oldest
727s, which began production in the late 1960s, have or are reaching the final
stages of their economic lives as passenger airplanes. While the market today
for most narrowbody airplanes ranges from good to very strong, we believe these
old 727s, many of which are already in storage, will either be officially
retired over the near term or will be converted to freight. These older aircraft
will exhibit weak future value retention. There is a middle group of 727s which
we consider "swing" airplanes, those that are on the margin in the economic
sense. As chronologically and technologically older airplanes, they suffer from
high operating costs because of their age and 3-engine/3-pilot configuration and
they are noisy. At the same time, they are well-priced now and as 150-seat
medium range airplanes, are well-matched to today's route structure
requirements. The paucity of other good-quality narrowbodies has renewed demand
for them. We believe that they will exhibit reasonable value retention as long
as demand for narrowbody airplanes remains firm, but will be among the first to
suffer a fairly rapid decline in both utility and value when any of a number of
factors occur such as a softening in traffic growth, a sharp increase in fuel
prices, introduction of new aging aircraft regulations, tightening of noise
rules beyond Stage 3/Chapter 3, etc.
The narrowbody surplus of aircraft during the early 1990s heavily impacted the
727. Between early 1990 and early 1991, the number of available 727s increased
six-fold and by early 1994, 338 727s of all types were in storage. As the
narrowbody market has improved, so has the 727 market. The number of stored and
available airplanes has been declining since the latter half of 1994 as the
chart below indicates. In February 1997, about 150 727s of all types were
parked, many of them quite old, and two dozen 727-200/200As were publicly
available for sale or lease. Of those airplanes, 15 were -200nonAdvanced
models, the youngest of which was built in 1969. There were eight -200A
passenger airplanes available built between 1973 and 1981 and one Valsan
aircraft. No 727-200Fs were publicly available. As narrowbody demand has
picked up, good Stage 3 aircraft were the first to return to service and very
few of them are now available. Interest in well-maintained twin-engine 2-pilot
Stage 2 narrowbodies such as DC-9s and 737s has been strong and availability is
now low in that market segment. As the supply of
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those airplanes has dwindled, the continuing demand for lift has pulled up
demand and prices for the 3-engine, 3-pilot 727s.
727s PARKED AND AVAILABLE
<TABLE>
<CAPTION>
Parked: 200
All 727s Available
<S> <C> <C>
1-90 28
2-90 26
3-90 35
4-90 22
5-90 25
6-90 38
7-90 64
8-90 74
9-90 79
10-90 85
11-90 85
12-90 86
1-91 96
2-91 168
3-91 168
4-91 127
5-91 132
6-91 131
7-91 141
8-91 130
9-91 142
10-91 150
11-91 155
12-91 162
1-92 132
2-92 137
3-92 210 146
4-92 229 144
5-92 209 141
6-92 206 142
7-92 205 140
8-92 225 116
9-92 225 105
10-92 226 106
11-92 237 129
12-92 267 122
1-93 265 109
2-93 273 109
3-93 281 97
4-93 277 98
5-93 274 106
6-93 279 95
7-93 288 95
8-93 302 104
9-93 301 116
10-93 314 117
11-93 304 119
12-93 329 114
1-94 338 109
2-94 325 108
3-94 338 94
4-94 335 101
5-94 333 103
6-94 331 105
7-94 335 93
8-94 326 93
9-94 330 95
10-94 332 98
11-94 316 96
12-94 275 78
1-95 276 71
2-95 263 70
3-95 250 65
4-95 231 58
5-95 223 57
6-95 214 44
7-95 222 51
8-95 216 50
9-95 197 59
10-95 193 58
11-95 209 59
12-95 196 57
1-96 196 57
2-96 195 60
3-96 178 54
4-96 174 45
5-96 173 34
6-96 165 22
7-96 159 21
8-96 160 25
9-96 158 27
10-96 155 27
11-96 147 25
12-96 149 27
1-97 149 30
2-97 24
</TABLE>
Short- to medium-term signals are somewhat mixed as different carriers take
different approaches to their fleets. For example, Northwest announced early in
1996 that it would be hushkitting 20 of its 727-200s and they, Delta and ATA
had been showing interest in purchasing 727s. In July 1996, Continental
announced that it had reached agreement with Boeing on the restructuring of its
already-outstanding order and with the delivery of new 737-700/800s and 757s
over the next 5 years, would be retiring all of its remaining 727s. GRAS
believes that the shortage of quality narrowbody airliners will continue to
drive 727 values.
During the last year, a period when good 727 values have been climbing, asking
prices have ranged from below $1 million for an aircraft which required
extensive maintenance to almost $7 million for a late model aircraft equipped
with JT8D-17R engines. There have been few late model passenger 727s available
for sale (as of February 1997, only four-200As were available of 1979 or younger
build) and consequently most transactions have involved older vintage and
freighter aircraft. On the low end of the spectrum, a 1969 built -200 was sold
in late 1995 to an undisclosed buyer for $750,000. As of February 1997, four
1968-1969 -200nonAdvanced hushkitted airplanes were for sale with asking prices
of $5.8 million each. A recent upper end transaction involved the sale of a 1981
ex-Carnival aircraft requiring C and D checks and interior work to American
Trans Air for a reported purchase price of $3 million. A late 1970s model sold
for cash in the third quarter of 1996 for slightly over $4 million. GRAS is also
aware of a small package of late model -15 powered -200s priced at somewhat
under $4 million each before hushkitting. A group of five ex-Ansett -200As (one
1979 and four 1981s) have been available since late 1996. They are high gross
weight airplanes with -15 engines and have extra fuel capacity. Two of the 1981s
recently sold for prices believed to be in the upper $4 million range. Asking
price on the 1979 airplane is $4.8 million and $5.3 million for the 1981 models.
Rental rates for unhushed -200As have been in the $45,000-50,000 range for -9A
powered airplanes, $75,000-85,000 for -15 aircraft and $80,000-100,000 for -17
powered aircraft.
U.S. regulations require the complete phaseout of Stage 2 aircraft by the end
of 1999 and the import of non-Stage 3/Chapter 3 airplanes into Europe and
Australia is prohibited. Thus the geographic scope of
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exporting unhushed 727s is limited. The only current 727 hushkitting program is
FedEx's as noted in the section above. Those hushkits are available for 727s
with maximum takeoff weights of up to 204,500 pounds. As of January 1997, FedEx
kits have been installed on 275 727s of all types.
COMMERCIAL JET MARKET OVERVIEW
The General Situation
GRAS continually tracks the variables which influence aircraft value, utility
and market acceptance. These include economic conditions, airlines' and
manufacturers' activities, capital availability, regulatory and environmental
matters and details regarding the airplanes themselves. For ease of analysis,
we view these factors in terms of their effects on airliner supply and demand.
With regard to airliner demand, world and regional economic conditions are major
drivers of passenger traffic and therefore demand for capacity. During the
economic weakness of the early 1990s, traffic growth softened at the same time
that record numbers of new aircraft deliveries were being made as a result of
the economic boom of the late 1980s. The result was a vast oversupply of
jetliners; at one point, almost 10% of the jetliner fleet was in storage. As
economic conditions have improved, so has the airline business. During
1994-1996, world traffic grew substantially, about 25%, and exceeded capacity
growth (up about 17% during the period). ICAO reported that revenue passenger
kilometers in 1996 rose 7% over 1995, freight grew 5% and average load factor
was 68%. During the first 9 months of 1996, U.S. majors traffic grew 6.5% while
capacity was up only about 2.4%. Load factors have risen to record levels during
the period and in the summer of 1996 exceeded 80% for some carriers. The trend
in yields has been positive since early 1995 although yield improvements slowed
somewhat in the latter part of 1996.
As traffic grew, carriers were reluctant to place new orders, especially in the
U.S. They increased aircraft utilization, returned parked aircraft to service
and deferred retiring aging workhorses such as the DC-9-30. The order spigot
finally opened in 1995 after 4 years of very low new order volume and, as
discussed below, the flow of orders reached a high volume in 1996.
In addition to economic conditions, there has been a basic change in the
operating philosophy of the airlines themselves. There is a somewhat reduced
focus on market share and liberalization in Europe is moving ahead. Airlines
are likely to continue their focus on improving financial performance and
preparing in terms of costs, marketing, fleet capacity and revenue management
for ever increasing competition. These factors will continue to drive airlines'
demand for aircraft, type selection and fleet mix as fleet planners try to get
the most efficient match between aircraft types, routes and schedules.
As always, there are uncertainties influencing aircraft demand. With respect to
the airlines, a number of labor contracts are up for negotiation during 1997 and
fuel prices have been rising. While most forecasts assume steady economic
growth, in reality it is never as smooth as predicted. Among other things,
political and economic volatility in emerging areas such as China (for which
high growth and aircraft demand are forecast) and the CIS will have their
effects on aircraft demand. Carriers will continue to seek maximum flexibility
and minimum financial exposure in ordering new aircraft even as demand for lift
is building. A strong indication of this is American's order from Boeing in late
1996 which incorporated purchase rights that give known purchase prices and the
ability to order narrowbodies with 15 months notice and widebodies with 18
months notice. There is also the possibility that continuing regulatory scrutiny
of start-up and low cost operators will put a crimp in the demand for used
narrowbodies.
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The dynamics of the airliner supply situation are also in a state of flux. As
the chart below indicates, new aircraft orders fell abruptly during the first
half of the 1990s to 347 new orders in 1995, increased to almost 700 in 1995 and
again sharply in 1996 to over 1,200. There is a question as to whether all
those orders will materialize; the American order is currently in limbo pending
the outcome of its pilots union negotiations and USAir has not confirmed its
large order with Airbus. These two orders account for about one-sixth of 1996
orders. In the face of this surge, manufacturers are increasing production
rates dramatically. Airbus delivered 126 jetliners in 1996, plans to increase
1997 production by 45% to 183 aircraft and in 1998 to 220 airplanes. During
1996, Boeing hired about 18,000 new workers and made a series of announcements
regarding production rate increases. In December 1996, it announced that it
planned to increase its then-current rate of 22.5 aircraft per month to 40 per
month by the end of 1997, slightly over its record production rate of 39.5 in
1992. Its planned acquisition of McDonnell Douglas will boost its engineering
and production capabilities substantially.
JETLINER ORDERS, DELIVERIES AND RETIREMENTS
<TABLE>
<CAPTION>
Orders Deliveries Retirements
------ ---------- -----------
<S> <C> <C> <C>
1960 231 255 5
1961 192 208 5
1962 91 171 8
1963 166 100 10
1964 272 206 10
1965 753 285 10
1966 685 402 17
1967 505 524 24
1968 500 732 28
1969 248 566 20
1970 226 330 26
1971 187 252 21
1972 296 225 37
1973 299 304 54
1974 274 353 58
1975 199 315 60
1976 234 267 84
1977 348 208 64
1978 666 276 59
1979 530 408 47
1980 393 439 88
1981 270 432 130
1982 183 287 128
1983 272 319 149
1984 361 265 120
1985 680 346 82
1986 618 394 46
1987 626 419 37
1988 1,009 512 45
1989 1,356 564 59
1990 885 671 54
1991 445 829 91
1992 458 787 134
1993 406 650 118
1994 347 520 140
1995 694 483 142
1996 1,239 496
</TABLE>
As a result of this order and delivery activity, the order backlog fell from a
historical high of almost 3,100 jetliners at the end of the 1980s to about
2,100 by mid-1996 and has started rising as the following chart indicates:
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JETLINER BACKLOG BY MANUFACTURER
<TABLE>
<CAPTION>
March 1996 June 1996 September 1996 December 1996
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Airbus 603 656 729 728
AI(R) 35 26 24 32
Boeing 1,196 1,122 1,265 1,347
BRAD 44 36 44 34
Douglas 207 203 237 190
Embr 0 18 45 44
Fokker 52 46 46 6
</TABLE>
THE NARROWBODY SECTOR
In terms of values and availability during the last 2 years, the narrowbody
market has firmed significantly. Airline traffic has been growing, capacity has
been lagging and yields have been good. The number of parked airplanes has
fallen and lease rental rates have risen substantially. Order books are
filled, Fokker is literally manufacturing its final airplane and Douglas
production lines may wind down. While the picture is still cloudy, we think it
unlikely that the Boeing-McDonnell Douglas combination will have any pronounced
effects on DC-9 and MD-80 values. There is a large population of both types;
they should continue to have good utility and product support from Douglas
should no longer be a question. However, future prospects for the MD-90,
which has a very limited population and order book, and the MD-95 are very
uncertain. We believe that narrowbody market conditions should remain good
over the near to medium term and that the second half of the 1990s should be
highly competitive as new aircraft models such as the A-319, A321-200 and next
generation of 737s come to market. The important question here is whether
sufficient traffic will materialize to fill all the new airplanes now on order.
At the end of 1988, there were about 140 narrowbodies available for sale or
lease worldwide. By early 1991, the second Continental bankruptcy and
liquidation of Eastern were under way and that number had quintupled, peaking at
730 airplanes which was a very high 9% of the narrowbody fleet. Since that
time, availability has been dropping steadily, particularly since mid-1994. As
of February 1997, about 125 narrowbodies were publicly available for sale or
lease, about 1.5% of the narrowbody fleet, which we believe indicates a firm
overall market. Only about 25 modern technology Stage 3 airplanes were
available which indicates very firm conditions. DC-9-30s and 737-200As in good
condition have also been popular and many of the BAe-146s which had been parked
are now back in service. Of the available Stage 2 narrowbodies, a majority of
them are at least 20 years old. As of February 1997, ValuJet's restart and the
sale of some of its fleet do not appear to have had a material effect on
narrowbody values.
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NARROWBODIES PARKED AND AVAILABLE
<TABLE>
<CAPTION>
AVAILABLE PARKED
<S> <C> <C>
1-90 288
2-90 256
3-90 393
4-90 321
5-90 302
6-90 339
7-90 402
8-90 379
9-90 381
10-90 390
11-90 393
12-90 465
1-91 486
2-91 730
3-91 730
4-91 696
5-91 688
6-91 719
7-91 720
8-91 666
9-91 682
10-91 638
11-91 599
12-91 601
1-92 571
2-92 595
3-92 590 725
4-92 566 732
5-92 542 701
6-92 552 671
7-92 533 668
8-92 522 684
9-92 503 687
10-92 499 708
11-92 520 727
12-92 507 843
1-93 508 844
2-93 532 859
3-93 533 866
4-93 522 874
5-93 539 866
6-93 503 844
7-93 494 851
8-93 500 880
9-93 511 884
10-93 492 898
11-93 499 876
12-93 492 899
1-94 473 894
2-94 476 881
3-94 455 878
4-94 491 866
5-94 482 843
6-94 420 829
7-94 446 809
8-94 446 776
9-94 448 777
10-94 428 774
11-94 407 744
12-94 361 701
1-95 329 681
2-95 331 669
3-95 316 644
4-95 320 619
5-95 325 587
6-95 314 556
7-95 323 542
8-95 280 538
9-95 314 508
10-95 302 503
11-95 299 500
12-95 286 475
1-96 287 463
2-96 305 466
3-96 263 460
4-96 260 459
5-96 180 469
6-96 166 437
7-96 148 413
8-96 155 409
9-96 157 410
10-96 160 403
11-96 158 397
12-96 163 412
1-97 138 445
2-97 124
</TABLE>
As the chart below shows, the number of narrowbody jetliners in storage peaked
in late 1993 at almost 900 airplanes. By January 1997, that number had dropped
to about 450 airplanes, over a third of which were Boeing 727s. Many of these
airplanes are unlikely to return to service except in the case of a real
shortage of lift.
Near-term Perspective
GRAS believes that the late 1990s should be a time of improvement as we move
along the up side of the aircraft cycle. There is likely to be at least
reasonable economic and traffic growth through the end of the century. The
supply of used aircraft has largely evaporated, operating lease rates are up
and order growth has been very strong in 1995 and 1996. The narrowbody market
will remain active. In North America, frequencies will continue to be
important and as liberalization proceeds in Europe increased frequencies will
probably become increasingly important. The market for intermediate and large
twins will be strong, especially as the trans- and intra-Pacific long haul
markets grow. They provide good flexibility on inter-regional and
international routes; they allow carriers to fly from hubs where they control
traffic feed, avoid crowded traditional gateways like JFK and offer good
economies on thinner routes and to secondary cities. We expect this class of
aircraft to increasingly supplant 3-engine passenger airplanes and the early
4-engine widebodies. Big widebodies will continue to play their important role
on long haul, dense routes.
Even in the glow of an improving market, there are several factors to watch:
- There have been very large orders placed in 1995 and 1996 and
manufacturers are speeding up production sharply. If traffic does not
grow as projected, this could ultimately lead to a surplus of airplanes.
- ValuJet's restart appears to be plagued with the unfortunate combination
of low fares, low load factors and the inability to expand rapidly. To
date, their situation does not appear to have materially affected used
narrowbody prices, but the situation bears observation.
- Fuel costs have risen, a number of airline labor contracts are up for
renewal in 1997 and many carriers' cost trends are up rather than down.
- With respect to new aircraft price increases, two opposing forces are in
play. Even with the apparent demise of Fokker and the likely withdrawal
of Douglas from the market over time, there is still fierce sales
competition between Boeing and Airbus and airlines continue to complain
about new aircraft prices. This will tend to keep prices in check. At
the same time, order books are filling rapidly, which can ultimately
lead to reduced airliner price discounts. GRAS believes that price
increases will probably be moderate over the foreseeable future.
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February 26, 1997
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<PAGE> 138
A final caveat. In former times, the choice of narrowbodies was primarily among
DC-9s, 727s and 737s and among widebodies the 747, DC-10 and L-1011. GRAS
believes airline planners will continue to fine tune aircraft types and sizes
to match their routes and manufacturers are introducing an increasing number of
jetliner models and variants to meet this need. In the next few years, there
will likely be six models of 737s in production, three versions each of the A340
and 777 and Airbus is studying the A3XX. This proliferation of new aircraft
variants is going to make it more difficult, and far more important, for those
who take residual and/or asset risk in aircraft to determine which airplanes
will provide the value retention they need.
COVENANTS
- ---------
GRAS hereby consents to the use of the report and its name in Client's
Information Statement which may be filed with the Securities and Exchange
Commission.
In accordance with ISTAT's Principles of Appraisal Practice and Code of Ethics,
this desktop valuation has been prepared for the exclusive use of Client; GRAS
will not provide this report to any other party without the express consent of
Client. GRAS has no present or contemplated interest in the subject equipment
or any similar equipment nor does it have any other interest which might tend
to prevent it making a fair and unbiased appraisal.
This report fairly represents GRAS's opinion of the subject equipment's value.
In reaching our value opinions, we have relied upon information provided to us
by Client. We do not assume responsibility or legal liability for any actions
taken, or not taken, by Client or other parties with regard to the equipment.
By accepting this desktop valuation, all parties agree that GRAS shall bear no
such responsibility or legal liability including liability for special or
consequential damages.
/s/ FRED J. KLEIN
Fred J. Klein
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February 26, 1997
B-3-19
<PAGE> 139
GRA Aviation Specialists, Inc.
COMPANY PROFILE
Although the newest members of the GRA group, GRA Aviation Specialists'
principals Fred Klein, Richard Barlow and Bob Zuskin are well-known in the
aviation and financial industries. They were formerly the Vice President --
Valuations and two appraisers out of Avitas's four-person Appraisal Department
where they were responsible for appraising several billion dollars of
jetliners, commuter aircraft, corporate airplanes, engines and simulators. They
have extensive practical aviation industry experience in such areas as finance,
asset management, airframe and engine maintenance and market analysis. GRA
Aviation Specialists (GRAS) provides its clients with premium quality services
at very cost effective prices.
Messrs. Klein, Barlow and Zuskin joined with GRA, Incorporated (GRA) in forming
GRA Aviation Specialists in order to extend GRA's reach into the financial
sector of the aviation business. GRAS's principals, all veteran aircraft
appraisers and market analysts, have practical experience in the asset-based
finance, airline and corporate aircraft industries which allows them to provide
pragmatic advice and counsel to their clients who include banks, lessors,
manufacturers, arrangers, airlines and legal counsel. Services include:
o Appraisals and inspections of jet, commuter and corporate
airplanes, engines and simulators
o Quantifying risk in such areas as residual values and return
provisions
o Analysis of general aviation markets as well as specific
aircraft types/markets
o Advising clients in understanding, drafting and negotiating
aircraft leases and loans
o THE GUIDE, a reference book with jetliner values,
specifications and demographics
GRAS's staff is widely recognized for its extensive aviation industry
experience and for its ability to translate that expertise into effective
advice for its clients. Fred Klein has over 20 years experience in the
transportation equipment finance industry in asset management, marketing,
credit and problem deal workouts. He was previously Chief Appraiser and Vice
President - Marketing at Avitas. Richard Barlow has over a dozen years of
technical and appraisal experience, holds an FAA A&P license and was formerly
Avitas's Manager - Aircraft Valuations. Bob Zuskin has 17 years in the
corporate aircraft industry and is exceptionally knowledgeable about corporate
airplanes. He was formerly Avitas's Senior Value Analyst and Manager -
Corporate Aircraft Consulting.
In addition to its own in-house experience, GRAS has immediate access to the
knowledge and extensive data resources of the GRA, Incorporated staff with whom
they have worked on a number of joint projects. GRA is a transportation
consulting firm founded in 1972 as Gellman Research Associates. They are
financial and economic specialists who are particularly active in the areas of
strategic planning and analysis, public policy and regulatory matters and do
much of their work in the government and airline sectors. They have been
involved in airline privatizations, worked on behalf of creditors' committees,
have helped international carriers evaluate potential investments in U.S.
carriers and perform extensive on-going work for the FAA. GRA is also active in
the rail industry as a consultant and expert appraiser of rail equipment. In
addition to its highly qualified staff, GRA has an extensive in-house library, a
full-time research librarian and on-line access to transportation data bases at
Princeton, Northwestern University and Berkeley.
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February 26, 1997
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<PAGE> 140
GRA Aviation Specialists, Inc.
PRINCIPALS' BACKGROUNDS
FRANK BERARDINO, PRESIDENT OF GRA, INCORPORATED AND CHAIRMAN OF GRA AVIATION
SPECIALISTS: With 20 years of professional consulting experience, he
specializes in strategic and economic matters in the aviation industry; many of
his assignments involve financial transactions. He has directed several airline
acquisition, divestiture and privatization engagements for major carriers in
the U.S., Europe and Asia. Mr. Berardino has also testified as an expert witness
in legal and regulatory proceedings. He is a member of the American Economic
Association, the Transportation Research Forum, the National Business
Economists and the Transportation Public Utilities Group. Mr. Berardino holds a
BA in economics from Kenyon College and an MA in economics from the University
of Pittsburgh.
FRED KLEIN, PRESIDENT: Seven years with Avitas as Vice President - Valuations
and Vice President - Marketing. He spent the previous 14 years with Greyhound
Financial Corporation, where he worked in all phases of the asset finance
business including senior positions in asset management, marketing, credit and
problem solving. In addition to working in Greyhound's U.S. and Canadian
operations, he also held postings with the company's overseas joint ventures in
Tokyo and Switzerland which were extensively involved in aircraft and ship
financing. he holds a BA in economics from Dartmouth College and an MBA in
finance from the University of North Carolina.
RICHARD BARLOW, DIRECTOR - VALUATIONS: Five years with Avitas as Manager -
Asset Valuations and Technical Auditor. He has an additional eight years
technical aviation experience in maintenance, quality assurance and
supervisory positions with Page AvJet, Airwork, Emerald Airlines and the U.S.
Army. Mr. Barlow attended Embry-Riddle Aeronautical University and holds an FAA
Airframe & Powerplant license.
ROBERT ZUSKIN, DIRECTOR - RESEARCH: Three years with Avitas as Manager -
Corporate Aviation and Senior Value Analyst. Mr. Zuskin also spent 14 years in
research and management positions as Director of Market Research with AMR
Aircraft Sales, Vice President of Boston JetSearch and Director of Market
Research at U.S. Aircraft Sales. He holds a BS from American University.
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February 26, 1997
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<PAGE> 141
EXHIBIT C
SECOND AMENDMENT TO
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP
This Second Amendment to Amended and Restated Agreement of Limited
Partnership of Airlease Ltd., A California Limited Partnership (this
"Amendment"), is made and entered into as of the [ day of December],
1997.
WHEREAS, the Partners previously entered into an Amended and Restated
Agreement of Limited Partnership dated as of October 10, 1986, as amended on
December 12, 1988 (the "Original Partnership Agreement");
WHEREAS, the Partners desire to amend the Original Partnership Agreement as
specified in this Amendment; and
WHEREAS, Article 18 of the Original Partnership Agreement provides that it
may be amended if certain conditions are satisfied, and all such conditions have
been satisfied with respect to this Amendment;
NOW, THEREFORE, for and in consideration of the foregoing, and of the
covenants and agreements hereinafter set forth, it is hereby agreed as follows:
1. Defined Terms. All capitalized terms used but not defined herein shall
have the meanings given to such terms in the Original Partnership Agreement, as
amended by this Amendment.
2. Deletion of "Assignee." The General Partner shall be authorized to
delete the definition of "Assignee" from Article 1 of the Agreement and to
delete all references in the Agreement to any "Assignee," which term shall then
be of no further force and effect.
3. "Transfer Application." The General Partner shall be authorized to
delete the definition of "Transfer Application" included in Article 1 of the
Agreement and to replace it in its entirety with the following definition:
Transfer Application: An application and agreement for transfer of
Depositary Units in the form set forth on the back of the Depositary
Receipt or in a form substantially to the same effect in a separate
instrument by which (a) a proposed transferee of Depositary Units requests
admission to the Partnership as a Substituted Limited Partner, agrees to be
bound by the terms and conditions of this Agreement and the Depositary
Agreement, grants a power of attorney to the General Partner pursuant to
Article 17, and represents and warrants to the Partnership that he is a
United States Citizen or Resident Alien and (b) a proposed transferee of
Depositary Units makes representations regarding the manner of transfer of
such Depositary Units as the General Partner deems necessary to avoid
taxation of the Partnership as a corporation for federal income tax
purposes. The form and content of the Transfer Application may be changed
from time to time in the sole discretion of the General Partner.
4. Amendment of Section 3.3(B). The General Partner shall be authorized to
delete Sections 3.3(B)(1) and 3.3(B)(2) of the Agreement in their entirety and
to replace them with the following Section 3.3(B), to read in its entirety as
follows:
(B) After December 31, 1997, all Cash Available From Sale or
Refinancing shall be distributed pursuant to Section 10.3(C), provided that
if the General Partner determines that it would be in the Partnership's
best interest, Cash Available From Sale or Refinancing may be used to repay
indebtedness.
5. Amendment of Section 4.1(ff). The General Partner shall be authorized to
delete Section 4.1(ff) of the Agreement in its entirety and to replace it with
the following Section 4.1(ff) to read in its entirety as follows:
(ff) To sell any and all Partnership Assets on terms and conditions
determined by the General Partner, including a sale of all or substantially
all of the Partnership Assets.
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6. Amendment to end of Section 4.1. The General Partner shall be authorized
to add a new Section 4.1(ii) to the end of Section 4.1, to read in its entirety
as follows:
(ii) To impose such restrictions on the transfer of Units as the
General Partner deems necessary or appropriate to prevent the Partnership
from being taxed as a corporation for federal income tax purposes.
7. Amendment of Section 7.9(A)(2). The General Partner shall be authorized
to delete Section 7.9(A)(2) of the Agreement in its entirety and to replace it
with the following Section 7.9(A)(2) to read in its entirety as follows:
(2) Dissolution, discontinuation, or material alteration of the
business of the Partnership, provided that no approval is required for
dissolution following the sale of all or substantially all of the
Partnership Assets;
8. Amendment of Section 10.3.
a. The General Partner shall be authorized to delete Section 10.3(B) of
the Agreement in its entirety.
b. The General Partner shall be authorized to delete Section 10.3(C) of
the Agreement in its entirety and to replace it with the following Section
10.3(C) to read in its entirety as follows:
(C) After December 31, 1997, subject to Section 3.3(B), any Cash
Available From Sale or Refinancing shall be distributed 99% to the
Unitholders and 1% to the General Partner.
9. Changes to Transfer Provisions in Article 13.
a. The General Partner shall be authorized to delete Section 13.4(B) of
the Agreement in its entirety and to replace it with the following Section
13.4(B) to read in its entirety as follows:
(B) A transferee who has completed and delivered a Transfer
Application shall be deemed (i) to have agreed to be bound by the terms and
conditions of the Depositary Agreement and the Depositary Receipt, (ii) to
have requested admission as a Substituted Limited Partner with respect to
the Units transferred, (iii) to have agreed to comply with and be bound by
this Agreement, whether or not such transferee is admitted as a Substituted
Limited Partner and to execute any document that the General Partner may
reasonably require to be executed in connection with the transfer or with
the admission of such transferee as a Substituted Limited Partner pursuant
to Article 14 with respect to the Depositary Units transferred, (iv) to
have represented and warranted that such transferee is a United States
Citizen or Resident Alien and has authority to enter into the Depositary
Agreement and this Agreement, (v) to have made representations regarding
the manner of transfer of such Depositary Units as the General Partner
deems necessary to avoid taxation of the Partnership as a corporation for
federal income tax purposes, (vi) to have appointed the General Partner his
attorney-in-fact to execute any document that the General Partner may deem
necessary or appropriate to be executed in connection with the transfer
and/or his admission as a Substituted Limited Partner with respect to the
Depositary Units transferred, (vii) to have given the power of attorney set
forth in Article 17, and (viii) to have given the consents and waivers
contained in this Agreement. Unless and until admitted as a Substituted
Limited Partner pursuant to Article 14 with respect to Depositary Units
transferred pursuant to this Section 13.4, no transferee shall have any
rights with respect to the Partnership. Except as specifically provided in
this Agreement, a transferee shall not be treated as or have the rights of
a Limited Partner.
b. The General Partner shall be authorized to delete Section 13.4(E) of
the Agreement in its entirety and to replace it with the following Section
13.4(E) to read in its entirety as follows:
(E) Any holder of a Unit or a Depositary Receipt (including a
transferee thereof conclusively shall be deemed to have agreed to comply
with and be bound by all terms and conditions of this Agreement, with the
same effect as if such holder had executed a Transfer Application, whether
or not such holder in fact has executed such a Transfer Application.
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<PAGE> 143
10. Changes to Partner Admission Procedures in Article 14. The General
Partner shall be authorized to delete Section 14.1(A) of the Agreement in its
entirety and to replace it with the following Section 14.1(A) to read in its
entirety as follows:
(A) Any person shall have the right to request admission as a
Substituted Limited Partner subject to the conditions of and in the manner
permitted by the terms of this Agreement. By transfer of a Depositary
Receipt, the transferor is deemed to have given the transferee the right to
request admission as a Substituted Limited Partner subject to the
conditions of and in the manner permitted under this Agreement. Each
transferee of a Depository Receipt (including any Person, such as a broker,
dealer, bank, trust company, clearing corporation, other nominee holder, or
an agent of any of the foregoing, acquiring such Depositary Unit for the
account of another Person) shall apply to become a Substituted Limited
Partner with respect to Depositary Units transferred to such Person by
executing and delivering a Transfer Application at the time of such
transfer. Such transferee shall become a Substituted Limited Partner with
respect to Depositary Units transferred at such time as the General Partner
consents thereto, which consent may be given or withheld in the General
Partner's sole discretion. Unless the Depositary is notified to the
contrary, the General Partner shall be deemed to have given its consent to
the admission of a transferee as a Substituted Limited Partner, and such
admission shall be effective, at and from the close of business on the last
business day of the calendar month in which a properly executed Transfer
Application is received by a Transfer Agent.
11. Exhibit 1 to the Agreement. The General Partner shall be authorized to
amend the form of Transfer Application included in Exhibit 1 to the Agreement by
replacing it with Attachment 1 hereto. The General Partner shall be authorized
to change the form and content of Attachment 1 from time to time in its sole
discretion.
12. Authority of General Partner to Take Certain Action. The General
Partner shall be authorized to make any or all of the foregoing amendments. In
addition, if any amendment or proposed amendment to partnership tax law is
enacted or pending, the General Partner is authorized to take such other actions
(including amending the Agreement or any amendment thereto) which the General
Partner determines are in the best interests of the Partnership and the Limited
Partners and which are consistent with the intent of the Restrictions on Unit
Transferability and Portfolio Runoff, as defined in the Consent Solicitation
Statement dated June , 1997 in light of any change or proposed change in
partnership tax law from the law in existence on June 1, 1997. Without limiting
the authority of the General Partner, the General Partner is authorized to
further amend the Agreement and to take any other action necessary or
appropriate to carry out the intent of the foregoing provisions of this
Amendment.
13. Agreement in Full Force and Effect. Except as amended hereby, the
Agreement shall continue in full force and effect.
14. Governing Law. This Amendment shall be governed by and construed under
the laws of the State of California.
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<PAGE> 144
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
day and year first written above.
GENERAL PARTNER:
AIRLEASE MANAGEMENT SERVICES, INC.
By:
------------------------------------
Name:
Title:
LIMITED PARTNERS (pursuant to
powers-of-attorney to the General
Partner)
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<PAGE> 145
Attachment 1
NO ASSIGNMENT OF THE DEPOSITARY UNITS EVIDENCED BY A DEPOSITARY RECEIPT
WILL BE REGISTERED ON THE BOOKS OF THE DEPOSITARY OR OF AIRLEASE LTD., A
CALIFORNIA LIMITED PARTNERSHIP (THE "PARTNERSHIP"), UNLESS AN APPLICATION FOR
TRANSFER OF DEPOSITARY UNITS HAS BEEN EXECUTED BY A TRANSFEREE WHO CERTIFIES
THAT THE TRANSFEREE, AND IF THE TRANSFEREE IS HOLDING A DEPOSITARY UNIT FOR
ANOTHER PERSON, THAT TO THE BEST KNOWLEDGE OF THE TRANSFEREE SUCH OTHER PERSON,
IS A UNITED STATES CITIZEN OR RESIDENT ALIEN (AS THOSE TERMS ARE DEFINED IN THE
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF THE PARTNERSHIP), ON
THE FORM OF APPLICATION SET FORTH BELOW.
APPLICATION FOR TRANSFER OF DEPOSITARY UNITS
The undersigned ("Applicant") hereby applies for transfer to the name of
the Applicant of the Depositary Units evidenced by a Depositary Receipt and
hereby certifies to Airlease Ltd., A California Limited Partnership (the
"Partnership"), and the Depositary that the Applicant (including, to the best of
Applicant's knowledge, any person for whom the Applicant will hold the
Depositary Units) is a United States Citizen or Resident Alien (as those terms
are defined in the Amended and Restated Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement")).
The Applicant further certifies to the Partnership that:
(Check one)
<TABLE>
<C> <S>
---- (a) The Applicant has acquired the Depositary Units by a "transfer not involving
trading" within the meaning of Internal Revenue Service Notice 88-75.
----
(b) The Applicant has acquired the Depositary Units in compliance with the "two percent"
safe harbor described in Internal Revenue Service Notice 88-75.
----
(c) The Applicant has acquired the Depositary Units in a qualified "matching service"
transaction described in Internal Revenue Service Notice 88-75.
</TABLE>
THE TRANSFER OF DEPOSITARY UNITS PURSUANT TO THIS TRANSFER APPLICATION IS
SUBJECT TO A DETERMINATION BY THE GENERAL PARTNER IN ITS SOLE DISCRETION THAT
SUCH TRANSFER WAS MADE IN ACCORDANCE WITH INTERNAL REVENUE SERVICE NOTICE 88-75
AND WILL NOT CAUSE THE AGGREGATE PERCENTAGE OF DEPOSITARY UNITS TRANSFERRED
DURING THE CALENDAR YEAR TO EXCEED THE ALLOWABLE AMOUNT OR OTHERWISE CAUSE THE
DEPOSITARY UNITS TO BE TREATED AS TRADED ON AN ESTABLISHED SECURITIES MARKET OR
READILY TRADABLE ON A SECONDARY MARKET (OR THE SUBSTANTIAL EQUIVALENT THEREOF)
AS DEFINED IN SECTION 7704(B) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
The Applicant (i) agrees to be bound by the terms and conditions of the
Depositary Agreement and the Depositary Receipt, (ii) requests admission as a
Substituted Limited Partner in the Partnership and agrees to be bound by the
Partnership Agreement, and (iii) appoints the General Partner of the Partnership
his attorney to execute, swear to, acknowledge and file any document necessary
or appropriate for the Applicant's admission as a Substituted Limited Partner in
the Partnership and as a party to the Partnership Agreement, if consent to such
admission is given by the General Partner in its sole discretion.
<TABLE>
<S> <C>
Dated --------------------------------------------------------------------
Signature of Transferee
(Must Be United States Citizen or Resident Alien)
- ------------------------------ --------------------------------------------------------------------
Social Security or other Residence Address
identifying number
- ------------------------------
Purchase Price (including
Commissions, if any)
</TABLE>
Type of Entity (check one):
- ---- Individual
- ---- Partnership
- ---- Corporation
- ---- Trust
- ---- Other (Specify)
Nationality (check one):
- ---- U.S. Citizen or Resident Alien
- ---- Foreign Corporation or Non-resident Alien
If the Applicant is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof, or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange, or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Applicant is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, the above
certification as to any person for whom the Applicant will hold the Depositary
Units shall be made to the best of the Applicant's knowledge.
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<PAGE> 146
LOGO
The General Partner of Airlease Ltd., A California Limited Partnership
June 24, 1997
Dear Limited Partner,
Enclosed is a Consent Solicitation Statement which seeks your approval, as
a Limited Partner of Airlease, to authorize us, as General Partner of Airlease,
to restrict trading of the Units and to stop making new investments in aircraft
and to sell aircraft as attractive opportunities arise. If Limited Partners
approve and there is no change in tax law, in December 1997 Airlease would cease
to be listed on the New York Stock Exchange.
The reason for this proposal is to avoid an additional tax scheduled to be
imposed beginning January 1, 1998. This additional tax would substantially
reduce distributions to Limited Partners. Under the present law, there are two
ways to avoid the additional tax: first, sell all assets during 1997; second,
restrict trading of the Units, which would require delisting from the New York
Stock Exchange. Earlier this year we contacted potential purchasers and
confirmed that an immediate sale probably would not provide Limited Partners
with full value. As a forced sale, an immediate sale likely would result in
depressed valuation.
Delisting the Units from trading on the New York Stock Exchange is the
other alternative to avoid the higher level of tax. Unfortunately, the delisting
will reduce the liquidity of your investment in Airlease, and this is one of the
reasons we are also proposing to stop making new aircraft investments. To
shorten the period of time during which you would hold a less liquid investment,
we are proposing that we sell aircraft as attractive investment opportunities
arise and distribute the net sales proceeds to Limited Partners. This should
provide an earlier than originally planned return on your investment. Although
we cannot predict when or at what price aircraft will be sold, 85% of the
portfolio is scheduled to come off lease within five years. Since its inception
Airlease has sold interests in 11 aircraft with each sale being at a gain over
book value.
The other significant factor we reviewed in making the proposal is
Airlease's competitive position. As we have been reporting to you, during the
past five years Airlease has made only two aircraft investments, both of which
were possible because of special circumstances which we believe are unlikely to
occur in the future. Airlease's difficulty in making additional investments and
the tax which will be imposed in January 1998 are the reasons we are proposing
to restrict trading of Units and to stop making new investments.
Two bills are pending in Congress which, if enacted, would extend the tax
benefits for publicly traded partnerships, like Airlease, but would impose a tax
on the gross income of partnerships which elect to be covered by this law. Since
we can't predict whether or in what form this legislation may be enacted,
Airlease needs flexibility to respond to changes in tax law which may be
beneficial to the
<PAGE> 147
Limited Partners. For that reason, the proposal also permits us to take other
actions which are in the best interests of the Limited Partners.
The enclosed Consent Solicitation Statement, which we urge you to read
carefully, provides information about the proposal, including cash flow
projections. These projections include scheduled rental payments and appraisals
from outside experts on the values of the aircraft and should help you evaluate
the proposal. In addition, we have tried to anticipate some of your questions in
the attached few pages.
We do not make our recommendation lightly or without investment risk of our
own. We carefully considered the alternatives and make this recommendation based
on our judgment of what is in the best interest of the Limited Partners. In
addition to being the General Partner, our parent owns 1,025,000 Units. Based on
our recommendation, our parent will vote these Units in favor of the proposal
because it also believes the proposal provides the greatest projected return to
Limited Partners. We recommend that you also approve the proposal.
For your vote to count, the consent card must be postmarked by August 28,
1997. Failure to return the card has the same effect as a vote against the
proposal.
If you have questions, you may call toll-free our solicitation agent at
1-800-714-3133 or Airlease at 1-888-800-0161.
Airlease Management Services, Inc.
<PAGE> 148
QUESTIONS AND ANSWERS ABOUT THE PROPOSAL
The following questions and answers are designed to respond to questions
you may have about the Proposal. The answers do not include all of the
information in the accompanying Consent Solicitation Statement, so we have
included cross-references to the Consent Solicitation Statement. WE URGE YOU TO
READ THE CONSENT SOLICITATION STATEMENT CAREFULLY.
IF YOU HAVE ANY QUESTIONS OR NEED HELP IN FILLING OUT YOUR LIMITED PARTNER
CONSENT CARD, PLEASE CALL D.F. KING & CO., INC., OUR SOLICITATION AGENT FOR THIS
CONSENT SOLICITATION PROCESS, AT 1-800-714-3133.
1. WHAT ACTIONS ARE YOU TAKING?
We are seeking your approval, as a Limited Partner of Airlease, to
authorize us, as the General Partner of Airlease, to take the following actions:
(i) restrict transferability of the Units which will result in the
Units being delisted from trading on the New York Stock Exchange in
December 1997;
(ii) stop investing in aircraft, sell Airlease's remaining aircraft as
attractive opportunities arise, distribute the net proceeds of sale to
Limited Partners and dissolve Airlease when all assets are sold; and
(iii) if any amendment or proposed amendment to partnership tax law is
enacted or pending, to take other actions consistent with the intent of the
Proposal which are in the best interests of the Limited Partners.
These authorizations to the General Partner are called the Proposal.
If the Proposal is approved by the Limited Partners and there is no
amendment or proposed favorable amendment to partnership tax law, we will impose
the transfer restrictions and will stop making new investments, as described in
(i) and (ii) above. If the Proposal is approved and there is an amendment or
proposed amendment to partnership tax law, we will consider whether to impose
transfer restrictions or to take other actions which are consistent with the
Proposal and in the best interests of the Limited Partners. Based upon
Airlease's investment experience over the last several years and our knowledge
of the market, if the Proposal is approved we expect that we will stop making
new investments even if we do not impose transfer restrictions on the Units.
See "THE PROPOSAL" pages 35 - 40.
<PAGE> 149
2. WHAT PROMPTED YOU TO MAKE THE PROPOSAL NOW?
Airlease's income has not been subject to tax, and to date all
distributions to Limited Partners have been made free of tax at the partnership
level. However, under current federal tax law, if we do not take any action, the
income of Airlease will be subject to tax beginning in January 1998, and this
would substantially reduce distributions to Limited Partners after that date.
Delisting the Units from trading on the New York Stock Exchange is necessary to
avoid the higher level of tax. Unfortunately, the delisting will reduce the
liquidity of your investment in Airlease, and this is one of the reasons we are
also proposing to stop making new aircraft investments.
In addition to the impact of the tax law, finding investment opportunities
which offer an appropriate balance of risk and reward has been very difficult.
In fact, as we have been reporting to you, during the past five years Airlease
has made only two aircraft investments, both of which were possible because of
special circumstances which we believe are unlikely to occur in the future.
Because of these two factors, the illiquidity resulting from delisting and
the general unavailability of attractive investments for Airlease, we are
proposing that Airlease stop making new aircraft investments, sell its aircraft
as attractive opportunities arise, and distribute net sales proceeds to Limited
Partners. We believe that the Proposal offers the best opportunity under the
circumstances to maximize value to you as a Limited Partner.
Bills are pending in Congress which, if enacted, would extend the tax
benefits for publicly traded partnerships, like Airlease but would impose a tax
on the gross income of partnerships which elect to be covered by this law. Of
course we can't predict whether or in what form this legislation may be enacted.
However, because of this potential change in partnership tax law, Airlease needs
flexibility to respond to a change in tax law which is beneficial to the Limited
Partners. For that reason, if there is an amendment or proposed amendment to the
tax law, the Proposal permits us to take other actions which we believe are
consistent with the intent of the Proposal and are in the best interests of the
Limited Partners.
If there is no amendment or proposed amendment to partnership tax law, we
would impose the transfer restrictions and stop making aircraft investments, as
described above.
See "SPECIAL FACTORS -- The Proposal -- Background for the Proposal" pages
16-18, "THE PROPOSAL -- Potential Change in Tax Law" page 39-40, and "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- Partnership Tax Status" pages 58-59.
2
<PAGE> 150
3. WHAT WILL HAPPEN IF THE PROPOSAL IS APPROVED?
If the Proposal is approved, Limited Partners will continue to receive
distributions from cash available from operations and from aircraft sales
without the imposition of an additional tax. However, unless a change in
partnership tax law is enacted, we will impose restrictions on transferability
of the Units effective on or about December 17, 1997 and the Units will be
delisted from trading on the New York Stock Exchange at that time. Thereafter,
there will be no public market for the Units. Under provisions of tax law, there
are services which may be available to facilitate trading of a limited number of
Units each year. These are described in Question 17, below.
If the Proposal is approved and we impose transfer restrictions on the
Units, we would also stop making new aircraft investments and would sell
aircraft as attractive opportunities arise. We would distribute net sales
proceeds to Unitholders after each disposition and dissolve Airlease when all
assets are sold. Although we cannot predict when sales will be made, assuming
that lessees comply with their lease obligations, renewal options available
under leases are not exercised and the aircraft are sold at the end of their
existing lease terms, 86% of the assets would be sold within five years and the
remainder by 2006. Of course we can't assure that these circumstances will occur
or what the sales price of aircraft will be.
As described in Question 2 above, bills are pending in Congress which would
extend the tax benefits for publicly traded partnerships, like Airlease, but
would impose a tax on the gross income of partnerships electing to be subject to
the law. If either of these bills are enacted, we will consider whether to
impose transfer restrictions or take other action which would be beneficial to
Limited Partners. Based upon Airlease's investment experience over the last
several years and our knowledge of the market, if the Proposal is approved we
expect that we will stop making new investments even if we do not impose
transfer restrictions on the Units.
See "THE PROPOSAL" pages 35-40.
4. WHAT ALTERNATIVES DID YOU CONSIDER?
We considered three strategic alternatives:
IMMEDIATE SALE -- sell all of Airlease's assets during 1997 and
dissolve Airlease by December 31, 1997.
RESTRICT UNIT TRANSFERS AND PORTFOLIO RUNOFF -- restrict the
transferability of the Units (which would result in delisting the Units
from trading on the New York Stock Exchange) and run off the aircraft
portfolio (which means that we would stop making new aircraft investments,
sell aircraft as attractive opportu-
3
<PAGE> 151
nities arise, distribute the net sales proceeds to Limited Partners, and
liquidate Airlease when all assets were sold). This alternative is the
Proposal.
CORPORATE TAX AND PORTFOLIO RUNOFF -- Permit the Units to remain
publicly traded, thereby causing Airlease to be taxed as a corporation, and
run off the aircraft portfolio as described above.
See "SPECIAL FACTORS -- The Proposal -- Review of Strategic Alternatives" pages
19-24.
5. WHY DO YOU BELIEVE THAT THE PROPOSAL IS THE BEST ALTERNATIVE FOR AIRLEASE
AND ITS INVESTORS?
Of the three alternatives we considered, the Proposal provides the highest
projected value of future cash distributions to Limited Partners.
The value of distributions to Limited Partners will be greater if there is
no tax on Airlease, but this means that the Units must be delisted from trading
on the New York Stock Exchange and your investment in Airlease will be less
liquid.
To shorten the period of time during which you would hold a less liquid
investment, we are proposing that we sell aircraft as attractive investment
opportunities arise and distribute the net sales proceeds to Limited Partners.
This should provide an earlier than originally planned return on your
investment. Of course we cannot predict when sales will be made or the price at
which aircraft may be sold.
If there is an amendment or proposed amendment to the tax law, the Proposal
permits us to take other actions consistent with the intent of the Proposal
which we believe are in the best interests of the Limited Partners.
See "SPECIAL FACTORS -- Recommendation of the Special Committee and the Board;
Fairness of the Proposal" pages 29-30, and "-- Risks and Benefits to the Limited
Partners if the Proposal is Consummated -- Potential Change in Tax Law" pages
32-33.
6. WHY ARE YOU ASKING FOR APPROVAL OF THE PROPOSAL NOW WHEN THE TAX LAW MAY BE
AMENDED?
Under the current tax law, if we do nothing, Airlease will be taxed as a
corporation beginning on January 1, 1998 which would reduce distributions
substantially. As described in Question 2, above, bills are now pending which
would extend the favorable tax treatment for Airlease, but would impose a tax on
gross income which would reduce distributions.
4
<PAGE> 152
We can't predict whether or in what form this legislation may be enacted.
The final legislation, if any, may not be enacted for some time and it is
important that we allow sufficient time to obtain any necessary Limited Partner
consent. In addition, since Airlease is a California limited partnership with
offices in California, we will need to consider the effect of California tax law
and to date no legislation similar to the pending federal tax bills has been
introduced in the California legislature. Obtaining consent now will allow us to
restrict transferability of Units if the tax law does not change, while at the
same time providing Airlease with the flexibility to respond to a change in tax
law which is beneficial to Limited Partners.
See "THE PROPOSAL -- Potential Change in Tax Law" pages 39-40.
7. WHAT DID YOU DO TO TRY TO OBTAIN A LEGISLATIVE EXTENSION OF AIRLEASE'S
FAVORABLE TAX POSITION?
We joined industry coalition groups to lobby Congress for an extension.
With others we hired a Washington-based legal firm to lobby for an extension,
and we wrote letters to Congress seeking support for extension of the tax
provisions. Recently, bills were introduced in Congress which, if enacted, would
extend the tax benefits for publicly traded partnerships, like Airlease but
would impose a tax on the gross income of partnerships which elect to be covered
by this law. We are actively following the progress of these bills.
See "SPECIAL FACTORS -- The Proposal -- Background for the Proposal" pages
16-18, and "SPECIAL FACTORS -- The Proposal -- Potential Change in Tax Law"
pages 32-33.
8. WHY DOESN'T AIRLEASE SELL ALL OF ITS ASSETS AND LIQUIDATE DURING 1997?
One of the three alternatives we considered was Immediate Sale -- selling
all of Airlease's assets during 1997. This essentially would constitute a forced
sale which we believe would not produce the best price for Airlease's aircraft.
We believe an orderly sale at or prior to the end of the leases provides the
best opportunity to maximize the sales value of Airlease's aircraft.
See "SPECIAL FACTORS -- The Proposal -- Review of Strategic Alternatives --
Immediate Sale" pages 20-21 and "-- Recommendation of the Special Committee and
the Board; Fairness of the Proposal" pages 29-30.
5
<PAGE> 153
9. WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSAL?
In order to be adopted, the Proposal must be approved by a majority of the
outstanding Units, including Units held by affiliates of the General Partner.
See "INTRODUCTION -- Vote Required" page 16.
10. DOES THE PROPOSAL CHANGE THE WAY THE GENERAL PARTNER IS COMPENSATED?
No. The General Partner will continue to receive the same rate of
compensation that it has received since the inception of Airlease.
See "SPECIAL FACTORS -- Conflicts of Interest -- Interests of General Partner
and BALCAP in the Proposal" pages 30-31.
11. HOW WAS THE DECISION TO DELIST THE UNITS FROM TRADING ON THE NEW YORK
EXCHANGE MADE? WHO MADE THIS DECISION?
Under the Limited Partnership Agreement, management of the business and
affairs of Airlease is the responsibility of the General Partner. In making
decisions for Airlease, the General Partner acts through its Board of Directors.
In order to assure that the recommendation to the Limited Partners was not
affected by any conflict of interest between the General Partner and the Limited
Partners, the Board of Directors appointed a Special Committee made up of
directors independent of and unaffiliated with the General Partner to make an
independent recommendation to the Board about the Proposal.
The Special Committee of independent directors and the Board each
determined that the best way to maximize value to the Limited Partners is
through the Proposal and that the Proposal is fair to and in the best interests
of the Limited Partners. Any future decision required because of a change in tax
law also will be made by the Special Committee.
See "SPECIAL FACTORS -- The Proposal -- Meetings of the Board of Directors and
the Special Committee" pages 26-28 and "-- Recommendation of the Special
Committee and the Board; Fairness of the Proposal" pages 29-30.
12. HOW DID YOU COMPARE THE ALTERNATIVES?
We compared the alternatives based on the projected cash flow, which is the
cash available for distribution to Limited Partners, for each alternative.
We projected the cash flow based on a number of assumptions, primarily the
scheduled rent payments under the existing leases, the estimated sales value of
the aircraft at the end of their lease based on the average of three independent
6
<PAGE> 154
appraisals for each aircraft and estimated expenses of Airlease, such as
administrative and debt service expenses and fees payable to the General Partner
under the Limited Partnership Agreement. For the Corporate Tax alternative, we
also assumed a level of federal taxes.
We then applied a discount rate to this calculated cash flow to determine
the present value of cash distributions; that is the value today of the cash
that is calculated to be distributed to Limited Partners at various points in
the future.
See "SPECIAL FACTORS -- The Proposal -- Review of Strategic Alternatives" pages
19-24.
13. WHAT IS A DISCOUNT RATE AND HOW IS IT APPLIED TO PROJECTED FUTURE CASH
DISTRIBUTIONS FROM AIRLEASE?
The discount rate is the rate or percentage applied to a future payment in
order to measure the present value of this future payment. This rate should
represent the investment return an investor expects to receive, in light of the
risks assumed, on an investment.
In the Consent Solicitation Statement, we have calculated the present value
of projected future cash distributions based on a range of discount rates. The
chart on page 22 of the Consent Solicitation Statement sets forth the estimated
present value as of June 1, 1997 of future cash distributions assuming the
Proposal is adopted and implemented. Based on the assumptions utilized in
preparing these projections, assuming that aircraft were sold at the end of
their lease term at the appraised value, the present value of future cash
distributions for one Unit at a 9% discount rate is $15.48, while the present
value of future distributions for one Unit at a 12% discount rate is $14.22.
The cash flow projections are based on a number of assumptions, including
that all rent will be paid on time, that no lessee will default, that no lease
will be renewed and that aircraft will be sold at the end of the lease (or, for
the Immediate Sale Alternative, during 1997) at a price based on the appraised
value. Many circumstances could occur which would cause actual results to differ
materially from those contemplated by the cash flow projections. CASH FLOW
PROJECTIONS BY THEIR NATURE ARE PROJECTIONS BASED ON ESTIMATES AND ASSUMPTIONS
CONSIDERED REASONABLE AT A POINT IN TIME. CHANGES IN THE ESTIMATES OR
ASSUMPTIONS WOULD AFFECT THE VALUES PROJECTED TO BE REALIZED, AND NO ASSURANCE
CAN BE GIVEN THAT THE VALUES SET FORTH IN THE CASH FLOW PROJECTIONS WILL BE
REALIZED.
See "SPECIAL FACTORS -- The Proposal -- Review of Strategic Alternatives" pages
19-24.
7
<PAGE> 155
14. WHAT IS THE PROJECTED VALUE OF A UNIT UNDER EACH OF THE ALTERNATIVES YOU
CONSIDERED?
Set forth below is a range of estimated values as of June 1, 1997 of future
cash distributions based upon the assumptions made in connection with our
evaluation of each of the three strategic alternatives. While we believe that
the values set forth below represent a reasonable estimate of the values which
would be realized under such strategic alternative, many circumstances could
occur which would cause actual results to differ materially from the values set
forth below and no assurance is given that such values could or would be
realized. These values are provided to give an indication of the relative value
of each of the three alternatives we considered and not to indicate the actual
or estimated value of a Unit.
<TABLE>
<CAPTION>
INDICATIVE VALUES OF
FUTURE CASH REFERENCE TO CONSENT
DISTRIBUTIONS PER UNIT SOLICITATION
STRATEGIC ALTERNATIVE AS OF JUNE 1, 1997 STATEMENT
----------------------------- ---------------------- --------------------
<S> <C> <C>
Immediate Sale $10.81 - $12.77 pages 20-21
Restrict Unit Transfers and
Portfolio Runoff (the $13.12 - $15.48 pages 21-22
Proposal)
Corporate Taxation and $8.94 - $10.25 pages 22-24
Portfolio Runoff
</TABLE>
The cash flow projections which were used to calculate the values set forth
above are based on a number of assumptions, including that all rent will be paid
on time, that no lessee will default, that no lease will be renewed and that
aircraft will be sold at the end of the lease (or, for the Immediate Sale
Alternative, during 1997) at a price based on the appraised value. Many
circumstances could occur which would cause actual results to differ materially
from those contemplated by the cash flow projections. CASH FLOW PROJECTIONS BY
THEIR NATURE ARE PROJECTIONS BASED ON ESTIMATES AND ASSUMPTIONS CONSIDERED
REASONABLE AT A POINT IN TIME. CHANGES IN THE ESTIMATES OR ASSUMPTIONS WOULD
AFFECT THE VALUES PROJECTED TO BE REALIZED.
See "SPECIAL FACTORS -- The Proposal -- Review of Strategic Alternatives" pages
19-24.
15. WHAT REPORTS WILL I RECEIVE IF THE PROPOSAL IS APPROVED?
Airlease will continue to distribute regular quarterly and annual reports
and K-1 schedules.
16. WILL I STILL HAVE TO FILE A K-1 FOR TAX PURPOSES?
Yes. Airlease will continue to be subject to partnership tax law. Each
Limited Partner will continue to receive a K-1 schedule for tax reporting
purposes.
8
<PAGE> 156
17. HOW CAN I SELL MY UNITS AFTER 1997 IF THEY ARE NO LONGER LISTED FOR TRADING
ON THE NEW YORK STOCK EXCHANGE?
Upon delisting there will be no public market for the Units. We expect, but
can't assure, that a Qualified Matching Service, which matches buyers and
sellers of securities of limited partnerships, an electronic bulletin board,
which posts price information, or a similar service will develop to facilitate
purchases and sales of Units. Of course, we cannot provide assurance as to the
prices at which the Units may be sold using such a service.
IRS rules impose limitations on the total number of Units that can be sold
in any given year, other than sales between family members, sales upon death or
distributions from qualified retirement plans. Currently the yearly limit is
approximately 7.78% of the outstanding Units, and most of these trades would
need to be conducted through a Qualified Matching Service, a process which
imposes certain delays before a sale can take place. Because of these volume
limitations, there may be times, particularly towards the end of each year after
1997, when you may not be able to purchase or sell Units.
We plan to honor transfer requests on a first-come, first-served basis,
based upon when our transfer agent receives the appropriate transfer forms. We
will also provide you with over-the-phone information regarding the number of
Units which could be transferred under the annual tax limitations at the time of
the call, but we cannot assure you that a transfer will fall within the
permitted limitations until our transfer agent actually receives the necessary
transfer forms.
See "THE PROPOSAL -- Restrictions on Unit Transferability" pages 36-38 and
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Tax Status" pages 58-59.
18. WILL THE AMOUNT OF CASH DISTRIBUTIONS REMAIN THE SAME?
No. Under the Proposal, Airlease will sell its aircraft as attractive
opportunities arise. These aircraft sales will result in a liquidation of the
portfolio over time. Increasingly cash flow and distributions will depend more
upon sales proceeds and less upon receipt of regular rental payments, and thus
will be less predictable.
For information as to the present value of future cash distributions
assuming the Proposal is approved and implemented, see "SPECIAL FACTORS -- The
Proposal -- Review of Strategic Alternatives -- Restricting Unit Transfers and
Portfolio Runoff" pages 21-22 and Exhibit A-2 for projected cash flows beginning
in 1998.
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<PAGE> 157
19. WHAT HAPPENS IF THE PROPOSAL IS NOT APPROVED BY THE LIMITED PARTNERS?
If the Proposal is not approved, we will continue to operate Airlease in
accordance with the Limited Partnership Agreement, will not seek to delist from
the New York Stock Exchange and will attempt to reinvest proceeds of aircraft
sales until January 1, 2005 (after that date, proceeds from sales are required
to be returned to Limited Partners). In this event, assuming partnership tax law
is not amended, distributions would be reduced substantially as a result of the
imposition of the additional tax. In addition, because of Airlease's competitive
position, it is unlikely that we will be able to invest sales proceeds in new
aircraft investments which provide an attractive return consistent with the
risk.
Furthermore, under the Limited Partnership Agreement, Limited Partner
approval may be required in order for Airlease to sell all or substantially all
of its assets and distribute the net proceeds to Limited Partners. Thus, if the
Proposal is not approved and Airlease is not able to make new investments,
Airlease may again be required to incur the expense of soliciting Limited
Partner consent in order to sell its assets and dissolve.
If Airlease continues to operate and to seek new investments, the value of
the Units would depend on many factors beyond our control, including general
economic conditions, future rental income, reinvestment opportunities and the
residual value of aircraft on sale. In addition, although we would not seek to
delist the Units from trading, we cannot assure that the Units and Airlease will
continue to qualify for listing on the New York Stock Exchange.
See "SPECIAL FACTORS -- Risks and Benefits to the Limited Partners If the
Proposal Is Not Consummated" pages 34-35 and "SPECIAL FACTORS -- The
Proposal -- Review of Strategic Alternatives -- Corporate Taxation and Portfolio
Runoff" pages 22-24.
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<PAGE> 158
AIRLEASE, LTD., A CALIFORNIA LIMITED PARTNERSHIP
LIMITED PARTNER CONSENT CARD
REGARDING AUTHORIZATION TO THE GENERAL PARTNER
TO RESTRICT TRANSFERABILITY OF UNITS,
TO CEASE MAKING NEW AIRCRAFT INVESTMENTS
AND TO DISSOLVE THE PARTNERSHIP WHEN ALL ASSETS ARE SOLD
AND TO TAKE OTHER ACTIONS
Please mark one of the boxes on the reverse side of this Consent
Card to vote on the authorization to the General Partner to amend the Amended
and Restated Agreement of Limited Partnership, as amended (the "Limited
Partnership Agreement"), of Airlease Ltd., A California Limited Partnership (the
"Partnership") (i) to impose restrictions on transferability of the Units to the
extent necessary to avoid the Partnership being taxed as a corporation, which
restrictions, if imposed, would result in the Units being delisted from trading
on the New York Stock Exchange, and (ii) to provide that the Partnership will
not make new aircraft investments, will sell its aircraft as attractive sale
opportunities arise and will dissolve when all assets are sold; and if any
amendment or proposed amendment to partnership tax law is enacted or pending, to
authorize the General Partner to take such other actions which the General
Partner determines are in the best interests of the Partnership and the Limited
Partners and which are consistent with the intent of the Proposal (as defined
below), including amending the Limited Partnership Agreement; all as described
in the Consent Solicitation Statement Furnished in Connection with the
Solicitation of Consents dated June 24, 1997. These authorizations to the
General Partner (collectively, the "Proposal") comprise a single proposal, and
consent to the Proposal will constitute consent to the adoption of either or
both of the amendments to the Limited Partnership Agreement described above,
including the resulting liquidation and dissolution of the Partnership, and if
any amendment or proposed amendment to partnership tax law is enacted or
pending, consent to such other actions which the General Partner determines to
be in the best interests of the Partnership and the Limited Partners and to be
consistent with the intent of the Proposal.
THIS CONSENT IS SOLICITED BY THE GENERAL PARTNER OF AIRLEASE LTD., A
CALIFORNIA LIMITED PARTNERSHIP
(continued and to be signed on other side)
<PAGE> 159
(Continued from other side)
THE GENERAL PARTNER RECOMMENDS THAT LIMITED PARTNERS CONSENT TO THE
PROPOSAL.
[ ] CONSENT [ ] DO NOT CONSENT [ ] ABSTAIN
Dated this __________ day of __________, 1997
Limited Partner(s)
________________________________________
Signature
________________________________________
Signature
(Please date and sign exactly as your investment is
registered. Joint owners should each sign. If signing as
an executor, administrator, attorney, trustee or
guardian, give title as such. If a corporation, sign in
full corporate name by an authorized officer. If a
partnership, sign in name of authorized person.)
UNMARKED AND SIGNED CONSENT CARDS WILL BE COUNTED AS
CONSENTS TO THE PROPOSAL.
2
